Ninepoint Resource Class Commentary

OUTLOOK

Global debt continues to grow and hit levels never seen before. No lessons were learned following the 2008 Global Financial Crisis. Total global debt is $250 trillion, up $70 trillion over the last decade. Global debt to GDP now stands at a staggering 320+%. Growth in debt has been rampant across all economies. In the US, non-financial debt totaled $54 trillion at the end of September 2019. This is 20% above 2007 peak levels and 70% greater than the 2000 peak level. More recently, debt growth has been accelerating. US Non-financial debt totaled $49 trillion at the end of 2017. $5 trillion was added in approximately 18 months, which equates to a staggering $420,000 per US household. Growth in debt amongst emerging countries is even more astonishing. EM aggregate debt is at $55 trillion, a 54% surge since 2010. Chinese debt has accounted for the bulk of global debt growth. Chinese Debt to GDP has grew to approximately 300%, an increase of almost three-quarters since 2010. World Bank Group President David Malpass said it best: “The size, speed, and breadth of the latest debt wave should concern us all”. At some point all this debt will need to be repaid or monetized or in some way extinguished. And when that happens, it will be very good for gold bullion and gold equities.

With respect to all this debt and its impact on economic growth, it appears that the law of diminishing returns became pronounced in 2019. Despite the continued ramp up in debt, global growth recorded its weakest pace since the global financial crisis. During 2019 GDP growth not only slowed globally but also in the largest economies including the US, China and the Eurozone. In the US, which up until 2019 had been an island of strength, corporate profits are poised to decline for the fourth consecutive quarter while leading indicators such as retail sales, durable goods and PMI levels are positioned to end 2019 with a whimper. US PMI data, which is a decent leading indicator, ended the year near at its lowest levels since 2009. Eurozone PMIs have been in contractionary territory for 11 straight months. Following a solid 2018, the JPMorgan Global Manufacturing PMI index weakened to an average of 50 through the first 11 months of 2019. With respect to the outlook for 2020, both the IMF and World Bank have repeatedly downgraded 2020 economic growth projections with a negative bias. From the IMF’s October update: “In the October World Economic Outlook, we are projecting a modest improvement in global growth to 3.4 percent in 2020, another downward revision of 0.2 percent from our April projections. However, unlike the synchronized slowdown, this recovery is not broad-based and remains precarious.”

The Fed has responded to weakening economic growth by restarting Quantitative Easing (QE) that the Fed won’t call QE. This policy pivot is unequivocally bullish for gold bullion and gold equities. I reference the narrative of former Sprott colleague Trey Reik (now of Bristol Gold Group):

• “In perhaps the most widely telegraphed policy action in its history, the Fed just spent 23 months…running its balance sheet down some $750 billion…”

• After declaring in December 2018 that its balance sheet runoff was “on autopilot, working well, and not subject to review,” Chair Powell abruptly reversed direction and shuttered the program completely in August 2019.

• Now, in the 10 weeks since 8/28, the Fed has expanded its balance sheet by a mind-numbing $283 billion, or an annual rate of $1.5 trillion.

• Further, the Fed's proposed schedule of Treasury bill POMO's2 will tack another $510 billion on the Fed's balance sheet by June 2020, returning its size to its prior all-time high of $4.5 trillion!"

Gold bullion had an eventful 2019 as the commodity broke through formidable price levels last seen in 2013. Despite gold bullion appreciating 18% (USD), gold equities appear to be on sale. Bullion ended 2019 11% above its 2016 peak of $1366 yet the GDX is 13% below its 2016 peak levels while the GDXJ is 26% off its 2016 peak. This disconnect is even more pronounced since the last major gold equity bull market when stocks peaked in September 2011. Since then gold bullion has declined 19% while the GDX and GDXJ have depreciated by 59% and 75%, respectively. In addition, equity valuations continue to languish near trough levels. Both price to cash flow and the gold equity to gold bullion ratio are close to multiyear low levels. An emerging theme that picked up steam in the final quarter of 2019 that could address both valuations and the disconnect between bullion and the equities is M&A. 2019 was a big year for M&A with over $30B in mergers. It is noteworthy that as M&A activity picked up in Q4 it increasingly involved smaller market capitalization companies. If this trend continues it should drive portfolio returns.

Resource Class

The fund returned -2.81% in 2019 compared to the benchmark which returned 17.97%. The fund is weighted as follows:

• 64% Gold
• 23% Energy
• 2% Base Metals
• 5% Uranium
• 3% Other

The fund’s underperformance is primarily attributable to an overweight in small and mid-cap gold exploration and production companies. It was a good year for gold bullion and larger cap gold equities. Gold bullion rose 18% while the SPTSX Gold Index returned 41%. The fund was overweight small and mid-cap gold equities because of the historic valuation differential to large cap golds.

2018 and 2018 II Flow-Through Update

These funds will be terminating on February 3rd, 2020 at which point the after-tax rates of return will be formally calculated.The funds have remained near fully invested into year end.

Investors are routinely fixated on pre-tax returns. This is surprising considering investors rarely capture those returns on an after-tax basis because most investors are taxed on gains and income. When evaluating the returns of a flow-through fund, the only meaningful measure of performance is on an after-tax basis considering it is a tax mitigating product. Although after-tax return figures are not calculated until the fund is terminated, investors should consider some of the following points when gauging how the investment is performing on an after-tax basis. Many investors incorrectly evaluate the performance of the fund based on the initial investment of $25/unit.

