Ninepoint Flow-Through Mid Year Update

Q2 2022 Commentary

Resource Market Update

The most impactful market events in the first half of 2022 were the Russian-Ukraine war, surging inflation, Fed tightening and China’s Covid lockdowns. Early in the year, the Russian-Ukraine war drove both resource prices and resource equities, higher. Supply side concerns were front and center since Russia is a net exporter of numerous commodities. However, the market quickly shifted focus to potential demand destruction as China repeatedly locked down major cities and the Fed tightened financial conditions to address inflation which hit multi-decade highs. Resource equities gave up their early year gains then some. The exception were energy stocks which continued to hit multi-year highs into May but then sharply reversed in June as recession fears became entrenched. How bad was the second quarter for resource equities? From their April highs, the GDXJ (junior gold miners ETF) and XME (metals and mining ETF) were down 36% and 33%, respectively, while XLE (energy ETF) declined 20% from its June 8th peak.

Microcap resource stocks, which comprise majorly of flow-through portfolios, sold off disproportionately as broader markets corrected and the Fed’s tightening reduced liquidity while sparking recession fears. And the worst performing sector amongst the microcap correcting equities were the gold microcap stocks, which constitute mostly of the flow-through investment universe. This is quite frustrating considering the performance of gold bullion. In H1/22, gold bullion returned -1.2% yet the GDX (gold miners ETF) and GDXJ were down 14.5% and 23.7%, respectively.

Although H1/22 was difficult for resource equities, a lack of excess capacity and underlying supply side constraints will persist and should drive commodity prices higher over the medium to long term. Increasing political instability, lower quality deposits, lack of investment, onerous regulatory environments and ESG concerns have all conspired to impair the future supply of essential commodities such as oil, natural gas, base metals and other materials like uranium. This backdrop should limit any cyclical correction to the lower end of the historic range although the severity and duration of a downturn and subsequent recovery will be dependent on the magnitude of any economic downturn.

Ninepoint 2021 Flow-Through Update

The fund exited the quarter weighted as follows: 54% precious metals, 27% base metals, 14% uranium and 4% energy. Micro and small cap precious metal and base metal equities sold off dramatically in H1/22 as a result of the aforementioned macro-economic factors. Since the beginning of 2021, the inception year of the 2021 Flow-Through fund, gold bullion has returned -4.8% while the GDX and GDXJ have fallen 24% and 41%, respectively. We have always stressed to clients that commodities and resource equities are incredibly volatile. Performance of the flow-through funds will range from spectacular to awful. After two years of posting double digit after-tax returns in the 2019 and 2020 flow-through limited partnerships, the small cap resource trade has had a difficult stretch. While digesting the performance of the 2021 LPs, I would like to remind investors of my track record and the need to evaluate returns on an after-tax basis. I would also like to remind clients of the importance to remain 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 thereby not accounting 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 2021 Flow-Through LP prospectus, the breakeven point on an after-tax basis for an Ontario investor taxed at the highest marginal rate is approximately $12.40/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 any flow-through fund.

On June 30, 2022 the Before-Tax Net Asset Value (NAV) for the Ninepoint 2021 Flow Through National Class was $11.27 (Series A) and Ninepoint 2021 Flow Through Quebec Class was $7.06 (Series A).

Ninepoint 2021 Short Duration Flow-Through Update

The fund exited the quarter weighted as follows: 63% precious metals, 23% base metals and 14% uranium. Micro and small cap precious metal and base metal equities sold off dramatically in H1/22 as a result of the aforementioned macro-economic factors. Since the fund’s September 2021 inception, gold bullion has returned -0.354% while the GDX and GDXJ have fallen 16% and 26%, respectively. We have always stressed to clients that commodities and resource equities are incredibly volatile. Performance of the flow-through funds will range from spectacular to awful. After two years of posting double digit after-tax returns in the 2019 and 2020 flow-through limited partnerships, the small cap resource trade has had a difficult stretch. While digesting the performance of the 2021 LPs, I would like to remind investors of my track record and the need to evaluate returns on an after-tax basis. I would also like to remind clients of the importance to remain 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 thereby not accounting 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 2021 Flow-Through LP prospectus, the breakeven point on an after-tax basis for an Ontario investor taxed at the highest marginal rate is approximately $12.40/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 any flow-through fund

On June 30, 2022 the Before-Tax Net Asset Value (NAV) for the Ninepoint 2021 Short Duration Flow Through fund was $13.33 (Series A).

Ninepoint 2022 Flow-Through Update

The fund successfully raised $58M in April 2022. As of June 30, 2022 76% of the initial proceeds had been either invested or committed. 48% had been allocated to gold mining equities, 19% to base metal equities while uranium and other metals account for the balance. The portfolio currently consists of 36 companies with a weighted average market capitalization of $120M. The weighted average premium paid to date is 7%.

As disclosed in the 2022 Flow-Through LP prospectus, the breakeven point on an after-tax basis for an Ontario investor taxed at the highest marginal rate is approximately $12.40/unit. Note that this breakeven figure does not account for the additional tax credits for critical mineral exploration that was announced in the 2022 Canadian federal budget. 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 any flow-through fund.

On June 30, 2022 the Before-Tax Net Asset Value (NAV) for the Ninepoint 2022 Flow Through National Class was $16.41 (Series A) and Ninepoint 2022 Flow Through Quebec Class was $19.07 (Series A).

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

Series A NAV Details ($) Per Unit as at June 30, 2022 (Before Tax)

Fund Name NAV (Series A))
Ninepoint 2021 Short Duration Flow Through $13.33
Ninepoint 2021 Flow Through National Class $11.27
Ninepoint 2021 Flow Through Quebec Class $7.06
Ninepoint 2022 Flow Through National Class $16.41
Ninepoint 2022 Flow Through Quebec Class $19.07

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.

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