July 31, 2008 / 4:58 PM / in 9 years

UPDATE 1-Sprott CEO sticks with short-selling themes

(Updated throughout)

TORONTO, July 31 (Reuters) - Eric Sprott, a Canadian hedge-fund manager who for years has taken a dim view of the financial system and been bullish on resources, said his money-management firm Sprott Inc SII.TO is content to keep its short positions in U.S. financial and home-builder stocks.

“We think we’re likely in the midst of a systemic financial meltdown. I‘m not trying to be shocking to anyone,” Sprott said on a conference call on Thursday to discuss the newly public company’s quarterly results.

He cited Bear Stearns’ collapse, recent measures to bolster U.S. mortgage lenders Fannie Mae FNM.N and Freddie Mac FRE.N, and the demise of several U.S. banks as proof of “major issues”

Sprott, who is president, CEO and the controlling shareholder of Sprott Inc, said the firm’s mutual funds and hedge funds own physical gold, shares in gold miners and energy producers. On the short side, the company figures that shares of banks and brokerages, consumer products companies and home builders have room to fall further.

Short sellers profit by borrowing and selling a security they think will drop in value. If their call is correct, they buy it back at a lower price, pocketing the difference.

Sprott Inc’s portfolios have about C$1.5 billion in various short positions, Sprott said on the call.

“Now that we’re technically in a bear market, we believe we’re well positioned to outperform the market and generate solid returns,” he said. “We take a very long-term view of the macros, we try to stay the course.”

Until lenders are more willing to lend, house prices stop declining and U.S. home builders stop adding to excess housing inventory, the company will stick with its short themes, Sprott said.

“I don’t think we need one new home in the U.S. ... if you’re a new home-builder, I don’t know who you’re building for because there’s really no net need for new homes.”

Earlier on Thursday, the company said its profit climbed to C$11.4 million, or 8 Canadian cents a share, in the three months ended June 30. That compared with a net loss of C$7.7 million a year ago, when it was still a private company.

Assets under management rose to C$7.7 billion from C$6.8 billion at the end of March. The 13.6 percent increase in assets came from net sales of C$259 million, plus appreciation in the market value of its portfolios.

“We’re very happy” with the sales number, since other fund managers are seeing smaller inflows or net redemptions, Sprott said.

The company’s stock was up 2.6 percent at C$8.00 on Thursday afternoon on the Toronto Stock Exchange.

But the shares are down 20 percent since the C$10 initial public offering price in mid-May.

The company is stepping up marketing efforts, developing or participating in new funds, and expects to see continued growth in its offshore funds, Sprott said. ($1=$1.02 Canadian) (Reporting by Lynne Olver; editing by Rob Wilson)

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