SPROTT PHYSICAL PLATINUM & PALLADIUM TRUST Annual Report: A Comprehensive Investor Review

Unlock the insights into Sprott Physical Platinum & Palladium Trust (SPPP) with our detailed review of its annual filing for the fiscal year ended December 31, 2023. Filed in March 2024, this report offers a clear look at the Trust's performance, financial health, and strategic direction, providing valuable information for both current and prospective investors.

1. Business Overview: Understanding SPPP's Investment Objective and Operations

Sprott PPLT (ticker: SPPP on NYSE Arca) provides investors with a secure, convenient, and cost-effective way to gain exposure to physical platinum and palladium bullion. The Trust's primary investment objective is to offer a low-cost, transparent, and exchange-traded means of investing in physical platinum and palladium, with its unit value closely tracking the spot price of these metals.

The Trust holds only physical platinum and palladium bullion that meets the stringent "Good Delivery Standards" of the London Platinum and Palladium Market (LPPM), guaranteeing a minimum purity of 99.95%. Unlike many investment vehicles, SPPP avoids derivatives, futures contracts, or unallocated accounts; it invests solely in actual, allocated metal. The Royal Canadian Mint serves as the primary custodian, with Loomis International acting as a sub-custodian for palladium, ensuring the secure storage of these valuable assets.

Market Context for 2023: The year 2023 brought significant volatility and upward momentum to the platinum and palladium markets. Increasing industrial demand, particularly from the automotive sector (catalytic converters), and potential supply disruptions influenced platinum prices. Palladium, also driven by automotive demand, faced some challenges from substitution trends towards platinum in certain applications. However, it generally benefited from broader precious metals sentiment and supply concerns. Understanding these underlying market dynamics is crucial for interpreting the Trust's performance.

2. Financial Performance: Key Highlights and Growth

2023 marked a year of substantial growth and strong performance for Sprott PPLT:

• Significant Unit Growth: The Trust significantly expanded its asset base through its "at-the-market" (ATM) offering program. In 2023, SPPP issued 25,247,168 new units, raising $317.5 million in capital. This represents a substantial increase from the 7,458,545 units issued in 2022 for $75.1 million. This influx of capital meant that the new units issued in 2023 constituted approximately 56% of the total 45,084,000 units outstanding as of December 31, 2023, demonstrating robust investor demand.
• Expanded Metal Holdings: Reflecting this capital raise, the Trust's physical metal holdings soared:
  • Platinum: 238,956 troy ounces (up from 93,738 troy ounces in 2022).
  • Palladium: 170,850 troy ounces (up from 90,172 troy ounces in 2022).
• Metal Valuation: The market value of these holdings increased dramatically:
  • Platinum Spot Price: Ended 2023 at $2,060.51 per troy ounce, a significant rise from $907.55 in 2022.
  • Palladium Spot Price: Ended 2023 at $1,620.00 per troy ounce, also up substantially from $912.63 in 2022.
• Net Asset Value (NAV) per Unit: The value of each unit increased remarkably, starting 2023 at $9.13 and closing the year at $17.73. Appreciation in metal prices primarily drove this increase.

3. Financial Performance: Revenue, Profit, and Expense Structure

In 2023, the Trust's financial performance showed significant gains from its metal holdings and a well-managed expense structure, especially considering its growth:

• Total Net Assets (NAV): As of December 31, 2023, the Trust's total Net Asset Value reached approximately $799.2 million, a substantial increase from $297.8 million at the end of 2022.
• Unrealized Gains: Rising metal prices led to substantial paper gains:
  • Platinum: $194.9 million in unrealized gains (a strong reversal from $8.5 million in unrealized losses in 2022).
  • Palladium: $98.1 million in unrealized gains (compared to $13.5 million in unrealized losses in 2022).
• Realized Gains: The Trust also reported a modest $0.3 million in realized gains from selling a small portion of platinum in 2023, indicating active, albeit limited, management of its holdings.
• Overall Trust Return: SPPP delivered an impressive 94.1% return for 2023, a significant rebound from a -14.6% loss in 2022. This performance closely tracked the underlying metals, with spot platinum returning 127.0% and spot palladium returning 77.5% over the same period.
• Expense Management:
  • Operating Expenses: Increased to $1.6 million in 2023 (from $0.6 million in 2022). However, thanks to the Trust's substantial growth, these expenses fell as a percentage of average total assets, from 0.46% in 2022 to 0.45% in 2023, indicating improved operational efficiency.
  • Management Fees: Sprott Asset Management LP received management fees of $1.8 million in 2023 (up from $0.7 million in 2022), calculated as 0.50% of the Trust's net assets.
  • Total Management Expense Ratio (MER): Including all operational costs, the Trust's MER for 2023 was approximately 0.95%, which represents the total annual cost of owning the units.
  • Audit Fees: KPMG LLP received $179,892 for audit services in 2023, up from $142,775 in 2022, primarily due to increased audit-related fees.

