PSLV – Sprott Registers to Sell – Sold To You Sucka

In my travails of the internet today I kept coming across references to a PSLV secondary offering, which I didn’t see a headline for.  Something was up, obviously, as PSLV underperformed SLV by 3% today.   In these situations there’s a smart thing to do – go look for the SEC filing yourself (in fact, that’s ALWAYS the smart thing to do – verify the facts yourself instead of taking someone else’s word for it).  Yep – this is what I do on Friday night at 11:30pm – peruse the SEC filings – thrilling, I know.  I have to admit, I got a little bit excited when I came across this gem from PSLV, though: an F-1 filing for Sprott’s Physical Silver Trust (PSLV)

Wow. Considering that I seem to be the only person alive writing about the fact that PSLV’s premium means that it’s overpriced and doesn’t have logical implications about the supply of silver available in the market, this is a MEGA-story.  What does it mean?  Well, I encourage you to spend 15 minutes perusing the F-1 filing – let’s talk about the implications.

This is NOT a notice of a secondary offering by PSLV.   In a secondary offering, PSLV would sell new shares to the public, take the proceeds, and buy more silver bullion for their Trust.  That’s what I expected would happen eventually.  This is much worse.  Notice what this offering says:

“Through this prospectus, the selling unitholders named in the section “Selling Unitholders” may sell in one or more offerings from time to time pursuant to this prospectus up to an aggregate of 14,971,815 transferable, redeemable units of Sprott Physical Silver Trust, to which we will refer as the Trust. Each unit represents an equal, fractional, undivided ownership interest in the net assets of the Trust attributable to the particular class of units.

The selling unitholders may sell any or all of the units registered under this prospectus on any stock exchange, market or trading facility on which the units are traded or in privately negotiated transactions at fixed prices that may be changed, at market prices prevailing at the time of sale or at negotiated prices. Information on the selling unitholders and the times and manner in which the selling unitholders may offer and sell the units registered under this prospectus is described under the sections titled “Selling Unitholders” and “Plan of Distribution” in this prospectus. The Trust is not selling any units under this prospectus, and the Trust will not receive any of the proceeds from the sale of the selling unitholders’ units of the Trust registered under this prospectus.”

In English, it’s telling you that some unitholders are registering to sell their shares.  “Why would unitholders have to register to sell their shares?”  You might ask.  Think of it as a variation of insider selling – they need to register their shares before they can sell them.

Here’s the zinger: let’s look at who the selling unitholders are:

Name of Selling Unitholder(1)
Number of
Units
Beneficially
Owned Prior
to the
Offering(2)
Ownership
Percentage
Prior to the
Offering
Maximum
Number of
Units
Being
Offered
Number of
Units to Be
Beneficially
Owned Upon
Termination
of the
Offering
Ownership
Percentage
Upon
Termination
of the
Offering
The Sprott Foundation 4,982,115 8.66% 4,982,115 0 0%
Sprott Hedge Fund LP 3,288,300 5.72% 3,288,300 0 0%
Sprott Hedge Fund LP II 3,329,200 5.79% 3,329,200 0 0%
Sprott Master Fund Ltd 2,109,200 3.67% 2,109,200 0 0%
Sprott Master Fund Ltd II 1,263,000 2.20% 1,263,000 0 0%
Total 14,971,815

 

Is it sinking in yet?  I’ll put it in bold face large font for you, just so there’s no confusion:

Eric Sprott is filing so that he can sell all of his PSLV shares at any time.

Whoops.  Why would he do that?  Well, as I noted at length, the shares are trading at a huge premium to their Net Asset Value.   A few savvy commenters asked “Why doesn’t Sprott arb the premium himself through a secondary?”  The thing is, if PSLV does a secondary offering of new shares to the public, that money goes to the Trust, and Sprott doesn’t really “arb” anything.   Here, however, if Sprott sells his holdings into the market, he can receive whatever premium the market is willing to fork over, and then reinvest the proceeds into silver bullion himself.   Sell at 120 cents on the dollar, buy back at 100 cents on the dollar. Rinse, repeat.

I told you Eric Sprott was a smart man.

Sold to you, Sucka.

I think there is something even more sinister going on here with Sprott’s handling of PSLV, but I’m going to save that for next week. Stay tuned.

-KD

 

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