“One unique type of gold investment (that most Americans have never heard of) based in British Columbia has outperformed every asset class in existence – rising twice as fast as gold.
“The average investor in this gold secret made over 80% a year for 20 straight years – even after gold crashed last year.
“But some investors had the chance to make 3,000%+ gains…
“I call this investment the ‘British Columbia Gold Bank’ because it’s a super-safe way to invest in gold.”
That’s the intro from Ian Wyatt for the latest teaser pitch seeking subscribers to his $100K Portfolio newsletter, one of the many newsletters that cropped up over the past few years which runs a “real money” portfolio of the editor or publisher’s actual cash in the market.
Wyatt has been sparking interest among readers with emails that have subject lines hinting at why he’s selling gold — and he says he wants to sell gold and buy this particular “British Columbia Gold Bank.” So that’s getting attention because gold has fallen so hard and so fast, and investors are wondering just what to do with this asset that had seemed — for more than a decade now — like it could only go up.
And he implies a high level of safety for this investment, which also makes Gumshoe readers see green — here’s how he puts it:
“CNBC recently called this investment ‘a banker for gold miners.’
“As I’ll explain, gold banks have all of the upside of gold – with none of the downside – and the potential for much faster gains.”
None of the downside? That’s a big claim. So what’s he talking about?
Well, it’s a Canadian investment — he tells us all about how Vancouver is the “Wall Street of Commodities”, which is more or less true … that British Columbian City is home of what used to be the Vancouver Stock Exchange and is now the Venture Exchange (though I think it’s actually headquartered in Calgary now, the Venture is the combination of the Alberta and Vancouver exchanges), but it’s certainly a hotbed of junior mining and energy financing in Canada, which itself is the land where most mining startups get their sea legs. Vancouver is the silicon valley for venture investments, IPOs, and backdoor deals in the natural resources industries.
Here’s more from the ad:
“Thousands of small exploration companies vie for limited access to capital – many of them go bust.
“These small companies are the lottery tickets of the investment world.
“And they all need funding.
“That’s where the British Columbia Gold banks come in.
“They provide funding to the BEST possible precious metal startups – the explorers and developers with a track record of success, the best property, the best reserves, etc.
“In exchange, these ‘Gold Banks’ receive a portion of the future production and proceeds of any gold mined during the entire lifespan of the company.
“And the best resource analysts in the world all work in Vancouver – for one little-known gold bank…”
And then Wyatt lets the cat out of the bag a wee bit — telling us what probably most Gumshoe readers already know, that these “BC Gold Banks” are really just precious metals streaming and royalty companies. He even gives the examples of a couple companies that most investors are familiar with, the silver streamer Silver Wheaton (SLW) and the big gold royalty company Royal Gold (RGLD) … but he has another fish in mind:
“You can’t buy past performance.
“Royal Gold just isn’t going to grow another 2000-fold anytime soon. That would make it a $3 trillion market cap company. It would be bigger than the top 5 biggest companies in the Dow put together. It’s just not going to happen.
“Silver Wheaton isn’t likely to grow another 20 fold in the next three years either. That would make it a $140 billion company – bigger than BP (NYSE: BP).
“So if you want to achieve a similar result in your portfolio, you have to find the next Royal Gold and the next Silver Wheaton.
“Such a company already exists – and if you buy it today, you give yourself a great chance at repeating the performance of its forebears.
“This company is only about 4 years old and it is already off to a better start than Royal Gold in its first 4 years.
“That’s because this other ‘gold bank’ already has 10 gold streams producing with more coming online early in 2014 yet it has a total market cap under $600 million.
“And amazingly – they’ve put together deals with their 10 gold streaming clients to ensure they get access to any gold they mine for an average of $400 an ounce…”
OK, so that clears it up pretty well — we don’t even have to take the tarps off of the ol’ Thinkolator to tell you that Ian Wyatt is buying and teasing Sandstorm Gold (SAND in NY, SSL in Toronto)
Which I own as well, and have written about many times here — it’s been teased by other newsletters, and I’ve bought and sold the stock and the warrants a few times since the company was founded, but it is still a substantial position for me and my favorite gold equity investment.
