Regular investors are getting interested in gold again, after the big run it had in the first half of this year… and many of us also remember the ludicrous returns that many folks got from buying bitcoin early on… so it’s only natural that this ad puts our greed receptors into overdrive:
“The time to get in on this NEW Gold-based Renegade ‘Alternative Currency’ investment is now, while it is still cheap… and relatively unheard of.”
The ad is for Strategic Intelligence, which is the “entry level” newsletter from Jim Rickards over at Agora (the same letter he was pitching when he promised “D-Day for the US Dollar on September 30” last month. Here’s the intro:
“26 years before the birth of Bitcoin, three rogue entrepreneurs created a radical new investment. A venture that turned every $10 stake into $11,899 over 19 years. It began…
“Electrum: America’s FIRST Gold-Based ‘Alternative Currency’
“99.99% of Americans don’t even know this ‘alt currency’ sub-niche even exists, yet it could make you an absolute fortune over the next 12-24 months. Here’s a rare peek inside…”
So, naturally, the question for the Thinkolator is “what the heck is he talking about?” Let’s dig into the clues so we can figure it out and try to explain things a bit for you… without charging $49 or $79 or whatever it is that Rickards is asking for his “front end” newsletter (I call these “front end” or “entry level” letters because they’re the first step in the marketing funnel that gets you interested in their “back end” newsletters — in this case Rickards’ Currency Wars, Intelligence Triggers or Gold Speculator services, each of which cost $3,000 a year).
So what is this “Electrum” alternative currency that Rickards says was first created in 1983? Here’s some more from the ad:
“You see, this unique investment is like bitcoin, only better…
“A LOT better.Are you getting our free Daily Update
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“It can’t be manipulated – or ‘created out of thin air’ – by any government.
“And it’s OPEN to the public…
“But that’s about where the similarities end.
“You see, what makes ‘America’s FIRST Renegade Alternative Currency Investment’ so unique is that it’s also based on assets like gold and silver…
“And it gets better…
“This investment can pay out massive streams of income, up to hundreds of dollars per month, in some cases.”
“Hundreds of dollars per month,” of course, is a meaningless statement unless you know how much is invested in this “Electrum” … but we’ll let that pass for the moment. What other clues do we get about what this “Renegade Alternative Currency Investment is?
“Just by taking part in this alternative currency sub-niche since it first went public, for example, it would have been possible to see long term gains of:
OK, and what other clues do we have to feed to the Thinkolator? We get this about the history of “Electrum” …
“The story begins with a businessman and entrepreneur named Seymour Schulich.
“He’s the guy who created ‘America’s First Renegade Alternative Currency Investment’ as we know it today.
“If you’ve never heard of him, you’re not alone.
“Schulich began his career working as a securities analyst… eventually working his way up to partner and Vice President at one of the world’s biggest and most respected investment firms.
“And it was here, while managing wealth for the ultra-rich, that Schulich stumbled across the secret of a lifetime…
“A unique form of money traded almost exclusively among the wealthy elite – NOT available to the general public….”
Ah, well that tells us where we’re headed — Seymour Schulich is the lesser-known half of the duo who founded Franco-Nevada almost 35 years ago and started to make indirect access to mining royalties feasible for individual investors. Most people are more familiar with his partner, Pierre Lassonde, because Lassonde is still Chair of Franco-Nevada. The total returns for Franco-Nevada over its history are a little tricky to calculate, mostly because it was taken over by Newmont Mining in 2002 and then spun out again into a separate company in 2008, but they’ve certainly been remarkable — the stock is up 600%+ since 2008, and returned an average of something like 40% a year in the 20 years before it was taken over by Newmont.
Here’s a bit more on that:
“Over the next two decades Schulich’s Renegade Alternative Currency Investment skyrocketed an incredible 119,899%.
“If you had invested just $10 when Schulich’s ‘renegade alternative currency investment’ went public back in 1983, your tiny initial stake could have grown into more than $11,899 over the next 2 decades.
“Remember, that’s starting with just $10! …
“Even Bitcoin’s historic run in 2012-2013 – which went up about 20,000% – was no match for Seymour Schulich’s ‘Renegade Alternative Currency investment’.”
OK, so that’s not exactly fair — comparing a one-year 20,000% return in the crazy bitcoin speculative bubble with a 120,000% return from a stock over 20 years… but yes, we’ll stipulate that both where incredible returns.
And yes, this “Electrum” is very likely some sort of precious metals royalty investment. Despite the “Renegade Alternative Currency” talk, he’s probably just talking about buying stock in one of the royalty companies… but we’ll dig in further and find out for sure. What other clues do we get?
