The Conversation (0)
Last week, the precious metals space saw a bit of a shakeup when Sprott Asset Management announced its intention to make an unsolicited takeover bid for Central GoldTrust and Silver Bullion Trust. This week, Resource Investing News had the chance to speak with Rick Rule, founder of Sprott Global Resource Investments, to get his take on the situation.
This article was first published on Gold Investing News on April 29 2015.
Last week, the precious metals space saw a bit of a shakeup when Sprott Asset Management announced its intention to make an unsolicited takeover bid for Central GoldTrust (TSX:GTU.UN) and Silver Bullion Trust (TSX:SBT.UN).
The transaction, which according to Sprott will be valued at approximately US$895 million, is being backed by the largest shareholders of Central GoldTrust, including Chicago-based Pekin Singer Strauss Asset Management and Toronto-based Polar Securities. In fact, the Financial Post notes that Polar has been at odds with the trusts for some time, advocating for the companies to change the way that units may be redeemed.
Sprott intends to offer to exchange Sprott Physical Gold Trust (TSX:PHY.U,NYSEARCA:PHYS) and Sprott Physical Silver Trust (TSX:PHS.U) units for Central GoldTrust and Silver Bullion Trust units, respectively, on a NAV to NAV basis, subject to successful consent solicitations of unitholders.
To be sure, not everyone is pleased with the news. Management at both Central GoldTrust and Silver Bullion Trust have said they were not contacted by Sprott concerning the offer prior to the company’s announcement last Thursday.
Central GoldTrust has also come out with a release aiming to “set the record straight” regarding the situation. It states, among other points, that its management fees are 43 percent lower than those of the Sprott Physical Gold Trust and that it is “the only gold bullion entity with a sliding scale administration fee that decreases as the trust’s net assets grow.”
Meanwhile, a recent release from Sprott highlights what it sees as a positive market reaction to the announcement, noting that the discounts to NAV at which both trusts currently trade have narrowed by 54 and 92 percent respectively since Thursday.
Thoughts from Rick Rule
This week, Resource Investing News had the chance to speak with Rick Rule, founder of Sprott Global Resource Investments, to get his take on the situation.
Of course, there’s been a fair amount of focus from Sprott on the fact that its units are redeemable in certain circumstances, while units of Central GoldTrust and Silver Bullion Trust are not. Rule was able to elaborate on that point.
“What that means is that if the Sprott units traded at an appreciable discount to NAV, it’s an easy matter for shareholders to tender their Sprott units and receive physical precious metals, which protects the value of their investment,” he said. “The Central fund has maintained its own structure which does not have redemption, and a consequence of that is that the unitholders of the Central products have at times been penalized with double-digit discounts.”
That discount has led a number of institutional unitholders to lead a “revolt,” Rule noted.
Interestingly, despite the focus on redeemable units, Rule also stated that the Sprott gold and silver trusts haven’t actually seen that much redemption. “Out of billions of dollars in the trusts, we’ve had millions of dollars in redemptions,” he said, explaining that the trusts were designed to be “a more efficient mechanism for investors to hold physical precious metals” that was more than just a proxy for gold and silver. He also stressed that redemption is an “integral part” of Sprott’s structure.
While he couldn’t speak to why Central GoldTrust and Silver Bullion Trust don’t offer a redemption feature, Rule did state that “redeeming physical precious metals for shareholders costs money,” adding that redemption can lower the NAV of a trust.
“In other words, if people redeem, the amount of money that the manager manages is less, and the fees received by the manager are less,” he said.
In any case, the discounts that the Central GoldTrust and Silver Bullion Trust trade at certainly seem to be an issue for investors. “I personally have been [informally] contacted over the last decade by literally hundreds of Central fund shareholders asking what could be done to eliminate the discount,” he said. “
As mentioned above, both funds have said they were not formally contacted by Sprott regarding the offer. However, Rule stated that Sprott attempted, through advisors, to contact the Spicer family and Central GoldTrust managers on an informal basis. He also said he informally contacted a longtime friend who serves as one of the fund’s independent trustees, but that the conversation was a difficult one to have.
Unitholder reactions so far
On the other hand, the response from unitholders has been more positive. Rule stated that he has not heard any negative reactions to Sprott’s takeover bid from Central GoldTrust and Silver Bullion Trust unitholders, though there was one negative comment associated with Polar’s shareholder action prior to Sprott’s proposal.
“There was a comment that suggested that the Polar action would lead to the wholesale liquidation of the Central assets, and that’s an objection that we dealt with,” he stated. “There would be a continuation of the Central assets into the Sprott products.”
Rule also stated that while he could only speak to informal responses from his own clients, reactions to the deal have been positive from Sprott unitholders as well. While there are no guarantees, Rule expects that with another billion dollars added, the liquidity of the Sprott trusts will only increase.
To be sure, it’s an interesting situation, and many precious metals investors will be keeping an eye out to see what happens next. When asked about the timing for an official offer, Rule simply advised market participants to “watch this space.”
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
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