Here’s the lead-in to the latest ad for the Global Resource Alert
“I’m Peter Krauth and I’d like to tell you a story about a “private vault”…
“A ‘vault’ that contains nearly one million ounces of 99.9% pure gold bars ready for market, ready to sell for nearly $1.4 billion at today’s spot price.
“This is also the story of men who are making the kind of money most only dream of.
“Wouldn’t it be wonderful to partner with them? Well, you can, and in the next 72 hours.
“You can buy in, in the same way a banker buys in, at a steep discount.
“You can own the most valuable commodity in all the land, obtained at almost a steal.”
This is a pitch for what Krause calls a “safety first” type of investment in a “gold vault.” Here’s some more description of it:
“This golden vault is out west in Vancouver. Not many know about it, or the ‘bank’ that it sits in, secure, walled off from the public. That’s because it’s no ordinary vault, and no ordinary bank.
“They don’t take deposits, or have ATM machines, or hand out mortgage loans, or play with dangerous derivatives or any of that Wall Street flimflam. They do just one very unique thing:
“They buy a portion of a mine’s production in advance, and get gold in return.
“And not just any gold – highly discounted gold. Obtained for as low as $444 an ounce, which is less than one-third of the current spot price.”
Sounds good, right? And familiar, probably — it turns out that this is a stock I’ve written about many times, most recently for a similar but more veiled teaser for Frank Curzio’s Phase 1 Investor for the Stock Gumshoe Irregulars about 10 days ago.
So yes, your friendly neighborhood Gumshoe knows who this is … but let me share some more of Krause’s teaser language just to get you all hot and bothered on this sultry summer day …
“… this ‘gold bank’ doesn’t leverage the heck out of their money, leaving them and their investors exposed to a collapsing market or a run on the bank.
“No, this ‘gold bank’ acts more like a VC, a venture capitalist. They put up a few million bucks… and get a few hundred million back in gold.
“This is the old ‘supplying shovels to miners’ play – which makes good sense, right?
“Well, it makes even better sense here because the bank is not stepping in early while the miner is still wandering the backcountry with a 3-legged mule and an empty canteen. They wait until the miner’s laughter comes ringing down through the canyon because that vein runs deep…”
And we hear a bit about management, which is always key for any company, but particularly if you’re dealing with optimism-plagued gold miners …
“If you know the Silver Wheaton story and the 12x returns they produced, you’re familiar with the wonder boy behind it all.
“Silver Wheaton’s CFO was the youngest CFO of any New York Stock Exchange company… ever.
“And now he’s CEO… and still only 32… and if you talk to any mining insider in Vancouver, they’ll tell you ‘he has a keen eye for the value of dirt.’
“And he’s tireless in pursuit of the perfect plot of dirt.
“In his first year at this new gold banking company, he looked at nearly 400 mining operations. He got requests to do business from miners all over the world.
“He’s only financed six projects so far….
“… this wonder boy banker has got it. I’m looking at his company’s financials right now, and I can see that they’re on track to tally up a minimum of $1.4 billion in gold sales and probably much, much more…
“And they’re doing all this with only 10 employees and a puny little $1.5 million operating budget!”
Krause is much more open about this teaser than Curzio was for his — he even lists the six projects that the company has deals with, and the specifics of them with the number of ounces, the price per ounce, and the estimated return on capital they’ll earn based on $1,550 gold … as well as the ridiculous returns they can earn if gold goes to $4,000 an ounce or more … or if the mines they’re contracted with turn out to be much bigger than expected.
And he tells us that the mines are in safe jurisdictions, that they have a senior position in the balance sheet of these miners (in case of bankruptcy or other problems), and then he gives us some very appealing-sounding earnings projections to support a 300% gain this year:
“Let’s say the ‘bank’ sells all the gold they’re scheduled to receive in just the next 12 months at $1,550 an ounce. That’ll bring in $60 million in cash earnings. So we multiply those earnings by 20 and we get a $1.2 billion valuation for the company.
“Okay, now the ‘bank’ is trading at a value of $300 million. Again doing the math… a $300 million company… worth $1.2 billion based on sales… that’s four times its current value.
“On that basis, the stock should rise from $1 a share to $4 in just the coming year alone.”
