Investment Analysis: Sandstorm Metals & Energy (CVE: SND) – See’s Candies at a Sanborn Maps Price
Feb 24th, 2012 by Above Average Odds
“Value investing…as in, buy something when “all is quiet”. When the stock just drifts along…when no one seems to like it…when the company is trying to keep things quiet and insiders are accumulating…when the silence is designed to shake you out of your position.
I am learning…you don’t just throw money at an idea whatever the price. You also pay attention to the cycle of silence (accumulation), markup, and promotion. Some stocks scream accumulation when there is an almost unnatural silence for a long time, and unbelievably low volumes.
Why buy a stock when it’s expensive and noisy when you can get it cheap and quiet?”
– Mike Burry
“A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”
– Wayne Gretzky
Thesis:
Sandstorm Metals & Energy (SND) is an obscure, underappreciated, micro-cap franchise with a highly skewed, incredibly favorable risk/reward equation.
Investment Highlights:
An investment in Sandstorm Metals and Energy at or around the current price possesses nearly all the qualities we look for in a great long-term investment. In particular (1) an unsustainably low valuation (both absolute and relative to peers) (2) a good, fully incentivized management team (3) near to medium-term operating momentum (4) a highly attractive long-term business model and (5) multiple internal and external high probability catalysts (which we expect will drive substantial near to medium-term upside)
Other attractive attributes of Sandstorm M&E include…
- A dominant competitive position in a rapidly growing niche market
- An unlevered balance sheet
- Improving economics on an attractive and fast growing asset base
- Zero tax liability given Luxembourg domicile
- A high likelihood of experiencing meaningful improvements in near term profitability and cash flow
- Opportunity to invest capital at (1) a very high rate and (2) for a very long time
- A natural inflation hedge/low risk way to participate in minerals/commodity bull market
Opportunity Overview:
Why its Mispriced?
As an illiquid, Canadian micro-cap spinoff with a practically non-existent operating history and financials that offer a limited view of SND’s future earnings power – as to date they’ve shown the cost of acquiring 9 M&E streams but very limited revenue and cash flow given the natural lag between the initial investment and production – it’s not necessarily shocking that SND is mis-priced, nor that the majority of intelligent investors at this point are completely unaware of the company’s existence.
A Low-Risk High-Return Investment Opportunity:
What is a little shocking in my mind though is the magnitude of the mis-pricing and the opportunity to earn many multiples of your money over the next 3-5 years with practically no chance of permanent loss.
Rarely do I come across an opportunity to purchase a fast growing emerging franchise run by a visionary owner operator with an extraordinary record of value creation (and a better than average shot at being a 1B+ company in time) at a truly absurd ~4x normalized earnings and/or a conservative discount to its readily ascertainable liquidation value (defined here as a discount to the run-off value of SND’s senior secured, contractually guaranteed minimum cash flows.).
The Jockey:
Not often (practically never actually) have I been so impressed by, and frankly fired up to partner with such a visionary and capable CEO over the course of my investing career. Sandstorm’s President and CEO Nolan Watson is truly something special. As a chartered accountant and CFA who went on to become the first employee and CFO of value creating juggernaut Silver Wheaton, Watson proceeded to invent the commodity stream business model and developed one of the most impressive track records I’ve ever come across as a professional investor (before the ripe old age of 30). I mean, we’re talking about a guy who at 26 became the youngest CFO in the NYSE’s history. Not bad.
A few additional interesting highlights on Watson include his love of value investing, and his graduation from Canada’s elite University of British Colombia at only 19. Post graduation, Watson worked for Deloitte’s corporate finance department doing business valuation and M&A, until leaving in 2004 to start SLW under the guidance of industry legend Ian Telfer. He was named one of the CFA magazine’s “most motivated” in 2008 and has been awarded countless other awards and distinctions such as Valedictorian of the Institute of Chartered Accountants of British Colombia.
Notably, by the time Watson decided to leave in 2008 to build his own business in hopes of replicating Silver Wheaton’s success in other parts of the mining sector, he had raised over $1B in debt and equity, hit more than a few absolute grand slam streaming deals and been a key figure in SLW’s market cap growing from ~200m to over $3B over the course of his 4 year tenure. Not too shabby for four years of work no? As an aside, with Silver Wheaton’s current market cap at ~13B, the power of SND’s “mini SLW” business model should be readily apparent.
The key takeaway from all of this in my mind is that Nolan was an instrumental figure in building SLW into the company it is today and he appears well positioned to do it again, supported by an impressive board and a world class advisory/technical group and an open ended opportunity set. With an almost super-human work ethic and an unquenchable desire to truly build a business for the record books, I think we have all the ingredients here for substantial long-term success.
The following profiles and interviews should help paint the picture as far as sizing up the caliber of the extraordinary individual leading SND’s charge…
http://www.caseyresearch.com/nexten/nolan-watson
http://www.eventualmillionaire.com/blog/2011/05/millionaire-nolan-watson/
The Stakes
So with some basic familiarity with who this guy is, it’s comforting to know that Watson’s reputation, money, and career are all on the line here. Given that and the profiles/interviews above, ya think he’s motivated to succeed? I’d say so.
So while success in life and business is never assured, I think its fair to say that this guy is one of the smartest, most intensely motivated leaders I’ve ever invested alongside and one would have to be border-line insane to bet against him (as SND’s price implies). Not to imply this guy doesn’t make mistakes (see the recent Royal Coal debacle), we all do and he certainly has – but all that said, he does seem to possess the passion, the magic if you will, that is the hallmark of all truly great business leaders and entrepeneurs. I read a VC article the other day that put it well – “what he does mixes with who he is, which is cooked and propelled by what he believes.”
It’s also worth noting that Watson’s on record saying that he believes SND will be a multi-billion dollar business and should ultimately become the biggest and best of his babies in time (fyi, he is also president and CEO of SND’s sister company Sandstorm Gold). I tend to agree to say the least. Perhaps more importantly, he’s on record saying how frankly stupid cheap SND is at or around today’s valuation and (unsurprisingly), has been actively adding to his already large stake in the open market.
Unique High Return Business Model
As the only pure play, publicly traded base metal and energy-streaming company of its kind, Sandstorm offers several benefits/unique characteristics to both investors of traditional mining companies and executives looking for optimal sources of financing. So, before we delve in to what makes this company so special, let quickly review how SND makes money.
Put simply, SND finances late stage junior miners with low cost operations and best in class management teams by buying future production of commodities at fixed prices. The typical price they pay is at or beneath that of the commodity in questions low cost producer. The producer gets needed financing to bring mines into production without massively diluting shareholders and SND in turn gets a percentage of their future production and usually a guaranteed principal repayment within 5 years (so far, all of their existing deals have this heads I win, tails I don’t lose provision).
Per Sandstorm’s website….
“Sandstorm Metals & Energy Ltd. is a growth focused resource based company that seeks to complete commodity purchase agreements with companies that have advanced stage development projects or operating mines. A commodity purchase agreement involves Sandstorm making an up-front cash payment to its partners and in exchange, Sandstorm receives the right to purchase a percentage of the commodity produced for the life of the asset, at a fixed price per unit. Sandstorm helps other companies in the resource industry grow their business, while acquiring attractive assets in the process.
