Well, yesterday’s look at Steve Sjuggerud’s favorite gold stock brought a bunch of questions out of the woodwork about a different Stansberry gold teaser… we don’t often like to “pick on” the same publisher two days in a row, but we do aim to please — so that’s our topic for today.
The ad is for subscriptions to something called Commodity Supercycles, which looks like it’s a new “hard assets” investment letter (it’s being sold at $49/year, hadn’t heard of it before today).
It’s signed by editor Bill Shaw, who also edits Stansberry Gold & Silver Investor, which is a much pricier precious metals advisory ($2,500 up front, plus $49/month) — the only pitch of his we’ve looked at before was when he teased First Mining Finance (FF.TO, FFMGF) about two years ago. That’s worth noting mostly because it should remind us to treat marketing language with great skepticism — he talked that up as being maybe “the most lucrative speculation in our firm’s 19-year history” and predicted a huge year for gold in 2017, and we can now look back and say “not so fast” to both those predictions, which should help us be rational when looking at today’s prediction.
Because marketing language is so powerful, and I’m inclined to like the kinds of stocks teased here, I’ll start you off with a visual reminder of that fallibility… this is what First Mining and gold have done since that ad in August of 2017 (orange is First Mining, blue is the gold ETF GLD, with the gold mining ETF GDX (red) and the S&P 500 (green) for comparison):
But what everyone’s looking for, of course, is another wild bull market in gold — like we saw in the first half of 2016, and before that in 2010-2011. And we’ve at least gotten the start of another bullish run for gold this year thanks to falling interest rates and growing global uncertainty, with gold up by 15% or so since January and the big gold miners (GDX) providing the typical 2X return on that (up 34%). So we’re primed to hope for more… and, perhaps, tempted to flee into gold as global politics stacks new bricks on the “wall of worry.”
So with that backdrop, what is Bill Shaw teasing? It starts out by sounding quite familiar, at least to anyone who has seen the many mining teasers that have been thrown at us over the past 15 years…
“Running in a small-town Nevada newspaper, a local business owner needed to raise cash to pay off an outstanding loan.
“NOBODY could have predicted what happened next.
“Put simply, the man who stumbled upon this ad discovered a secret my colleague Dr. Steve Sjuggerud has called:Are you getting our free Daily Update
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‘The best business model I’ve ever seen.'”
Oh, great, so we’re going to see another pitch for royalties, aren’t we? More from the intro email:
“Porter Stansberry has said: ‘[This business model] will do well no matter what happens to the stock market.'”
And here’s some of the promo language:
“Today, we are at the beginning of a brand-new bull market – and I strongly believe we’re about to see spectacular gains.
“If you want to capture the biggest gains, you absolutely must get into this brand-new bull market as early as possible…..
“I’m going to show you exactly what to buy today – it’s by far the #1 way to get rich in gold today, and you can get started for less than $10…..
“It’s not a Mining Stock, ETF, or Bullion – but this virtually unknown $7 investment could hand you a small fortune as gold soars higher.”
OK, yep, that’s pointing us right at royalty stocks — which are always teased as “unknown” and “secret” and “best business model ever” and, technically, are not really “mining stocks” so yes, most folks who are not active investors probably haven’t heard of them.
So we probably already know the stock, right? There are not that many royalty stocks.
But we don’t want to spoil the surprise yet…. Let’s have a brief interlude to get Shaw’s pitch about gold in general…
“… maybe you remember when billionaire and legendary investor Stanley Druckenmiller made headlines claiming he SOLD all his gold after President Trump was elected…
“Well, just recently, he changed his tune, piling back into gold in 2019. In just the last few months, Druckenmiller bought more than four million shares of gold mining giants Barrick Gold and Agnico Mining…..
“Not only do I expect gold to hit $2,000 by the end of 2019…
“But I think it’ll keep going, soaring far beyond $3,000… possibly reaching $5,000 or higher in this new bull market….
“Most people don’t know this, but so far this year, gold has outperformed every major investment class…
“It’s returned more than oil, bonds – even stocks in the past year…
“And as this rally gains steam, most folks will run out and buy bullion or mining stocks.
“But I have an unfortunate truth to tell you…
“When it comes to investing in gold, most folks (I’d guess 99% or more of the investing public AND the wealthy investors I just told you about) will miss out on the biggest gains.”
So there’s our “FOMO” (fear of missing out) alert… did that cause your credit card hand to twitch?