4. Financial Health: Debt, Cash, and Liquidity

As a physical bullion trust, SPPP's financial structure is straightforward and debt-free. The Trust does not incur debt to finance its holdings of platinum and palladium bullion. Its assets consist almost entirely of physical metal, funded directly by issuing units to investors.

The Trust maintains cash and cash equivalents primarily to cover operational expenses, such as management fees, custody fees, audit fees, and other administrative costs. Financial institutions typically hold these cash balances in interest-bearing accounts.

The Trust's liquidity for operational purposes comes from these cash reserves and, if necessary, from selling a minimal portion of its metal holdings. However, the management fee structure and cash from incidental activities typically fund operations. The ability to issue new units through its "at-the-market" program also enables capital raising, which indirectly supports the Trust's financial stability and growth without relying on debt.

5. Competitive Position

The Sprott Physical Platinum & Palladium Trust stands out within the precious metals investment landscape because it offers direct, allocated, and physical ownership of platinum and palladium bullion. Its key competitive advantages include:

• Direct Physical Ownership: Unlike many investment products that rely on derivatives, futures contracts, or unallocated accounts, SPPP holds only physical, allocated platinum and palladium bullion. This eliminates counterparty risk associated with synthetic products and ensures investors have a direct claim on the underlying metal.
• High Purity and Standards: The Trust holds only "Good Delivery Standards" bullion (minimum 99.95% purity) from recognized refiners, guaranteeing the quality and marketability of its assets.
• Secure Custodianship: Highly reputable custodians like the Royal Canadian Mint and Loomis International provide a high level of security and integrity for the physical assets, differentiating SPPP from less transparent storage solutions.
• Exchange-Traded Convenience: As an exchange-traded trust, SPPP offers investors the liquidity and ease of trading found in publicly listed securities, while providing direct exposure to physical commodities without the complexities of direct bullion purchase, storage, and insurance.
• Cost-Effectiveness: While management fees apply, the Trust aims to provide a cost-effective solution compared to direct individual storage and insurance of physical bullion, particularly for larger investors.
• Transparency: The Trust publicly discloses its holdings, and its transparent structure allows investors to clearly understand what they own.

Compared to other investment options such as futures contracts, mining company stocks, or other precious metal ETFs that may use unallocated accounts or derivatives, SPPP appeals to investors seeking the highest level of direct physical exposure and security for their platinum and palladium investments.

6. Risk Factors

Major Successes:

1. Exceptional Growth: The successful ATM program and the resulting significant increase in units outstanding and metal holdings underscore strong investor confidence and effective capital raising.
2. Strong Performance: The 94.1% return in 2023 demonstrates the Trust's ability to effectively capture the upside of a rising precious metals market, reversing previous year's losses.
3. Operational Efficiency: Despite rapid growth, the Trust managed to slightly reduce its operating expenses as a percentage of assets, indicating scalable operations.

Key Risks for Investors:

1. Commodity Price Volatility: The value of SPPP units directly reflects the highly volatile spot prices of platinum and palladium. Global economic conditions, industrial demand (especially automotive), geopolitical events, and supply disruptions influence these prices, which can lead to significant fluctuations in unit value.
2. Custody and Security Risk: While the Trust uses reputable custodians (Royal Canadian Mint, Loomis International), an inherent risk always exists with the physical storage of large quantities of precious metals, including potential loss, damage, or theft.
3. Liquidity Risk: While SPPP units trade on NYSE Arca, the liquidity of the underlying physical metal market can impact the Trust's ability to acquire or dispose of bullion efficiently, potentially affecting NAV.
4. Currency Risk: As platinum and palladium are priced globally in U.S. dollars, investors holding other currencies face currency fluctuation risks.
5. Trust Structure Risks: The Trust is not actively managed to generate income beyond metal appreciation. It does not pay distributions, and its value depends solely on the underlying assets and market demand for its units.
6. Dilution Risk: While the ATM program facilitates growth, continuous issuance of new units could dilute existing unitholders if not managed effectively or if the new capital isn't deployed advantageously.

7. Future Outlook and Strategy

Sprott Asset Management LP, as the Trust's manager, remains committed to its core strategy of providing direct, physical exposure to platinum and palladium. Their successful ATM program in 2023 indicates a continued strategy of growing the Trust's asset base to meet investor demand and enhance liquidity.

Management's commentary suggests an optimistic, yet cautious, outlook for platinum and palladium. They anticipate continued demand from industrial applications, particularly as global economic activity recovers and environmental regulations drive demand for catalytic converters. They also acknowledge potential supply constraints from mining operations, which could support prices. The Trust's strategy will likely continue to focus on maintaining its low-cost structure, ensuring the integrity and security of its physical holdings, and leveraging its exchange-traded structure to offer accessible investment in these critical industrial and precious metals. Investors should monitor global economic trends, automotive industry performance, and mining supply reports for further insights into the Trust's future performance.