Sandstorm is focused on low cost, profitable operations with excellent exploration potential and management teams focused on accretive growth in politically stable jurisdictions.”
For what its worth, I think the story is very much the same story as it was for SLW in 2004. We have an unknown, hugely underappreciated innovative business with fixed SG&A, network effects, significant operating leverage, minimal cap-ex, high ROIC, an effective tax shield, and no brainer multiple expansion once (1) the company is better known and (2) it reaches a level of scale where comparisons to the bigger royalty companies becomes fully appropriate/undeniable. All of which highlight the immense power of the business model to grow and create almost stupid amounts of shareholder value over time.
So what makes SND so special? In particular, Sandstorm benefits relative to traditional industrial commodity business in the following ways:
- Leverage to increasing metal and energy prices (i.e. coal, oil, natural gas, and copper)
- Low fixed operating costs (i.e. $75/t met coal, $55/t thermal, $15/bbl oil)
- Exposure to production upside without associated costs (zero M Cap-ex)
- Exposure to exploration upside without associated costs
- No environmental or closure responsibilities
I also think it’s worth thinking about what SND’s operations actually consist of. Make no mistake, this isn’t your average industrial commodity business. SND’s operations consist of essentially a small office staff of finance experts/value investors who continue to add deals to the portfolio and hence production – all without significantly adding to overhead in the process. After all, sitting in a room arbitraging commodity cost/price differentials with very little (if any) risk while getting massive free upside optionality doesn’t require a lot of capital.
Win/Win Value Proposition:
Let’s take a look at the value proposition of SND’s platform. Sandstorm offers the traditionally more risk-averse mining investor with the ability to maintain exposure to exploration success, expansion possibilities, and metals and energy price movements, all while reducing risks typically associated with traditional metal and energy operating businesses. In other words, Sandstorm provides investors with a better way to gain meaningful leverage to the ongoing commodity super-cycle in a qualitatively superior, and materially less risky manner.
Of course it’s also a no brainer for Sandstorm’s resource company partners. I think about it like this, is this streaming transaction good or bad for the shareholders of the company in question relative to the alternative?
After analyzing the alternatives, I have to say that the answer is almost always an unequivocal Yes. Not that there isn’t upside and downside to the transaction(s) (as there always is in every deal), that’s not the issue. The issue is whether or not SND’s solutions provide resource company executives with a better way, i.e. the ability to finance the last leg of a mine to production without share dilution (i.e. raising equity and/or taking on debt), as SND’s streams provide the capital to avoid exactly that outcome at a lower ultimate cost to shareholders vs. alternatives.
Now, while taking on debt and diluting your shareholders is an intuitive and somewhat obviously negative thing, let’s not forget the rationale for why this is so. Remember that debt in these industries is often deadly given the nature of commodity businesses (i.e. high capital intensity) and the cyclicality of their industries/commodity prices in general. Oftentimes that debt would ultimately end up triggering additional dilution – read “more debt” – if say commodity prices unexpectedly drop below a set level, or if there are unexpected delays in mine development. Those risks are less onerous in the Sandstorm structure because the costs are known and the timeline to development less relevant.
There is also the fact that when issues arise, as they of always do (these are, after all, mining companies), Sandstorm has the expertise to be a much better, more flexible partner than your typical bank and can nearly always offer a more optimal solution to the issue at hand. That, and can someone tell me why any good management team operating a high quality, late stage resource company – who almost by definition are always constantly looking for the most optimal partner to source new mine and/or expansion financing – would prefer to work with a typical bank relative to working with a team like Nolan’s? What possible reason could there be to do so? I mean, SND is the ideal partner as they possess a proven track record, offers better terms, and are actually looking to establish long-term, constructive, win-win working relationships. Again, with a proven track record that has demonstrated a co-operative approach to ensuring business success time and time again, the choice seems clear.
Growth Drivers
Commodity Price Increases:
Now while I don’t expect the type of parabolic price rises in base metal and energy commodities that we’ve seen with silver and gold, I do expect structurally bottlenecked commodity prices (oil, met coal, iron ore, potash etc) to be higher 3, 5, 10 years from today on average. While anything is possible, I think we can all agree that the odds of prices not rising in a stable to growing, resource constrained world with negative real interest rates and where major developed western central banks are printing money like mad in hopes of averting a deflationary debt spiral, to be quite low all things considered. Unless global growth falls of a cliff and ceases to recover, its pretty inconceivable to me that a diversified basket of “moaty” commodities won’t cost more 5-10 years in the future.
I want to note that with SND’s costs to acquire its commodities fixed and substantially below both current market prices and that of the low cost producer, any future commodity price increases will result in perpetual gross margin expansion and fall straight to SND’s bottom line. Also, these deal structures are set up where it makes it essentially impossible for SND to ever generate a negative gross margin. Production volumes will therefore always be at least marginally profitable.
Additonal Stream Acquisitions:
As the leading and only commodity and base metal streaming finance company, SND’s pioneering management team is uniquely positioned to grow. Given SND’s ability to raise capital regardless of the market environment, I believe value accretive growth through the purchase of additional commodity streams going forward is likely to be substantial and should actually accelerate the bigger the company gets. The fact that the company has already done 9 deals in its short existence is a testament to management’s ability to aggressively grow its stream count. Again, it’s entirely reasonable in my mind given the early stage nature of the opportunity (and the proven jockey at its helm), that SND will grow its present portfolio to many, many multiples of its current size looking out 3-5 years.
Embedded Reserves & Resources Optionality:
Another crucial point when thinking about the growth opportunity here is the fact that most companies go into production on a resource calculation that is typically representative of the smaller portion of a larger deposit whose reserves and resources are typically enhanced over time through continuing exploration.
So SND gets an embedded free call option on any additional exploration upside thrown in at no cost to the company. Think about it like this, if SND does a streaming deal with a company whose oil asset starts initial production at ~5k barrels/day but is actually capable of a mature run-rate of over ~20k/day once the asset has been fully proved up and developed, the reward for SND and shareholders is amplified exponentially. So in every deal, SND gets both a downside protection put (i.e. a minimum guaranteed payment) and a potentially multi-bagger free upside call option.
For some great perspective on just how much this upside optionality can be worth, I would advise taking the time to examine some of the deals done at Silver Wheaton over the course of Watson’s time at the company. I certainly found it enlightening regarding the type of moonshot that are possible with this type of deal structure. The asymmetry can be stunning.
Valuation:
Note: I’ve left out an in depth NAV analysis and/or a discussion of SND’s individual properties given the discount to the run-off value of its contractual minimum payment guarantees. I don’t feel it’s really all that important to do so at this point, as investors are essentially getting the entire value of SND’s proved and probable reserves for free at the current market cap. That, and even a cursory analysis of the respective properties should highlight the quality of these assets. I think you’ll find that the potential production and NAV growth of the existing asset base (as they are proved out and fully developed over time) is much, much higher than what is reflected in SND’s forward production estimates and its current proved and probable reserve profile. For what its worth, I think the Donner, Terrex, Thunderbird, and Rex streams could in and of themselves be worth more than SND’s current EV.