But it sure ain’t a stock that gives you upside with “none of the downside” — those of us who have held the stock for a few years can certainly attest to the upside, but we’ve also felt the downside when gold prices fall.
All of the royalty stocks and streaming stocks, large and small, have fallen very, very hard with the collapse in gold prices — they provide some leverage to the price of gold as it rises, and also the downside of leverage as they fall harder than the gold price when gold declines. I’ve been a bit surprised, actually, to see that the royalty companies have not done much better than the average large mining stocks during this latest collapse in the price of gold — they’re better companies, with less downside than the miners in a normal operating environment, but they either got too expensive when people ran to them (they rose to trade at a marked premium to the big miners in terms of cash flow or earnings) or they got sold off too aggressively because everyone fled any investment with “gold” in its name.
Sandstorm does indeed get to buy gold for an average of $400 an ounce (roughly — it’s probably a bit higher than that now), but that doesn’t mean they are necessarily going to be profitable if gold falls to $800 or $700 per ounce. That’s because they’re a passive partner in the mines — and they don’t get to decide whether or not the miners produce, or how much they produce in any given year.
If you’re not familiar with this passive model, there are basically two kinds of these “gold bank” investments — royalties and streamers.
Royalties are generally a small net participation in the mine, either the full output or the output of a particular mineral (ie, a few percent of the NSR, or net smelter return, of gold from the mine). Royalties are sometimes sold by miners as a way to finance early development or exploration, and sometimes are earned by landowners or early prospectors.
Streaming deals are generally for a larger share of the production but they also require an ongoing payment — in the case of Sandstorm Gold or their progenitor, Silver Wheaton, they pay up front to help fund the mine construction or late stage exploration and receive the right to purchase a large portion of the mine’s output of the metal in question, often 10-25%, at a set price well below the market price. In practice, these are larger deals with bigger up-front payments, and they are usually done only when the mine is pretty close to production or expansion — needing just a big chunk of change for construction or final permitting or whatever the case might be.
Most companies in this mine finance space do at least a bit of each kind of deal — Sandstorm is primarily focused on streaming deals but they do have a few royalties, including some that they made as small deals that included a “right of first refusal” on any future streaming deals. Royal Gold is primarily a royalty company, but does have a few “streaming” deals as well. No one “owns” the idea or the concept, the reason there aren’t hundreds of these companies is that the market is fairly small, but also because you need a capital base from which to make those initial deals and build that portfolio of royalties or streaming deals, and it’s tough to grow until those deals start to generate cash flow that you can then commit to buying new deals and financing new mines.
The CEO of Sandstorm Gold, Nolan Watson, timed his formation of the company pretty well in what turned out to be the early days of gold’s run from $700-$1,900, and, perhaps more importantly, he made good deals that were close to generating cash — including one early deal that has become a much larger mine than anticipated and which generates the largest slice of their cash today (that’s Luna’s Aurizona mine in Brazil). Watson came from Silver Wheaton, where he helped to perfect the model of the public streaming company as a very young CFO, so he doubtless had good connections and good experience in finding and evaluating deals, but he also got a bit of luck in those early years. The company grew quite nicely but gradually early on, signing larger and larger deals and eventually growing the company large enough to make a NY listing feasible (it formerly traded only at SSL on the venture exchange, then graduated to the Toronto exchange before getting the SAND listing in New York).
The basic argument for the streaming and royalty companies is that unlike gold mining, they’re not terrible and unpredictable businesses — miners are often awful at managing costs, meeting deadlines, and handling the financial side of things, and they’re also subject to several things outside their control that dramatically impact their results, like natural forces (flooding of mines, etc), energy costs (mines suck up lots of electricity and diesel fuel), and labor costs, all of which can change dramatically in the many years between when the mine is initially drawn up and the time when it hits commercial production.
But streamers and royalty owners don’t really care about production costs, they care about production levels — they get their share of the output at a fixed price, so whether the mine’s cash costs of production are $400 an ounce or $1,000 an ounce doesn’t matter to them. It matters intensely to the miners themselves, of course, since that’s their profit margin, but, at least in theory, the passive financiers don’t have to care whether the mine is profitable — they get their ounces of gold, in Sandstorm’s case, for anywhere between $350-500 an ounce, depending on which deal it is, so they profit even if gold falls dramatically lower.