And then he gets into the kind of investment he’s teasing, which we’re already pretty sure will rhyme with “shmoyalties”…
“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% per year – for 18 straight years….
“Even during the great recession, when the stock market lost 37% in 2008, this approach preserved investors’ wealth – and even gained more than 50% – despite the fact that gold bullion barely moved.”
Then, finally, to the actual investment being teased…
“… it’s as simple as buying a stock in your ordinary brokerage account….
“Today, you can get into this gold strategy for just $7.
“That gives you the chance to capture amazing gains – with the potential to turn every $1,000 invested into a small fortune over the next few months – as gold explodes higher and higher.”
But wait, first let’s lay on one more layer of FOMO for you…
“And even students of history – investors who know the safe-haven power of gold – might be tempted to rush into investments like the iShares gold ETF, or gold coins and bullion.
“Many more will simply buy risky, hit-or-miss mining stocks.
“And here’s the thing: If you rush out and buy the same investments everyone else is buying, you might do OK.
“But if you want a low-risk way to potentially turn every $100 invested into $32,947, you’re going to have to turn away from the herd and take a stake in a different kind of gold investment.”
OK… now into the details, as we shovel some actual clues into the Thinkolator…
“Don’t Buy Gold, Bullion, or Mining Stocks… Do THIS Instead
“The virtually unknown gold investment I want to tell you about was pioneered by a Canadian named Pierre Lassonde….
“If you invested $100 in Lassonde’s company when it first went public, you could have made more than $32,000…
“And if you had invested $5,000, it could’ve turned into a windfall worth $1.6 million.
“In short, the secret Lassonde discovered was ‘Mining Royalties’ – that is, simply a right to receive a percentage of production from a lucrative gold mine.”
So that surprise is out of the bag… yes, we’re talking royalties again. Which is lovely, I’m a big fan of royalty stocks, but it probably also means we’re looking at a stock we’ve heard of before.
Pierre Lassonde, if you’re unaware, was the founder of Franco-Nevada (FNV), which was a mostly failed mining explorer in the early 1980s but made a pivotal acquisition of a royalty on a mine in Nevada in 1986, with Lassonde pretty immediately recognizing the appeal of that approach and beginning a campaign to buy more royalties and get out of the actual mining business over the ensuing several years. They are credited with really creating the modern mining royalty business, though royalties had of course existed as a financing and land acquisition tool for a long time before then (and were widely popular at the time in oil and gas).
Royal Gold (RGLD), the second major royalty company in the space, followed a somewhat similar path — it was a failed oil company, then a faltering gold company when the stock market crash in October, 1987 caused them to refocus on something more conservative… which started out being investing in joint ventures in gold, but became a real “royalty’ business a few years later, built on the foundation of a sliding scale royalty on the Cortez Pipeline property in Nevada.
So yes, it’s true that Pierre Lassonde hit an absolute home run with his first royalty investment in the 1980s… but it’s also true that this isn’t likely to happen again. It’s a good business, with good odds of success and a much smaller penalty for failure than regular miners have (since they won’t be dragged down to zero if a mine goes over budget, or commodity prices fall, partly because they’re diversified but also because they have little or no debt), but it’s not a magical business. And gold royalties are much more beloved and well-known now, thanks to the work of early pioneers like Franco-Nevada and Royal Gold, so they’re not cheap.
Royal Gold and Franco-Nevada, though they came to royalties out of weakness, turned into pretty spectacular businesses despite the fact that they were born at historically high gold prices and spend the next 10-15 years seeing the price of gold fall pretty dramatically (gold peaked in 1980 at over 2,000 an ounce following the Nixon shock and the late 1970s inflation, but was also over $1,000 in late 1987 before beginning the long decline to below $400 in 2000)… but they also had some very bad years.
If you bought Royal Gold a month after the October 1987 market crash and just held forever, you had several periods where the share price declined by more than 50% from your cost basis before going on the incredible run, starting near the bottom for gold in 2001 or so, of eventual 2,000% gains.
Franco-Nevada’s path is harder to track, since it went private for a while in the middle (it was bought by Newmont in 2001, then spun off in an IPO in 2007), but over the past decade+ it has certainly again been spectacular. This is Royal Gold and Franco-Nevada since 2008 (FNV in green, RGLD in purple, Gold in blue, with the S&P 500 (red) and Gold Mining Index ETF in orange):
So that’s the promise… and you need only compare that green line to the orange line to see the reason why we are always told (with some historical accuracy) that royalty stocks are a lot better than mining stocks. Of course, there have been plenty of little explorers that are far too small to be in the GDX ETF and who have posted extraordinary returns over the years, with some of them eventually becoming big mining companies… but the rate of failure in the junior mining business is such that most of us should completely avoid it most of the time.