Capital Structure
Market Cap C$133.4m
S/Price C$0.42
S/O 317.8m
Options C$14.6m
Warrants 155.5m
F/D S/O 487.9m
Current Cash C$44.7m
F/D Cash Adds C$115.9m
Working Capital C$44.7m
Long-term Debt C$0.00m
Book Value C$140.5m
Total Enterprise Value (EV) C$88.7m
*EV = Market Capitalization – Cash + Long-term Debt C$
*All #’s in CAD
Base Case: Range of Values
On an absolute basis, companies like SND with 50%+ normalized operating margins that operate in large/growing markets with zero maintenance cap-ex requirements and no tax liabilities should by definition trade at very high multiples of its EBITDA & CF. I would propose that Sandstorm’s ability to grow sales and cash flow at high rates without needing any capital to do so is the essence of a high multiple business and thus should be priced accordingly. So logically then, it follows a business like SND should trade at a premium market multiple (anything less than 10-15x seems hard to intellectually justify in my mind).
So, given SND is a high quality business very early in its evolution, I think an EV/FCF multiple of 12x is reasonably conservative. At 12x SND’s ~$25m in expected 2014 FCF, the implied valuation is ~$300m or over 3x the current EV. At an almost unreasonable 10x, SND’s implied valuation is ~$250m or over 2.5x it’s current price.
On a relative valuation basis, it’s even cheaper. If we use the average of Sandstorm’s appropriate comparables (Franco Nevada, Silver Wheaton, & Royal Gold), SND would trade at 14x 2014 FCF. At 14x the company would be worth ~$350m or nearly four times it’s current EV.
Summing up the base case, we have a great business currently trading hands at ~3x 2014 EBITDA and ~4x ‘14 expected FCF on its existing asset base. You could cut those already reasonably conservative estimates in half and Sandstorm would still be too cheap on an earnings basis.
A couple of quick thoughts…
I think excessively anchoring relative valuations to the metal &energy operating companies isn’t really all that rational – meaning, because base metals companies trade at 5x then SND should trade at 7x or something like that. While I get it that SND’s results are in a certain, very real sense tied to commodity businesses, the differences in operating profitability, capital intensity, growth potential, avg. mine life etc. vs. the average industrial commodity business are so different that it makes the comparison specious at best. A fast growing tax advantaged compounding machine should never trade at a slight premium to a basket of bad businesses and/or a mid to low single digit multiple to FCF for any reason.
I also think that once the company reaches critical mass stream wise (both in number and diversification by commodity type) it should garner an equal to higher multiple relative to appropriate comps. The three most obvious reasons in my mind being (1) M&E has a much larger total addressable market than the precious metal companies (2) because a diversified portfolio of structurally bottlenecked commodity streams provides superior cash flow stability and is inherently more defensive than a pure play precious metals business and (3) the diversified model provides Nolan and Co. with a multi-tool toolbox so to speak. With SND, management can allocate capital towards only the most mis-priced metal and/or energy commodities at any given time – such opportunistic flexibility is just as powerful of an advantage in streaming as it is in any other form of investing.
Also, my ~$25m in normalized free cash flow estimate assumes zero growth in the # of streams, as well as zero growth in production and reserve value above and beyond their partners initial production estimates. The estimate is based on a reasonably conservative commodity price deck and production estimate outlined well in the company’s most recent presentation linked below.
http://www.sandstormmetalsandenergy.com/i/PDF/SND-Presentation.pdf
Best Case Scenario
Given the captain at the helm and the sheer size of the markets Sandstorm operates in, it’s worth considering what SND could reasonably be worth in 7-10 years time.
With that in mind, I think it’s entirely reasonable to assume that commodity prices will generally be higher on average 7-10 years from today. I also think its reasonable to assume that Nolan and his team could acquire 5x the total streams and hence generate at least 5x the cash flow in 2019 that I expect it will conservatively do in 2014 (which is admittedly simplistic but also almost certainly unreasonably conservative, as it doesn’t give any credit for the additional operational leverage, probable production and resource base growth optionality, etc.).
So, under that scenario SND would be generating something in the ballpark of $125m in 2019 FCF. At a reasonable 12x, that’s an implied EV of $1.5B or about 15x todays EV. Now that’s what I call big boy upside 
.
Again, I’ve rarely come across opportunities where you have a reasonably decent shot at a 15 bagger in 7-10 years at a discount to liquidation value. I like that risk/reward (to say the least), and expect the market will as well as SND becomes better known. As it does, I expect the market will quickly reward this high quality business with an appropriate (i.e., 10-15x EV/FCF) multiple much more reflective of the quality of this business and its high return, above average growth prospects.
Downside Protection:
When thinking about downside protection, I think investors need to realize that at or around today’s price, SND actually has cash and minimum cash-flow guarantees that are equal to ~100% of the current market cap. Now cash is cash but I think the guarantees need some minor explanation, as they are a relatively recent innovation within the stream finance business model.
Essentially these minimum cash-flow guarantee’s are exactly what they sound like, i.e. senior secured contractual guarantees that ensure SND will at least break even on the transaction in question over a ~5 year time horizon. Intuitively then, these minimum cash flow guarantees act as a put of sorts and therefore should provide the company’s equity with a floor (valuation wise). This should be the case because both (1) we are talking about a market leading high quality business with tremendous underlying economics and above average long-term growth prospects that should trade at a significant premium to its assets and (2) because one way or another it’s a near certainty SND will ultimately get their principal back (as even if the client fails in its entirety, SND’s investment is collateralized by assets worth considerably more than the initial investment).
So with cash + minimum cash flow guarantees higher than the actual market cap, what we have here is a rapidly growing emerging franchise that is currently priced at a meaningful discount to what I believe is its worst-case run-off value. Safe to say I think this is crazy/unsustainable on a whole host of different levels.
The fact that an investor can purchase SND’s guaranteed cash flows at roughly par and essentially receive all of SND’s reserves and exploration upside for free is frankly an anomaly that doesn’t come around too often given SND’s qualitative characteristics and huge high margin/high growth runway. I mean for the market to price Sandstorm’s equity at a level that implies (1) that the fully incentivized, best in class management team that actually pioneered commodity stream financing in the first place (and who notably has created literally billions of dollars of shareholder value as they’ve honed and perfected the craft) is actually value destructive (who knew?) and (2) the equally preposterous proposition that there is zero value above and beyond the minimum guarantees in any of SND’s 9 existing commodity streams. Again, this is preposterous.