Well, as I read further through the ad I see that they do open up about that “royalty” connection…
“Schulich had uncovered the highly secretive world of Royalty Rights.
“What are Royalty Rights?
“A Royalty Right is simply the right to a percentage of income from a natural resource such as a gold or silver mining operation—
“In fact, I refer to Royalty Rights as ‘America’s FIRST Renegade Alternative Currency’ because they were once a very popular medium of exchange and store of value in America…
“Openly available to everyone…
“You see, about 150 years ago, investors bought, sold, and traded royalty stakes in gold and silver-filled land… and received income (or royalties) as the precious metals came out of the ground.”
OK, so no big secret there. And yes, royalties have been around for a long time — prospectors who sold projects to bigger mining outfits routinely would take a royalty as part of their payment (and they still do), and landowners often take a royalty as well. There are lots of different kinds of royalty agreements, and they’ve been around for centuries (and, lest we forget to mention, most of them never amount to anything… since most land that gets explored never gets turned into a mine).
The ad also runs through a bunch of examples of early “renegade currency” beneficiaries who pulled in 100% gains each month and other crazy returns — so those serve to inflame those good ol’ greed receptors in our brains, but those references are to the 19th century claim stakers and traders who profited from the many “gold rush” manias from the 1840s-1890s (California, South Dakota, Nevada, Klondike, etc.). If you want those kinds of returns, which make even the gains in Franco-Nevada from 1983-2002 look puny, your best bet is probably investing in a time machine.
So what is it that Rickards thinks we should buy today as a play on this same “Electrum” strategy? More clues…
And, yes, though you’re probably familiar with the basic concept of gold royalties, we do get Rickards’ explanation of what makes them special:
“The secret behind these ‘Renegade Alternative Currency investments’ is simple.
“These businesses don’t do any mining, digging, or exploring…
“They don’t own a single truck, drill rig, or employ a single miner.
“REMEMBER: All they do is buy up royalty rights to lucrative mining operations, and wait for the money to roll in once the companies are willing to mine the precious metals.”
The downside, as I always try to remember to mention to folks, is that royalty owners are passive — so even though they’re not incurring the cost overruns or labor problems of the mining companies, they are surely dependent on the mining companies. If a mine doesn’t get built, or gets shut down because of problems, the royalty owner doesn’t earn anything… it’s good that they don’t have to pay anything, either, but they don’t generally have any power to force a company to mine a certain amount of gold within a certain timeframe.
In exchange for that, the great upside for royalty owners comes from both the potential of rising commodity prices, which would mean that the ounces they project to receive payment on would be more valuable, and from the tendency that mines have to grow larger over time. When you’re building a mine, there’s no incentive to explore and book more reserves once you’ve already established that a mine is viable… you book enough reserves to justify and finance the building of the mine.
But once the mine is operating, a few years down the line (in your ideal world), you start to get some cash flow and then you start investing in more exploration so you can find more veins, book more reserves, and extend the mine life and make more use of those fixed investments (the mill, the mining equipment, etc.). And often those royalty agreements will apply to an entire area, not just to the original mine property or to a specific amount of production, so a royalty that looked like it would generate income for eight years when you first bought it might generate income for decades beyond that.
So that’s the beauty of the royalty model, and the potential leverage that it can provide if commodity prices are going your way and you happen to have royalty agreements with good operators.
And Rickards pulls out the three biggies to provide his examples — the huge returns he repeats in this next bit are references to “buy at the beginning and hold on” purchases of Franco-Nevada (FNV), Royal Gold (RGLD) and Silver Wheaton (SLW), which are by far the largest precious metals royalty/streaming companies.
“These are the kinds of gains that can, quite literally, change your life.
“And to be honest, I suspected we’d never encounter an opportunity to capitalize on one of these opportunities again, in the very early stages of the game.
“But it looks like we may actually have the opportunity again, right now… with a microscopically small equity, which I can almost guarantee you’ve never heard of before…
“It went public not too long ago, and already has a foothold on some of the most lucrative gold and silver mining royalties in the world right now.
“The good news is, it’s still incredibly early in the game.”
OK. So that means Rickards’ references to “Electrum” are just his super-secret way of saying “I’ve found the next great precious metals royalty company” — which one is it that he likes?
Here are our hints:
“I’ve learned about a small and relatively unheard of Renegade Alternative Currency investment that has quickly and quietly secured 131 royalty deals in some of the safest and most desirable gold and silver mining locations in the world…
“And that the vast majority of these deals are on early stage projects that haven’t ramped up to full production yet.
“Why is this a big deal?
“Well because, simply put, this company’s cash flow is expected to explode – as mines reach production – potentially making investors very rich….
