Fascinating work done by the guys over at Empiritrage

(H/T Phil from The Book Book Fund Blog)

Per a friend…
The Yellow BRK’ers Meet and Greet is a great event for a first timer and anyone else:

Berkshire Hathaway shareholders from all online communities are welcome to an unofficial gathering on Friday, May 4th, 2012.

You are invited to join as fellow shareholders unofficially gather on Friday, May 4th, 2012 at the DoubleTree Hotel in Omaha to meet and have fun, starting at 4:00 pm and you can linger until 7:00 pm (or longer). There will be a short program at approximately 5:00 or 5:30.

This is a casual atmosphere, with light snacks available. It’s a “happy hour” type of gathering – not a formal dinner or anything of that sort.

The DoubleTree is located on 16th and Dodge. There may be some street parking, otherwise, one can use the parking garage with an entrance from the South at 16th & Dodge street, just east of the First National Bank.

To register for the event: http://yellowbrkers.com/

A little late, but better late than never…

Deja Vu All Over Again

“Wisdom is learning what to overlook”

–       William James

“…a fiery growth engine, the kind of business we like to own: one that doesn’t require enormous sums of cash to generate annuity-like cash flow”

–     Sardar Biglari


For part 2 of the ongoing review of the high quality assets backing Sandstorms M&E streaming portfolio, I want to turn our attention to Sandstorm’s flagship Metallurgical Coal assets. I’ve chosen to follow up with the met coal deals primarily because I think that they offer yet another powerful illustration of the fact that SND’s highly attractive streaming assets can be purchased at a price that is by any rational measure completely out of proportion to economic reality, and almost certainly unsustainable assuming pretty much any future scenario where the world doesn’t actually end.

So, without further ado let me introduce you to NovaDx and its low cost, long-lived high quality metallurgical coal play(s), the Rosa and Rex No. 1 mines. Like with nearly all of SND’s streaming assets, the potential to increase value above and beyond the initial 2013 reserve/production estimates is substantial (to say the least) and the potential for a true moonshot type of homerun when all is said and done is very, very real. Of course, I would do a disservice to not mention that SND shareholders at current prices are quite literally paying nothing for this high probability, heads I win, tails I don’t lose call option on high quality silicon based met coal, so definitely keep that in mind as we go.

My hope is this latest rational walk will highlight the above reality and in the process, provide the breadcrumbs that ultimately persuade other bargain hunting investors to really roll up their analytical sleeves so to speak and do the work necessary to get to know these assets, their respective competitive/cost positions, the guys running the show, and last but not least, to come to a firm conviction as far as what is, and is not, an appropriate valuation after weighing all of those factors. While I’m not certain of many things, I am certain that the price implied expectations are one thing, but reality here is another – and so I think the real rewards (as always) will accrue to those that can tell the difference and position themselves accordingly.

So lets get to it.

Thoughts on the Silicon Metallurgical Coal Market

Before I begin I want to note that I’ve chosen to focus on the silicon coal aspect of this story as opposed to met coal utilized in the coking and activated carbon markets, primarily because the vast majority of the potential value creation here resides in the continued development of SND’s Rex No. 1 stream and the high quality silicon coal it produces. For those who aren’t familiar with silicon coal and its uses, silicon is a key input in silicon metal and hence by extension in thousands of industrial and consumer products unrelated to steel production – typically within the chemicals and aluminum industries. So I think its crucial to understand this nuance, as NDX – and SND by extension – and its Rex No. 1 mine is well positioned to capitalize on the anticipated growth and widening supply/demand imbalance of silicon coal over time.

Keep in mind that demand for Silicon metals is a secular growth story that is both firmly intact and driven by a confluence of global macro “mega trends.” These “mega trends” make silicon coal somewhat unique amongst the coal family, given it possesses multiple sources of end market demand. Much like the difference between silver and gold, silicon coal’s supply/demand dynamics are driven by multiple uses in more a more varied set of end markets. The takeaway is that pricing isn’t solely reliant on the relentless shift of China’s rise as the economic center of gravity as far as the consumption of met coal is concerned. This is an important and salient point to understand as far as thinking about the value of these streams long-term to SND and the associated supply/demand dynamics (and hence pricing) of the silicon coal that is produced. Granted, concerns over the pace of growth in China, the European financial crisis and the strength of the U.S. recovery have caused downward pressure on steel demand. Yet, even with these short-term concerns, U.S. coke plants are running near capacity and global steel mill percentage utilization remains in the mid-70s. With seaborne metallurgical coal demand expected to grow by more than 170 million tonnes to 428 million tonnes by 2020 (which is nearly 70 percent higher than the 2011 level) clearly the long-term fundamentals are still in tact.

What is not as well known are high quality silicon coals other industrial uses/underlying drivers, and thats a big part of this streams story. Consider silicon coals role in the production of silicon metal, which is the key component in the production of silicon chips and therefore everyday electronics. The increasingly global focus on renewable energy & energy conservation is another big piece of this puzzle that is expected to continue to benefit silicon producers and their bottom line.

For example, the use of silicon metal in aluminium alloys makes it both stronger and lighter. As a result, silicon metal is a key component in the aluminum that is being increasingly used in the automotive industry in order to replace heavier cast iron components. The benefits of this transition are obvious, as it allows car and other vehicle manufacturers to garner weight reductions. This leads to less fuel consumption and increased efficiencies and hence benefits the environment by both reducing greenhouse gas emissions and conserving fossil fuels. This is a trend thats here to stay.

Other drivers of the increasing demand for Silicon Metal (and hence silicon based coal) come from (1) the solar power industry – as solar panels are made from silicon, which use the sun’s energy to produce domestic and industrial electricity and (2) silicon based polymers – which are used as alternatives to hydrocarbon based products and appear in many other every day staples such as lubricants, greases, resins, skin and hair products. So while this is not meant in any way to be a comprehensive overview of the end markets and/or the underlying supply/demand equation that should support silicon coal pricing, I did want to briefly discuss the issue in order to highlight that numerous secular tailwinds are supporting the value of SND’s Rex No. 1 assets long-term. Taken together the tailwinds here are VERY powerful, not entirely dependent on Chinese consumption, and unlikely to relent long-term for obvious reasons, so the fundamental underlying reality governing the supply/demand imbalance of silicon coal appears here to stay and I think its reasonable to expect a stable to rising price over time.

