Alt Thinking December 31, 2023
Commentary
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Ninepoint Flow-Through Update Q4 2023 Commentary

Ninepoint Flow-Through Update Q4 2023 Commentary
Investment Team
  • Jason Mayer, MBA, CFA
    Senior Portfolio Manager, Sprott Asset Management - Sub-Advisor
    Jason Mayer, MBA, CFA
    Senior Portfolio Manager, Sprott Asset Management - Sub-Advisor
    Jason Mayer joined Sprott Asset Management LP in November 2012. Jason has more than 15 years of investment industry experience focused on structuring flow-through investment vehicles and managing portfolios of growth oriented resource equities. Mr. Mayer joined Sprott from Middlefield Capital Corporation where he acted as lead portfolio manager on a number of investment funds with a focus on resource equities. Mr. Mayer is an MBA graduate of the Schulich School of Business at York University...
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Key Takeaways
  • Despite the volatility in commodities and resource equities, microcap resource equities, especially in gold exploration, underperformed in 2022 and 2023, which was unexpected given the 13% appreciation in gold bullion.
  • The Federal Reserve's indication to potentially reduce rates in 2024 could bode well for gold equities, historically outperforming during Fed easing cycles, suggesting a possible advantage for investors to stay invested post the 2022 funds' rollover in mid-February.
  • Investors are reminded to assess the performance of flow-through funds on an after-tax basis due to their tax-advantaged nature, with the actual economic benefit being significantly influenced by the tax savings, rather than the initial investment amount.

Ninepoint 2022 Flow-Through Update

The NAV for the Ninepoint 2022 Flow-Through - National Fund Series A and the Ninepoint 2022 Short Duration Flow-Through Fund on December 29, 2023 was $8.26/unit and $13.30/unit, respectively.

We have always stressed to clients that commodities and resource equities are incredibly volatile. The performance of flow-through funds will range from spectacular to awful. After two years of posting triple-digit after-tax returns in the 2019 and 2020 flow-through limited partnerships, microcap resource equities underperformed in both 2022 and 2023. Underperformance was most pronounced amongst microcap, gold exploration equities which comprise most of the flow-through fund portfolios. The underperformance of microcap, gold exploration equities in 2023 was baffling since gold bullion appreciated 13%. However, the gold bullion outlook has improved markedly. At the December FOMC meeting, the Federal Reserve abruptly changed course when it signaled a willingness to significantly reduce the federal funds rate in 2024. Historically, gold equities have dramatically outperformed during Fed easing cycles as illustrated below. If this thesis comes to fruition, unitholders who will be provided with liquidity when the 2022 flow-through funds rollover in mid-February may be best served to remain invested in the rollover fund.

While digesting the performance of the 2022 LPs, I would like to remind investors of the track record and the need to evaluate returns on an after-tax basis. I would also remind clients of the importance of remaining committed to the flow-through strategy during poorly performing periods because the product track record clearly illustrates the benefit of consistent participation.

Investors are routinely fixated on pre-tax returns. This is surprising considering investors rarely capture those returns on an after-tax basis as most investors are taxed on capital 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 and as a result, do not account for any of the tax benefits.

It is also important to remember the $25/unit is not adjusted for initial fees, premiums paid to acquire flow-through shares or 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 2023 Short Duration Flow-Through LP prospectus, the breakeven point on an after-tax basis for an Ontario investor taxed at the highest marginal rate is approximately $11.75/unit, which assumes only 25% of the portfolio qualifies for the Critical Minerals Exploration Tax Credit. The bogey for a flow-through fund is the aforementioned after-tax breakeven point, not the $25/unit initial offering price. Investors need to understand this to correctly evaluate the performance of any flow-through fund.

Ninepoint 2023 Flow-Through National Update

The NAV of the Ninepoint 2023 Flow-Through National Fund, Series A on December 29, 2023 was $16.47/unit.

The fund successfully raised $33M in April 2023. 100% of the initial proceeds were invested by year end. 62% had been allocated to gold mining equities, 12% to base metal equities while uranium and other metals account for the balance. The portfolio currently consists of 30 companies with a weighted average market capitalization of $105M. The weighted average premium paid was 5%.

As disclosed in the 2023 Flow-Through LP prospectus, the breakeven point on an after-tax basis for an Ontario investor taxed at the highest marginal rate is approximately $12.00/unit. Note that this breakeven figure does not include the enhanced Critical Minerals Exploration Tax Credit. 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 to correctly evaluate the performance of any flow-through fund.

Ninepoint 2023 Short Duration Flow-Through Update

he NAV of the Ninepoint 2023 Short Duration Flow-Through Fund, Series A on December 29, 2023 was $23.51/unit.

The fund successfully raised $20M in October 2023. 100% of the initial proceeds were invested by year end. 60% had been allocated to gold mining equities, 22% to uranium equities and 18% to base metal equities. The portfolio currently consists of 20 companies with a weighted average market capitalization of $70M. The weighted average premium paid was 2%.

As disclosed in the 2023 Short Duration Flow-Through LP prospectus, the breakeven point on an after-tax basis for an Ontario investor taxed at the highest marginal rate is approximately $11.75/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 to correctly evaluate the performance of any flow-through fund.

