This Small Gold Streamer Expects to More Than Double Production

Lyn Alden  |

Historically, gold mining companies have not done very well for investors, as they've under-performed the price of gold as well as stocks and bonds in general.

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It's an industry that generally has low insider ownership and tends to enrich management but not shareholders. There have been a few major exceptions like Randgold Resources GOLD that has been exceptionally well-managed, but overall it's an industry filled with landmines and disappointments for prospective investors.

However, one small group of companies within the industry, called precious metal royalty and streaming companies, has stood out as outperformers. Rather than operate mines themselves, these companies pay money upfront to develop mines, and then in exchange they receive rights to buy metals from the mine once it's active at a small fraction of the spot price (streams), or they receive a percentage of gross or net production (royalties).

These precious metal financiers get to avoid many of the risks associated with mining, but tend to be highly-valued and have a bit less explosive upside potential than miners should the price of gold and silver sharply rise. For miners, financing their projects by selling mineral rights to royalty and streaming companies is generally safer than using debt, and less dilutive than issuing equity.

All three major precious metal royalty and streaming companies (Franco Nevada FNV, Royal Gold RGLD, and Wheaton Precious Metals WPM) have outperformed the price of gold since they'e been public. Out of the three, Franco Nevada has been the star outperformer:

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I have a long-term bullish outlook on the three major royalty and streaming companies, but one of the up-and-coming junior streamers is worth a serious look too. The risks are higher but so is the potential upside.

In this late-cycle environment, where broad growth estimates are slowing and global debt is at all time highs both in nominal terms and as a percentage of global GDP, I think having some portfolio exposure to precious metals is prudent for conservative investors.

Sandstorm Gold Royalties (SAND) is a precious metals royalty and streaming company with zero debt in the earlier phase of their growth cycle. While Franco Nevada, Royal Gold, and Wheaton all have market capitalizations of several billion dollars each, Sandstorm's market capitalization is currently well under $1 billion.

In addition, while those major royalty and streamers have the majority of their mineral rights in current production, less than 40% of Sandstorm's mineral rights are in production. The rest are in development or exploration phases. As these mineral rights come online and start producing active royalties and streams over the next several years, that's a lot of potential upside for Sandstorm.

Specifically, the company earned about 55,000 gold equivalent ounces in 2017, which is up from about 20,000 ounces back in 2011. They expect to produce nearly 60,000 ounces in 2018. For the next few years they expect relatively flat growth up to about 75,000 ounces per year. However, after a few years of this relatively flat performance, the company's five-year outlook expects this to rapidly increase to 140,000 ounces in 2023, which was most recently mentioned in their 2018 Q3 financial report.

According to their 2018 Q3 financial report, starting in January 2019, their Yamana silver stream should come online. Sandstorm will buy 20% of their produced silver at 30% of the spot price of silver, which is very profitable for Sandstorm and a good example of a streaming agreement.

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In 2017, Sandstorm acquired a 30% stake in the Hot Maden project in Turkey, which was discovered a few years ago. Early analysis shows that when this large mine is in production starting in early 2022, it could have all-in sustaining costs (AISC) of less than $400 per ounce of gold.

In comparison, the vast majority of mines have AISC of over $800, with many of them having AISC over $1,000. This mine could be one of the cheapest sources of gold in the world, which makes it incredibly profitable at current gold prices or even at moderately lower gold prices.

According to their November 2018 investor presentation, Sandstorm estimates that their average attributable gold ounces from the project will be 80,000 per year when it is active, which is more than their entire company-wide current gold equivalent ounce production in 2018. The project could have an after-tax internal rate of return as high as 50%, with a payback period of under 2 years.

Due to the size and expected profitability and this project, it is by far Sandstorm's most important asset going forward, is key for reaching Sandstorm's expected 140,000 ounces of annual company-wide production, and will likely play a dis-proportionally large role in the company's future.

However, over the very long run as a greater share of the company's 187 mineral rights assets start to come online, going from less than 40% of their book in production to over 70% of their book in production like the more mature royalty and streaming companies, Sandstorm will hopefully further grow and diversify its holdings. In addition, as they reinvest free cash flow into more mineral rights, this should further grow and diversify their sources of revenue.

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For Sandstorm, the biggest drawback for investors has been share dilution. The company has grown massively over the past 8 years, going from 5 mineral rights assets to 187 mineral rights assets and increasing their gold equivalent ounces from basically nothing to nearly 60,000 annually, but they've also increased their share count from 51 million to 192 million to finance all of this growth. Investors have not done very well holding Sandstorm stock over the past several years.

However, from this point on, management is on record as saying they don't expect much further share dilution. At this point, the company is free cash flow positive, and they can reinvest that capital into new mineral right acquisitions without diluting shareholders. In fact, as of the 2018 Q3 earnings announcement, the company has authorized a share buyback program of 10% of its existing shares.

And over the next 5 years, gold equivalent ounces for the company is expected to go from under 60,000 to 140,000, with significant upside potential. Patient investors should be well-rewarded if this plays out as expected, even if the price of gold stays relatively flat. A sharp upward movement in the price of gold and silver, due to recessions or other factors, would further benefit Sandstorm and its investors.

Besides the fluctuating price of gold, the key risk for Sandstorm investors is the Hot Maden project due to the disproportionate size of this potential mine compared to Sandstorm's other assets. If the mine development is delayed or at worst cancelled, it would be a serious blow to Sandstorm's growth plans.

So far, all geological surveys of the mine have been positive, but if there are negative findings about the size or purity of the mine, it would be a material negative impact to Sandstorm's growth plans.

In addition, the Hot Maden project is located in Turkey, which gives it more jurisdictional risk than mines in North America. Some investors fear that in the event of serious economic recession, the Turkish government could seize foreign property rights like Sandstorm's stake in the Hot Maden property.

The good news is that Turkey has had a strong record of respecting mineral rights, and the project is majority owned by a Turkish mining company Lydia with a good history of successful mine development in Turkey.

Over the coming years, as the Hot Maden project reaches milestones towards development and production becomes more of a certainty, this should be positively reflected in Sandstorm's stock price. Any setbacks would likely be a big negative for the stock price.

In summary, precious metal royalty and streaming companies have historically been successful investments, and Sandstorm is shaping up to potentially be one of the next major players in the industry. There is considerable risk due to the importance of the Hot Maden project for the company, but this risk is more than balanced out by the potential upside for the project and the company as a whole. If all goes as expected over the next decade, Sandstorm could be the next Franco Nevada, with investors' capital being worth several times what it is today.

As a small part of a diversified portfolio, Sandstorm is a solid investment choice this year in my opinion, mainly for investors with a long-term buy-and-hold investment philosophy that want a hedge against volatility and global uncertainty.


The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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