In sum then, who knows what pricing will look like over the next year or two or how much met coal China will need to import in the meantime. I certainly don’t. Our downside here is well protected either way and the good news is that I don’t think one has to know the answer to that question anyway – at least if we’re patient, long-term investors evaluating a 2-3 decade premier coal asset with a long-term time horizon in mind.

Long-Term Contracts

I would also be amiss if I didn’t mention another attractive attribute of these assets that I believe is relevant in regards to thinking about the intrinsic value of SND’s stream(s), especially in context of the cyclical nature of all commodity assets generally and there potential vulnerability to external shock. Investors should understand (and appreciate) that high quality silicon producers can, and usually do, strike long-term contracts with customers for all or at least a portion of their expected production (think manufacturers of silicon metal).

As a sucker for stable, predictable cash flows with a high degree of visibility, I honestly can’t help but do a little dance when I think about this – as the combination of (1) SND’s locked in low fixed costs and well covered economics with (2) the cash flow visibility provided by long-term contracts, should will provide SND with what will be an unheard of combination of outsized and growing cash margins on production volumes coupled with a degree of cash flow stability that is honestly something approaching perfection as far as the typical commodity producer is concerned (so eat your heart out upstream MLP’s!!! Ha!).

I think its fair to say that the combination of low cost assets, sound financial footing, and long-term contracts is as close to a match made in heaven as it gets in this business, and honestly goes along way towards neutralizing the negative effects associated with the cyclicality of met coal or commodity pricing generally. I don’t say that lightly, but the reality is that we are talking about an asset (1) with well covered economics given its low cost operations which, almost by definition, should allow the asset in question to generate consistently positive cash flows over a full cycle. If you toss in long-term contracts into that equation, the assets vulnerability to external shock is lessoned materially (2) that is owned by a producer that is – and should continue to be – well financed thanks to the financial fortress that is SND.

In commodity investing I think owning marginal (i.e. assets that aren’t low cost) is a really bad idea generally and – at least in my experience – one of the best ways on the planet I’m aware of to both (A) lose money  and (B) suffer sleepless nights. Not my cup of tea. Again, as someone that’s learned the hard way (twice no less!), I think its critical to insist on only owning assets that are low cost in nature and possess balance sheets that are strong enough to safely withstand a long period of low commodity prices – otherwise the company in question may be forced to liquidate assets or raise equity at the absolute worst possible moment. It’s just not worth it. Ever. That, and if your trying to get leverage to commodity x, there are much better ways to go about it than owning the equity of some high cost producer that’s loaded with debt. So what I’m saying is that we have the best of all worlds with these streams as the presence of low cost deposits, long-term contracts and a strong financing partner augment the MOS to a level that’s usually not possible in resource assets and for that I’m thankful. And it’s also no small point that SND’s fortress like financial strength and win-win partnership approach provides NDX with both the financial flexibility and firm financial footing necessary succeed long-term as it allows them to both better deal with the occasional “out of left field” kick in the balls (that is part and parcel of all capital intensive commodity businesses) as well as a healthy amount of negotiating leverage when negotiating contracts with customers. All in all, the odds of success seem highly skewed in our favor.

Thoughts on NovaDx Ventures: More Than Meets The Eye

Before we dig in to the assets, I wanted to do a quick overview of Sandstorm’s partner NovaDx Ventures. For those who aren’t familiar with NDX yet, they are a Vancouver based mining investment company that owns the Rosa & Rex No. 1 mines and the companies primary focus is to acquire and develop companies with active or near production high quality coal reserves within the US Appalachian coal region. NovaDx’s goal over time is to continue growing its “specialty” coal business through expanding production organically at its existing mines as well as through the opportunistic pursuit of value accretive acquisitions.

Per the company’s website…

“In October, 2006 new management lead by Neil MacDonald, Novadx’s CEO took over Novadx and the company began operations as a merchant bank with an investment focus in mineral exploration. The company structured, made investments as a principal and provided management and other related services to companies and projects that it believed had an above average opportunity to provide a high return on investment. During this time the company acquired and expanded the Canadian Small Cap Resource Funds, a family of flow through funds, which was subsequently sold in June 2009.

In October 2008, Novadx changed its investment focus to concentrate on acquiring and developing high quality coal reserves and operations in the Appalachia coal region of the USA and incorporated its wholly owned subsidiary MCoal Corporation to commence the property acquisition, permitting and development of the Company’s flagship Rosa Mine in Blount County, Alabama. Novadx commenced production of high quality metallurgical coal at the Rosa Mine in April 2010. In November 2010, Novadx arranged up to $38 million in funding by way of a coal stream financing with Sandstorm Metals & Energy of Vancouver, BC”

So, we have a CEO who is a former financier who used to run a merchant bank, but decided that the Rex and Rosa opportunities were worth effectively winding down his merchant bank business in order to focus solely on the development of those assets. Interesting to say the least. Of course as a focused opportunist myself that sees what he sees (just do the math), I can certainly relate.

Now I’ve never spoken to Mr. McDonald personally, but from what I can gather he seems to be about as non-promotional as it gets given the minimal publicly available information on both his previous firms history, and more importantly on NDX and its assets generally (as the company doesn’t even have a presentation on its website or an IR representative – at least the last time I checked) – so its hard to size him as I normally would. That said, from the few things I do know I’ve been impressed, and I trust Nolan’s instincts and overall process thoroughly anyhow, so intuitively I think we’re in good hands here.

As far as what specifically impressed me, it was the way McDonald went about building the business from the start. In particular, how he patiently poached various top local executives in order to build a deep bench that appears to possess both (1) a distinguished track record and (2) a truly intimate familiarity with what it takes to successfully operate within both the Appalachian coal belt (and Tennessee and Alabama in particular).