“One of their royalty agreements gives them the right to 25% of the first 175,000 ounces of gold produced—and then 12% of the gold produced thereafter for the life of the mine, on one of the current highest grade gold-copper deposits in the world. A huge mine with a life of over 21 years!
“And that’s just ONE royalty stream.
“These guys landed another contract on another huge and recent discovery.
“I won’t tell you the name of it here… but this property has already been independently projected to contain well over 47 million ounces of silver.
“That’s one of the largest silver discoveries in recent years.
“Thanks to this royalty agreement, our company is legally entitled to 20% of the silver from this discovery, until 7 million ounces has been reached. After that, they are entitled to 9% of the silver produced thereafter, for the LIFE OF THE MINE.”
And he uses the word “skyrocket” to refer to this secret company’s expected cash flows, though the chart he shows to illustrate this just says that this company will go from about $50 million in operating cash flows in 2016 to $67 million in 2021. That’s growth of about 7% a year in cash flow, which doesn’t conjure up images of a “skyrocket” to me… but yes, growth is good.
So what’s the stock?
Well, as some of you will have by now guessed, this is our old favorite Sandstorm Gold (SAND), which was founded in 2008 by a couple Silver Wheaton employees, most notably former Silver Wheaton CFO Nolan Watson. The original idea was to bring the “streaming” model that had been so successful for silver into the gold market, starting with small miners.
If you’re new to this business, “streaming” and “royalties” are both generally passive participation rights in a mine — “streaming” means you buy a certain portion of the mine’s output at an ongoing set (below market) price, “royalty” means you just collect a percentage of the income from the operation (there are several different kinds of royalties, but most common is probably the “net smelter return” royalty, which means you get X% of the gold that is produced). Typically streaming deals are much larger as a percentage of the mine output (sometimes 10-20% or more) and involve more of a capital infusion for the miner, and are often made as the mine is going through the last stages of funding construction or expansion and needs a lot of money but also has a much higher probability of actually becoming a mine, whereas royalties are often formed much earlier on in the process and are much smaller in size, often just 1-3% of the gold (or whatever) produced.
They started out with some cash and a handful of streaming deals, and gradually built up and bought more deals in the ensuing years, and the stock hit its peak when it got a NYSE listing in late 2012, which also happened to be just before gold started its most recent long decline. By the time gold bottomed out, about 40 below those all-time highs, Sandstorm Gold also bottomed out, in January of this year, about 85% below its all-time highs from October of 2012.
So it’s been a nice run for Sandstorm Gold this year, to be sure, as it recovered from those lows and bounced back up by 200% or so (it has since come down a bit), but it’s worth remembering that leverage to gold prices works both ways — depending on when you bought it, an investment in SAND could have lost you a lot more money than an investment into plain old gold bullion.
The biggest reason for Sandstorm Gold doing much worse than gold, and worse than all the other royalty companies of meaningful size, is that they were not particularly well-diversified in 2012, and their biggest royalty streams at the time were either financed when gold was at $1,500 or above, or provided disappointing returns for other reasons. That’s less of an issue now, as Sandstorm has done a good job of dramatically increasing the number of active royalties and streams in its portfolio, but it is still a relatively small company compared to the big three (FNV, RGLD, SLW) and comes with both a lower valuation and higher expected volatility.
I like that about Sandstorm, because their smaller size means that there’s more potential for one great mine to have a substantial impact on their income statement — but it does mean that SAND requires probably a stronger stomach than FNV or RGLD, particularly if gold hits another swoon and all the gold equities sell off.
On the positive side, in addition to increasing the size and diversification of their royalty and streaming deal portfolio in recent years, they’ve also seen a gradual improvement in the quality of their partners — mostly because small miners have been bought out by midtier or larger mining companies, the operators of the mines Sandstorm has deals with are generally stronger than they were a few years ago.
To follow through on those hints in the ad, the mine that Rickards refers to when he talks about that “25% of the first 175,000 ounces of gold” royalty is the Ming Mine in Newfoundland and Labrador, owned by Rambler Metals and Mining — that one is a pretty small fish in Sandstorm’s pond, production has been disappointing because they produced a fair amount of gold out of the gate five years ago, when the mine was first being restarted, but they moved production to areas of the mine that were optimized for copper production for much of the past few years and gold production remains fairly low (about 7,000 ounces last year). So Rambler is one of their weaker partners still, it’s a tiny junior miner that is not currently profitable, and even if they keep production up with relatively strong copper and gold prices it may well take a loooong time to get 25% of the first 175,000 ounces… but that’s OK a royalty investor has to be pretty patient and wait for projects to play out, sometimes over decades.