So who is it? Well, Krause tosses out enough clues that you can probably find out just fine on your own — but this is Sandstorm Gold (SSL in Canada, SNDXF on the pink sheets)
Which is run by Nolan Watson, golden boy former CFO of Silver Wheaton, and using the Silver Wheaton “streaming” model for gold. This is also when I have to tell you that I’ve owned Sandstorm Gold, which used to be called Sandstorm Resources, for well over a year (both equity and warrants), and it has become my single largest stock holding. I also own a smaller chunk of Watson’s sister company, Sandstorm Metal and Energy, which is building a “streaming” royalty-type portfolio for other commodities (natural gas and coal so far, though they want metals too).
Unlike Silver Wheaton, which started out buying unwanted, cheap by-product silver “streams” from zinc and copper miners (among others — that’s a simplification), Sandstorm is buying primary product and not secondary product, and they don’t have the advantage of building the portfolio when prices are depressed, but the basic model is the same — a variation on royalties, though a little bit different, and, from what I’m told, with a friendlier tax treatment at the corporate level.
And yes, as I told the Irregulars on June 10, this is the same company being promoted by Frank Curzio as his “Next Royal Gold.”
The basic business model is pretty accurately described by Krause, though he uses rosier projections than I do — Sandstorm buys gold in advance from mines that are either producing or near production (within a couple years), paying an upfront fee that helps the miner with capital needs (paying down debt, closing hedge books, or expanding or building a mine in most cases). In exchange for that up front investment they get the right to buy a set percentage of the gold output of the mine at a set per-ounce price — generally it’s in the range of 10-20% or so of production at a per-ounce price that’s a bit more than a third of the gold price at the time the deal was signed, most of the deals are for between $400-500/ounce.
The leverage in the business model comes from the fact that many mines are able to expand their reserves and production over time, and then you get a big bump in leverage if it turns out that gold prices go up dramatically, since Sandstorm’s buy price is set by contract (and they don’t have to pay for higher production costs, or mining construction overruns, or whatever). The risk comes largely from the fact that they’re passive owners of these “gold streams” — they don’t pay cost overruns, but they also can’t control the mine, so production could be halted if the miner wished and some of the mines may well disappoint in terms of production volume. And they obviously can’t control the market price of gold.
Since this is one of my large personal holdings I watch them pretty closely and write about them for the Irregulars with some regularity. I won’t copy over my longer articles about the company since that seems unfair to the paid members and it’s awfully long, but my more subdued projections have them pulling in probably about $25 million in net sales over the next 12 months (basically, the cash they get for the gold minus their per-ounce cost). They’ll probably be profitable and the company should have relatively low operating costs, particularly as they grow, but not all of that will be earnings — they’re also due to make further payments to some of their partners, and will probably sign new deals that use up the incoming cash as well. They’ve said that they expect to mature into a dividend payer eventually, but I’d guess that will take a long time.
I think Krause’s projection that they’ll make $60 million in earnings for the coming four quarters is very optimistic, and would depend on gold going up considerably and the miners doing better than their baseline projections (I use a $1,300 gold price for my assumptions). That said, the cash flow and earnings should, if prices hold and production approaches what the miners predict, grow very nicely for the next couple years as the mines reach full commercial production — using that same relatively conservative baseline, I pencil in roughly a doubling of their net revenue number from 2011 to 2013, which gets them to the point where most of their mines are expected to be at max production.
I don’t know where the share price will go — it has climbed considerably in the ten days since the Stansberry folks started touting it, and no doubt having Krause’s folks tease it at the same time is providing a lot of support for the stock price at a time when most mining stocks have been pretty weak and gold itself pretty flat, and the newsletters have brought a huge amount of trading volume in these shares. That means if we see some disappointment, or people realize that this is fundamentally a steady growth stock with gold leverage and not necessarily an overnight sensation that will go up 1,000%, the price could easily weaken a bit. Still, I’m obviously comfortable with the current valuation and won’t be selling my shares in the near future — and not just because of my three-day trading moratorium.
So there you have it — plenty of new attention for a relatively small stock has already brought the price to all-time highs, and a stock that I’m obviously more optimistic about than most because I own it, so take my words above with a grain of salt. If you’ve got info or opinions to share about Sandstorm, let us know with a comment below.
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