Another salient signpost in my mind has been his strategic decision to focus on specialty coals – or put differently – on only higher margin subsets of the coal industry with structural supply/demand imbalances (nice and double nice!). So while I withhold a definitive opinion for now, I think its fair to say that clearly this isn’t your typical early stage natural resource management team. I mean it’s been built by a guy that for all intents and purposes did it through the acquisition of local all-stars (genius) and with a focus only on stable, higher margin niches with attractive long-term pricing dynamics (common sense). Two very savvy moves no doubt.

All in all then, given his history as an investor and financier, and taking into account his execution so far at Rosa and Rex, not to mention the way he built his team and shaped its strategy, again, it appears things are quite good in respect to the individuals leading the charge. At the very least he appears to be a capable leader that understands how to intelligently build and operate this type of business as well as capital allocation and competitive strategy – a convergence of characteristics that – lets be honest – is exceedingly rare in the industry (we are, after all, talking about an industry dominated by C-level execs and geologists that historically has proven adept, no freaky good actually, at the fine art of shareholder wealth immolation). That, and I seriously doubt Nolan wouldn’t be extremely picky about the team he chose to back the development of Sandstorms flagship (and originally only) asset. Again, I think we’re in good hands and that’s a critical point.

The Rex No. 1 Mine: Underground Mine located in Campbell County, TN

With the backdrop out of the way, lets switch gears and turn our attention to the actual assets underlying Sandstorms coal streams and in particular, its crown Jewel, the Rex No. 1 mine located in Campbell county, TN. This is where it starts to get good.

As I alluded to earlier, the Rex seam is known for its high quality metallurgical coal; a high volatile A bituminous coal with very low ash, very low sulphur, and high British Thermal Units content that is often used in the production of silicon metal. The Rex deposit is located in one of the most attractive coal mining districts in NA and notably sits on one of the largest single continuous resources of metallurgical coal located in the Central Appalachian coal belt. Historically, high quality metallurgical coal has been mined in the area surrounding the Rex No. 1 deposit since the early 1900’s and was traditionally sold as metallurgical “coking” coal. Since 2004, the Rex coal has been sold primarily for the production of silicon metal due to its high quality and low iron and titanium content.

What we have here then is more of that Watson’s family special sauce we observed in Part 1 with Sandstorms Gordon Creek natural gas stream. Like Gordon Creek, the Rex deposit is indisputably high quality, long-lived, and currently under development in a premier location with (A) consistent and well known regional geology and (B) substantial infrastructure (and access to ports) already in place. Also like the Gordon Creek stream, this asset is (1) run by a seasoned, locally connected management team with (in this case) over 100 years of cumulative experience in both the coal and capital markets (2) low cost operations and (3) a “high impact” opportunity to expand the resource base with a simple and well known playbook. The similarities don’t stop there either, as it’s also entirely reasonable to assume that management is capable, and will ultimately succeed in their goal of ramping Rex’s normalized production volumes to a level vastly higher than the initial run-rate. And again, were talking about basic blocking and tacking here (i.e. a combination of increased drilling and increasing the lease area in the immediate vicinity). Basically it’s just more of the same, and why my mess around with a perfect recipe anyway? “Perfect” may be a little strong but clearly the odds are stacked in our favor, and let’s be honest, that’s what its all about is it not?

Anyhow, the Rex No. 1 Mine is still undergoing development and is expected to begin production during the third quarter of 2013. As you would expect, managements got lots of wood to chop between now and then. Which, now that I think about it, is probably why they don’t have a presentation or why they don’t appear to have a scintilla of interest in promoting the stock at this point. Frankly, now is not the time in my opinion and honestly view it as another sign we’re dealing with capable individuals here. So ongoing construction at the mine is considerable at this point, including surface infrastructure, development of additional mains to support future operations, rehabilitation of access ramps and preparation of underground mining equipment. Think of it like a bunch of bees preparing the hive in order to ensure that it will hum in perfect harmony.

So what’s it worth? Well, I’ll break it down in the valuation section below but lets just say there’s a decent chance that Rex is Sandstorms most valuable asset, in which just like Gordon Creek, the NPV of all future cash flows is likely worth more than the current enterprise value of Sandstorm as a whole. With an initial production run rate of 450-500k tons per year and a 2p reserve value of ~39m tons, this thing has the potential to become a cash producing monster once it grows up. Think about it like this, barring a substantial increase in annual production, current reserves dictate a LOM ~78 years!!” Call it the “super long lived, long-lived asset” if you will. From a cash flow perspective, assuming a flat silicon coal price (so a ~115 cash margin/ton) and zero increase in mine resources (both ridiculous assumptions), Rex would generate ~$14.3m to SND every year for the next several DECADES. Read that twice.

Remember, you can theoretically purchase the whole enterprise today for ~100m. Lets take a moment to think about how crazy this is, as even if we assume flat prices, no resource expansion, a conservative recovery rate and in one last fit of insanity decide to zero out the entire rest of SND’s current – and hugely valuable – existing streaming portfolio and assume they never do another deal – even then – we would be purchasing what I think is intellectually valid to characterize as a fully covered, 40+ year senior secured bond with an implied ~15% annual yield, where that yield is highly probably to grow substantially over time. Now if that doesn’t put it into perspective for you, you should probably just stop reading now. Not to beat a dead horse, but this business at this price is a GIFT.

The Rose Mine: Auger & Strip Met Coal mine in Alabama:

The Rosa Mine in Alabama is a currently producing auger mine and is expanding its strip mining operations in addition to increased auger mining operations. Construction of the Rosa wash plant was recently completed and is now entering the commissioning phase, increasing its recoverable coal yield to 90%. Notably, NovaDx had previously stockpiled a portion of its coal production, in anticipation of the wash plant becoming operational, and has recently begun processing this coal through the new facility for sale to market.

I’ve chosen to keep the analysis light on Rosa given its value is a secondary consideration in the context of Rex. Readers should feel free to ask any questions about the Rosa mine in the comments section below. That said, annual expected production is approx 150k tons/yr with on-going cash costs of $75. At 150k oz of production, Rosa’s current LOM sits @ ~3.5 years but is expected to reach ~12 years after Rosa is fully proved up and developed. SND’s streams cover the first two phases.

