IPO Preview: Sprott Physical Platinum & Palladium Trust

Based in Toronto, Ontario, Canada, Sprott Physical Platinum & Palladium Trust (SPPP) scheduled a $350 million IPO with a market capitalization of $350 million at a price of $10 per share, for Wednesday, December 19, 2012. Held over from last week.

S-1 filed November 30, 2012

Manager, Joint Managers: Morgan Stanley; RBC; BofA Merrill Lynch; UBS Securities.

SUMMARY

This appears to be a deal cooked up by the money management firm Sprott (Toronto Stock Exchange: SII) – $583 million market cap -to increase their revenue.

The simple idea is to invest 97% of the IPO proceeds within 20 business days of the IPO in equal portions of Platinum and Palladium, and then hold those assets indefinitely .

YTD the sponsor Sprott’s stock has sunk from $6.15 to $3.45, down 45%, which is hardly a recommendation to investors for a new venture, such as SPPP.

Sprott has also sponsored a similar gold trust – Sprott Physical Gold Trust (PHYS) – which has a market cap of $2.8 billion. PHYS stock as increased on a YTD basis from $14.15 to $14.45.

CONCLUSION

Avoid unless you believe investing 97% of the IPO proceeds in equal amounts of Palladium and Platinum, within 20 days of the IPO, is clearly the right thing to do.

BUSINESS

SPPP was created to invest and hold substantially all of its assets in physical platinum and palladium bullion.

The Trust intends to invest primarily in long-term holdings of unencumbered, fully allocated, physical platinum and palladium bullion and will not speculate with regard to short-term changes in platinum and palladium prices.

SPPP plans to fully committed 97% of the IPO proceeds within 20 business days.

DISTRIBUTION

SPPP does not anticipate making regular cash distributions to Unitholders.

The initial distribution policy of the Trust will be to make an annual distribution of such net income and net realized capital gains, if any, to Unitholders through a distribution of additional Units to the extent that such income or gains is not being allocated to Unitholders whose Units were redeemed in the year

OPERATING EXPENSES

Management Fee, .5% per year. The aggregate annual operating expenses are estimated to be approximately $0.9 million per year.

HISTORICAL PRICES

Since 2008, demand for physical platinum and palladium bullion for investment purposes has been at historically high levels.

Platinum price chart.

Palladium price chart

ABOUT THE SPONSOR

As of September 30, 2012, the Manager, together with its affiliates and related entities, had assets under management totaling Canadian $10.3 billion, and provided management and investment advisory services to many entities, including private investment funds, the Sprott Mutual Funds, the Sprott discretionary managed accounts, and management of certain companies through its subsidiary, Sprott Consulting LP.

Sprout Organization chart here.

RISK

A slowdown in the automobile industry may have the effect of causing a decline in the prices of platinum and palladium and a corresponding decline in the trading price of the Units on NYSE Arca and the TSX.

Autocatalysts, automobile components that use platinum and palladium, accounted for 38% of the global demand in platinum and 71% of the global demand in palladium in 2011. Reduced automotive industry sales may result in a decline in demand for autocatalysts. This means that a decline in the global automotive industry may impact the price of platinum and palladium and affect the trading price of the Units on NYSE Arca and the TSX.

COMPETITION

The development of new technology or new alloys could reduce the demand for platinum and palladium and adversely affect platinum and palladium prices and the Net Asset Value.

Demand for platinum and/or palladium may be reduced if manufacturers in the automotive, electronics and dental industries find substitutes for platinum and/or palladium.

The development of a substitute alloy or synthetic material which has catalytic characteristics similar to Platinum/Palladium Group Metals could result in a decrease in demand for platinum and/or palladium.

Furthermore, if the automotive industry were to develop automobiles that do not require catalytic converters and that gain market acceptance, such as pure electric vehicles, it could significantly reduce the demand for platinum and/or palladium.

High prices for platinum or palladium can create an incentive for the development of substitutes. Any such developments could have a material adverse effect on the long term prices of platinum and/or palladium.

NEED AN ACCOUNTANT’S ADVICE

The Trust expects to be a passive foreign investment company, which may have adverse U.S. federal income tax consequences to U.S. holders who do not make certain elections.

USE OF PROCEEDS

SPPP expects to net $332 million in IPO proceeds.

SPPP anticipates it will use at least 97% of the net proceeds of the offering to acquire amounts of Good Delivery physical platinum and palladium bullion equal in dollar value, all in accordance with the Trust’s investment objective and subject to the Trust’s investment and operating restrictions described herein.

The remaining net proceeds of the offering will be retained by the Trust in cash in order to provide available funds for expenses.

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