The other hinted-at royalty, the silver one that’s coming from a project that’s estimated to have more than 47 million ounces of silver, is the Cerro Moro project being built by Yamana in Argentina. It was Sandstorm’s three deals with Yamana last Fall (this one plus a copper stream and a gold stream) that encouraged me to increase my holdings in SAND for the first time in a long time, and that turned out to be a very timely set of deals (at least so far), since Yamana was a little desperate to improve their balance sheet a year ago, when gold prices were still falling, and SAND had enough leverage and cash to get what seemed to me like a good deal.
Sandstorm is not going to look particularly appealing if you look at traditional metrics like “earnings” — that’s because depletion and asset writedowns have erased a lot of their earnings over the past couple years. Those aren’t cash costs, though they do have real business impact (ounces produced can’t be produced again, so future potential is removed by depletion… and asset writedowns are largely a function of falling metals prices or mines that don’t produce what was expected), so I generally prefer to think of the royalty cash flow at Sandstorm minus the ongoing operating costs.
On that front, SAND has pretty consistently had cash operating expenses, including interest, of about $20 million a year. There’s no real reason to think that number should have to increase with the steady increases in revenue they’re expected to have, so my thinking is that SAND’s current $30 million or so in operating cash flow will grow to about $45-50 million in operating cash flow as mines come online or grow over the next five years.
That does not make SAND cheap, but those expectations are based on gold being down in this $1,100-1,300 range… and on no really meaningful deals being made by Sandstorm, and no surprise upside from any of their larger royalties. So there is potential for those numbers to be conservative, but being conservative makes sense to me. At $30-35 million in operating cash flow, you’re paying roughly 25 times operating cash flow for Sandstorm Gold today.
That ain’t cheap, but it’s cheaper than Franco-Nevada (43 times operating cash flow) or Royal Gold (32X), and I think SAND has a reasonable chance, particularly in a rising gold price environment where some of their royalties might come online more rapidly (or where production might be spurred at Oyu Tolgoi in Mongolia, to name one example, where SAND has a potentially valuable streaming deal on some sections), to grow more quickly than their larger colleagues. And they are still very much focused on growth, with a clean balance sheet and about $100 million available in a credit line if Nolan Watson finds some more opportunities to invest in future streams and royalties.
No guarantees, to be sure, and it’s been a short, sharp run this year that could certainly reverse if gold falls apart for some reason… but I’m still quite comfortable with Sandstorm representing the core of my gold equity exposure.
And as the ads for these kinds of investments often do, they imply that you’re earning those “royalty payments” directly as some form of income…
“… the power of “America’s FIRST renegade alternative currency investments” lies in its function as a store of value…
“A way to protect your wealth (much like gold or silver bullion)…
“Potentially grow it by amazing multiples…
“And even receive a steady stream of income… a form of quickly-growing investment income thanks to royalty payments you receive as a company stockholder.”
There’s even a chart of the compound dividend growth of one of these “Electrum” stocks (in this case, referring to Royal Gold, RGLD, the other large gold-focused royalty company that has been around for decades… and yes, Royal Gold has grown its dividend at a pretty good clip over the years, though the dividend has never been very substantial and now offers just a 1% yield).
And on that front, Sandstorm isn’t likely to excite anytime soon — Sandstorm does not currently pay even a token dividend, though Nolan Watson has indicated in the past that they would like to pay a dividend eventually. So you’re not going to get any direct cash flow from this one, though perhaps that will come as the business improves… assuming, above all else, that the price of gold does not collapse.
So… it’s not really an “alternative currency,” though the ounces of gold in the ground that Sandstorm owns rights to are a potential “store of value” and offer the potential for very levered returns IF Jim Rickards is right about gold going to $10,000 an ounces over the next few years… and even if he’s not right and we don’t get gold prices that are so high that you get crazy returns from SAND, if gold stays, for example, in the $1,200-1,400/ounce neighborhood where it’s been in recent months, Sandstorm should be able to consistently generate positive cash flow and survive.
Sound like the kind of thing you’d be interested in? Have other gold or precious metals investments that you prefer? Think we’ve seen the top for gold prices for now? Please share your thoughts with a comment below.
P.S. “Electrum,” if you’re curious, is a combination of gold and silver — often used for jewelry in the ancient world. It’s also the brand name of a bitcoin “wallet” company. I suppose you can think of Sandstorm as having some connection to electrum, since it’s driven both by gold and silver prices, but that’s still a bit of a stretch… as is the idea of precious metals royalties, or companies that own and manage those royalties, being some sort of “alt currency,” though it’s generally true that gold does well in dollar terms when the value of the dollar falls (as is true of most “hard assets,” most of the time).