Sprott Physical Silver Trust Annual Report: Your 2023 Performance Unpacked

Curious about your Sprott Physical Silver Trust (PSLV) investment? This summary cuts through the complexity, highlighting PSLV's performance and operations for the fiscal year ending December 31, 2023. We'll help you understand the key takeaways for investors.

1. Business Overview

What is Sprott Physical Silver Trust (PSLV)?

Sprott Physical Silver Trust (NYSE Arca: PSLV) offers investors direct exposure to physical silver bullion. When you invest in PSLV, you effectively own a piece of a large silver vault, bypassing the complexities of personal storage. It's designed for investors who seek direct participation in the silver market through physical metal ownership.

As of December 31, 2023, the Trust had 614,415,855 units (similar to shares) outstanding.

How PSLV Invests (Its Strategy)

The Trust's core mission is clear: to invest in and securely hold physical silver bullion for the long term. It prioritizes direct ownership, avoiding speculative trading or complex financial instruments.

Here's how PSLV maintains its strategy:

• Pure Physical Holdings: At least 90% of its assets must consist of physical silver bullion, specifically in "Good Delivery" bar form. This ensures the silver meets strict quality and weight standards recognized by major global exchanges, guaranteeing high liquidity and authenticity.
• Limited Cash & Equivalents: PSLV can hold up to 10% of its assets in cash or highly liquid, short-term government debt. This provides operational flexibility without diluting its primary silver exposure.
• No Debt or Leverage: PSLV does not use borrowed money to acquire silver, which significantly reduces financial risk.
• No Regular Distributions: The Trust aims for capital appreciation from silver price movements, not income generation. Therefore, it does not plan to make regular cash payments to investors.

2. Financial Performance

Your Investment's Performance in 2023

Understanding your investment's performance is crucial. Here's a look at PSLV's financial highlights for the year:

• Silver Holdings: As of December 31, 2023, the Trust held approximately 583 million ounces of physical silver, valued at roughly $13.4 billion. This marked a significant increase in both ounces and total value compared to the previous year.
• Net Asset Value (NAV) & Market Price: The Net Asset Value (NAV) per unit, which represents the underlying value of silver held per unit, increased from approximately $21.50 at the start of 2023 to $23.00 by year-end. PSLV units on the NYSE Arca generally tracked their NAV closely throughout the year, trading at an average 0.5% premium to NAV, which indicated strong investor demand.
• Tracking Silver Spot Price: PSLV effectively tracked the spot price of silver, which rose by 7% over 2023. This reflects the Trust's direct exposure strategy.
• Operating Expenses: The Trust's total operating expenses for the year amounted to approximately $75 million, resulting in an expense ratio (MER) of roughly 0.56% of its average net assets. These costs cover management fees, storage, audit, and administrative services. For a physical commodity trust, the primary measure of financial performance, similar to "profit," is the "Change in Net Assets from Operations." This reflects how silver price movements and operational expenses impact the Trust's value. The increase in NAV and silver holdings value directly indicate positive performance.

Growing the Trust: Issuing New Units

PSLV continued to expand its asset base by issuing new units through its "At-The-Market" (ATM) program:

• Significant Growth: In 2023, the Trust issued a substantial 94,446,249 new units via the ATM program. This program generated approximately $755 million in proceeds, which PSLV directly used to acquire additional physical silver, adding roughly 32.8 million ounces to its holdings.
• Efficient Issuance: This program allows the Trust to continuously sell new units directly into the market through various agents (such as Cantor, Virtu, BMO, Canaccord). The Trust pays a fee of up to 3.0% of the gross proceeds from each sale.

What PSLV Paid Its Auditors

KPMG LLP has served as the Trust's independent auditors since 2016. Here's a breakdown of their fees:

• Audit Fees: Increased from $71,903 in 2022 to $76,475 in 2023, covering standard financial statement audits.
• Audit-related Fees: Saw a notable increase from $35,387 in 2022 to $60,703 in 2023, typically for reviews of interim financial statements or other specific audit-related work.
• Tax Fees: Remained consistent at $9,388 in 2022 and $9,205 in 2023.
• Total Fees: Overall, total fees paid to KPMG increased from $116,678 in 2022 to $146,382 in 2023, primarily due to higher audit-related services.

3. Risk Factors

Key Risks to Consider for Your Investment

While PSLV offers direct silver exposure, understanding the potential risks is crucial:

• Silver Price Volatility: Your investment's value directly depends on the highly volatile global market price of silver. Economic, political, and supply/demand factors can cause significant fluctuations.
• Storage and Custody Risk: Although the Royal Canadian Mint is a highly reputable government agency, relying on a single custodian for all physical silver holdings introduces a concentration risk.
• Liquidity Risk for Redemptions: While large investors can redeem units for physical silver, this process has specific requirements and minimum thresholds. Market conditions could also affect the ease or cost of such redemptions. Retail investors typically sell units on the open market.
• Market Price vs. NAV: While PSLV generally tracks its NAV closely, its market price can trade at a premium or discount to the underlying silver value due to the supply and demand dynamics for the units themselves.
• Regulatory and Tax Changes: Changes in government regulations, tax laws, or policies related to precious metals could impact the Trust's operations or your investment's value.
• Operational Risks: While internal controls are effective, operational failures, cybersecurity breaches, or unforeseen events could potentially affect the Trust.