Now to the valuation…


Terms of the Transaction

Sandstorm has agreed to purchase 25% of the first 3,800,000 tons of metallurgical equivalent coal produced and 16% of the life of mine metallurgical equivalent coal produced thereafter from the Rosa and the Rex No. 1 Mine for an upfront payment of US$30 million plus ongoing per ton payments of US$75 for metallurgical coal. NovaDx has provided Sandstorm with a guarantee that Sandstorm will receive minimum cash flows of $5.0 million in 2012, $6.0 million in 2013, and $8.0 million in each of 2014 and 2015.

For our purposes here, lets ignore the potential measured and indicated reserves and just use the 39m Tons of proved and probable currently on the books. Let’s also be ridiculously conservative simply for conservatisms sake, and assume that only 55% of this number is recoverable, so the amount of total recoverable reserves at Rex is ~20m Tons. Now depending on how well you think management will execute, normalized production volumes should fall somewhere between the 500k ton “kitchen sink” estimate used to manage expectations and lets say 1m tons at full utilization upon maturity.

Either way you slice it then, were looking at a wonderfully long-lived asset. With conservative recovery estimates on 2P reserves of ~39m tons and a range on steady state production between 500k to 1m tons a year, the Rex No. 1 LOM is somewhere between 20 & 40 Years. So let’s split the difference and say the LOM is 30 years. So, our senior secured high margin annuity has a duration of ~3 DECADES.

If management reaches a steady state production level of 1m tons at some point within the next ~5 years (which to a generalist at least, seems like a reasonably plausible outcome), then at 1m tons per year in production Sandstorms 16% interest would equal ~160k tons per year. Assuming ~160k tons and a reasonable after-tax cash margin/ton of $115 (met coal price of $190/ton – $75/ton fixed cost), SND would earn ~$18.4m in a normal year. Not bad.

Again this is conservative because SND will receive a 25% interest of the first 3.8m tons produced or for about the first 6-7 years of the life of the assets and 16% thereafter. Just for fun, 25% of first 3.8m tons equals 950k tons to SND. So 950k in annualized production x $115 cash margin/ton = $109,250,000 in total undiscounted gross profit attributable to SND over the first 6.3 years of production (3.8m /600k in normalized production – 450k Rex, 150 Rosa). SND’s total current EV today is roughly ~100m.

What’s a reasonable multiple to pay for a growing, high margin ~30 year bond-like annuity with a normalized/inflation protected coupon of ~$18.4m and a “AAA” credit profile (capital at risk is fully covered and then some)?  What’s that worth when a return free 10yr treasury is ~2%? Let’s be borderline insane and say it’s only worth 12x. In that case, the Rex stream is worth ~$220m our over 2x the implied enterprise value of SND today.

The fact that Watson was able to purchase this wonderful asset for only $30m is yet another example of his demonstrated ability to literally crush the ball. The man sees his pitches clearly, and clearly knows when its time to really swing. And not that I’m counting my chickens before they hatch either, its just that under any reasonable future scenario this asset should make a lot of money for a very long time. That, and given the embedded value of the reserves, in place infrastructure, etc its almost inconceivable that they would permanently lose money here. Once again, the asymmetry here is stunning.

For more of the same Jedi Knight style value creation, take a look at the IRR’s on these streams and the embedded and highly visible, multi-decade runway of high return reinvestment opportunity that they provide.

Note: In thinking about the IRR I’ve decided to capitalize the cost of the asset and write it down over its life on a straight line basis (annual costs). I conservatively assume a ~20 year LOM. Feel free to front load the initial investment over 5 or 10 years instead of 20 if you wish, either way its still a phenomenally good use of capital.

Normalized Economics: The Rex No. 1 Mine

Annual Investment:              $10,625,000

Unit Cost Breakdown:

Annual cost/Ton                   $10/Ton

Cost/Ton                                  $75/Ton

Normalized Op Cost/Ton      $85

Normalized Production                125,000

Normalized Met Coal Price         $190

Normalized Op Cost/ton              $84

Steady State Free Cash Flow     $13,125,000

Normalized Economics: The Rosa Mine

Annual Investment:              $2,936,250

Unit Cost Breakdown:

Annual cost/Ton                  $13.3/Ton

Cost/Ton                               $65/Ton

Normalized Op Cost/Ton      $78.3

Normalized Production                37,500

Normalized Met Coal Price           $170

Normalized Op Cost/ton              $78

Steady State Free Cash Flow     $3,438,750

Rex No. 1: Base Case

Notes: FCF assumes SND caps out at 125M tons in annualized production at maturity. A multiple of 12x seems unjustifiably conservative given Rex’s recoverable reserve value of 20m+ tons of silicon based metallurgical coal. Remember SND pays no taxes and is debt free so gross profit pretty much approximates FCF.

Normalized Revenue                         $23,750,000

Normalized operating costs             $9,687,500

Steady State Free Cash Flow   $14,062,500

Implied Per Share value of SND’s interest at 12x SS FCF             $168,750,000

Implied Value Per Share                                                                                $0.53/share

Implied Per Share value of SND’s interest at 15x SS FCF              $210,937,500

Implied Value Per Share                                                                                 $0.66/share

Rex No. 1: Best Case

Notes: FCF assumes SND caps out at 250M tons in annualized production at maturity.

Normalized Revenue                          $47,500,000

Normalized operating costs            $19,375,000

Steady State Free Cash Flow     $28,125,000

Implied Per Share value of SND’s interest at 12x SS FCF              $337,500,000

Implied Value Per Share                                                                                 $1.06/share

Rosa Mine: Base Case

Notes: FCF assumes SND caps out at 37.5k tons in annualized production at maturity. A multiple of 5x seems unjustifiably low given management expectations of a fully developed Rosa LOM of 10-12 years.

Normalized Revenue                      $6,375,000

Normalized operating costs        $2,936,250

Steady State Free Cash Flow   $3,438,750

Implied Per Share value of SND’s interest at 5x SS FCF              $17,193,750

Implied Value Per Share                                                                                 $0.05/share

Royal Coal: Victory in Defeat

As an aside, let me publicly proclaim that Royal Coal be damned – it was a good decision and a bad outcome, it will by necessity happen from time to time, and shareholders should get their money back under a reorganization anyway. Eventually. That, and I couldn’t help but find it delightful to hear on last week’s inaugural conference call that Watson was able to emerge victorious even in in the jaws of defeat. Specifically, shareholders learned that by doing the deal, the company earned a tax shelter with an NPV worth more than the entire amount of the Royal Coal investment. Good form!! In all seriousness, that’s exactly the type of hidden revelation that warms a value investor’s heart. Makes you want to make a T-shirt with a picture of Watson with RULE #1 in bold above it doesn’t it not?

