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Alternative Investing in the Age of Financial Repression

CFA Ottawa Society Scott Colbourne, MBA, CFA Senior Portfolio Manager November 2011

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Disclaimer

Sprott Asset Management LP is the investment manager to the Sprott Funds (collectively, the “Funds”). Important information about these Funds, including their investment objectives and strategies, purchase options, and applicable management fees, performance fees (if any), and expenses, is contained in their prospectus or offering memorandum. Please read these documents carefully before investing. Commissions, trailing commissions, management fees, performance fees, other charges and expenses all may be associated with investing in the Funds. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Funds. The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.

A Personal Journey

AGF to Cornerstone to TDAM to Sprott Long (relative return) asset management to Long/Short asset management

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Sprott Asset Management LP Overview Sprott group of companies current AUM: $9.9 billion*

Over 100 employees (Sprott group of companies) with

21 investment professionals The original Hedge Fund L.P. has generated a net

annualized return of 20.2%** since its inception in November 2000 Parent company is Sprott Inc. is publicly traded under

symbol SII on the Toronto Stock Exchange * As of Sprott Inc. press release dated Nov. 10, 2011 **All returns are based on Class A units, net of fees, annualized if period is greater than one year, and as of October 31, 2011. The Sprott

Hedge Fund L.P. is closed to new investments.

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Awards and Achievements Sprott Capital L.P. Fund of the Year, 2010 Sprott Hedge Fund L.P. Finalist; U.S. Equity Category 2008 Sprott Asset Management Inc. Finalist; ‘Management Firm of the Year,’ 2008

Sprott Capital L.P. Nominee: Best Long/Short Hedge Fund Globally, 2010. Sprott Offshore Fund Ltd. Winner; Best Long/Short Hedge Fund Globally, 2008 Sprott Opportunities Hedge Fund L.P. Nominee; Best Long/Short Hedge Fund Globally, 2008 Sprott Opportunities Hedge Fund L.P. Winner; Canadian Based Manager Category; U.S. Performance

Awards, 2007

Sprott Offshore Fund Ltd. #46; 'The Hedge Fund 100', May 21, 2011 Sprott Offshore Fund Ltd. #49; 'The Hedge Fund 100', May 11, 2009 Sprott Offshore Fund Ltd. #33 & Sprott Opportunities Hedge Fund LP #50; “The World’s 75 Best

Hedge Funds”, April 14, 2008 Sprott Hedge Fund L.P. #1 Hedge Fund Globally, 2002 Sprott Offshore Fund Ltd. Winner; Best Canada-Based Manager, 2006

Sprott Gold & Precious Minerals Fund Best Fund Over 1 Year; Precious Metals Equity Category,

February 2010 Lipper Awards

Sprott Canadian Equity Fund #1 Fund in Canada for ten-year return, March 2009 Sprott Gold & Precious Minerals Fund #1 Precious Metals Equity Fund in Canada for annualized

return since inception, 2006

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Sprott’s Success

Expertise in small cap, large cap, precious metals, resources, fixed income and long short investing

Conviction with a macro economic emphasis Focus on long-term secular themes Non traditional “alternative” approach to investment

management No 60:40 balance No focus on tracking errors Asset management vs. asset gathering

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Historical Sector Allocation in Long Portfolio Example of Sprott Long/Short Strategy

Average Gross Long: 86%

Average Gross Long Excluding Bullion: 62%

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Investment Process: Secular Themes

The investment team focuses on strategic asset/sector allocation decisions and trends that are long-term in nature.

Source: Bloomberg. The foregoing information shows the past performance of the Sprott Hedge Fund L.P. (the “Fund”) and is intended for illustrative purposes only as the Fund is currently closed to new investors. Important information about the Fund, including its investment objective, strategies and restrictions, and management fees, performance fees, other charges and expenses, is contained in its offering memorandum. Performance data represents past performance of the Fund and is not indicative of future performance. The foregoing graph shows the cumulative performance of the Class A units of the Fund since the Fund’s inception date of November 7, 2000 to October 31, 2011 as compared to the Standard & Poor’s 500 Total Return Index (“S&P 500 Index”), spot gold prices (CAD$) and WTI crude oil prices (CAD$) during the same period. The performance information shown assumes that all distributions made by the Fund during the period shown were reinvested in additional Class A units of the Fund. The performance information does not take into account sales, redemption, distribution or other optional charges or income taxes payable by a unitholder that would have reduced returns of the Fund. The S&P 500 Index is a capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries. This index is reported in Canadian dollars and assumes the reinvestment of all dividends. Since the Fund does not necessarily invest in the same securities as this index or in the same proportion, the Fund’s performance is not expected to equal the performance of this index.