Even if we assume that over the next five years management does literally nothing other than collect on the fully-secured cash-flow guarantees on our existing commodity streams (and hence never does another deal) – an investment purchased today would almost certainly get our money back when all is said and done. Framed this way, I think the magnitude of the downside protection here becomes clear and highlights the idea that an investment in SND is in many ways akin to a fully collateralized, senior secured bond that offers (1) a free call option on a diversified basket of “moaty” commodities (i.e. those commodities with structurally bottlenecked supply/demand dynamics) (2) inflation protection and (3) a similar duration and rate of return as a “risk-free” gov’t bond.
Also, any downturn in the base metal and energy markets or across all of them as a whole not only wouldn’t be the end of SND, it would almost certainly make them materially stronger. In a sense, the profitability of new streaming acquisitions is inversely correlated with the health of the industries in question and its access to capital. While the ROIC on new deals are always attractive (management underwrites for IRR’s in the mid 20’s), the real moon shots are made in this business when there’s blood in the streets (sound familiar?).
There are many reasons for this. The biggest reason is that SND’s terms of trade would substantially improve as capital becomes more expensive/scarce. The size of the opportunity set would also expand, as more junior M&E companies would find themselves in need of the capital that banks have stopped providing. Put simply, in the worst of times, SND has the financing power that junior’s lack and that banks won’t provide. Oh, and there is the tens of millions in readily deployable cash (net of commitments) on SND’s books that’s worth roughly a quarter of the current market cap. So as the ideal white knight for best in class resource companies looking to grow, Nolan and his team should able to treat any oncoming dislocation as an opportunity to step in and fund some enormously appealing mining and energy projects on good terms. Looking out longer-term then, any near-term market crash is more likely than not to be a material positive for Sandstorm M&E shareholders.
I think the above reality is an important aspect to keep in mind as far as thinking about what happens to SND’s intrinsic business value in the near to medium-term future in today’s highly uncertain global economic environment, given the stock is already priced for depression. Also, the advantages of Nolan’s relationships, capital raising abilities, and overall deal-flow are substantial and key competitive advantages. I think Watson’s demonstrated ability to raise large amounts of capital in both good times and bad, but especially bad is an important point to comprehend (interestingly, Watson was able to raise funds for Sandstorm right in the teeth of the great recession). Again, there is very little doubt in my mind that Watson possesses the street cred, track record, and network of relationships to raise large amounts of money even in the worst of times, and equally as importantly, the investment acumen to make the most of it. So the takeaway in this respect is that SND offers impressive low risk, high return growth in normal times, but potentially supernormal low risk, high return growth in bad times – and investors can get it all at a valuation that implies the company is essentially worth more dead than alive (talk about a cherry on top). Not a bad combination given the state of things.
Risks
For this section I’m primarily just going to quote management’s thoughts on risk, but first I wanted to address a common – and erroneous – concern I’ve heard revolving around SND’s periodic equity issuance’s that have taken place since the company was spun-off from sister company Sandstorm Gold. Also feel free to comment on any additional risks in the comments section and I would be glad to address it.
In regard to the equity issuance, the worry here is quite understandably that these deals are dilutive. They’re not – they are actually very accretive on an NAV basis and I think you have to look at share issuance here completely different from the way you would look at it with regular mining or E&P business. In those instances, the proceeds are used for things like new machinery or a speculative new deposit or any of the myriad of other truly dilutive reasons that these highly capital intensive and inherently bad businesses typically raise funds for. In SND’s case, essentially 100% of the proceeds raised are directly invested into additional (and again, materially value accretive) commodity stream agreements (agreements of which have senior secured contractual guarantees that 100% of the invested capital will be paid back, usually within a ~5 year period). I would also mention that these raises have always been done above book value.
Watson on risk…
“JT: Wow, that’s excellent. I mean it doesn’t sound like there’s a ton of risk. What risk do you guys run into? I mean if gold tanks I guess that would be a big risk for you but in general, it doesn’t seem like there’s too much.
NW: Yeah, although there is quite a bit of risk in the sense that you’re right, if gold or the commodity prices decrease that’s a risk to us. Another risk to us is that the assets themselves don’t perform so if you invest a significant amount of money into a mine and then the mine doesn’t work, and that’s actually a fairly common scenario in the mining industry when mines don’t work quite as they were originally intended to, but we put a number of mitigating factors into the contracts and so far we’ve never lost money on one of them.
One of the key focuses that we try to do in our business is focus on getting an above-average risk adjusted return for our investors. So more of the risk we take on, we try to get an even better return than that and comparing ourselves and our risk profile to an actual mining company, we’re a lot lower risk because one of the biggest risks in the mining industry right now is that costs are going up, you know, a tire for a mining truck which may have cost $5,000 a few years ago costs $35,000 today. The cost of actually producing its material is going up dramatically whereas if we negotiate a contract or buy gold at $500 an ounce we know we’re buying it at $500 now, this year, next year and for several years to come. So that really decreases the risk to the operating process for our investors.”
JT: Wow. Excellent. Well it’s funny, I heard you say on an interview that you know out of like 100 mines you’ll invest in one of them. That sounds like an amazing amount of due diligence on your part. What makes you guys do that?
NW: Well there’s no shortage of poor quality mines out there and/or management teams that get a hold of the poor quality mine and try to put it into production or try to just spend more money to keep going even though it’s losing money. So our team is focused solely on trying to identify those assets that are going to produce well and they’re going to produce for a longer period of time. I won’t get into technical nature but there is so many different things that can go wrong at different types of mines. So we sort of built the due diligence process that’s focused on just identifying these types of things up front. What are the key risk factors and making sure we stay away from anything that’s just too much risk for us or for our investors and I think any type of risk that’s really the key is ensuring that you’re building your asset base with strong assets. So we’re focused on doing that and I think our shareholders are happy because of it.
Conclusion:
Sandstorm is a leader in innovation with an ability to grow rapidly over time from its present small base of revenue and profits, and perhaps even more importantly, has a very high probability of earning multiples of what it earns today looking out a few years hence. It is lead by a uniquely capable owner/operator with a long and impressive paper trail of success and substantial equity ownership who’s been adding of late in the open market. It also happens to be unsustainably cheap. I think the combination of these factors should provide investors with the opportunity to earn 2-15x their money with very little risk of permanent capital loss under any reasonable future scenario we can imagine looking out 3, 5, or 10 years time.
I believe these returns will be driven on the back of a combination of a multi year production ramp-up and the significant multiple expansion associated with (1) increasing earnings visibility (as existing streams come on line)(2) the announcement of additional acquisitions of value accretive streaming agreement(s) (3) the company’s fixed cost operating leverage begins to take hold (4) the gradual optimization of SND’s unlevered capital structure begins and (5) the recognition that this is a truly great business is realized. As management executes (as they have always done), the positive inertia of the “lollapalooza effects” listed above should start to gain steam. As they do I expect value creation to accelerate markedly, driving dramatic and sustained increases in per share value for years to come.
The bottom line here then is that I believe Sandstorm Metals & Energy is a classic low-risk, high-return fat pitch and it’s only a matter of time before the market wakes up and comes around to a saner point of view (my guess is sooner rather than later).
So be like Burry, and get it at or around today’s price, when insiders are still acquiring, its insanely cheap and all is quiet. It won’t be like this for long. It never is.