If you’re new to this space, a royalty company is essentially a financier — they provide capital to a mining project up front, and in return they receive either a royalty or a “stream” on that mine. A royalty is typically smaller and comes with no additional cost, like a net smelter return that might give the financier, for example, 2% of the gold produced from the property. A stream is typically larger and comes with ongoing per-ounce costs, like an agreement to buy 20% of the gold from the mine at a set price of $500 an ounce.
Once the royalty/stream owner has made the investment, they’re essentially a passive observer — they don’t have to pay if there are cost overruns to get the mine built, or labor disputes, or if the cost to mine an ounce turns out to be 50% higher than the initial feasibility study estimated. They just get their gold. Which is great, because mines almost always go over budget, have troubles getting built, and cost more than expected.
The downside for royalty investors is that they pay up front, and maybe the mine doesn’t get built… or maybe it takes five years longer than expected to get built. The royalty owner doesn’t really get a say, though each agreement is different and sometimes there are specific terms that benefit them in the face of delays. And if the miner goes bankrupt, the royalty or streaming investor might be part of the bankruptcy workout but they can’t force the mine to operate, and sometimes the royalty company will be tempted to “rescue” the mine with additional investment, which can sometimes mean throwing good money after bad.
The upside potential, though, is indeed remarkable when it all works out — and that comes from the double leverage that royalty and streaming companies enjoy: They get the full benefit of a rising commodity price, assuming it does rise; and they also purchase royalties based on the economic assumptions the mining company has at the time (like in a preliminary economic analysis or a prefeasibility study that might predict production of a certain amount of gold for nine years, for example), but typically also participate fully in the fact that most mines are not fully defined at their edges when they are first built, and they typically see their mine life extended, sometimes substantially, beyond those initial assumptions. That second one is the real doozy, a mining operator doesn’t have the financial incentive to drill and explore to establish 40 years of reserves at a mine if eight years is enough to get construction financing, but once the mine is profitable they have great incentive to reinvest in that mine to extend its life, and the royalty owner gets exposure to that — so they bought a royalty with eight year assumptions, but when it works out well they get to collect that royalty for decades longer.
So now, dear friends, let’s finally identify the specific royalty company being teased by Shaw… clues, please!
“… if gold continues to soar, Franco Nevada is going to continue to beat these other assets and the overall market.
“But there’s a small company that’s even better than Franco Nevada.
“It’s far cheaper to get into, and it has much bigger upside….
“Royalty companies… are cash cow businesses because they have little overhead and require very few employees. In fact, Franco Nevada has only 29 full-time employees, and it’s a $17.7 billion company.
“One of my favorite royalty streams is based out of a humble office park in Canada. It only has about 25 employees… far less than a typical McDonald’s. Yet it’s able to rake in $59 million a year. And ever since 2007, participation in this stream has been open to the public.”
We even get the aerial view of this “humble office park,” which is one of my favorite teaser tropes… it somehow gives you the idea that you’re really in control, looking down on this little company, and it’s also a nice clue.
“There are essentially 10 precious metal royalty companies in the entire stock market.
“Franco Nevada and Royal Gold, along with two more of these companies, are worth more than a billion dollars according to today’s valuations. Six of them are worth less than a billion dollars.
“And one of these 6 is BY FAR the best gold royalty investment you can make in the world right now.”
And a few other tidbits…
“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….
“This tiny upstart, with fewer than 15 employees and almost no overhead – is still hungry and agile enough to take on smaller deals, where they can negotiate terms that end up being more favorable for the firm – and more profitable for investors.”
Wait a minute, I thought it was “about 25 employees” … where did this “fewer than 15 employees” bit come from?
Well, regardless of where it might have come from, this is, indeed, our old friend Sandstorm Gold (SAND).
Sandstorm is one of my long-time favorites in the gold space… I just looked back, and it appears I first bought Sandstorm shares 9-1/2 years ago. And I’ll probably be holding them ten years from now, assuming the current management stays in place and continues their work, building a strong portfolio of gold royalties that has begun to compound a bit (meaning that they can generate cash from the royalties, then reinvest that into new royalties, at a faster rate than the real value of their royalty portfolio declines due to depletion).
