Fun With Canadian Retail Precious Metals Merger Arbitrage

This morning Sprott launched an exchange offer for shares of $GTU and $SBT-U (no positions).  Sprott has also set up a website,, in an effort to help convince shareholders of GTU and SBT-U that these exchanges are in their best interests.

I wrote a preliminary post about this subject a few weeks ago, and, while this is not investment advice, I do believe that the Sprott products are better products than the Central Trust products which lack a decent redemption feature to insure that they trade near their Net Asset Values.

What’s interesting about this situation is that it seems (based on comments I have seen on my own blog post on the subject and on other discussion venues) like the GTU shareholders don’t want interference from outside parties to help them close the pesky NAV discount that arises from the inferior construction of their trust.  They like their old school inferior Trust exactly how it is, and they’re sure that the NAV discount will rebound eventually.  (I addressed this belief in my earlier post)   My impression of GTU shareholders is that they are some of the most naive retail investors on the planet, and this makes for an interesting dynamic for guys like me who might be inclined to trade this merger arbitrage spread (buying GTU, shorting PHYS).

See, the Sprott Offer has some minimum requirements (2/3rds acceptance), and it’s a definite possibility that they won’t be able to get 2/3rds of GTU’s shareholders to realize that this is probably a good deal for them.   I am not putting on this arbitrage spread, because I believe that Canadian retail precious metals trust holders are unpredictable, and may very well vote against their own best interests – not realizing what their best interests actually are.  It will be interesting to see how the Central Trust responds to Sprott’s official offer – as their prior responses indicated that they were far from receptive.

Anyway, my favorite part of the Sprott documents are Sprott’s explanations of why the Sprott funds are better, emphasis mine:

If the Offers are successful, Sprott believes that GTU and SBT unitholders will see a meaningful reduction in the persistent discount to NAV impacting their current investments in GTU and SBT units. Sprott believes these discounts are due, in large part, to GTU and SBT management’s failure to reinvest the fees it collects in marketing the products. Additionally, GTU and SBT have punitive redemption features under which their unitholders may only redeem their units for less than market value. GTU and SBT do not allow their unitholders to redeem for physical bullion.

Sprott is a global leader in precious metals investing with the proven track record and best-in-class platform needed to address the persistent discounts to NAV at which GTU and SBT have traded. Sprott actively markets its products to retail and institutional investors, creating buying demand that supports the price of Sprott Physical Trust units. The Sprott Physical Trusts also offer an industry-leading physical redemption feature.

Now, of course, they do mention the superior Sprott redemption features, but I find it hilarious that that’s the secondary factor.  Does Sprott really believe that their products trade tighter to NAV because their marketing allowed them to convince more Canadian retail investors to buy the product?    No – it’s because the product itself is a better product with a redemption feature that allows the Market to arbitrage away mispricings by buying shares if they trade at a meaningful discount to NAV and redeeming them for bullion.   This, in fact, has happened – it’s not just a fanciful theory of mine.  In short, what I’m saying is that the products trade near their NAV not because the Sprott Machine is good at creating hype (although is it!) and constantly inducing a flow of new buyers of the product – but because the Sprott products’ redemption features naturally provide those buyers to arbitrage the mispricings.

I eagerly await Central Trust’s response to the Sprott Offers…

Closed End Fund Arbitrage and Hostile Takeovers




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