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“All In” Buy Alert Answers: Stansberry’s urgent “#1 Gold Play for 2022?”

What's hinted at with the "Expert issues rare 'All In' buy alert on $10 gold stock" tease from Commodity Supercycles?

By Travis Johnson, Stock Gumshoe, March 16, 2022

Here’s the pitch from Stansberry’s Bill Shaw that readers are asking about this week:

“An Urgent Message From One Of The Most Respected Names In Precious Metals

‘The #1 Gold Play for 2022’

“It’s not a Mining Stock, ETF, or Bullion – but this virtually unknown $6 investment could hand you a small fortune as gold soars higher”

So that’s a $6 investment, though the emails I received today from Stansberry also had this headline, pointing at the same ad:

“Expert Issues Rare ‘All In’ Buy Alert on $10 Gold Stock”

Which means, I guess, that the price has probably been bouncing around a bit. So what’s the story?

Well, it actually sounds kinda familiar… but let’s look at the clues first, don’t want to jump the gun… Shaw is selling his Commodity Supercycles newsletter ($49 for the first year, renews at $199), and the first part of the ad is all about Shaw’s conviction that we’re “on the cusp of a major bull market” for gold.

Which might be true, though Shaw’s ads for his Stansberry newsletters have expressed similar confidence about the inevitability of the next gold market for several years now, so we should probably be a little skeptical. Sentiment about gold is nothing if not unpredictable — it’s usually driven by crisis or by fears of inflation, and gold often rises after a market crash, but “usually” and “often” don’t mean much when it comes to predicting the price of bullion in any given month (or year). Gold certainly did surge following the Russian invasion of Ukraine, rising about 10% at the peak, but the gold price today (it’s right around $1,900 an ounce as I type) is actually back down to about where it was before the tanks started rolling.

As the ad rolls along, following the argument that gold is about to surge to $3,000 or $5,000 as the bull market explodes, Shaw starts to talk about the type of stock he’s recommending… and that will sound familiar to any longtime gumshoe readers:

“When it comes to investing in gold, most folks will likely miss out on the biggest gains.

“That’s because there’s a much, much better way to profit from the emerging gold boom.

“Unfortunately, most people know nothing about it.

“As I’ll show you, if you follow this simple approach, which has nothing to do with bullion, ETFs, or mining stocks, the gains can be absolutely incredible.

“During one period, for example, this virtually unknown gold strategy returned 38% per year!

“And not just for a year or two…

“This incredible investment returned an average of 38% a year – for 18 straight years…”

OK, so that’s pretty clearly a reference to gold royalty companies, who have been the most consistent winners among gold stocks most of the time — not necessarily because they surge the highest during the bull markets when gold is rising, though they do rise, but because they don’t go bankrupt or have to borrow tons of money to stay alive when gold is crashing. Buying into royalties instead of buying into operating gold miners is as much about avoiding the worst outcomes as it is about enjoying a leveraged surge when gold prices go up.

And Shaw does finally admit that’s what he’s talking about, referring several times to the huge long-term gains enjoyed by royalty pioneers Royal Gold (RGLD) and Franco-Nevada (FNV) in decades past.

Then the clues start dropping:

“One of my favorite royalty streams is based out of a humble office park in Canada.

“They only have about 25 employees… far less than a typical McDonald’s.

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“Yet they’re able to rake in $84 million a year. And ever since 2007, participation in this stream has been open to the public.”

So those are some useful clues… though as luck would have it, the satellite photo he shows of that “humble office park in Canada” is actually a photo of the building that houses Altius Minerals (ALS.TO, ATUSF), a longtime favorite of some of the Stansberry folks, and a large holding for me, but not a gold company. Maybe someone over at Stansberry mixed up their photos. (If you want more info on Altius, by the way, Dan Ferris at Stansberry’s Extreme Value included it as one of his “10 inflation fighting stocks” pitch last month, so I wrote about it here).

But presumably those other clues are on target, something like $84 million and 25 employees. That narrows it down a little bit.

What else? These are the other clues…

“Franco-Nevada and Royal Gold are great companies, BUT…

“They’ve both been around for nearly 40 years.

“Yes, they can still make investors decent money. But the days of 1,000% gains are probably long gone.

“After all, Franco-Nevada is worth $27 billion. And Royal Gold is valued at $7 billion.

“But there’s another company that, I believe, is BY FAR the best gold royalty investment you could make in the world right now.

“And that’s why this company gives you a realistic chance to make astonishing gains thanks to this incredible business model.

“It’s led by a man who grew the world’s largest silver royalty outfit into a multibillion-dollar company.