So to conclude…

Watson has made a stunningly asymmetric bet on high quality, silicon based metallurgical coal that should eventually pay off many multiples of his invested capital over time. This initial investment of $30m comes with a put option in the form of a 5yr guaranteed payback and a low-risk, highly visible runway of high return reinvestment opportunity that should last for many decades to come.

Initial Production come 2013 should approach an initial run-rate of 125m tons a year or ~ $14.3m in profit to SND’s bottom line (500m tons * .25 = 125m tons to SND or ~$14.3m in annualized gross profit assuming a 2013/14 price of $190 per ton. And as I’ve outlined above, this annual run-rate of ~$14.3m in gross profit could easily double as NovaDx’s management continues to tackle the abundance of low hanging fruit on its properties in the fullness of time.

Last but not least, the Rex No. 1 mine possesses the potential to be a low-cost mid tier silicon based coal producer for the next several decades and is hence a scarce, hugely valuable high quality coal asset given its low cost operations, consistent regional geology, long-term contracts and huge 2P reserve value, not to mention in place infrastructure and access to ports.

So while I put together an overview of the next significant stream that SND investors are currently getting for free, let me ask, what’s not to love here?

March 2012 Novadx Presentation (H/T to Joel Kitsul, NDX’s new IR!!)

The New World Economy and the Global Met Coal Market (H/T Alex)

July 2010 NovaDx Private Placement Presentation

Inaugural Conference Call

Ray Dalio on deleveraging

H/T to Plan Maestro

“Any time we see a headline saying commodity X is trading at a 30-year low, we’ll be sure to look closely at the industry for the company or companies still doing okay, which are most likely to lead the way off the bottom…The more dependably cyclical the industry is, as the commodity price trend reverses itself the true value of the company is likely to come out”

–   James Vanasek, VII 4-30-08

“Stay away from bad management”

“They might say they believe in their ability to build a mine on budget, but nobody ever does that…You need to have capital contingencies so there are buffers at every stage”

“We’re the first ones in the base metals and energy space, and we’re hoping to get a multi-billion dollar market capitalization before anybody else shows up.”

–  Nolan Watson


As a follow up series to my original post on Sandstorm, I’ve decided to put together a few posts that dig deeper into some of the underlying properties that undergird Sandstorm’s streaming portfolio. My goal with the following analysis is to highlight the quality of these properties, which in turn, should hopefully put an exclamation point on the magnitude of Sandstorm Metals & Energy’s current mis-pricing and the overall attractiveness of the opportunity.

That, and given one of the primary attractions of investing in a stream finance company is the ability to participate in the monetization of future streaming, exploration, and acquisition gains before the general market recognizes their cash generative potential – I think it makes a lot of sense to look under the hood if you will to get a better idea of the quality of these assets and the reserve expansion and production upside (read “cash-flow”) potential at maturity. Hopefully this rational walk will prove enlightening.

So, without further ado let me introduce you to Thunderbird Energy and its low cost, long-lived NG shale play, Gordon Creek. Like with nearly all of SND’s streaming assets, the potential to increase value above and beyond the initial 2014 reserve/production estimates is substantial (to say the least) and the potential for a true moonshot type of homerun when all is said and done is very, very real. Of course, I would do a disservice to not mention that SND shareholders at current prices are quite literally paying nothing for this high probability, heads I win, tails I don’t lose call option on natural gas, so definitely keep that in mind as we go.

Thoughts on Natural Gas

Before we dig into the transaction details, let’s take a minute to discuss my thoughts on the NG outlook generally in order to put the recent price weakness in proper context of what is essentially a wonderful little 20+ yr natural gas annuity.

While I’m agnostic on NG pricing in the near to medium-term (meaning I don’t necessarily expect prices to recover anytime soon), I think its important to point out that not only is pricing currently at 10 year historic lows, its depressed to a level where further exploration and production at this point has become completely uneconomic (as evidence of this reality, note the announcement by Chesapeake recently that they plan to curtail drilling and future activities until prices recover).

So with a natural gas price lower than it’s cost of production it’s safe to say its only a matter of when (not if) pricing recovers as it’s a certainty that NG prices will eventually revert towards a more economic level – a level that in my opinion is likely to be reasonably north of the ~$4/mcf mid-cycle price assumption I use in the valuation section below.

Again, who knows where the long-term equilibrium will eventually balance out here or exactly when, but I’m willing to bet it’s higher than that ~4 per Mcf assumption given (1) the cost of production (2) a large and growing differential between U.S. gas prices and those around the rest of the world (3) the all time high spread between oil & gas on $ per energy equivalent basis and (5) all of the monetary and fiscal shenanigans currently taking place amongst the central banks of the developed world.

Keep in mind as well that from today’s trough levels, Sandstorm’s leverage to a sustained recovery in pricing is rather dramatic given the company’s perpetual fixed costs of $1 per Mcf. That, and while I’m no soothsayer, I wouldn’t be shocked if looking back 5 years from today Watson’s contrarian call on NG here ends up looking every bit as genius as some of his earlier silver streaming deals done at SLW. Regardless, lets dig in to the asset acquired in SND’s most recent stream acquisition, Thunderbird Energy’s, Gordon Creek.

Gordon Creek (Uinta Basin, Utah)

Unbeknownst to many, Utah is one of the most attractive resource development states in America today, particularly as it relates to natural gas given the abundance of long-lived NG deposits in the state.

Interestingly enough then, the Drunkard’s Wash property operated by Conoco Phillips that borders Gordon Creek, is the largest and most prolific natural gas field in the state – having already produced nearly one trillion cubic feet of natural gas over the life of its operation. This thing’s a monster, clearly – and it’s reign of terror should continue for quite some time due to the 20-30 year, roughly two billion-cubic-foot projected life of an average well on its deposit.

