This article was last updated in January, but the surge of bank anxiety has caused a little run in the gold price, and that has Stansberry blanketing the world with this “#1 Gold Stock for 2023” pitch again, so we’ll re-share it with you to help answer questions. Not much has really happened over the past couple months, the company being teased is in roughly the same position it was then… and the gold price has really just risen back to where it was in mid-January (gold has bounced from roughly $1,700/oz to $2,000/oz since the pandemic began, but was generally below $1,400 for about five years before that). What follows was last updated on January 20.

Gold has had a pretty good run over the past couple months, which is fairly typical — gold tends to do very well in the months after a market crash or panic, as people instinctively seek something solid and “safe.”

It hasn’t been a smooth ride, for sure, partly because the gold price tends to be weak when interest rates are rising, so some of the recent strength, since the lows of September, probably comes from the fact that inflation is getting under control and interest rates have dipped back down a bit (gold competes with cash and T-bills for that “flight to safety” money… so when cash suddenly started earning a 4% yield, after years of 0% returns for cash, gold suffered a bit because the “yield” for gold is always negative — it pays no interest, and it costs something to store it or buy it in an easy and transferable form like a gold coin).

This is what the gold price has looked like in US$ over the past twenty years, just to give you some context (that’s the S&P 500 in purple, gold in orange — gold has gained, on average, about 9% a year):

Part of the gain in gold is “dollar weakness,” since inflation means that the US Dollar (like all “fiat” currencies in modern history) loses purchasing power and value over time. It’s not just inflation, though — if gold were to just keep up with dollar inflation over the past 20 years, it would only be a hair over $1,000 an ounce today. The big years for gold of late have tended to come when people are losing confidence in their local currency — so during the global financial crisis, gold rose because we all thought ATMs might stop working and we’d be back in the dark ages for a while… and then it kicked into a new gear during the euro crisis that followed, when investors were freaking out about Greece and Cyprus (we were also all quite sure, around 2012 or 2013, that Germany and France and Italy would be pulling out of the common currency and scrapping the euro “experiment”).

It’s all made up, of course, “money” is whatever enough people agree it is, and gold is not automatically better than paper certificates or silver or seashells — but it is shiny, rare, portable, and easily divided (and expensive to find and mine, so, unlike government currencies, production is limited and it can’t be created on a whim). That has helped gold to embed itself in human culture as being “valuable,” for a couple thousand years now, and it has had more staying power on that “store of value” front than any other type of currency I can think of.

That doesn’t mean it will always be so, for a while everyone was convinced (and many still are) that Bitcoin would be the next gold, a store of value for the digital age, and maybe that’s how it will evolve… but Bitcoin has only been around for 20 years or so, it’s got a ways to go in developing a brand. There’s always something new and rare that catches our eye, especially if it’s shiny (like aluminum in the 1850s, when it was more valuable than gold… until we figured out how to make it more cheaply), but gold has had real staying power.

And there is at least one thing you always know for sure: When gold prices go up, like they have in recent months, the gold pitches from investment newsletters will start filling up your inbox. We’ve gotten a bunch of reader questions about one of the heavily distributed gold pitches from the Stansberry folks, so that’s our focus for today: What are they touting as the “#1 Gold Play for 2023?”

The ad is from Amy Gamper, for Stansberry’s Commodity Supercycles ($49 first year, renews at $199), and this is how it gets us started:

“Today, I’m going to show you the No. 1 gold play you can use this year.

“We think you could use this to turn a $5 investment into a substantial gain as gold soars higher.

“That’s because, after what feels like nearly a decade of disappointing performance, we believe gold is on the cusp of a major bull market.”

Gamper is a spokesmodel and commercial actress, like most of the “anchors and hosts” that read these presentations (she calls herself a “financial reporter,” for some reason, but if that’s her career she’s quite new at it — though she has been the face and voice of several Stansberry presentations over the past year or so), and she doesn’t name the actual editor of the newsletter in this pitch… it looks like Bill Shaw, who launched that Commodity Supercycles newsletter as well as Stansberry’s Gold and Silver Investor a few years ago, is no longer at Stansberry — as of today, the letter has no named editor, and the only analyst named is Bryan Tycango (who has generally specialized in Asian stocks and tech stocks in the past).

