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« ETFs: Do You Really Know What You're Buying? | Main | Protest to end Coromandel gold mining - New Zealand »
Tuesday
Mar272012

Sandstorm Gold Limited: One to Watch

Sandstorm Gold's (SSL) fortune is directly related to the future price of gold. Sandstorm completes “metal stream transactions” with gold mining companies. These contracts give Sandstorm the right to purchase a percentage of a mine’s gold production at a fixed price for the life of the mine, in exchange for an upfront cash payment. Sandstorm targets advanced stage development projects and also operational mines for their metal stream contracts.

The fantastic thing about this company is they seek out mining enterprises who need funding to get, or keep, their mine operational. At the most opportune time Sandstorm swoops in and offers to pay for the remainder of the project, in return for a percentage of the gold produced for the life of the mine at a fixed price. The best part is, because the mine is generally in a predicament at the time of the cash boost, the price charged to Sandstorm per oz from then on is very low - around $350-$500/oz. The agreements generally guarantee Sandstorm 10-20% of future production.

The company was founded in 2008 and has since blossomed, quadrupling its value. Sandstorm currently holds seven gold streams, five of which are producing mines. They forecast adding 3-4 streams to their portfolio each year and gold sales are forecasted to increase from 25-35,000oz in 2012 to over 50,000oz in 2015.

Sandstorm has a market capitalization of $660 million, a 52 week low of $0.87 and a high of $2.02. The average volume of shares traded is between 1 and 3 million per day, with 350 million shares outstanding so liquidity is sufficient.


As the above chart shows, this stock’s fortunes are largely dependent on the price of gold. Profit is determined by the difference between the price of gold and the agreed price of the purchase agreements Sandstorm holds. Barring a large drop in gold, the company’s prospects look healthy indeed, given the forecasted doubling in the quantity of gold streams in the next three years.

This type of stock does carry a higher than average level of risk. The biggest risk is obviously being the price of gold declining. On top of this, the company is directly exposed to the risks of the individual mines it has agreements with. Sandstorm receives no compensation if production targets are not met and there is no control over the mining operations.

Sandstorm has had an extraordinary run of growth since its inception. The likelihood of a continuation in this growth is strong. The trailing P/E ratio is high at 58 indicating perhaps the stock has been overbought,however, with a forward P/E of 18, this could be a great buy. A consensus of analysts certainly believes so, with the majority labeling this stock as a buy or strong buy. Not a single analyst surveyed suggested any strategy less than hold.

Worthy of note is the caliber of Sandstorm’s management. Nolan Watson, CEO, is ex-Silver Wheaton and his track record there speaks for itself. David Awram, VP (also ex-Silver Wheaton), along with Mr Nolan are the founders of Sandstorm. If they can replicate the growth of that company for Sandstorm, the sky is the limit. Given that Silver Wheaton and Sandstorm Gold are very similar companies as far as their business model is concerned, Sandstorm could be a future star.

Gold prices have fallen a tad in the past month, however it should be noted that the drop has not been reflected in Sandstorm’s share price, which is indicative of the stocks strength and popularity.

In terms of timing a purchase it is difficult to say as it is riding high at the moment and this could be a good time to short sell this stock with the view that this current aberration comes to an end and it resumes a position closer to that of the gold price. For those who take a longer term view, perhaps this show of strength is an indicator of Sandstorm’s recently developed resistance to short term fluctuations in the gold price and it will go from strength to strength.

We like it and have placed it on our 'Watch List' in order to monitor its progress and hopefully identify a suitable entry point for our funds.

Sandstorm Gold Limited trades on the TSX under the symbol of CVE: SSL.

For disclosure purposes we not own this stock.

Regarding www.skoptionstrading.com. In 2011 we outperformed

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Reader Comments (2)

Interesting post here, really makes me think about gold prices and how they correlate to mining companies. Thanks for sharing this article.

March 27, 2012 | Unregistered CommenterPrice of Gold

Thank you Gentlemen, I appreciate your taking the time to give what I consider to be exceptional insight! Good luck to you and all your readers, Vincent

March 27, 2012 | Unregistered CommenterVincent

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