 

Jason Mayer CFA, MBA
Sprott Asset Management
Sub-Advisor to the Fund

References

1. Peer Group includes: Middlefield, Frontstreet, NCE, Brompton, Maple Leaf, CMP
2. Peer Group includes: Middlefield, Frontstreet, NCE, Brompton, Maple Leaf, CMP, Canoe
3. Peer Group includes: Middlefield, Frontstreet, Maple Leaf
4. Peer Group includes: Middlefield, NCE, Brompton, Maple Leaf, CMP, Canoe
5. Peer Group includes: Middlefield, NCE, Maple Leaf, CMP, Canoe
6. Peer Group includes: Marquest, Maple Leaf
7. Peer Group includes: Middlefield, Brompton, Maple Leaf, CMP
8. Peer Group includes: Middlefield, Maple Leaf
9. Peer Group includes: Middlefield, Maple Leaf, CMP
10. Peer Group includes: Maple Leaf
11. Peer Group includes: Middlefield, CMP, Maple Leaf
12. Peer Group includes: Middlefield, Maple Leaf
13. Peer Group includes: Middlefield, CMP, Maple Leaf
14. Peer Group includes: Middlefield, Maple Leaf
15. Peer Group includes: Middlefield, CMP
16. Peer Group includes: Middlefield, Maple Leaf

Series A NAV Details ($) Per Unit as at December 29, 2023 (Before Tax)

Fund Name

NAV (Series A)

Ninepoint 2022 Flow-Through LP - National

$8.26

Ninepoint 2022 Flow-Through LP - Quebec

$7.95

Ninepoint 2022 Short Duration Flow-Through LP

$13.30

Ninepoint 2023 Flow-Through LP

$16.47

Ninepoint 2023 Short Duration Flow-Through LP

$23.51
All Funds
  • NNTUF.F
    (Series F)
    Hedge Funds & LPs Tax-Efficient Funds Flow-through Limited Partnerships
    $13.34 -$1.87 (2.95%)
    As at 11/30/2024
    Go To Fund

    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.There are ongoing fees and expenses associated with owning units of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents. Investment 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 Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: Speculative Investments; Sector Risks; Lack of Operating History of the Partnership; Changes in Net Asset Values; Valuation and Liquidity of Non-Listed Resource Issuers; Global Economic Downturn; Tax Related Risks; Lack of Liquidity of Units; Flow-Through Share Premiums; Reliance on the Manager and/or Sub-Advisor; Conflicts of Interest; Possibility that Limited Partners may Receive Illiquid Securities on Dissolution; Financial Resources of the General Partner; Transferability of the Units; Resale Restrictions on Portfolio Securities; Short Sales; Derivatives; Lack of Suitable Investments; Cybersecurity Risk; Possible Loss of Limited Liability; Loan Facility.

    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 income tax considerations applicable to an investor will vary depending on a number of factors, including whether units of flow-through funds are characterized as capital property, the province or territory in which he or she resides, carries on business, or has a permanent establishment, the amount that would be his or her taxable income but for the interest in the flow-through fund, and the legal characterization of the investor as an individual, corporation, trust, or partnership.

    Ninepoint Partners LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. The information should not be regarded by recipients as a substitute for the exercise of their own judgment or for the advice of legal and tax advisors.

  • NNTVF.F
    (Series F)
    Hedge Funds & LPs Tax-Efficient Funds Flow-through Limited Partnerships
    $16.78 -$1.26 (1.87%)
    As at 11/30/2024
    Performance as at 11/30/2024
    1 Year
    -22.06%
    3 Year
    -
    5 Year
    -
    10 Year
    -
    Incept.1
    -25.65%
    1 Inception Date 10/5/2023
    Go To Fund

    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.There are ongoing fees and expenses associated with owning units of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents. Investment 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 Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: Speculative Investments; Sector Risks; Lack of Operating History of the Partnership; Changes in Net Asset Values; Valuation and Liquidity of Non-Listed Resource Issuers; Global Economic Downturn; Tax Related Risks; Management or administrative services provided by a general partner to an investment limited partnership; Lack of Liquidity of Units; Flow-Through Share Premiums; Reliance on the Manager and/or Sub-Advisor; Conflicts of Interest; Possibility that Limited Partners may Receive Illiquid Securities on Dissolution; Financial Resources of the General Partner; Transferability of the Units; Resale Restrictions on Portfolio Securities; Short Sales; Derivatives; Lack of Suitable Investments; Cybersecurity Risk; Possible Loss of Limited Liability.

    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 income tax considerations applicable to an investor will vary depending on a number of factors, including whether units of flow-through funds are characterized as capital property, the province or territory in which he or she resides, carries on business, or has a permanent establishment, the amount that would be his or her taxable income but for the interest in the flow-through fund, and the legal characterization of the investor as an individual, corporation, trust, or partnership.

    Ninepoint Partners LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. The information should not be regarded by recipients as a substitute for the exercise of their own judgment or for the advice of legal and tax advisors.

1All 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 12/31/2023. Sector allocation as at 12/31/2023. Sector allocation based on % of net asset value. Numbers may not add up due to rounding. Cash and cash equivalents include non-portfolio assets and/or liabilities.

The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: Speculative Investments; Sector Risks; Global Economic Downturn; Lack of Operating History of the Partnership; Changes in Net Asset Values; Valuation and Liquidity of Non-Listed Resource Issuers; Tax Related Risks; Lack of Liquidity of Units; Flow-Through Share Premiums; Reliance on the Manager and/or Sub-Advisor; Conflicts of Interest; Possibility that Limited Partners may Receive Illiquid Securities on Dissolution; Financial Resources of the General Partner; Transferability of the Units; Resale Restrictions on Portfolio Securities; Short Sales; Derivatives; Lack of Suitable Investments; Cybersecurity Risk; Possible Loss of Limited Liability; Loan Facility.

Ninepoint Partners LP is the investment manager to the Ninepoint 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 rate of return for series F units of the Fund for the period ended 12/31/2023 is based on the historical annual compounded total return including changes in unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. 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 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 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 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.