So we don’t really know who this idea is coming from… but we can at least figure out what the idea is. Here’s how she teases the investment:

“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 haven’t heard of Lassonde, don’t be surprised. Most Americans haven’t. He was born in Montreal and came to the United States to work as an engineer.

“While working in the U.S., he fell in love with the state of Nevada for its skiing and vast mineral resource potential.

“Lassonde knew Nevada held huge amounts of untapped gold wealth waiting to be exploited for millions of dollars.

“But the genius behind Lassonde’s unique investment has absolutely nothing to do with the risky, expensive, and complicated mining business.

“If you know the ‘secret’ of Lassonde’s business, you could use it to make huge gains over the next few years.”

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So that’s a big waving flag which says, “this is a gold royalty company.” Pierre Lassonde was the founder of Franco-Nevada (FNV), which was the first successful gold royalty firm and has become the largest player in the space… and pretty much always trades at a premium valuation to its near-peers.  Gamper goes on to highlight both Franco-Nevada and the almost-as-old Royal Gold (RGLD), which followed in FNV’s footsteps to build something quite similar, and those are indeed the easiest starting point if you’re going to start looking at precious metals royalty companies. They’ve both been solid investments over the very long term, though FNV is still the clear long-term winner in this segment of the market.

And no, they are not “virtually unknown,” not unless you’re really new to precious metals investing — people love speculating on gold miners when the price of gold is moving, but gold royalty companies have generally been the best performing gold stocks for decades now, during with big gold miners have been terrible investments, on average, and investors have noticed.

She goes on…

“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…”

That was indeed Franco-Nevada, in case you’re curious.

So… what is the appeal of royalty companies? Why do people seek those out, and pay premium prices for them. Wouldn’t the actual big gold miners do better?

Well, sometimes — gold miners, especially small miners, have more leverage to rising gold prices when everything is going great with their projects… but gold royalty companies are much, much more consistent.

Why so? Well, mostly just because mining is a terrible business. Yes, you have the excitement of turning dirt and rocks into gold… but it mostly doesn’t go very well, and it’s very expensive. Not only do you have to do years of exploration work, but then you have to build a mine, which always costs more and takes longer than you think, and once you’ve got the mine operating and can finally generate some revenue, you have to deal with changing local taxes, or inflated costs for diesel fuel or employees, or repairing broken equipment, or dealing with floods in the mine, or labor strikes, and it’s often the case that you spent tons of money building up the project just at the same point that gold prices peaked, and your profits end up being too low.  There are always some successes, but the average big miner is a lousy business, and has been so for a long time — since the first big gold mining ETF was created in 2006 (the VanEck Gold Miners ETF (GDX)), you would have been better off buying boring an ounce of gold than trying to profit from the companies who create those ounces.

Royalty owners, however, have a much smoother ride. Most royalty and streaming deals come about either from some initial right that a landowner or an explorer had on the property or initial discovery, or, more commonly these days, from the explorer or mine developer selling royalties and streaming deals in order to finance the development of the mine.

There are generally two kinds of “royalties” that we see regularly in the mining space — the first are actual royalties, usually for a small percentage of the metal output from the mine (sometimes all the metals they produce, sometimes just one of them). Most common is probably something like a 3% Net Smelter Return (NSR) royalty, which means that the royalty owner has no ongoing financial obligation, and they get to receive 3% of the gold that is produced from the operation. Royalties are often initially created very early on, well before the mine is built, so they don’t often cost very much — but they also often end up sitting there and gathering dust for decades if the project is explored slowly or the mine is never built (most discoveries, of course, never become mines… too small, too expensive, too low-grade, wrong regulatory regime, bad owners, location too far from infrastructure, low gold prices, high financing costs, there are endless reasons to not build a mine). Royalty owners are passive, they collect their share if the mine is built and operating… but if the mine never gets built, or if it shuts down for a while, they’re out of luck.