So given its proximity, it shouldn’t be any surprise to SND shareholders that the story of Gordon Creek is set to be a similarly positive tale. This story is for the time being though, still primarily one of ongoing development activity – all of which is squarely aimed at reaching critical mass in order to optimally exploit the property’s consistent regional geology (nice), above-average well life (very nice), and in place infrastructure (cherry on top) for the benefit of both Thunderbird and Sandstorm shareholders. Thankfully, the rewards for successfully doing so should be tremendous, as the Gordon Creek natural gas field possesses the potential to be a low-cost, major natural gas producer for the next several decades. Sandstorm’s role in all of this is simple – they’ve brought the requisite financing fire power necessary to make it all happen.

So we‘re still early in this long-term story but with the exception of the implosion of natural gas pricing of late, it’s been one that has been progressing rather nicely since SND struck this deal in late summer of last year. While admittedly there have been a few hiccups here and there (contractor issues, etc.) – as there always is with these types of situations – nothing has happened that’s really out of the ordinary or that would make me worry that all is not as it seems. Going forward then, I expect more of the same consistent progress that has been the hallmark of this project since it began.

Anyhow, I find it hard to imagine that between (1) Thunderbird’s seasoned suite of proven executives presently captaining the Thunderbird ship and (2) the financial expertise and literal “wall of money” SND has at its disposal to facilitate the process, we should all be able to sit back and enjoy what is more likely than not to be a very happy ending when all is said and done.

As far as framing the terms of the deal and Gordon’s Creek’s ultimate potential, I thought Andy Hoffman of Torrey Hills Capital put it well last September, so rather than regurgitate it, I figure its better to just go straight to the source…

“…the company invested $25 million in Gordon Creek last month, targeting a production increase from roughly 900 mcf/day currently to an estimated 18,000 mcf/day by the end of 2012.  The royalty agreement lets Sandstorm own 35% of the life-of-mine natural gas at a fixed price of essentially $1 per mcf in exchange for ‘development fees’ of roughly $500,000 for each of the first 50 wells; hence the initial $25 million commitment. Also requires is $325,000 per well for the next 100 wells. There are numerous other details in the agreement.

Due to the region’s consistent geology and the 2009 construction of the Rocky Mountain Express pipeline, Gordon Creek’s estimated breakeven operating cost is roughly $2 per mcf, among the lowest in the nation. This theoretically yields a 100% profit margin at current gas prices and strong long-term project economics.

The initial $25 million Sandstorm investment will fund the majority of the first 50 holes of delineation drilling (plus five work-overs). Turnaround time from completion to production tie-in is designed to be nearly instantaneous. The company’s plan targets 58 wells to be online by the end of 2012, each producing 350 mcf/day, on average. Currently, three wells produce. At a current natural gas price of roughly $4 per mcf, such production would yield to Thunderbird, net of Sandstorm’s 35% interest, a pre-tax cash flow run rate of approximately $13 million. This in turn could be reinvested into the next 50, or even 100, delineation wells in 2013, presuming Sandstorm continues to invest alongside.

The key valuation metric over the next 12 months is likely to be reserve growth given the company’s $20 million market capitalization and targeted eightfold reserve increase by the end of 2012. The key to this strategy probably is the pace of land acquisition in the Gordon Creek area, where Thunderbird aims to accelerate its efforts in the next year or so.

The pace of reserve growth will depend on how many adjacent blocks it can acquire, as the more land (with consistent or similar geology) the company can add to the property, the more dispersed the planned 50 drill holes can be. This allows for a wider volume of the deposit to be considered reserves under Canadian Instrument 51-101 reporting standards.

Thunderbird’s current land position at Gordon Creek is roughly 12 “sections,” or square miles. It aims to increase its holdings to 40 sections by the end of 2012, the large majority of which are USA federal lands and the remainder privately held.

Given the company’s position in the area, its pipeline infrastructure and relationship with government agencies thanks to the SWP partnership, it appears likely the acquisition strategy will be viable and I believe successful. Thunderbird’s management anticipates such acquisition costs to be $1.5 million to $2 million based on recent transaction statistics. Given the relationship with Sandstorm, most likely SND would contribute 35% of said costs to maintain its royalty interest.

If such transactions are not consummated, the company expects the 50-hole drilling program to increase the current 25 billion cubic feet of reserves to roughly 100 bcf by the end of 2012 (net of Sandstorm’s 35% interest), most likely at the 2P level. If the additional 28 sections are acquired, the more dispersed drilling targets would yield a “base case” expectation” of closer to 200 bcf, or eight times the current level. Assuming 119 million shares outstanding (79 million shares outstanding plus 40 million warrants with an average strike price of $0.25/share), and an average “per mcf” valuation based on 2008-2010 transactions, it is plausible that a stock revaluation will occur.”

While the above is somewhat dated given recent time-table changes such as the production deferral (which btw was imo not only a very savvy move given current NG prices but a prime example of the types of value added flexibility that only SND provides), the terms of the transaction and the size and potential scope of the Gordon Creek natural gas field are the same. Clearly I was serious about the value of the embedded resource optionality in these types of deals.

I mean, the first time I realized that not only were the initial run-rate production estimates relatively easily achievable, but that there was a reasonably high probability that normalized production run-rates at maturity could be something like ~2-3x higher than my initial expectations, I had a hard time believing it (maybe this Watson guy is the insightful contrarian home run hitter that his track record indicated after all).  So a quick “boomshakala” and a few fist pumps later (kidding) I rechecked my work and the underlying premises of my assumptions, and again, found that a multifold increase was indeed a reasonably achievable, if not probable goal over a longer time frame (3+ years).  Remember, this isn’t some pie in the sky “wildcatting” best-case scenario that I’m talking about, its basic blocking and tackling oil & gas exploitation – i.e. no one is reinventing the wheel here. So we know the gas is there in a BIG way (as is the requisite infrastructure), the geology is consistent and the optimal extraction methods well known, and last but not least, the planned acquisition of additional acreage has for the most part gone-off without a hitch.