Catalysts:
(1) Increasing earnings visibility as existing streams come on line
(2) The announcement of additional value accretive streaming agreements
(3) The announcement of positive reserve and production estimate revisions on existing streams
(4) Realized critical mass stream-wise and the operational leverage and accelerating stream acquisition capacity that will result
(5) Increasing investor recognition of a great business
Miscellaneous:
Insider Activity
http://www.canadianinsider.com/node/7?ticker=SND
Property Updates/outlines, etc.
http://www.sandstormmetalsandenergy.com/i/PDF/SND-Q3-2011.pdf
Nolan Watson Profiles/Interviews:
http://businessinfoguide.com/entrepreneur-interview-nolan-watson-of-sandstorm-resources/
http://www.midasletter.com/news/09062506_Sandstorm-resources-and-the-gold-royalty-model.php
http://en.wikipedia.org/wiki/Nolan_Watson
http://www.biv.com/40under40/2006/watson.asp
http://www.mo.com/nolan-watson-sandstorm
http://pitchingwell.com/2011/06/07/sandstorm-gold-nolan-watson-profile-interview/
http://watch.bnn.ca/#clip474160
http://advantagemagazine.ca/digital-edition/
Miscellaneous Articles on SSL & the Stream Finance Model:
http://seekingalpha.com/article/237401-proposing-a-new-strategy-for-precious-metal-streamers
http://seekingalpha.com/article/276761-precious-metal-royalties-sandstorm-s-transformation-begins
http://seekingalpha.com/article/279843-sandstorm-gold-a-golden-opportunity
http://seekingalpha.com/article/281150-sandstorm-it-just-keeps-getting-better
http://seekingalpha.com/article/272218-an-alternative-valuation-approach-to-precious-metal-royalties
http://seekingalpha.com/article/241731-pm-royalties-report-beyond-the-obvious-part-i
http://seekingalpha.com/article/241736-pm-royalties-report-beyond-the-obvious-part-ii
http://seekingalpha.com/article/241727-pm-royalties-report-beyond-the-obvious-part-iii
I don’t know anything about this name, but isn’t this just an investment fund rather than a genuine operating business?
whyinvestinaninvestor,
Not sure I understand the question. How do you define a “genuine operating business”?
Also not sure why your not clear on the value of investing alongside a brilliant capital allocator operating in a nascent, extremely inefficient market with a substantial edge no less. Makes a lot of sense to me. All things equal, my preference is to invest with management teams that actually understand capital allocation.
Seems like a tough security to buy from the US. Any suggestion on what broker to use to buy securities in that exchange (CSE)?
Thanks for the thoughtful analysis, I had not heard of this company before. A couple thoughts:
1) I disagree in principle with your comments about equity issuance – as I understand them. It sounds like you think intrinsic value per share is higher than the share issuance prices (correct me if I am wrong), which in the simplest sense should be the bar that must be cleared. It is possible, admittedly, to justify such a transaction as a means to the end of achieving sufficient economies of scale, but as you said, they have very low fixed costs. I worry that management’s incentives are to grow the company, not per share value.
2) As you imply, for reasons related to both management personnel and the business model, comparisons to Silver Wheaton are useful, and they have indeed grown by an enormous amount. However, that growth in enterprise value must be viewed through a couple of lenses. First, Silver Wheaton has increased their share count by an order of magnitude in the past. Second, given the nature of their royalty agreements, it is instructive to compare their stock price to the price of silver over the same time frame. Clearly this has been a huge tailwind. However, let me be clear that a rudimentary look at Silver Wheaton’s stock price still demonstrates good returns above and beyond these factors. Just not “as good” as they might first appear.
What are we left with? It appears we still have a business with great management and a high-ROIC, low-cost business model. Those aren’t bad things!
Luis, I would think that it shouldn’t be all that difficult. I’m sure Interactive Brokers can help out. It also might be easier to build a position through the U.S. pink sheet listing (STTYF.PK) so I would try that as well.
JRH,
Thanks for the kind words. Always appreciative of thoughtful comments/critiques.
As far as the dilution issue, I have to respectfully disagree, as by definition something is accretive if it adds more value than the cost of the acquisition (either immediately or over time). What I’m saying here is that there is nothing intrinsically wrong with issuing shares as long as per share value is growing at a faster rate than the share count. Simplistically then, if you issue $50m in shares to purchase ~$150m in present production value, as a shareholder you are unequivocally better off doing that deal. Remember that in SND’s case, we are talking about assets that almost always require a ~18 month lag between the initial investment and first production, so by definition any deal will be dilutive to cash flows in the near-term but again, that doesn’t speak to whether or not its immediately accretive to per share NAV (i.e. just because an asset purchases takes a year and a half or so to start cash flowing doesn’t mean the acquisition can’t be wildly accretive on a present value basis). So again, its all about getting more than you give.
Regarding the SLW comparison, I pretty much agree with all of your points. The two companies have much in common and should evolve operationally in a similar fashion but there are certainly meaningful differences to take into account as you highlight.
Hi,
Thanks for your write up.
I haven’t done any DD and have only looked at the financials. Did they issue stock to purchase the coal deposits, but are losing money on the sales? How much ore is left and how fast can they increase sales over costs?
Thanks.
“Simplistically then, if you issue $50m in shares to purchase ~$150m in present production value, as a shareholder you are unequivocally better off doing that deal.”
Not if that $50m equity issuance means you are giving away $200m in intrinsic value/pv of future cashflows due to those shares.
One thing I found unappealing was this Nolan Watson’s wikipedia page. It’s written in a very promotional style, rather then objective. Example:
“The future looked bright for Watson as he was awarded the “BC Gold Medal” on the final CA examination (the “UFE”), scoring the highest mark in Western Canada and becoming the Valedictorian of in the Institute of Chartered Accountants of British Columbia.”
Then when you look at the author of the wikipedia page “Denvyboy”, he has written all the articles on Sandstorm and Nolan. Seems like Nolan might be moonlighting as a wikipedia editor too.
This doesn’t undermine the business prospects, but Watson may be very focused on promotion.
rs,
Stock Issuance ala coal streams: Yes, the met coal deals were SND’s flagship assets and were done (if I remember correctly) in conjunction with SND’s spin-off from sister company Sandstorm gold.
Negative Gross Margin: No, but your question brings up a great point about the unique quality of SND’s differentiated business model. Keep in mind that its nearly impossible for SND to have a negative gross profit on sales given the unique terms of its streaming deals (their de facto COGS is fixed at a price substantially beneath both the current natural gas price and that of the low cost producer, so theoretically they should never lose money on any of their production volumes).
Reserve Life: Glad you asked as the rex met coal deal alone is expected to do roughly a half million tons/yr and possesses 2P reserves of ~32m ton’s (yes, you read that correctly). If the annual run-rate production level doesn’t increase, then the reserve life at Rex is currently over 60 years long! So SND will initially receive 25% of the Rex assets met coal production (after a certain amount of production it drops to 16%) at a fixed cost of $75/t for roughly six decades at the expected run- rate. This is a very valuable asset and is one of many that in and of themselves will likely prove to be worth more that SND’s entire current EV.