“This experienced team helped form a brand-new royalty company – which uses the same investor-friendly business model as Franco-Nevada and Royal Gold. They now own royalties on mines in Brazil, Turkey, Mongolia, Argentina, Canada, and the United States, just to name a few. “

OK, so that confirms it: We’re dealing with a teaser that Shaw has used before. This ad is certainly updated, and it’s a new presentation, but the stock he’s pitching as the “#1 Gold Stock of 2022” was also similarly teased as his favorite investment in 2019. This is our old friend Sandstorm Gold (SAND)

Shaw argues that Sandstorm Gold has an advantage over the big fellas because they can make smaller deals — buying the royalties which might be lucrative, but are too small to move the needle for Franco-Nevada. Sadly, that hasn’t helped so much in recent years — and yes, I say “sadly” because Sandstorm Gold has been my favorite gold royalty company for a dozen years now, and it has underperformed the big fellas since the collapse of the last gold bull market in 2013. Here’s the relative performance for the past 13 years or so, since SAND really started trading in 2009 (I didn’t start buying it until 2010) — that’s SAND in pink, FNV in blue, RGLD in purple… and gold itself in orange, along with the average big mining stock in green:

That green line at the bottom is the reason to favor royalty stocks over mining stocks, of course — that’s the Van Eck Gold Miners ETF (GDX), which tracks an index of large gold mining stocks, and you can see that it enjoyed a total return of less than zero despite the fact that gold has almost doubled in price since 2009.

To be fair, Sandstorm has been a decent pick since Shaw started pitching it as his fave gold stock in October of 2019 — it hasn’t kept up with Franco-Nevada, but it has at least kept up with gold prices and with gold miners and has clobbered Royal Gold. Here’s that same chart for those past 30 months or so:

The mining business tends to be pretty awful, with long delays and huge cost overruns and perennial exploration disappointments balancing the excitement of the occasional blockbuster drilling result or commodities bull market. On average, it’s a lot better to be a financier in the mining business, putting up some cash in exchange for a share of the output like the royalty companies do, because that means you don’t have to worry nearly as much about the price of diesel or a delay in permitting or a mine flooding.

Yes, royalties depend on mining success and on commodity prices — if nothing is produced, there is no royalty to collect… if gold falls, the royalty is smaller — but the royalty owner doesn’t have to pay more if the mine hits a rough patch, and the royalty is typically perpetual, so the royalty owner can just sit back and wait it out if things disappoint for a while. Commodity bear markets are a death knell for mine developers, but royalty companies, though they do not thrive if gold prices are in decline, can typically survive. They’re not nearly as fragile as miners.

And when things go well, in the long run, they tend to enjoy some great leverage to the best mines — that’s because they don’t have to pay for further exploration, but miners are incentivized to expand and extend a mine once they’ve made their initial investment in building it. Royalties generally cover a large enough area of land that once a mine is successful, and the miner thinks it’s worthwhile to keep exploring to extend the life of the mine, the royalty covers all that new stuff they discover, too. A royalty you buy on a little mine, which is priced as if the mine will produce a million ounces over a decade, could turn into something far larger if that mine keeps expanding — that’s what turned Franco-Nevada into a giant, some of those initial little royalties turned into mines that operated for 20 or 30 years longer than initially planned, producing millions more ounces of gold. If you’re fortunate enough to have a few of those kinds of assets in your portfolio, and get the double bonus of gold prices rising substantially over time, it can work out fantastically well.

Sandstorm Gold has been through some missteps over the years — the surge in 2012 and 2013 was caused by some gold mania that happened to be perfectly timed with Sandstorm’s uplisting to the NY Stock Exchange, but the weakness since then has been largely blamed on CEO Nolan Watson making a couple big bets that investors didn’t like — first in buying a royalty on a portion of the Oyu Tolgoi complex in Mongolia, and second in buying, in effect, an equity stake in the Hod Maden project in Turkey. Both of those were seen as risky deals both politically and operationally, particularly Hod Maden because it was an equity participation instead of a royalty, and would require Sandstorm to pony up its share of the development cost if the mine is ever built. And not surprisingly, both projects also faced delays along the way, further disappointing investors.

The rest of the business is chugging along nicely, Sandstorm continues to acquire royalties, including some big cash-generating deals like their royalties on Chapada in Brazil, and Fruta del Norte in Ecuador, as well as buying a few packages of very small early-stage royalties that offer a long tail of possible upside possibilities. They’ve also diversified a bit beyond gold, with some recent deals adding royalties on other metals (Chapada is copper and silver, for example, and they also bought several small royalties on Vale copper and iron mines).