Not to imply that this isn’t a complicated operation that will periodically run into issues and/or temporary roadblocks, – or that a ton of experience, skill, long hours, and hard work aren’t absolute requisites to bringing this deposit from A to Z – because it is. What I’m saying is that with a seasoned, highly competent management team leading the charge and a strong, patient and flexible financial partner to fund it (as is the case here), it’s eminently doable over a reasonable time frame. Anyhow, I will put together a range of values later on but first let’s take a look at the underlying deal economics of SND’s most recent stream.

Transaction Terms

My understanding of the deal is that SandStorm gets to purchase 35% of production at $1 per mcf for $500,000 per well for the first 50 wells. For the next 100 wells, Sandstorm gets to purchase 35% of production at $1 per Mcf for only $325,000 per well and any additional wells drilled thereafter.  Then there are the minimum guaranteed payments and Thunderbird has an option to repurchase 50% of the working interest for $16.25 million.  Since 100% of the working interest costs $25 million, the repurchase option would increase Sandstorm’s IRR on the project, however this option significantly reduces SandStorm’s optionality to higher gas prices – and at this point, it doesn’t even appear possible given both the recent year long delay in production and the cancellation of the CO2 sequestration project by the U.S government. In other words, Thunderbird lacks the excess cash to get it done so buying back SND’s interest is not likely an option.

I’ve run the numbers and assuming a reasonable mid-cycle price of $4/mcf, SND should generate a 28% IRR on the initial 50 wells that cost $500,000 each. For the 100+ additional wells thereafter (at a cost of $325,000), I get a 1yr 43% return and a long-term IRR (adjusted for depletion) in the mid thirties. So the deal starts to look considerably better after the initial 50 wells are drilled, but the long-term IRR’s are definitely solid as a whole and attractive on an absolute basis. The exercise also gives you a good feel for the relatively low-risk and highly visible runway of high return reinvestment opportunity this stream provides SND.

Also, keep in mind that any increases in gas prices above and beyond my middle cycle estimate will all fall straight to the bottom line (given fixed costs). So SND should start to see rapid improvements in the gross profitability of this deal due to the high incremental margins on wells drilled after the first 50 and any NG price increases thereafter.

Well Unit Economics

Initial 50 Wells:

Investment:   $500,000

Interest:         35%

Initial Production:     370mcf/day

Gas Price:       $4.00

Purchase Price:         $1.00

Year One CF to SND: $141,803 (370 mcf * 365 days * 35% interest * $3 spread)

Year One Return:      28%

Long-term Decline:   8.2%

Long-term IRR:        20.16%

Total CF          $253,894

SND CF           $141,803

Well Revenues           $540,200

Operating Costs         $255,500

Well Cash Flow          $284,700

SND Cash Flow         $141,803

SND Interest  55%

Additional 100+ Wells:

Investment:   $325,000

Interest:         35%

Initial Production:     370mcf/day

Gas Price:       $4.00

Purchase Price:         $1.00

Year One CF to SND: $141,803 (370 mcf * 365 days * 35% interest * $3 spread)

Year One Return:      43%

Long-term Decline:   8.2%

Long-term IRR:        35.4%

Thunderbird Well Parameters:

Royalty           $0.66

Op Cost           0.45

Transfer         0.5

MCF Cost        $1.61

Annual Cost   $12,000.00

MCF/Well       135,050

Cost/MCF       $0.09

Total Op Cost / MCF $1.70

Less: SND Override   $0.00

All In Op Cost           $1.70

Interestingly then, lets take a look at the potential annual cash generation to SND upon the completion of 200 wells, a goal that seems reasonably achievable over a long-term time horizon. If we assume 200 wells producing at 370Mcf /day at a $4 per Mcf, and hence a $3 spread to SND, we get annualized cash flows of ~149k per well.  So with 200 wells in operation, SND’s interest in Gordon Creek should generate a cool $29.8m in annual gross profit. Ya, I’d say that qualifies as a rub your eyes and check again data point given you can purchase SND in its entirety at the moment for a total EV of ~$90m.

Downside Protection

As a value investor that always tries to adhere to Rule #1, I think its important to look at this stream from a downside protection point of view, so lets take a quick look at Thunderbird’s existing reserves in order to get a better understanding of the worst-case value of the NG reserves backing SND’s minimum payment guarantee.

First, I think the details of SND’s guarantees are definitely a critical issue to understand as far as appropriately sizing up the risk/reward equation. Remember that – as I mentioned in the original write-up – SND is able to mitigate the risks typically associated with M&E operating companies through its minimum payment guarantees. These guarantees are enforced through the securitization of its investments in PPSA agreements, which provide collateral for SND based on the entire asset base of their streaming partners. In other words, if these companies go bankrupt and their assets are seized and sold by a bankruptcy trustee, SND is first in line as far as getting it’s money back (i.e. ahead of senior creditors, suppliers, etc.).

Rest assured then that these securitization’s really are senior secured as they are collateralized by ALL of the assets of the company in question, i.e. the value of the infrastructure + the mineral deposits – which are worth substantially more in total than the total liability’s owed to SND. These contractual guarantees are fully covered and then some (as we will see below), so the odds of suffering a permanent loss seem very, very low even in the event of bankruptcy. Also, Watson’s team is experienced with workouts and has the network/expertise/team in place to properly deal with a restructuring, so they have the processes in place/skill set necessary to recover what they are owed if it should come to that. Also, while I wouldn’t assume they receive anything more than their principal in a BK, it’s of course entirely possible that such an event could actually be beneficial in the long-run if say, post BK SND was able to emerge with ownership of the entire property outright in lieu of their claim (or at least with a more valuable asset than what they entered with).

So with all of the above in mind then, Thunderbird has booked reserves of ~25 Bcf today. What’s that likely worth?

Assuming a reasonable discount rate, a normalized mid-cycle NG price of $4 and full cycle operating costs of ~$2 per Mcf (in line with similar properties and management’s expectations), Gordon Creek’s 25 Bcf translates to 25m Mcf, which if we multiply by the $2 per Mcf in expected profit ($4 gas price less ~$2 in full cycle avg. costs), we get ~$50m in un-discounted gross profit. If one applies a reasonable discount rate here I think a reasonably conservative present value is roughly half that to a larger acquirer (say an upstream MLP), so lets say ~$25m conservatively. Given there is valuable infrastructure and significant resource expansion potential worth many times that amount at Gordon Creek, I’d say its a near certainty that Sandstorm’s invested capital is money good and then some under any reasonable future scenario.