On the other hand, if the mine turns out to be 10X larger than was guessed when the royalty was created, or goes on to produce gold for 100 years instead of the eight years that was planned, the royalty owner receives a ridiculous long-term windfall. That’s what happened to Franco-Nevada’s first royalty purchase — they bought a royalty on what was then a small mine called Goldstrike, on the Carlin Trend in Nevada, for $2 million in 1986. Within a few years, new operators came in and discovered more gold at depth, and it became one of the largest gold mines in the world… there have been further deals after that first purchase, but Franco-Nevada now gets more than $25 million in annual revenue from Goldstrike, which has produced close to 50 million ounces of gold and still has at least another 50 million ounces of reserves and resources to mine in the decades to come.

Goldstrike was a key driver for building both Franco-Nevada and operator Barrick Gold (GOLD) into the giants they are today… but, to expand a bit on the theme of the chart we shared a couple paragraphs ago, miners stink… the differing performance of their stocks pretty nicely tells the story of why investors prefer royalty companies to miners (this is the chart since FNV’s IPO, that’s Barrick in purple, badly trailing the actual price of gold (in blue), and Franco-Nevada soaring above it all):

That’s what people dream about when they buy royalty companies.

The second kind of royalty we see is the “streaming” deal, which is more often made for a pretty mature project — a mine that is either under construction or at least close to reaching that point. A streaming deal will usually be larger and more expensive than a royalty (since the project is usually “de-risked” and more likely to be built), and will entitle the buyer to a larger percentage of the mine output, but it often also comes at an ongoing cost — a financier will buy the right to receive a big percentage of the gold output of a mine, but also commit to paying the miner on an ongoing basis, usually at steep discount (maybe $500/ounce for the gold, for example, or an ongoing 60% of the spot price of gold per ounce).

Every deal and contract is different when it comes to royalties and streaming, but the basic idea is that you are getting a gross profit share of the operation… and will face no ongoing responsibility for problems or costs that arise at the mine, you are just a passive top-line partner. That’s a great business, in almost any sector of the economy — in some ways companies like McDonald’s (MCD) and Universal Music Group (UMG.AS, UMGNF) are also in the business of building large gross-sales royalties on long-term growth businesses, but the model is particularly clean and easy to understand in the mining business.

Since we’re in an inflationary period that mimics the late 1970s and early 1980s, to some degree, seeing royalty investments teased here reminded me of an old Warren Buffett profile from Financial World in 1979 — someone recently posted scans of the article, and this is the quote that caught my attention:

“The few businesses that Buffett thinks are worth owning often fall into the category he calls “gross profits royalty” companies, perhaps better called “gross revenues royalty” companies: TV Stations, institutional advertising agencies, iron-ore landowning companies newspapers. Benefitting directly from the large capital investments of the companies they serve, they require little working capital to operate and, in fact, pour off cash to their owners. The unfortunate capital-intensive producer — Chrysler, Monsanto or International Harvester — can’t bring its wares to its customers’ notice without paying tribute to the “royalty” holder: The Wall Street Journal, J. Walter Thompson, the local TV station, or all three.”

It’s not quite the same, of course, but participating at the top line of the income statement, and not worrying about all the capital-intensive work that goes into generating a profit on the bottom line, is inherently appealing. And I generally love royalty companies, and usually own several of them.

So… which gold royalty stock are they now touting as their #1 for 2023? Here’s the general idea…

“… there’s actually a much better (and newer) way to take advantage of gold royalties than Royal Gold or Franco-Nevada.

“You can invest in either company and you’ll probably do OK, but if you want to grow wealthy during this gold boom, THIS is the royalty company you want to own….

“The #1 Way to Invest in Gold in 2023.”