+322.1%

+86.0%

- 29.6%

+656.6%

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Economic Themes – Risk and Returns

Debt Hangover “This Time is Different”, Rogoff & Reinhart, 2009 “The Liquidation of Government Debt”, Reinhart & Sbrancia, 2011

Single greatest challenge for developed world

Transfer of risk from private sector to public sector Leads to:

Vulnerable financial system Financial repression Unsettled political environment Government intervention

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Financial System: Still vulnerable “The capital injection will be used to provide support for 10 years to the “bad bank”– the business that contains €95.3bn of poorly performing bonds – which is being retained by Dexia. Its portfolio includes €7.7bn in junk bonds and €7.4bn in mortgage-backed securities tied to the US. Belgium is contributing €54.45bn, France €32.85bn and Luxembourg €2.7bn.”

- City A.M., October 11, 2011

“The European Banking Authority is proposing that eurozone banks should hold capital equivalent to between 9% and 10% of their risk-weighted assets, on a Basel 2.5 basis, with sovereign debt in trading books and banking books marked down to market prices. Here is the translation: eurozone banks, as a group, will probably be forced to raise around 200bn euros of additional capital, if European Union governments accept the EBA's recommendations.”

- BBC News, October 13, 2011

Total US & European banks’ tangible common equity: $3.4 trillion PIIGS bank loans are equivalent to total tangible common equity of all

US and European banks.

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Age of Repression

Limited ways to deal with debt overhang Economic growth Substantial fiscal adjustment Explicit default of restructuring Sudden inflation Subtle type of debt restructuring takes form of “Financial

Repression”

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Directed lending to government by captive domestic audiences

Explicit or implicit caps on interest rates Regulation of cross border capital movements Tighter connection between government and banks Low nominal interest rates – reduce servicing costs Negative real interest rates liquidate or erode the real

value of government debt

Financial Repression

Debt Ceiling Debate Toxic

Source: Thomson Reuters/University of Michigan, Credit Suisse

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“Voluntary” 50% Greek debt haircut Operation Twist, SMP, EFSF, Dexia Bailout,

SNB FX devaluation QE1, QE2, TARP, TALF, Term Auction

Facility, UK bank bailouts, Term Security Lending Facility, American Recovery & Reinvestment Act, European Financial Stability Facility, Chinese bank loans, Home buyer tax credits,

Ireland bank bail-outs, Money Market Investor Funding Facility, Unemployment benefit extensions, FDIC bank takeovers, Fannie Mae & Freddie Mac, EU & IMF bail-out of Portugal, Canadian government mortgage purchases

through CMHC, Student loan guarantees …

So far…

Government Intervention

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“Financial Repression” will be prevalent for many years as way for governments to systematically liquidate debt

Will negative real interest rates will force investors to rethink investing?

Sprott’s view on this debate Real/hard assets Rethinking fixed income

Looking Forward

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Real/Hard Assets Gold equities and physical Silver equities and physical Commodities – Sprott Resource Corp.

Strategies

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Gold and Real Interest Rates

Source: McClellan Financial Publications

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Reconsidering Fixed Income

Government bonds will likely generate a negative real return Starting point is ex ante negative real returns In 1946, when UK yields were last at 2.5% (current level), over

the subsequent 28 years they lost 75% of their value in real terms

No protection from inflation Certificates of confiscation

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Term Premium in Now Negative

Best of Worst Worlds? Deflation protection Rogoff/Reinhart: the negative real return on government

bonds will beat the larger negative returns on equities

Rethinking Fixed Income

Debt Outcomes

Source: UBS

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Reconsidering Fixed Income

Liquidity has changed and volatility has increased Wall Street inventory at a 10 year low Bank deleveraging/capital markets de-emphasis

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EVT

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Reconsidering Fixed Income

Non traditional less liquid alternative strategies can contribute to positive real returns Long/Short Fixed Income – Sprott Absolute Return Income Fund Private Credit – Sprott Private Credit Fund Volatility Distressed Emerging Market Credit

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Solutions should complement low cost fixed income solutions Core: Liquid Fixed Income Add: Absolute return, unconstrained funds Diversifies alpha, protects against inflation and enhances

income

Fixed Income Allocation

What does this mean for advisors and investors?