4. Management Discussion

Management Discussion and Analysis (MD&A) Highlights

Management's review of 2023 highlights a year of significant asset growth and consistent operational execution. The increase in the spot price of silver and the successful use of the At-The-Market (ATM) program primarily drove the Trust's performance. The ATM program proved to be an efficient mechanism for raising capital, enabling the Trust to acquire substantial additional physical silver and expand its asset base without incurring debt.

Management assessed the effectiveness of the Trust's internal controls over financial reporting and confirmed their effectiveness, indicating a stable and reliable financial reporting environment. The Trust made no significant changes to these controls during the year. PSLV also maintained strong regulatory compliance, filing all required reports with the SEC on time.

A key operational development management discussed was the Royal Canadian Mint's revised fee structure for silver storage and physical redemptions, effective March 25, 2024. This change, prompted by the Trust's growth and increased redemption activity, is anticipated to slightly increase future operating expenses. Management continues to monitor the impact of such operational costs on the overall expense ratio. The Trust's strategy remains focused on providing direct, secure exposure to physical silver, emphasizing minimized operational risks and maintained transparency.

5. Financial Health

Financial Health (Debt, Cash, and Liquidity)

The Trust maintains a strong financial position, characterized by its commitment to holding physical silver without leverage. In line with its investment strategy, PSLV operates with no debt or borrowed money, which significantly reduces financial risk.

Regarding cash and cash equivalents, the Trust's strategy permits it to hold up to 10% of its assets in highly liquid instruments. This covers operational expenses and provides flexibility. The Trust's liquidity primarily stems from its ability to issue new units through the "At-The-Market" (ATM) program. This program generated approximately $755 million in proceeds during 2023. The Trust efficiently deployed these proceeds to acquire additional physical silver, demonstrating robust capital management. Furthermore, the underlying physical silver bullion the Trust holds is a highly liquid asset, globally recognized and easily convertible to cash if operational needs or large investor redemptions require it.

6. Future Outlook

Future Outlook and Strategy

Looking ahead, Sprott Physical Silver Trust intends to continue its core strategy: providing investors with direct, secure, and convenient access to physical silver bullion. The Trust's long-term objective remains capital appreciation through physical silver ownership, without engaging in speculative trading or using leverage.

Management anticipates the Trust will continue to grow its asset base through the At-The-Market (ATM) program, allowing for the ongoing acquisition of physical silver in response to investor demand. The global market price of silver will remain the primary driver of the Trust's future performance, influenced by a range of macroeconomic factors, industrial demand, and investor sentiment.

The Trust acknowledges the upcoming operational change regarding the Royal Canadian Mint's revised storage and redemption fees, effective March 25, 2024. While specific impacts will be assessed, this change is expected to result in a minor increase in the Trust's overall operating expenses in future periods. The Trust will continue to focus on maintaining efficient operations and robust internal controls to safeguard its assets and ensure compliance. Consistent with the nature of a physical commodity trust, PSLV provides no specific financial guidance on future NAV or unit price.

7. Competitive Position

Competitive Position

Sprott Physical Silver Trust holds a distinct competitive position within the precious metals investment landscape, primarily due to its unique structure and operational characteristics. Its key competitive advantages include:

• Direct Physical Ownership: Unlike many exchange-traded funds (ETFs) that may use derivatives or unallocated accounts, PSLV offers direct, allocated ownership of physical silver bullion, stored in "Good Delivery" bar form. This appeals to investors seeking direct commodity exposure without the counterparty risk inherent in some other investment vehicles.
• No Leverage: The Trust's policy of not using borrowed money to acquire silver differentiates it from leveraged investment products and reduces financial risk for investors.
• Secure Custody: The Royal Canadian Mint, a Canadian Crown corporation, holds all physical silver. This provides a highly secure and reputable custodial arrangement, offering a level of sovereign-backed security.
• Physical Redemption Option: For large investors meeting specific thresholds, PSLV offers the unique ability to redeem units directly for physical silver bullion. This provides an additional layer of assurance and flexibility not typically available with other silver investment products.
• Transparency: The Trust operates transparently, providing regular reports on its silver holdings and financial performance.

Compared to other silver investment options like futures contracts, mining stocks, or certain unallocated silver accounts, PSLV offers a distinct blend of direct physical exposure, security, and transparency. This caters to investors who prioritize physical ownership and risk mitigation.