Andrew,
Bad analogy I guess on my part but I trust you understood my meaning.
Phil,
Nice catch! I wonder if Denvyboy is Denver Harris (Sandstorms IR guy)? Either way, I agree that over-promotional tactics are bad form. An over promotional management team is never a good thing (I get uneasy when I feel like a management team is more focused on its stock price than its business).
As far as Nolan moonlighting as the editor, I seriously doubt it but you never know. For what its worth, he didn’t come off like that type of guy at all in our CC’s or in any of the public interview’s I’ve read. So again, maybe he’s some sort of head case that promotes himself as if he’s the second coming of the Lord but I would be shocked if that actually turned out to be true. In my experience its been the opposite.
That and he does have a duty to a certain degree to actively promote SND to the public given its micro cap Canadian status and terminal decline-like valuation. I actually think he’s done a good job of it so far.
“I wonder if Denvyboy is Denver Harris (Sandstorms IR guy)”
Almost certainly is given the name.. I think there is value in Watson playing off his “boy genius” schtick in getting good deals and raising finance. That’s only a good thing, and being able to point to a substantial wikipedia page will undoubtedly give people who he is entering into deals with (miners, bankers) more confidence.
I just think less would have been more in this case.
I spent a few hours looking at this and going back and forward. Ultimately I decided to pass because I just couldn’t get comfortable. I wrote my reasons up on my blog:
http://bookbookfund.blogspot.co.nz/2012/02/passing-on-sandstorm.html
I wish you luck, and as I say in the blog post, I really could be missing out here.
[...] AAOI – Investment Analysis: Sandstorm Metals & Energy (CVE: SND) – See’s Candies at a … [...]
Phil,
Agree that less is more. As far as passing, all I can say is dig deeper!! I’ll put together a point by point response to your thoughtful post when I have more time and I understand your apprehension and concerns, but a careful analysis of the details here may lead you to change your mind.
I’m in the process of putting together another string of posts highlighting the properties/deals that undergird SND’s streaming portfolio so hopefully they will shed more light on the value here and allay your fears. Thanks again for taking the time, I enjoyed your take.
Yes, my concern was the same as Andrew’s – essentially, you could say that the advantages to growth are economies of scale and diversification, with possible costs of growth consisting of falling marginal benefit of the properties acquired (a huge unknown, would take years to know for sure, and would be hugely dependent on industry conditions), and the associated dilution of “intrinsic value”, even if it may look accretive to “book value”.
Anyway, I’ll go read your follow up now. Thanks for sharing your work! I have made a small investment while I do more research.
JRH
Yes, I understood Andrew’s point as well as your fear and your right, given the natural lag time between when a deal is struck and when its full potential is realized their will naturally be huge uncertainty as it relates to whether the stream acquisitions in question will ultimately prove accretive/payoff. Theoretically then, this could be used to justify material dilution and empire building in the name of diversification, etc. What’s worse is that the average joe without the ability to verify the underlying economics, cash generative potential and overall risk/reward of these deals wouldn’t know for sure until it was already to late. So ya, I agree that the potential for abuse is significant and that one should be skeptical of taking management’s word at face value.
So ultimately then your going to need to dig into the deals yourself to come to your own conclusion as far as that goes (as it requires some level of subjective judgement) – but as I believe you will see, almost every deal on the books is very attractive on an absolute basis and holds within it the potential to ultimately generate more cash to SND shareholders than what the entire enterprise is worth outright at current market prices.
Honestly, I’m rather thankful the uncertainty you highlight exists, otherwise I’m pretty sure the opportunity wouldn’t exist either. This is for the time being a low-risk high-uncertaintly situation but it won’t always be that way – my guess is once the waterfall of cash flows starts to hit the bottom line (i.e. become visible in the GAAP financials) the opportunity will be long gone. Time will tell of course but let me know your thoughts on the update. Interested in your take.
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Phil,
I couldn’t post a reply on your blog so I’m replying here.
The warrants were given as part of the initial stock issuance. The strike price is 70 cents which is well above the current stock price. They expire at the end of this year. If they expire worthless then you won’t need to worry about them.
If you are worried about dilution, look at what they did with their sister company Sandstorm Gold. They chose to use a Revolving Loan of $50 million instead of a stock issuance for additional acquisitions.
http://finance.yahoo.com/news/Sandstorm-Gold-Announces-New-ccn-378088209.html?x=0
Sandstorm President and CEO Nolan Watson commented, “The credit facility coupled with our increasing operating cash flow, allows Sandstorm to continue to grow the Company through acquisitions while minimizing equity dilution going forward.”
From the comment, they are well aware of concerns about dilution.
But their action of not using another share issuance speaks more than words as the saying goes.
My question would be: why would this business model be fundamentally more attractive than other business models in the resource sector? If it’s such a great deal for miners to sell future production: shouldn’t we be buying equity? And if it’s not a good deal for them: why aren’t they raising equity or debt? Just doesn’t make sense to me.
Per the thunderbird press release (linked below) – which I assume you’ve seen but not yet discussed – the project has been delayed due to the fact that it is not economic at current prices.
In exchange for sandstorms approving the delay thunderbird paid sandstorm several million. What is the impact of this on sandstorms investment?
http://www.thunderbirdenergy.com/s/NewsReleases.asp?ReportID=506955&_Type=News-Releases&_Title=Thunderbird-Energy-Year-End-Update
Margaret,
Exactly, appreciate you making my job easier
. You make a great point about the eventual optimization of the capital structure that I wish I would have spent more time on in the original write-up.
At some point Nolan will start turning their cash cow of a business model into a dividend machine, which should force a multiple re-rate as it starts to trade on a yield basis. Eventually (likely years down the road), I think investors will start to view SND as a low-risk yield vehicle to get commodity exposure and it will start to trade accordingly.
Hielko,
I lay out the reasons why the model is fundamentally more attractive clearly in the write-up. As far as the deals, they are much better than the alternative which is to significantly dilute their shareholders and hence destroy value. The value proposition is very clear.
Regarding buying the equity of Thunderbird or any other equity of the company’s underlying their streaming deals, that’s probably not a bad idea if your comfortable with their individual risk/reward equations and you feel like dialing up the risk but that’s up to you.
AAO: I just don’t see why the model is fundamentally more attractive, and why it should be an ‘unique high return business’. The steaming model simply offers a type of financing that sits between pure debt and pure equity, and has a risk/reward ratio that sits somewhere in between as well. It’s not hugely different from the other financing options in the resource sector that are almost always also a mix between debt/equity. Throw in some commodity futures/options and you can probably synthetically recreate the positions of SND to a reasonable extent.
And wrt diluting shareholders: selling 10% of production or selling 10% of future production: that’s also not very different.
Sure: Nolan Watson might be a genius, and be able to pick the right companies and make great deals. But that’s what you are betting on: the business model isn’t fundamentally different and better than any other investment bank in the resource sector.