And then some specifics…

“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 $28 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. “

Ah… so we’ve got a rerun here. It looks like the Stansberry folks took those old Bill Shaw ads about his favorite gold royalty company, and they’re just re-running the pitch with a new spokesperson saying the words. This is a repeat of what Bill Shaw first called his “#1 gold pick” back in 2019, I think, and was repeated last year in similar ads as the “#1 gold stock of 2022″… these Commodity Supercycle ads are again teasing an investment in Sandstorm Gold (SAND, SSL.TO).

And while I have also had Sandstorm Gold as one of my largest gold investments most of the time over the past dozen years or so, having first bought it when it was a little penny stock startup, and I do like the company… I should also point out here that it has rarely been the best performer among the gold royalty companies, and it has also tended to be more volatile than the others. In retrospect, I would have been better off just owning Franco-Nevada — despite the fact that it is almost always trading at too high a premium price, Pierre Lassonde’s original gold royalty titan has handily outperformed most of its smaller competitors, most of the time.

How is Sandstorm doing? The business is still working well, as you would imagine — they sold 82,400 “attributable GEOs” in 2022 (GEOs are gold-equivalent ounces, there’s a little commodity price translation because some of their royalties are actually for other metals, mostly copper). That led to preliminary revenues of $148.7 million. That’s “ounces” growth of 22%, and revenue growth of 29%, and their margins were pretty steady (cash operating margin was $1,511 per ounce in 2022, down from $1,539 in 2021). They continue to forecast gold-equivalent ounces to exceed 150,000 ounces in 2025, mostly because of a couple large projects which are not yet developed — including the asset that has been both their biggest potential profit center and the biggest drag on the stock in recent years, the Hod Maden project in Turkey.

Sandstorm has made two big strategic moves in recent years: They roughly doubled in size with the acquisition of Nomad Royalty (NSR.TO) last year, which included a big stock offering, and they spun out some of their oddball investments (including their 30% ownership of Hod Maden, as well as their 25% shareholding in Entree Resources (ETG.TO)) to try to simplify the business for investors.

The Nomad Royalty deal closed back in August, and it essentially created 50% dilution for existing Sandstorm shareholders… though it also added a lot of producing and near-producing assets to Sandstorm’s portfolio, and boosted their growth. That’s been the heart of the challenge for the stock of late, I expect, the premium price they paid for Nomad, and the dilution that was part of the deal, mean that the immediate growth in “ounces” is probably not enough to bring substantial per-share growth in earnings or cash flow 2023 (unless the gold price keeps going up, of course). It makes them a better and more diversified company, with probably steadier growth over the next five years, but it’s also a big and transformative bet, and it was expensive.

The other strategic shift Sandstorm made last year was to turn their Hod Maden junior ownership into a royalty — they acquired their 30% stake in the project many years ago, and always thought of it as being somewhat like a royalty (since they’re not the operator, and the project has relatively low construction costs)… but it’s not a royalty, and investors have always been a little worried about it (partly because it’s in Turkey, of course, but also partly because of the open-ended nature of “we have to find development financing for the mine whenever that moves forward”).

Sandstorm’s solution was to sell both Hod Maden and some of their other odd projects (including some they bought in another transaction, which included a royalty on the giant Antamina copper mine in Chile), to another company, which is effectively a spinout that they’re calling Horizon Copper (HCU.V, RYTTF), and have Horizon Copper create royalties/streams from those assets for Sandstorm to own (Sandstorm will also continue to own at least a third of Horizon Copper). If it works well, and investors are finally cheered that they’ve turned their 30% Hod Maden ownership into a royalty they’re hoping that they’ll be able to continue to use this structure to create additional royalties in the future.

(The Hod Maden stream has been created, if you want details — Sandstorm will get 20% of the project’s gold until they’ve reached 405,000 ounces, which will probably take a dozen years or so, according to the feasibility study, and they’ll pay 50% of the gold spot price for each ounce — at current prices and planned production levels, that would be $25-30 million gross profit for Sandstorm per year.  If the mine grows after that, as it well may, SAND’s stream will drop to 12% of the gold at 60% of the spot price in perpetuity).

