What to Do With 5 Precious Metal Royalties
Since I first wrote an article regarding the streamers/royalties among the precious metal companies, a lot has changed, notably with Royal Gold (RGLD) and Sandstorm Resources. I will go over all the royalty companies once again, but this time a bit more in depth and not all for the best (Franco-Nevada).
How do royalty companies work? The royalty company pays an upfront fee (to help finance the development of various mines) in exchange for the right to purchase silver at approx $4/oz and gold at $450/oz (although they vary). I recommend doing due diligence to get an idea of what the difference is between streams and royalties as royalties have multiple types. This includes GSR (Gross Smelter Revenue), NPI (Net Profit Interest), GPR (GROSS PROCEEDS ROYALTY), CGR (CONTAINED GOLD RETURNED), (NET SMELTER ROYALTY) and SSR (SLIDING SCALE ROYALTY). They also do not need sustained capital expenditures going forward except the one time upfront payment when an acquisition is made.
First I will talk about the streamers - Silver Wheaton (SLW), Gold Wheaton (GLWGF.PK) and Sandstorm Resources. What's unique about them relative to pure royalties? They receive the physical metal instead of cash payments for a fixed price (as mentioned above) in addition to having a much more favorable tax situation courtesy of the Canadian Government. As long as they reinvest their proceeds or pay it out as dividends, they are stuck with a tax rate in the neighborhood of 0-8%. That's a huge advantage when it comes to net profit margin. I will start with Sandstorm as the company made the most recent acquisition, which is a game changer in my opinion.
Sandstorm Resources (SNDXF.PK) - A gold royalty company focusing on advanced stage or producing mines. Though Sandstorm has only been operating for a year and a half or so, it has already completed four royalty acquisitions. This is an amazing accomplishment given that Sandstorm is a micro/small cap company ( <200m market capitalization ). The company has an amazing management team headed by CEO Nolan Watson (former CFO of Silver Wheaton). Sandstorm is very well capitalized, following an acquisition in early March, with nearly $90 million of cash on hand. This gives the company ample room to deploy at least $60M of its cash balance off in the near term (as it has a bit over $100M in long term debt).
Available funding will dramatically increase, however, over the year as three of their four royalty streams will come online, with the fourth & fifth expected in 2011. They can also revert back to more equity financing (which I personally think they should do ) as they recently moved up to top tier status on the venture exchange, thus they will attract more attention. They have made it clear they are and will continue to be very aggressive on the acquisition front going forward, recently commenting they are in several advanced stage talks with various companies.
Similarities to Silver Wheaton - Silver Wheaton is recognized for their superior management as they have been able to grow future peak production levels from 0 in 2004 to 45m by early 2010 ( expected to be reached in 2013-2014). But what stands out is the fact they have been able make these acquisitions on extremely favorable terms, with all in costs amounting to more or less 8.00/oz of silver with the exception of a few deals such as Rosemont. One would expect having the former CFO of Silver Wheaton as CEO of Sandstorm, acquisitions would be on comparable terms. In fact, they are currently the lowest cost producer relative to Royal Gold, Franco-Nevada and Gold Wheaton. The average cost per attributable ounce is less than $400/oz. Additionally, like Silver Wheaton, they have little tax liability. That's another comparative advantage to Royal Gold and Franco-Nevada.
The following is a brief rundown of their royalty agreements thus far:
Aurizona Project - 17% of attributable gold production for LOM, which will initially produce 60k oz/year, ramping up to 80k year with cash costs of $400/oz. They also have the option to purchase 17% of the gold produced from the underground mine (should Luna Corp decide to develop it). In this case annual gold production will increase to a range of 100k-125k/year.
Saint Elena - 20% of attributable of the projected 40k annual production. The kicker here is the purchase price of just $350/oz. Additionally this mine has underground potential which Sandstorm will have claim to should they develop it. This would bring total mine production to an estimated 60-70k/year.
Summit Mine - Sandstorm will initially receive 50% of the first 10k mined, followed by a 22% interest in this small mine. Production estimates are expected to be between 12-14k/ year. Cash costs again are at the low end $400/oz. The operator also has the right to offer Sandstorm an additional 25% interest. This is a key example of generating immediate cash flow (indicated through the provision above).
Ming Mine - Production expected to commence in mid 2011. Initially Sandstorm will receive 25% of the first 175k produced followed by 12% thereafter. Gold production is projected to range from 20-25k annually, with excellent upside potential.
 or approx 36-38k assuming they do. This seems like small pickings relative to the other royalty companies but you have to put it into perspective. Investments are made in hopes of making the highest possible return given the risk involved. Sandstorm resources offer just that: When it comes to valuation, assuming a long term gold price of $1,300/oz, my valuation ranges between $1.75-$2/share. Of course valuations are very subjective with regard to required rate of return, LT gold price, etc. However, such a price to value disconnect in the valuation mentioned above makes it worth a look. (more on Silver Wheaton, Gold Wheaton, Royal Gold and Franco Nevada]<br><br><a class=) seekingalpha.com |