This $25/unit is not adjusted for initial fees, premiums paid to acquire flow-through shares or the tax benefits. Most importantly, it is critical that investors understand how impactful the tax benefits are to the per unit economics. As disclosed in the prospectus for the 2019 offerings, the breakeven point on an after-tax basis for an Ontario investor taxed at the highest marginal rate is approximately $14.75/unit. The prospectus calculation assumes the fund does not receive investment tax credits that are typically renounced when purchasing flow-through shares from mining companies. These credits drive down the after-tax cost even further. For example, the Sprott 2017 Flow-Through Limited Partnership actual breakeven point for an Ontario investor taxed at the highest marginal rate was approximately $13.22/unit. In this particular case, a positive after-tax return was generated on a terminal unit value above $13.22/unit, which compares to the initial unit price of $25/unit. The bogey for a flow-through fund is the after-tax breakeven point, not the $25/unit initial offering price. Investors need to understand this in order to correctly evaluate the performance of the flow-through fund

The Net Asset Value (NAV) for the 2018 and 2018 II Flow-Through funds on December 31, 2019 was $14.44/unit and $14.88/unit. Both funds would have a positive after-tax rate of return if they terminated at these price levels.

2019 Flow-Through Update

The fund’s proceeds were fully invested by year end. 87% had been allocated to gold mining equities while base metal, uranium and diamond equities represent the balance. The portfolio currently consists of 39 companies with a weighted average market capitalization of $140M. The weighted average premium paid was 12%.

The NAV on December 31, 2019 was $24.36/unit.

2019 II Flow-Through Update

The fund’s proceeds were fully invested by year end. 83% had been allocated to gold mining equities while uranium and diamond equities represent the balance. The portfolio currently consists of 17 companies with a weighted average market capitalization of $220M. The weighted average premium paid was 14%.

The NAV on December 31, 2019 was $22.00/unit.

Jason Mayer CFA,MBA
Senior Portfolio Manager

 

Ninepoint Resource Class - Compounded Returns¹

1M YTD 3M 6M 1YR 3YR 5YR Inception
Fund -7.6% -7.6% 1.9% -11.2% -15.2% -15.0% 0.1% -5.7%
Index -6.8% -6.8% 4.5% 1.8% 2.4% -3.7% -1.3% -3.1%

1 All returns and fund details are a) based on Series F shares; b) net of fees; c) annualized if period is greater than one year; d) as at December 31, 2019; e) 2011 annual returns are from 10/17/11 to 12/31/11. Blended Index (50/50 S&P/TSX Capped Materials Total Return Index and S&P/TSX Capped Energy Total Return Index) and is computed by Ninepoint Partners LP based on
available index information.

The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: capital gains risk; class risk; commodity risk; concentration risk; currency risk; derivatives risk; exchange traded funds risk; foreign investment risk; inflation risk; liquidity risk; market risk; regulatory risk; securities lending, repurchase and reverse repurchase transactions risk; series risk; short selling risk; small capitalization natural resource company risk; small company risk; tax risk; uninsured losses risk.

Ninepoint Partners LP is the investment manager to a number of funds (collectively, the “Funds”). Commissions, trailing commissions, management fees, performance fees (if any), and other expenses all may be associated with investing in the Funds. Please read the prospectus carefully before investing. The indicated rates of return for series F of the Funds for the period ended December 31, 2019 are based on the historical annual compounded total returns including changes in [unit/share] value and reinvestment of all distributions or dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Funds.

The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.

The opinions, estimates and projections (“information”) contained within this report are solely those of Ninepoint Partners LP and are subject to change without notice. Ninepoint Partners LP makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Ninepoint Partners LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Ninepoint Partners LP is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Ninepoint Partners LP. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any investment fund managed by Ninepoint Partners LP is or will be invested. Ninepoint Partners LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. Ninepoint Partners LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, Ninepoint Partners LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.

Ninepoint Partners LP: Toll Free: 1.866.299.9906. DEALER SERVICES: CIBC Mellon GSSC Record Keeping Services: Toll Free: 1.877.358.0540

 

 

The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: concentration risk; credit risk; currency risk; cybersecurity risk; derivatives risk; exchange traded funds risk; foreign investment risk; inflation risk; interest rate risk; liquidity risk; market risk; regulatory risk; securities lending, repurchase and reverse repurchase transactions risk; series risk; short selling risk; small capitalization natural resource company risk; specific issuer risk; tax risk.

Ninepoint Partners LP is the investment manager to a number of funds (collectively, the “Funds”). Important information about these Funds, including their investment objectives and strategies, purchase options, and applicable management fees, performance fees (if any), and expenses, is contained in their prospectus. Please read the prospectus carefully before investing. Commissions, trailing commissions, management fees, performance fees, other charges and expenses all may be associated with investing in the Funds. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Funds. The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Fund may be lawfully sold in their jurisdiction.

The opinions, estimates and projections (“information”) contained within this report are solely those of Ninepoint Partners LP and are subject to change without notice. Ninepoint Partners makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Ninepoint Partners assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Ninepoint Partners is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Ninepoint Partners. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any investment fund managed by Ninepoint Partners is or will be invested. Ninepoint Partners LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. Ninepoint Partners LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, Ninepoint Partners LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.

Ninepoint Partners LP: Toll Free: 1.866.299.9906. DEALER SERVICES: CIBC Mellon GSSC Record Keeping Services: Toll Free: 1.877.358.0540