Fast-moving Sandstorm Gold Ltd. (TSXV:SSL) is riding gold streams past the usual rocky shores of capital and operating expenses that sink some emerging miners.
"Generally speaking, the key ingredient in a gold stream is us making an upfront payment to receive a certain percentage of the life-of-mine production from the mine for a fixed price per ounce," said Sandstorm president and CEO Nolan Watson. "And you negotiate that price up front on day 1."
Typically, for providing cash up front to development-stage mining projects, the fixed per-ounce price is usually a bargain rate of between $400 and $500. With gold currently hovering above $1,700, Sandstorm is exposed to huge net gains and cash flow once the mine starts pouring gold bars.
The non-fixed-asset formula also allows Sandstorm to expose shareholders to unlimited future mining opportunities, as opposed to the higher risk profile of owning stock in a one- or two-project gold mine developer.
The upside for miners is they get needed cash to fund capital and operating expenses without diluting shareholder value, especially over the past year with shares at basement prices.
Watson, who is one of Business in Vancouver's just-announced CEOs of the year (see sidebar), said one of his company's first gold-stream deals was with Silver Crest Mines Inc. (TSXV: SVL), which he estimated had a market cap of well under $20 million.
"We gave them an amount of value equal to $15 million for the right to buy 20% of their gold production from one of their multiple assets.
"Their alternative was to raise an amount equal to 100% of their then current market cap and dilute investors 100%."
Consolidating gold streams and similarly structured royalties has been mostly the purview of two heavyweights in the field: Franco Nevada Corp. (TSX:FNV) and Royal Gold Inc. (TSX:RGL).
While both have largely focused on senior-miner-sized mines, Don MacLean, partner and senior analyst at Paradigm Capital Inc., said Sandstorm has developed a different sweet spot.
"What makes their business model special is that they are tapping into the royalty potential from small mines. Small deposits are far more numerous than the large deposits that senior companies like Royal Gold and Franco Nevada need to move the dial. More deposits mean less competition, strong growth potential and hopefully better rates of return."
Sandstorm's stock price has more than doubled in the past year to above $14. That performance won it the attention of manic Jim Cramer on CNBC's Mad Money on September 28.
The company posted record second-quarter gold sales of 9,259 ounces, a 150% increase over the same period last year. With that came record operating cash flow of $11.3 million for the quarter.
The company is also cashed up to do more deals after recently closing an over-allotted financing of $150 million.
Watson credits the company's upswing to the flow of mines now coming into full production. Of its eight gold streams and three royalties, five are now producing.
The company estimates its planned year-end of $40 million free cash flow will more than double to $90 million if projects come online as planned and gold continues to trade above $1,700 per ounce.
There are many lower grade or difficult projects in development that have been resuscitated by higher gold prices. But Sandstorm is sticking to the tried-and-true recipe of picking projects it believes can reach the goal of becoming a mine: proven mine-startup management advancing a deposit with low-cost characteristics and lots of exploration upside to add future ounces to the ledger.
"Our favourite types of assets are ones where you pay for five years and you get 20 (years of mine life)," said Watson.
Both Watson and MacLean agree that money appears to be coming off the sidelines in the precious metals equity market. The stock prices of advanced exploration and development companies all seem to be riding a general swell.
But MacLean said that as long as trading doesn't escalate radically, gold streams can be a perfect pairing with equity financings.
"Sandstorm doesn't want a beached boat and to be the sole source of financing, just a part. A healthier capital market, where the boats are starting to float, helps them by allowing the company to find the other part [equity financing].
"It will get tougher for Sandstorm when financing is easy for a company, but at this point in time – with the boats all starting to float – sailing conditions for Sandstorm are great."
However, Franco Nevada is looking to take some wind from Sandstorm's sails. The senior company announced in September a 50-50 royalty acquisition partnership with junior Gold Royalties Corp (TSXV: GRO).
"Our focus has been on large royalty and stream transactions. Yet our biggest wins have been from discoveries made at some of our smallest investments," stated Franco Nevada president and CEO David Harquail.
"This partnership with Gold Royalties provides Franco Nevada with a window to smaller opportunities."
