Steve Schoffstall, director of ETF Product Management at Sprott Asset Management was recently interviewed by Benzinga. Sprott is a global leader in precious metal and energy transition investments, providing access for investors around the world. The company says that its in-depth knowledge, experience and relationships separate it from the generalist investment firms. Schoffstall spoke about the exciting opportunities surrounding silver and Sprott's silver-related ETFs.
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00:00Hey, Ziggers, it's Dan Leach, and I have a fantastic guest for you today.
00:05It's Steve Schaafstahl, Director, ETF Product Management for Sprott Asset Management USA.
00:11It is so great to be with you, Steve.
00:13Thanks for having me here, Dan.
00:15The pleasure and honor is all mine.
00:16Let's start, if you can give us an overview of your company.
00:19Yeah, so Sprott is a global portfolio manager.
00:22We're headquartered out of Canada, but we have several offices in the United States,
00:26about $33 billion in assets.
00:29Our main focus is on precious metals and critical materials, both miners and also physical commodities.
00:36As it relates to those two categories, of the $33 billion or so that we have in assets,
00:41about $28 billion or so is dedicated to our exchange list of products.
00:46So those are like physical trusts that hold physical commodities, or our ETFs list in the United States,
00:52which generally provide exposure to miners of different commodities,
00:56whether it's uranium, silver, gold, lithium, anything that pertains to precious metals and critical materials.
01:03I love it.
01:04Let's talk about silver.
01:05I know silver has a dual role as a currency and a metal used for clean energy.
01:09Why is that a unique opportunity right now?
01:11Well, I think it is a duality, which makes it different than what we see perhaps with gold or other precious metals, right?
01:18So when you think historically about silver, it was primarily used as a monetary tool.
01:25As civilization has evolved in particularly even the last several years,
01:31we're actually seeing the industrial uses of silver are increasing significantly.
01:35So we're at a point now that as of the end of 2023, we had about 55% of silver was actually used for industrial purposes.
01:43So all told, there's about 10,000 different uses for silver.
01:45It's the most widely used commodity behind oil.
01:49There's a lot of uses as it relates to electronics.
01:52It is the most conductive metal on Earth.
01:54So we do see it used a lot in electronics.
01:57We see it in computer chips or semiconductor chips and becoming more increasingly important as it relates to artificial intelligence,
02:05which is a very high growth sector that we're seeing emerge here within the last 12 to 18 months.
02:10And when we start to look at another high growth sector, we actually see it used in the control rods of nuclear reactors.
02:17So nuclear energy is also another high growth area and theme that we're starting to see a lot of interest in a lot of investment flow into.
02:24But if we look at the amount of silver that's actually being used in industrial uses last year in 2023,
02:31it increased about 11% up to about 654 million ounces.
02:36Numbers for 2024 aren't out yet, but indications are that that will increase again up to about 711 million ounces just used for industrial uses.
02:46So not anything to do with that historical precious metal allocation that we see.
02:53Among the key growth drivers that we see, I did mention AI, I mentioned nuclear energy, and it also has medical purposes,
02:59but we see it being used a lot in power grids and 5G networks.
03:03The power grid is something that's getting increasing amount of attention as we start to see artificial intelligence is consuming more and more energy.
03:11We're seeing infrastructure build outs on a global perspective.
03:15And then also how that relates to the transition to cleaner energy, which most countries have now signed on to decreasing carbon emissions.
03:22It's it's becoming very important in that space as well.
03:26So as we continue to progress here throughout the next several decades,
03:29we expect the infrastructure build out in the transition to cleaner energy to really increase its uses.
03:37And as it relates to energy transition, we have the nuclear component, but we also have the solar energy component.
03:44So silver is very important as it relates to solar panels.
03:47It's actually gets applied as a paste and used to turn the sun's energy into something that we can use.
03:53We've actually seen the amount of silver demand increase from about 6% back in 2015 up to about 16% as it relates just to solar demand.
04:03So that's also a large growth area that we see.
04:05And part of the reason that we see that growth is one, we're increasing our reliance on solar energy.
04:11And two, as we're moving through and getting technological advances as the energy transition progresses,
04:17we're actually seeing new designs of solar panels take shape.
04:21And oftentimes those new panels are using more silver than older older panels.
04:27Yeah, that's that's a perfect segue to my next question.
04:29Do you believe that supply is keeping pace with demand for silver right now?
04:34It's it's one of those issues that we're starting to see actually creep up in a lot of commodities.
04:38It's not just the silver. We do see from a silver perspective that the supply has been relatively flat for the last nine or 10 years or so.
04:47It's actually decreased about 3%. So that's something that we expect to persist.
04:52And one of the there's a few drivers actually with that as it relates to silver.
04:56So one is if we look back at the 2010s, that decade was a decade where we saw underinvestment across the mining sector.
05:04So that's one of the issues that we have.
05:06Another issue that we have with increasing supply quickly is that silver is often mined as a byproduct metal.
05:14So because of that, there may be a zinc or a lead or an iron mine that is the primary goal for a miner to to extract.
05:24And then silver comes along as a byproduct.
05:27The price of silver might not really have an impact on the mining decisions as that's not the primary goal of each individual mine.