I’ve been somewhat cautious about this deal myself, partly because Sandstorm CEO Nolan Watson was also a major shareholder of the shell that they used to create Horizon Copper, and I think Sandstorm gave up too much in that deal, but the Hod Maden part makes sense.  The transaction has gotten a lot of regulatory scrutiny and still hasn’t really been finalized, so it’s not really clear how the valuations will settle (the first part of the deal closed, with Hod Maden being sold to Horizon Copper in exchange for a streaming deal, but Horizon Copper’s stock has been frozen since the initial press release, so we don’t really know how investors are going to value the company — sometime in the next few months, the second phase of the transaction should close, Horizon’s stock will resume trading, and we’ll finally get a better idea).

Assuming it gets built, the Hod Maden mine remains Sandstorm’s single largest growth engine (by itself, it would increase gross profit by 40% or so from today’s level), and it is finally making progress toward development — Sandstorm says that the operator, Lidya Madencilik, has the permits they need, and, as of October, were well underway with the “early works” infrastructure (power lines, road building, etc.), and it’s a shallow and high-grade deposit so they’re still hoping for production as soon as 2025. That’s several years behind the initial estimates that were made for the timeline when Sandstorm acquired their piece of Hod Maden, but we’ve been patiently griping about those delays for years, and more delay would not be surprising (if you invest in miners at all, you know that their management teams always overpromise and underdeliver — mining CEOs are pathological optimists, partly because they have to spend most of their time trying to convince people to invest in their projects). It’s at least encouraging that work is actually underway now. We’ll probably hear more from Sandstorm about the progress when they host their next earnings call (which should take place in about three weeks — it was on February 17 last year).

So… how do we value Sandstorm Gold now? They expect to have royalty revenue of $148 million in 2023, growing to $187 million in 2025 (those numbers assume $1,750/oz gold and $3.75/lb copper — as of today, copper is a little over $4, gold is at $1,920, so they could be meaningfully higher if those prices persist).  Royalty companies have big depletion charges as gold is produced, so the earnings often don’t really indicate how the business is doing — which is why I generally use gross profit and operating cash flow as my valuation measure. They generally turn 70% of their revenue into operating cash flow, which would mean that this year could see operating cash flow of more than $105 million, potentially growing to $131 million in a couple years if they hit that growth expectation (they probably won’t but it should come eventually).

I’m generally willing to pay up to 20X operating cash flow for a gold royalty company with a lot of potential growth (lots of non-producing royalties, some of which are on territory being actively explored or for mines that are currently being developed) — that’s a premium valuation, and I’m willing to go that high just because I think gold exposure is valuable, and portfolios of good gold royalties have huge upside potential if gold ever rises dramatically, and they are generally solid enough companies that they can hunker down and survive even if the market turns against them for a while, but if you’re paying that valuation they do require patience.

For Sandstorm, then, I’d be willing to go up to a valuation of about $2.1 billion, 20X that operating cash flow we expect this year. If you can see the future and you’re very confident about gold prices rising, you can perhaps give that a bump higher, but at that valuation you can justify a purchase up to about $7 a share. That’s where I’ll peg my “max buy” level now, that should work out very well if the growth materializes and gold prices remain strong or move higher.

Sandstorm also borrowed about $500 million for their recent strategic transactions, however (they never really had net debt before), so I’ll use the enterprise value instead, to be a hair more conservative. An enterprise valuation of $2.1 billion would put my “preferred buy below” price now at $5.30.

I’ve been patient with Sandstorm Gold, perhaps too patient given their long-term underperformance versus leaders like Franco-Nevada, but I still like the strategy and expect it to work out over time… and by some measures, Sandstorm is still the cheapest of the large or midsize gold royalty companies, and, thanks both to Hod Maden and the Nomad Royalty acquisition, has the best potential growth. There are challenges, new and old, but every meaningful royalty company has one or two big mines that present a challenge these days (even to the unbreakable Pierre Lassonde — Franco-Nevada’s biggest ever investment was spending roughly a billion dollars for several royalties and streams on the Cobre Panama mine a few years ago, and that’s under some threat now as the operator negotiates with the government to continue operating).