And, perhaps most importantly, they have proposed a restructuring that would get rid of some of the investor worry about Hod Maden — they’re planning to spin out their unconventional assets, mostly equity stakes, into a semi-controlled company that will effectively be a joint venture partner, giving Sandstorm a royalty or streaming deal on the assets but also taking the more esoteric stuff off of Sandstorm’s balance sheet. That new company is going to be called Horizon Copper, though right now it’s called Royalty North Partners and essentially trades as a blank shell (RNP.V), and Sandstorm’s CEO is on the board at Royalty North so it’s a related party deal. It’s a complicated spinoff, so I’m not entirely sure it’s the best long-term plan, but it could also lead to other joint venture deals (joining up with Horizon to buy into a mining company, with Sandstorm getting the royalty and Horizon the equity, stuff like that). And it might also get investors to give SAND shares a better multiple as the company sheds these more complex and sometimes off-putting assets, though I guess time will tell on that front.

Here’s what I wrote to the Irregulars last month, when this new Sandstorm spinoff deal was announced:

“We’ll see how it goes, this deal isn’t finalized yet and won’t close for a long time (second half of the year, they say), and there are a lot of moving parts, including the effort to raise capital at Royalty North/Horizon Copper, which will be telling, along with the regulatory review, and there’s also the wild card of another copper project that they hint at acquiring as part of the deal. In the short term, it’s likely to be good for Sandstorm as it cleans up their portfolio and makes it look prettier, and if Hod Maden ends up being a total flop Sandstorm will be slightly more insulated from that… in the long term, my initial reaction is that they probably gave up too much, capitulating because Nolan Watson was sick of investors whining about more delays at Hod Maden. For now, I’ll continue to put my “max buy” price for Sandstorm Gold at 20X operating cash flow, which is the number I typically use for precious metals royalties. Given the $83.5 million in cash flow from operations they reported for 2021, that would be $1.67 billion, or $8.70 per share. If we pencil in the same kind of earnings-based valuation I did for Royal Gold, with roughly 15% earnings growth for SAND (that depends mostly on gold prices, of course — not many analysts cover SAND, but that’s about their average expectation), that would put us at about $6 a share. They’ll forever be tied to the commodity prices, so you’d only buy if you want exposure to gold — if gold falls by 20%, SAND will likely fall by something like 50%.

“Sandstorm is not as diversified or steady as Franco-Nevada or Royal Gold, and the risk profile is different, partly because of Hod Maden, but they’re also much smaller and usually grow faster, with plenty of future optionality and likely more leverage to spiking gold prices, should they come, and from some perspectives their portfolio is higher quality than Royal Gold, though that’s a judgement call. I haven’t been adding more because I’m pretty well maxed out on Sandstorm Gold after buying for many years, so my gold money has been going to Royal Gold of late (I can’t convince myself to pay the huge valuation required to get back aboard Franco-Nevada), but SAND is still my favorite company in the space, pending any chance that I might change my mind as we see the details of this Horizon Copper deal.”

Sandstorm was getting close to that $6 level when I wrote those words, but has bounced back up again with the rising global tension helping the gold price — and who knows, perhaps Bill Shaw’s enthusiasm gave it a little boost as well. It’s still below my “max buy” price, and we still don’t have a lot more detail about the Horizon Copper spinoff (though that company, Royalty North, did at least raise the first tranche of the capital they’ll use to buy the Hod Maden equity from Sandstorm, so that makes the deal more likely to go through)… and beyond the shifting price of gold there hasn’t been a lot of other news, though Sandstorm did provide an asset update this week that includes encouraging news about some new expansion to the Chapada project. You can check out Sandstorm’s latest investor presentation and other materials here if you’d like to research further.

So, yes, I’m sad to say that this is not exactly “new news” — Bill Shaw called Sandstorm Gold his #1 Gold Investment back in 2019, it’s done reasonably well in the interim, and he still calls it his #1 pick here in 2022. I like Sandstorm, too, but have also been a bit too optimistic about it at times in the past… so it comes down, once again, to you. It is, after all, your money — are you ready to bet on gold by buying a royalty company? Think Sandstorm is the best way to do that, or do you prefer the bigger guys like Franco-Nevada (FNV) or Royal Gold (RGLD) or the relatively new Triple Flag Precious Metals (TFPM.TO)… or smaller upstarts like Nomad Royalty (NSR) or Metalla Royalty (MTA)? Let us know with a comment below. Thanks for reading!

Disclosure: Of the companies mentioned above, I own shares of and/or call options on Sandstorm Gold and Royal Gold, and I own physical gold. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.

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allank6
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allank6
March 27, 2022 2:22 pm

Commodity-Supercycles recommended SAND. I am invested in it but am not really impressed. Sand has gone up somewhat. Not sure where I found these two metals investments, but they are winners: RGLD and WPM, both streaming companies. RGLD is a gold streaming company and WPM is mostly silver with some gold. I have been selling options on them for awhile now. Check them out.

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P. Mikoll
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P. Mikoll
April 19, 2022 9:21 pm

SAND has been recommended by Andy Snyder over at the Oxford Club for quite a while and it has probably gone up close to 100% since it was at around $4/share when he did. It is a great Royalty stock. I prefer to have physical gold. Blessings.

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