August Idea of the Month — Let Others Think About Risk for You

By Travis Johnson, Stock Gumshoe, August 22, 2014

I have several companies I want to take a look at for you this month, since I’ve been reading a lot of insurance industry stuff lately and thinking about my approach to investing in insurance stocks, but first I’ve got a couple stocks folks have asked me to update my thoughts on… I’ll try to be quick:

Sandstorm Gold (SAND) — their quarter came out a couple weeks ago, they remain (of course) a leveraged play to gold as they receive future streams of gold at set (low) prices in exchange for up-front financing they provide to the miners (that’s what they call “gold streaming”, similar to a royalty business). Their attributable production growth (the number of ounces they get) has not grown as quickly as was anticipated a couple years ago, but they should still be getting 40-50,000 ounces this year and 60,000 by 2017 as mines which have streaming deals with them are developed or expanded. Right now their operating cash flow is approaching $40 million a year, so ex-cash (they have about $100 million in cash, market cap is $600 million) the stock is trading for about 12-14X operating cash flow. They’ve been cutting costs and keeping their cash pile available for opportunities that may arise, so there is potential for a dramatic jump if gold pops back up again — I think CEO Nolan Watson is a good deal maker (despite being burned by some too-aggressive bets on non-gold plays with Sandstorm Metals & Energy, now a part of SAND) and the stock is now more diversified (royalties are now substantial). The biggest risk is gold prices the second biggest risk is that they’re pretty heavily weighted to Luna’s Aurizona mine (their biggest stream, which had a bad quarter — and a company they own 20% of and have lent money to as well). I still like it as my favorite leveraged gold play, I think buying below $6 is likely to work out well as long as gold prices don’t collapse — and I still hold, but I haven’t bought any more this year.

MFC Industrial (MIL) is still in a holding pattern, waiting to see how well their natural gas assets will be monetized (including their processing plant and new wells being drilled by a partner) and, perhaps more importantly, what happens to the Wabush mine on which they hold a valuable royalty. ...

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