I already have a meaningful position in Sandstorm, however, so I am not likely to buy much more in the near future. Among the larger and slower-growing royalty companies, my second favorite these days is Royal Gold (RGLD), which is not growing as fast, and also brought on some debt recently, but trades at only about 15X cash flow (FNV is still the premium-priced player, at almost 30X cash flow — Wheaton Precious Metals (WPM), the other large royalty company, is only a hair cheaper than FNV these days).

That’s not an in-depth comparison, and if you want to confidently buy these kinds of companies and hold on for the long term you need to review their presentations and think about the key projects that will drive their portfolio (every big royalty company has a few “tentpole” projects that are much more important than the rest), but those are the back-of-the-envelope calculations I use to compare the big royalty firms.  None of them are really cheap right now… but if gold averages $2,000 an ounce or goes higher this year, they’ll all have really exceptional cash flow.

If gold falls back to $1,000, roughly the lowest price of the past decade, then it gets uglier — some of their mines will slow production and new mines won’t be built, so they’ll get fewer ounces of gold and will get less money for each ounce, but they should be able to keep the lights on while they wait for the sun to rise again — the main worry I’d have with Sandstorm these days is that IF a gold crash happens in the next year or two and interest rates continue to jump higher, before they have a chance to meaningfully pay down their new debt, they won’t be as “anti-fragile” as I’d like. They’ve made a meaningful bet on growth in the past year or so, and they have the cash flow to pay off that debt in the next few years, so it’s not exactly a crisis… but if they bet wrong and gold goes through another bear market, they might continue to under-perform their peers.

That’s just what I think, though, and I’ve been too optimistic with Sandstorm Gold for a long time — stubbornness, I guess.  I know we’ve got a bunch of royalty enthusiasts out there in the great Gumshoe universe, so if you’ve got other favorites to suggest, or want to remind me that I’ve been too patient with Nolan Watson, well, feel free to toss your thoughts into the friendly little comment box below. Thanks, as always, for reading.

P.S. 4/20/23 update: Sandstorm hasn’t reported another quarter yet, but they did provide the top-line sales number in early April — they had new records in both revenue and “ounces sold”, though we should note that these new records are largely due to the Nomad acquisition (with a little boost from higher gold prices). they grew revenue from $35 million a year ago to $44 million this quarter… but they also issued roughly 100 million new shares last year in connection with their acquisitions, so, as we noted above, that dilutes the per-share revenue (and cash flow, and earnings). First quarter revenue per share in 2022 was 18 cents, and in 2023 it was 15 cents. I expect it will work out over time, and spectacularly so if gold prices surge higher, but the immediate impact of the dilution is quite negative. They should issue their first quarter report with all the details in about three weeks.

So far in 2023, Sandstorm and Franco-Nevada have had similar returns, both roughly matching the 11% rise in the price of gold since January 1. Royal Gold (RGLD) has closed some of the valuation gap, Osisko Gold Royalties (OR) has had a big spike in growth, and Wheaton Precious Metals (WPM) has done extremely well, in part because they have meaningful exposure to silver as well — silver, as is typical, has been more volatile than gold. Here’s the chart for all of those, just FYI:

And over the past full year, SAND has continued to be a laggard… and interestingly, other than Osisko, ALL of the royalty companies have meaningfully lagged behind the gold price over 12 months (almost entirely because of investor dislike for the Nomad acquisition and associated dilution last year).

Disclosure:  Of the companies mentioned above, I own shares of Royal Gold and Sandstorm Gold, as well as some bitcoin and physical gold.  I will not trade in any covered investment for at least three days after publication, per Stock Gumshoe’s trading rules.