The foregoing information is for illustrative purposes only and should not be construed as a representation concerning the future composition or diversification of this Fund’s portfolio.

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Fund Benefits: 1. Institutional bond strategy

Cornerstone Capital experience 2. Well-suited for inflation-sensitive investors – a real return focus 3. Ideal complement to traditional bond funds 4. Flexible investment strategy 5. Floating rate hurdle: 3-month Canadian Dealer Offered Rate + 3%

Proxy for inflation +3% 6. Ability to use currencies and short selling to enhance returns 7. Very tax efficient

Sprott Absolute Return Income Fund

Long/Short Income Solution*

* For accredited investors only.

Sprott Absolute Return Income Fund

The foregoing information is for illustrative purposes only and should not be construed as a representation concerning the future composition or diversification of this Fund’s portfolio.

*Duration Neutral Strategies

Approach

Collateral Portfolio Duration < 2 years

Strategy

Sprott Private Credit Fund Successful Entrepreneurial Founders with Unique Private Credit and Private Equity Experience

Third Eye Capital formed in 2005 by Arif N. Bhalwani (15+ years venture capital, private equity, and distressed investing, founder of Pinnacle Capital, MBA, CFA) and Dr. David G. Alexander (30+ years commercial finance, former CEO of The CIT Group in Canada, DBA, MBA, CMA, ICD.D)

Founders invested, operated, and/or sold growth and distressed investments in construction services, technology, life sciences, financial services, specialty lending, automotive, mining, and energy

Recognized experts in private investing with reputations for creating value, which drives proprietary deal flow, market intelligence, and preferred investor status

Talented and Multidisciplinary Team with Extensive Investment Experience Five additional investment professionals with average 15+ years of mid-market investment, operational, and

workout experience, and five finance, marketing, and support staff with relevant industry experience Full-service capabilities in transaction sourcing, underwriting and portfolio management

Strong Investment Track Record Managing Major Institutional Assets TEC Funds have generated net annual returns of 13-15% without a single investment loss for a wide array of

investors including one of Canada’s largest pension funds, corporate pensions, endowments, foundations, large family offices, fund-of-funds, and high net-worth individuals

Exclusive sub-advisor to Sprott Asset Management, one of the most successful investment firms in Canada Established Leader in Alternative Lending in Canada

TEC first to launch pure alternative lending fund focused on Canadian SMEs for institutional investors Highly sought after in difficult-to-lend industries such as technology, mining, energy, and construction services

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Lenders 2006

Lenders 2008

Lenders 2010

Loan Characteristics Senior secured revolving and term credit facilities:

• Privately-negotiated, illiquid, non-rated instruments intended to be held to maturity

• 1st lien and secured by critical business assets, with preference for self-liquidating working capital

• Target LTV of 50% or less with dynamic borrowing base availability to ensure coverage

• Cash dominion and outside guarantees All-seasons financing:

• Working capital, capital expenditures, mergers and acquisitions, bridge, turnaround, and refinancing

Short-to-medium term maturities: • 12-24 months committed term • No prepayment penalties • Bullet, balloon, fixed payment, or excess cash flow sweep

amortization Contractual returns:

• Cash interest that is fixed or floating with floor • Fees including origination fees, closing fees, monitoring fees, standby fees, and renewal fees • 100% of fees paid to fund

Contingent returns: • Free equity or revenue participation

Compliance and reporting: • Financial and operating covenants (3-5 tested regularly)

Indicative Capital Structure

30-80% of total capital

10-30% of total capital

10-50% of total capital

Target Position

Senior secured 1st lien debt

Second lien, junior secured, unsecured, and

trade claims

Equity

Strategy Overview: Typical Loan Characteristics

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No Safe Havens/Easy Answers

Age of financial repression We believe that a non traditional approach can add alpha Emphasize real/hard assets Complement core fixed income liquidity with non

traditional fixed income alternatives

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Contact Information

Sprott Asset Management LP Royal Bank Plaza, South Tower 200 Bay Street Suite 2700 Toronto, ON M5J 2J1 T: 416 943 6707 Toll Free: 866 299 9906 F: 416 362 4928

Email: info@sprott.com Web: www.sprott.com

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