05:35So we see that byproduct nature of silver also hampering supply in the coming years as well.
05:42Well, let's talk about the investor side.
05:43You explain, obviously, all these amazing uses that silver has right now, right behind oil as the number two commodity.
05:50Why should an investor consider silver and silver miners as an opportunity?
05:54So I'd say first and foremost, it can add diversification to an investor portfolio.
05:58And what that can do is help reduce volatility in a well-diversified portfolio in periods of stress or volatility in the market.
06:07If you look at the correlation to physical silver relative to other asset classes, you'd see things like the S&P 500 and bonds.
06:15There's actually a low correlation.
06:17When you start looking at things like the U.S. dollar, we actually have a negative correlation with physical silver relative to the U.S. dollar.
06:24So there's that diversification that you can get.
06:27Also, given its industrial uses and the growth that we're seeing in that area, it starts to, I don't want to say completely move out of the precious metal space because that is a very important part of what silver is.
06:38But its reliance on industrial uses is increasing.
06:42And with that, you know, it can potentially add some growth to a portfolio.
06:46If you look at miners in particular, if you're looking at a miner that has at least 50 percent of its revenue coming from mining silver, they have an all in sustaining cost of mining.
06:58It's a little bit over 17 dollars per ounce where we sit today.
07:01Silver is up around 30 dollars per ounce.
07:03So it's at this point in time, it's a very profitable for silver miners to to mine silver.
07:09And from a silver miner perspective, particularly those pure play miners, that's something that, you know, we see continuing to play out into the near term.
07:18Historically, if you go back to the turn of the century, silver was about a little less than five dollars an ounce.
07:24And as I said, we're up around 30 today through the last 20 to 25 years or so.
07:30It's actually averaged an annual return of about 7 percent.
07:33And again, a lot of that is on the back of the increasing industrial demand that we have.
07:38Additionally, depending where investors believe we are in the market cycle, we've seen that historically, if we look at the last three periods of the Fed tightening, loosening or lowering rates and with a looser monetary policy, we do see that what we've noticed over those last three cycles is that that has been a leading indicator for higher silver prices if we go back for the first 25 years or so of the century.
08:06So that that's an aspect that, you know, investors are are starting to understand and see the the growth potential in periods of of looser monetary policy.
08:16If that's if that's the route that we end up going.
08:19Additionally, silver tends to do well, as does gold and other precious metals in periods of geopolitical risks and currency debasement.
08:28When we see periods of inflation, all those periods tend to be beneficial for precious metals and silver is no different from that regard.
08:36So that combined with the industrial uses that we think it sets investors up for the diversification with some potential growth benefits as well.
08:43Well, let's talk about the uniqueness of Sprott.
08:46What makes the Sprott silver miners and physical silver ETF different?
08:50Yeah, so we started developing this fund with Nasdaq last year.
08:55So it's been, you know, many, many months in progress.
08:57And, you know, as I mentioned at the top, our background really is in the metals and mining space.
09:02And so what we do whenever we go through a product development phase is we look at the market and we try to marry our background with what we think the potential opportunities are.
09:10And when we review the investment landscape, if we think there's an opportunity there to provide a differentiated product that we feel increases investor outcome, that's an area that we target.
09:21And so when we went through that process for silver, for this fund in particular, we saw that there was an opportunity to provide a fund that was focused on pure play miners.
09:32So the way we classify pure play miners, it's those miners that have at least 50% of their revenue or assets tied to mining silver or exploration or development type processes.
09:44But we also wanted to add a physical silver component to the portfolio, which is something that none of the other ETF investment options have done out there.
09:52So the physical silver component will at each semiannual rebalance make up about 17 to 18% of the underlying portfolio.
10:01It will fluctuate between rebalances.
10:04And then we have a smaller bucket within the portfolio to add some liquidity where we do decrease the pure play nature of some of the underlying components to a 25 to 50% revenue test that's limited to a 15% allocation.
10:20The rest is going to be in those predominantly 50% or greater silver miners.
10:26And the reason why that's important is if you look at the way the market set up, 72% of the silver that's mined is actually mined as a byproduct.
10:35So it's mined in conjunction with pulling other metals out of the ground.
10:40And if you're looking to invest in miners that maybe have only 5% or 10% of their revenue being derived from silver, your investment can be very much influenced by many other metals, whether it's lead or zinc or copper.
10:55Because of that byproduct nature.
10:57So that's one reason why we wanted to go with the pure play approach and think investors may benefit from that.
11:02Another is if you look at the 10 largest silver producers in the world, zero of those actually have silver as their primary revenue source.
11:12So it is a byproduct in the case of the 10 largest producers.
11:15So we think that by zeroing in on those pure play miners that have their mines that are tied to mining silver, as the underlying price of silver increases, we expect those miners to benefit relative to the more diversified miners that we see across the space.
11:32And as a result, we would expect to see the profitability increase as well in those periods.
11:38Exciting times for as well.
11:40And Steve Schaafstahl, the Director of ETF Product Management for Sprott Asset Management US.
11:45That was an absolutely fascinating conversation.
11:48Steve, thanks so much for joining me today.
11:50It's great to be here.
11:51Thanks, Dan.