The downside, beyond the fact that they obviously have lower profits if they buy at $350 and sell at $1,200 than if they can sell at $1,800, is the same as the upside: They are passive. They have no real say in the operation of the mine. And if the miner is losing money for an extended period of time they may either slow production, slow expansion, or shut down the mine entirely until the economics (ie, the gold price or the input costs) improve. If the mine shuts down then the streamer or royalty owner may have some recourse if there’s a clause in the contract that they have to produce a certain amount by a certain date, but that’s not always the case and any such clauses tend only to cut losses, not guarantee profits.
It’s very hard to rely on analyst estimates for these companies, because those estimates obviously depend on the analyst’s vision for gold prices in the next year or two, but currently SAND carries a trailing PE ratio of over 50 and a forward PE of about 15, with analysts expecting the company to earn 23 cents per share this year and 40 cents next year.
Analysts haven’t been getting the guesses very close to correct on this one, and we can be sure that if gold stays in the $1,200 neighborhood for the next year they’re definitely not going to earn 40 cents per share — but if we assume that all of their partners will keep up their production to match estimates over the next year they will see a steady increase in ounces of gold delivered as a few new mines begin to boost production. They also have some potential catalysts — their next Brazilian mine, Serra Pelada, begins production this Summer and finally releases a reserve statement to give some idea of what that large mine might produce over time, and the Deflector project in Australia is in a spot of financial bother (they have to raise their last cash just when it’s hard to finance mines) but should be able to start production soon as a low-cost producer, and both of those are expected to be meaningful producers for Sandstorm within two or three years.
Sandstorm’s estimates are that they will go from an estimated 35-40,000 ounces of gold this year to 70,000 ounces in 2016, and they are becoming more diversified as more new mines grow and come online, so there is a strong growth potential and they do pay a low average price of probably $450 for those ounces (the later, larger deals they signed are generally for $500 an ounce, bringing the average up a bit) — but with average all-in costs of gold production for most big miners in the neighborhood of $1,200-1,300 an ounce this is a pretty critical price point. If mines shut down or pause development, they’ll be in trouble, but Sandstorm’s focus has generally been to make deals with lower-cost producers so they should be OK as long as prices don’t fall below the $1,000-1,200 range.
“OK” doesn’t mean hugely profitable, though, it just means they should be profitable or at least breaking even and generating some positive cash flow — their profits would be dramatically higher if you can use a $1,800 gold price estimate. On the flip side, they do have close to $100 million in cash and another $100 million in a line of credit, so they have some flexibility to sign good deals with desperate miners right now — which, if you assume that gold will eventually recover, could lead to even better growth. Money is very tight in the mining industry these days, so they are, at least, in a strong bargaining position for new deals they make.
So I can’t say that Wyatt’s right about this pick having “none of the downside” of gold, because we’ve clearly seen that if gold falls the royalty and streaming companies can fall even further (gold fell about 25% over six months, SAND fell 50% as a result) — but I still prefer SAND to their larger competitors RGLD and Franco-Nevada (FNV), and I think they should be in reasonable financial shape as long as gold remains firmly above $1,000 and their partners keep mining. And that leverage that brought the price down works both ways, so if you think gold recovers or resumes the push upward to $2,000 an ounce, Sandstorm will be extremely profitable. Hopefully after having made some lucrative deals at these relatively low gold prices.
What do you think? Will the continued absence of inflation mean gold stays low or falls further, or will the continued efforts by every central bank to devalue their currencies eventually work and drive more investors or savers to gold as a store of value or “safe haven” refuge? I keep some of my savings and portfolio in gold because it has held its value over the long term, but “long term” when it comes to the enduring value of and human interest in gold has often meant decades, not weeks or months or even, as we’ve seen recently, years. I’ve written to the Irregulars recently that the fall in gold has led me to think that I should be rebalancing a bit and adding some to my holdings in the metal or in Sandstorm or one of the other royalty companies, but I haven’t had the gumption to actually do so.