Sandstorm Stories

Noting a sell in the Gumshoe Universe, and in my personal portfolio

By Travis Johnson, Stock Gumshoe, July 17, 2013

Those who’ve been around these parts for any length of time know that I like to get the minerals and mining exposure in my portfolio primarily through royalty companies and their ilk — the firms who put in cash or exploration properties in exchange for a share of future production but who don’t actually do the work themselves.

That’s because mining is a lousy and difficult business — it’s rare to have a mine start operations on time, or to get through a few years of solid production with no problems or hangups or floods or accidents or disappointments. Better, then, to be a secondary company that can collect a portion of the top line output without worrying much about bottom-line results.

The downside of royalties is that they’re passive, so the royalty owner can’t get in there and start mixing things up or firing managers or either speeding up or slowing down development … and the downside of smaller royalty companies, those who don’t have large diversified portfolios of royalties (or streaming deals, or whatever variety of passive production share), is that any issues that beset the companies on whom they are reliant for cash flow will become their issues. Usually to a lesser degree, depending on the specifics, but still certainly an issue.

And that’s what’s been happening with Sandstorm Metals & Energy (and, to a lesser extent, with Sandstorm Gold, their big sister). Sandstorm Metals (SND.V, STTYF) was one of the stocks I wrote about on Friday, essentially saying that at these prices you can justify the stock, given the likely solid revenue to be generated by their first real lucrative streaming deal, the Bracemac-McLeod mine and the potential growth from their palladium deal that will probably kick in next year at the Serra Pelada mine.

Then, as luck would have it, Monday brought bad news for BOTH of the companies Sandstorm is counting on for the next few years. Bracemac-Mcleod’s initial production was substantially lower grade than their feasibility study grades (though there were reasons for that), and Serra Pelada is having water issues that have delayed gold production by 4-6 months, which could perhaps lead to a delay in the platinum and palladium production they have planned for next year.

A company with a dozen well-operated mines in its royalty portfolio can handle that. A company with only one other producing royalty ...

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