Heiko
Points taken, but running with your comparison I don’t see why you don’t see what’s attractive about getting a tax advantaged natural resource investment bank-like franchise (very early in its evolution) at a discount to run-off value. If the assets backing their minimum guarantees weren’t worth many times their capital at risk or we were paying a premium for management I think I would understand the skepticism, but that’s not the case. The risk/reward here is hugely attractive on an absolute basis. That’s all I’m saying.
SND is certainly intrinsically “high-return” and fundamentally more attractive on almost every level relative to the average industrial commodity business – and its certainly “unique” as a publicly traded investment vehicle (maybe you could look at it as an all royalty version of the merchant bank operation held within Michael Smith’s MFC Industrial (MIL) – seems like a somewhat fair comparison).
As far as your point that we’re betting on management here, keep the current valuation in mind and that as investors, we’re currently getting paid to invest alongside management. With assets like these and a CEO like Watson, I’ll take that bet all day long and then some.
Also, to your point about being able to synthetically re-create this, no way. The differences qualitatively (at the margin) between the assets underlying SND’s streaming deals and the typical assets underlying such derivates are large enough to make any comparison specious at best.
Just my $.02 cents.
Where did you find that the company is domiciled in Bermuda ? All I can find is headquartered in Vancouver…
Lotsofwords,
I would read my follow up piece for my thoughts on Thunderbird.
http://www.aboveaverageodds.com/2012/02/27/sandstorm-metals-energy-cve-snd-a-look-under-the-hood-part-1/#comments
Here are my specific thoughts on the payment deferral and Production delay…
“Payment Deferral & Production Delay
Lastly, with that short back of the envelope overview of the Gordon Creek deal out of the way, I wanted to quickly discuss the recently announced minimum payment deferral and production push back because I think it (1) optically looks at least somewhat negative to the untrained eye and (2) because it signaled to me that Watson is indeed one smart cookie.
Now most would have looked at these changes and worried because, again to the untrained eye they appear to be your typical delay(s) and bumps in the road that are so common with these difficult businesses. My take was very different. With gas prices where they are I wondered why either Watson and/or Thunderbird’s management would ramp up production when that production would likely be breakeven to marginally profitable for Thunderbird (which is saying something given we are talking about a low cost producer here).
I mean why not just wait until prices revert towards an economic level given the low turnaround time required to get said production up and running and the fact that funding concerns aren’t an issue. I looked at the production delay as confirmation that we are indeed dealing with a management team that understands capital allocation and maximizing the risk/reward equation. I mean why waste the NG in the ground by unnecessarily ramping up production at such an unsustainable price level when there isn’t any good reason why they can’t just sit on their thumbs and wait for the cycle to turn? Especially when SND can do what it did, which was to wave Thunderbird’s yearly minimum cash payment till next year so they can utilize that time/money to continue to prove up and expand Gordon Creek’s highly attractive resource base/getting things perfectly in order. Why not just be patient when a delay is obviously the right call? Why not optimize and prepare this annuity-like natural gas cash generating machine for better times given there’s no real downside and quite a bit of upside to doing so?
What’s even better though for SND shareholder’s regarding these changes is that, while they didn’t get the cash payment (which wasn’t forgiven btw, just delayed a year), they did get an equivalent $ amount in Thunderbird’s dramatically undervalued equity simply for doing the right thing – read “being patient in order to maximize long-term business value”. So everyone wins – Thunderbird’s management can make the right move for shareholders because they have intelligent financiers that can see the value of the decision as they aren’t dealing with short sighted bankers worried about the optics of it all and SND gets equity that will in all likelihood be worth many multiples of the cash payment they were owed. It’s a beautiful thing really.”
AAO: I agree with you that the company currently seems pretty cheap based on the assets they own now, but another worry I have is that this value will be diluted because the company has an history of raising capital by issuing shares, and what I’m reading so far there is no reason to believe that the future is different. So that margin of safety that currently exists could easily be eroded away if future investments don’t offer market beating risk adjusted returns. Personally I’m basically never willing to bet that someone is able to beat the market unless they are named Warren Buffet, and management also doesn’t seem to own a lot of the company, making me more worried about future dilutions. Don’t think interests are properly aligned here. How much does management get paid by the way?
EmpCod: It used to be highlighted in their presentations but I don’t see it. Trust me its there. Maybe they’ve rethought the wisdom of publicly touting the fact that they pay no taxes. Might be the right call given the state of things.
Hielko: Yes, but what your not realizing (or taking into account) is that they also have a history of raising debt along with that equity and gradually/prudently optimizing the capital structures of the businesses they run. Once the business starts to really cash flow, most new deals will be funded through internally generated cash flow and/or any future raises will be done with debt or at least mostly debt rather than equity. At that point these deals will be MASSIVELY accretive.
As Margret mentioned…
“If you are worried about dilution, look at what they did with their sister company Sandstorm Gold. They chose to use a Revolving Loan of $50 million instead of a stock issuance for additional acquisitions.
http://finance.yahoo.com/news/Sandstorm-Gold-Announces-New-ccn-378088209.html?x=0
Sandstorm President and CEO Nolan Watson commented, “The credit facility coupled with our increasing operating cash flow, allows Sandstorm to continue to grow the Company through acquisitions while minimizing equity dilution going forward.”
From the comment, they are well aware of concerns about dilution.
But their action of not using another share issuance speaks more than words as the saying goes.”
As far as incentive alignment, Watson has pretty much his entire net worth (many millions of dollars) on the line here, so while its true that he doesn’t own 10% of the shares outstanding, his incentives are WITHOUT A DOUBT aligned with shareholders. His salary is only 125K a year and he’s got his reputation and nearly every penny he’s ever saved invested in the equity of SND & SSL.
That, and Watson knows what he’s doing, he knows what is and what is not accretive, and he knows that the second the cash flows of his operation can prudently support some leverage, its time to put the equity raises to a rest. Again, at every point in his career running the Sandstorm twins I think his actions have been in line with the actions of any savvy owner operator firmly focused on building a truly great, lasting enterprise. So, when you really look under the hood and judge him on both his words and deeds, the dilution and incentive alignment concerns start to seem a tad off base.
Hielko: Btw, love your blog. great stuff.
[...] Above Average Odds Investing blog published a few days ago a lengthy write-up on Sandstorm Metals & Energy, a merchant bank that provides financing to resource companies in [...]
This was a fantastic write up. I really appreciate that you took the time to provide such a substantial and well thought out research piece
A couple things:
- if you look at the most recent quarterly report, it lists the outlays made by Sandstorm for all of these arrangements. The outlays have been very large – I wonder what the ROICs for each of those outlays is xpectd to be. What we know: they’ve spent ALOT of money so far. What we almost CANNOT know is the quality of the underlying assets
- I may have this wrong – but I don’t think I do – but while they have minimum guarantees to protect them on some contracts, don’t they also have financial obligations with each of their contracts to buy commodities at set prices. In other words, it is not just that they are protected on the downside, they are also obligd to buy production at set prices. While some of these contracts appear to be struck at attractive prices and with floors, I’m not sure where they get the capital to meet the ongoing obligations should the commodities turn south (like natural gas did when they struck their original deal at $4 and it is now slightly above $2)
- taxes – if you are a US citizen the personal taxes as an investor could be a nightmare. Depending on how this investment is viewed by the IRS, I believe there cold be substantial withholding taxes. On the first page of their website they are US investors to check with personal accountants for individual tax implications. I do not believe this is likely efficient from a US tax structure standpoint
- Auditors? Who is the auditor and are they respected?