So now that we have a better feel for the downside protection, lets take a look at what these assets are likely worth assuming they are proved out and developed as management expects.

Base Case

If 3-5 years from today a mature Gordon Creek has ~100 Bcf and we assume a 20 year reserve life, that 100 Bcf translates to 100m Mcf which, when divided by 20 years gets us to normalized production estimate of ~5m Mcf per year or 1.75m Mcf to Sandstorm. At a reasonable $3 spread ($4 gas price less $1 per Mcf in fixed costs) SND’s interest should generate ~$5.25m in annualized gross profit. Given this high margin annuity-like cash flow stream is derived from a low cost producer with an asset that has a 20 year life and substantial potential to still meaningfully grow its reserve base I think applying a 10 multiple to this stream is on the low side of reasonable. So in our base case we are dealing with an asset worth at least $50m, or more than half of SND’s current EV.

Best Case

If five years from today a mature Gordon Creek has over ~8x its present reserve base of ~25 Bcf or ~250 Bcf, and we assume a 20 year reserve life, then that 250 Bcf translates to 250m Mcf which, when divided by 20 years gets us to normalized production estimate of ~12.5m Mcf per year or 4.8m Mcf net to Sandstorm. At a reasonable $3 spread ($4 gas price less $1 per Mcf in fixed costs) SND’s interest should generate ~$13m in annualized gross profit. Given this high margin annuity-like cash flow stream is derived from a low cost producer with an asset that has a 20 year life, I think applying a 10 multiple is definitely on the low side of reasonable. So in our best case we are dealing with an asset worth at least $130m.


The takeaway then is that SND has put ~$25m at risk to get the option to finance the development of a high quality, low cost NG asset potentially worth ~$130m to SND, a sum that’s – ridiculously enough – greater than its entire present EV.  That’s attractive, but especially so when you consider that SND’s investment is senior secured by ample collateral, offering substantial downside protection to shareholders in the form of Gordon Creek’s infrastructure and 25 Bcf of existing reserves. This innovative feature of stream finance makes the risk of permanent loss practically nil. So I’d say its fair to characterize this as a highly attractive deal no matter which way you slice it and a pretty sweet way to bet on the inevitable turn in the NG cycle.

As I said in the original write-up, the asymmetry of these deals can be stunning.

Thoughts on Private Market Value

One aspect to ponder here is what this world-class asset would be worth to an upstream MLP focused on the exploitation, development, and acquisition of oil natural gas properties such as Linn Energy. Most Upstream MLP’s produce natural gas at the wellhead for sale to various third parties and do not generally partake in exploratory drilling…rather, like Thunderbird, they own and operate assets in well known mature basins that exhibit low decline rates and possess long reserve lives, (i.e. assets that are appropriate for the MLP structure). Of course it’s no small point that Thunderbirds Gordon Creek asset has the lowest all in costs of any shale basin in the country as well (no pun intended) as a stable, relatively predictable production profile. This is a 20+ year high quality energy asset that requires relatively small amounts of capital to fund low-risk development drilling opportunities that offers a relatively high degree of visibility.

My point is that the Gordon Creek asset would be inherently very attractive to any upstream MLP looking to acquire an attractive low-cost, long-lived natural gas asset to their existing portfolio. First, because once the cycle turns (again a matter of when, not if) they can go long way in mitigating the inherent commodity risk via an actively managed hedging program which should lock in a stable, consistent cash flow stream over the full cycle. Second, because upstream MLP’s typically trade on a yield basis and therefore at very high multiples of EBITDA and cash flow (perhaps unjustifiably but I don’t see this changing anytime soon given our yield starved world), so the arbitrage available to them to acquire these types of assets on an accretive basis is significant. This is an important point. So take it for what its worth, but it seems obvious to me that Gordon Creek’s PMV to a strategic acquirer is almost certainly much, much higher than the worst case numbers outlined above.

My hunch is that a takeout transaction by an upstream MLP could be the ultimate end game for Thunderbird, once they (with the help of SND) have finished taking care of all of the heavy lifting so to speak. Notably, SND’s stream under such a scenario would remain in force. Also, Thunderbird’s existing management has done this successfully 3 separate times in the past, so rest assured they know how to develop high quality assets to the point where a sale will generate maximum value for their shareholders. This is a rinse, repeat, rinse, repeat type of situation for them.

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.

So to conclude…

Watson has made a stunningly asymmetric contrarian bet on natural gas at the bottom of the cycle (love it) that should eventually pay off many multiples of his invested capital over time. This initial investment of $25m comes with a put option in the form of a 7yr guaranteed payback and a low-risk, high-return visible runway of high return reinvestment opportunity that should last for at least a decade if not longer.

Initial Production come 2014 should approach an initial run-rate of 5 Bcf a year or ~ $5m in profit to SND’s bottom line (5m Mcf * .35% = 1.75m Mcf to SND or ~$5.25m in annualized gross profit assuming a 2013/14 NG price of $4 per Mcf. And as I’ve outlined above, this annual run-rate of ~$5m in gross profit could easily double or more as Thunderbird’s management continues to tackle the abundance of low hanging fruit on its properties over time.

Last but not least, the Gordon Creek natural gas field possesses the potential to be a low-cost major natural gas producer for the next several decades and is hence a scarce, hugely valuable natural gas asset given its low cost operations, consistent regional geology, above-average well life, and in place infrastructure.

So while I put together an overview of the next significant stream that SND investors are currently getting for free, let me ask, what’s not to love here?


Recent Thunderbird presentation

2011 Thunderbird Energy Year End Update


Natural Gas Pricing Updates


Natural Gas Weekly

“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


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…




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.


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.


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.


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.


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.


(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


Insider Activity


Property Updates/outlines, etc.


Nolan Watson Profiles/Interviews:











Miscellaneous Articles on SSL & the Stream Finance Model:










Hat tip to John Chew of the fantastic CS Investing for this wonderful analysis/discussion between Alice Schroeder and fellow investors on Buffett and See’s Candy.


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