Now, it’s absolutely true that Sandstorm Gold has a portfolio of compelling royalty and streaming deals with miners, mostly gold miners, and should benefit from the twin engines that fuel every mining royalty investment (rising commodity prices, and exploration that expands the mine beyond what was originally expected)… but it’s also true that this “mining royalties” is now a very established business, with a lot of large players (major listed companies like Franco-Nevada, Royal Gold and Wheaton Precious Metals, as well as smaller operators and private companies that get into royalties, like hedge funds and pension funds).
Your investment in Sandstorm Gold (or any of the others) is almost certainly not going to bring you windfall, lottery-ticket, life-changing profits. It did turn $100 into $32,000 once, with that first purchase by what became Franco-Nevada, but Sandstorm Gold isn’t a new idea or a new company… it’s relatively small, but it’s now a billion-dollar company (just barely), and even after what has been a good year it’s trading for about 15X the $75 million in revenue it generated last year.
But don’t let the search for “perfect” be the enemy of “good.” Sandstorm is, I think, the most appealing of the royalty companies because it is smaller, because it is a little bit less extravagantly valued than most of its competitors, and because it is not getting credit for a few major royalties that could kick in starting a few years from now.
The most important of those, by far, is the Hod Maden project in Turkey, and I wouldn’t be surprised if a new wave of political risk in that country gives investors pause and causes them to further discount the potential of Hod Maden, like they did Mongolian mining assets a few years back, but it is an incredibly large and high-grade deposit that is controlled by an experienced Turkish operator (Sandstorm is a junior partner, with a 30% equity stake plus a 2% royalty), and I think the odds are pretty good that it will eventually get built — maybe not on Sandstorm’s schedule, I have no idea, but the last we heard the project is, at least, making progress on the feasibility and permitting fronts, and it is so high-grade that it could be an appealing and lucrative mine to build even if the gold price falls by 50%, so the risk is primarily operational and political, it’s not a risky project economically or geologically.
If you’re curious about those other gold royalty companies, by the way, the four larger ones are Franco-Nevada, Royal Gold, Wheaton Precious Metals (WPM) and Osisko Gold Royalties (OR) (I have a little position in Osisko as well).
And to complete the circle (and match one of those clues), Wheaton Precious Metals used to be called Silver Wheaton, and one of the people who turned Silver Wheaton into a strong silver streaming business was their very young CFO, Nolan Watson, who left with a couple other Silver Wheaton employees and went on to create a small gold streaming business that he called Sandstorm in 2007… and today he’s still running the show at Sandstorm, which has had plenty of ups and downs over those 12 years.
The smaller ones? I’m sometimes tempted by those, but do not currently own any of them — that includes, from largest to smallest, Maverix Metals (MMX), Abitibi Royalties (RZZ.V, ATBYF), Metalla Royalty (MTA.V, MTAFF), EMX Royalty (EMX, the former Eurasian Minerals), Sailfish Royalty (FISH.V, SROYF), and ELY Gold Royalties (ELY.V, ELYGF). There may be others, but those are all the ones I know of in the gold space.
So yes, gold has been rising this year, and the gold royalty companies are likely to be the lowest-risk equities in the gold mining space. They don’t have the gains of a huge discovery, but they also don’t go out of business if exploration fails or they borrow a lot of money to build a mine at the top of the market.
And it’s encouraging that the dollar and gold are both rising at the same time, since that hasn’t happened in quite a while (in 2016, when gold rose by 25% or so, that coincided with the dollar losing about 5% of its value (using the trade-weighted dollar index against major currencies)… but that doesn’t mean gold is definitely going to keep going up. I do keep about 5-10% of my portfolio in a combination of gold stocks (mostly Sandstorm right now) and physical gold, but I also remind myself with some regularity that these are hedges against currency depreciation and other unforeseen and sometimes more acute crises, and it’s OK if those perform terribly… because that would mean that the rest of the market is probably doing pretty well.
That’s just me, though, and I’ve been holding (and adding to) my Sandstorm position since the Spring of 2010, and failed to take any profits during the spike those shares had in 2012 (that coincided with both peak gold price mania, and their uplisting to the NASDAQ), so I’m clearly both stubborn and biased — what matters to your portfolio is what you think, and we’d love to hear that if you feel like sharing, just use the happy little comment box below. Thanks for reading!
Disclosure: Of the stocks mentioned above, I have call options and/or equity positions in Sandstorm Gold and Osisko Gold Royalties. I will not trade in any covered stock for at least three days after this article is published, per Stock Gumshoe’s trading rules.