- The financials are not SEC compliant Maybe that doesn’t matter, why do they not register with the SEC? Isn’t that a red flag?
- I also am worried about the promotional aspect of Nolan when you do some searching on the net. It’s just odd the types of articles written about him as a “wonder boy” of sorts. Some of the websites on which he appears seem to be trading platforms and highly promotional mining sites. It feels fishy to me
George1357,
Thanks! I appreciate the kind words and thoughtful questions. A couple of thoughts…
Re ROIC/Asset Quality: Management shoots for mid twenty percent IRR’s and on average, I expect the ROIC from any existing/new streaming deals to come in at or above that target (see the valuation section on the natural gas stream overview for some additional color on the transaction terms of these type of deals).
As far as asset quality, I have to disagree. I actually think we can say with near certainty that these assets are very high quality relative to the average deposit. Future commodity price levels and how successfully the management teams of the underlying streams will execute are the bigger unknowns in my opinion.
Re Financial Obligations/Downside Protection: Where I think you may be going wrong is that your not realizing that any purchase (at the obligated fixed price) and sale occur simultaneously by utilizing the futures market, and therefore there is practically no capital required to execute these transactions. Remember too that negative gross margins on production volumes are theoretically impossible. Make sense? Let me know if you want me to elaborate.
Re Taxes: I would consult a tax professional but I don’t think that’s the case barring some future change in tax law and its worth the headache in my opinion regardless (all things considered). Here’s a note on the issue from SND’s CFO…
http://www.sandstormmetalsandenergy.com/i/PDF/AIF-Feb2011.pdf
Keep in mind that a Bermuda domicile isn’t that unheard of and the tax benefits are well known at this point [Silver Wheaton (SLW) and David Einhorn's Greenlight Re (GLRE) are other examples].
Re Auditors: Deloitte & Touche.
Re Financials/SEC Compliance: They are a Canadian company that is listed on a Canadian exchange. In other words, there isn’t any reason to file with the SEC.
Re Over Promotional Management: The company can’t control who links articles and I don’t think the level of promotion and favorable press is in any way out of line with what Watson has actually accomplished at this point in his career. For what its worth, Watson reminds me in many ways of a young Bruce Flatt of Brookfield Asset Management and I imagine the press on him at a similar point in his career was equally as favorable (and equally well deserved).
Anyhow, if your concerned with his character or acumen I would judge him on his paper trail and ignore all the hype.
Fabulous. Sounds like an exciting opportunity
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Re: the comment about the company losing money if the price of a given commodity were to fall below the price Sandstorm M&E agreed to purchase it at: I could be wrong but I could swear that in one of the previous CC’s Nolan addressed this and specifically stated that there are contingencies built into their contracts that in the unlikely situation that the price of the commodity fell below the price they agreed to purchase it at, that Sandstorm would purchase the commodity at the lower of the current “spot” price of the commodity or the amount that they agreed to purchase that commodity for, so at worst, even if commodity prices were to tank, the worst Sandstorm could do would be to break even on any given streaming deal. Please correct me if I’m wrong but I’m quite certain that I remember Nolan specifically addressing this and even giving an example, which just adds one more layer of downside risk protection.
In regard to Sandstorm having to come up with the money to actually execute the purchase the production from the streaming deals, (which I believe based on my comments above is a non-issue anyway since I believe they’re basically guaranteed to break even at the point of simultaneous purchase/sale of the commodity meaning no capital outlay) isn’t Sandstorm’s cost to purchase the commodity basically given to them as repayment of their initial up-front capital investment? Meaning if Sandstorm gives a company $25 million up-front and then has to provide addt’l cash outlays to actually purchase the commodity, how would they ever actually get their initial capital investment back in the worst case scenario, which according to Nolan they’re guaranteed to do regardless of what the price of the underlying commodity does? For example, let’s say that oil falls to $15/barrel and they’ve agreed to purchase oil for $15 barrel. If they actually have to lay out the $15/barrel to buy the production just to break even, how do they ever get their initial capital investment of $25 million back? Common sense says to me that after their initial capital outlay, Sandstorm provides little if any additional monies, since given the nature of the deals, they’re set up so that at a bare minimum Sandstorm is guaranteed to get their initial investment back regardless of what the price of the underlying commodity does, and the upside above and beyond breaking even is based on a) minimally the difference between what they obtain the price of the commodity for and the “spot” price at the times at which they obtain it b) price increases of the underlying commodity because as the price of the underlying commodity increases, so does the “spread” that they earn between the purchase price of the commodity and what they can sell it for increases yielding higher profits to the company c) reserve increases such that their % of production purchased at low prices yields a higher absolute amount of the commodity they receive and thus higher profits d) an increase in the mine life (this is tied in with c) such that the length of the time that they’re receiving guaranteed streams increases in conjunction with the life of the mine resulting in them receiving the “spread” between the “spot” price at which they sell it and the price they’re paying for it for a longer period of time.
In re: to raising additional capital via dilution (even with undervalued stock), let’s assume that the stock is trading at .50 and it’s 50% undervalued, meaning it should be valued at .75. At first glance, diluting at .50 would seem dumb, unless of course, you can take that .50 you receive for each share sold and turn it into $1.00 in future profits in a reasonable period of time. In that case, it’s not dilutive, it’s ultimately accretive, and assuming a shareholder believes in management’s ability to do this, if the stock market sold the stock off if/when the company did this, savvy investors would see this as a buying opportunity as they know that every time the company does this it’s because they have the opportunity to make an investment that will yield a significantly higher return than the discount at which they’re selling the shares at. Even assuming that they never see a penny from their existing streaming deals, with the cash on hand and their extremely low overhead costs, Sandstorm shouldn’t need to raise capital again for a very very long time unless there was an investment out that they are confident will yield a return superior to the undervaluation at which they’re selling the stock at.
I see no reason to doubt Nolan’s abilities or his intentions. His interests are aligned with those of the shareholders. He’s a smart guy with a proven track record of success. I believe a big reason that this stock is currently undervalued is simply because coal and nat gas prices are down, so there is a negative bias toward all companies associated with these two commodities. Ultimately, if the prices of these commodities remains depressed, like Thunderbird, companies will either delay or curtail production until the overheard supply is reduced enough that they can produce them profitably. In the interim, I’m taking advantage of the undervaluation in Sandstorm M&E’s share price and scaling in because I view this as a long term investment and I don’t believe that the current discount in Sandstorm M&E shares will be available for very long….
Well said. Agreed.