Why Sandstorm's Exceptional Value Makes It My Top 2013 Gold Stock

Mar.25.13 | About: Sandstorm Gold (SAND)

The SPDR Gold Trust (NYSEARCA:GLD) is about 3.6% off its six-month low of $150.84 and currently trades at $155.55. The Gold Miners Index has rebounded a bit stronger, up 7.3% from its 52-week low of $35.57, trading at $38.16. While there has been back and forth between many of my readers about whether a "real bottom" is in or not for GLD and the gold miners, at $1,600 gold or even at $1,500 gold, one stock will remain highly profitable in coming quarters due to its unique business model. Sandstorm Gold (NYSEMKT:SAND), in the span of just four months, has suffered a 46% decline from its 52-week high to touch as low as $8.25 per share in the March 4, 2013, trading session.

Since then, gold and silver have seem to have found a bottom. This bottom formation was catalyzed by the Federal Reserve announcement to continue to accelerate its debt-buying program. I believe that currency devaluation is a goal of the U.S. central bank which is a buy signal for the metals and miners. The worries in Cyprus, namely the fear that this country's idea of raiding citizen's bank deposit accounts could spread throughout Europe, also gave investors more reason to buy the metals. In my opinion, this high quality company's stock has pulled backed enough and seems to have found its bottom. Thus for investors looking to add to their long-term positions or establish new ones, I believe now is a good time to get in. The sell-off had nothing, for the most part to do with its business, but rather the sector selling off as a whole. Given its focus on growth and future profit potential, which I will outline here, SAND is now my favorite stock of the gold companies.

Sandstorm Gold Uses a Business Model Known as "Streaming"

I highly suggest potential investors in traditional precious metal mining stocks to consider streaming companies as a viable alternative. SAND operates as a streamer which is a unique and solvent business model in the precious metal sector. I believe the approach these companies take to seeking profits offers a stronger opportunity for share growth along with lower long-term overhead and will likely outperform miners in 2013 and beyond.

In general, a streaming company generates its profits by providing up front financing for mining companies looking to expand and drill for precious metals. In exchange for the up-front financing of these companies, the streaming company acquires the right to purchase a portion of production generated from the mines at a fixed cost. More specifically, SAND provides upfront financing for gold mining companies that are looking for capital for exploration and development. In return for upfront financing, SAND receives a gold streaming agreement giving SAND the right to purchase a percentage of the gold produced by the company. Further, SAND has the right to a percentage of a mine's gold production for the life of the mine.

Quarterly Performance: Q4 Highlights.

On Feb. 18, 2013, SAND reported its fourth-quarter results. For the quarter, gold sales totaled 7,243 oz. Operating cash flow during the quarter was $6.5 million. Margins were strong as the "average cash cost per oz. was $410 resulting in cash operating margins of $1,305 per oz." Net income for the quarter was $7.4 million. During 2012, SAND had a record year with just over 33,500 oz. of gold sold and at its low fixed cash cost, resulting in operating cash flow of $37.6 million.

Going forward for 2013 SAND is forecasting gold sales "between 33,000 oz. to 40,000 oz., increasing to approximately 70,000 oz. of gold equivalent by 2016, estimates that are based solely on existing streams and royalty deals." This guidance does not include any acquisitions that SAND plans on making or will make in the future.

A Quick Glance at Sandstorm's Portfolio

SAND has the agreements in place with the following mines/companies and is seeking to expand its portfolios (such expansion is hidden value in this stock as current evaluations can only account for what is in place). More specific details of these agreements can be found in my recent article that described SAND's portfolio holdings.

1. Black Fox Mine Operated by Brigus Gold (BRD)

2. Santa Elena Mine Operated by Silvercrest Mines (NYSEMKT:SVLC)

3. Serra Pelada Mine Operated by Colossus Minerals (OTC:COLUF)

4. Ming Mine Operated by Rambler Metals and Mining (OTC:RBMTF)

5. Deflector Mine Operated by Mutiny Gold

6. Bachelor Lake Mine Operated By Metanor Resources (OTCPK:MEAOF)

7. Hugo North Extension and Heruga Mine Operated by Entree Gold

8. Ann Mason Project also Operated by Entree Gold

9. Mount Hamilton Mine Operated By Solatario Exploration and Royalty Company (NYSEMKT:XPL) and Ely Gold (OTCPK:ELYGF)

10. Coringa and Cuiu Cuiu Mine Operated by Magellan Minerals (OTCPK:MAGNF)

11. Bracemac-Mcleod Mine Opereated by Donner Metals (OTCPK:DONFF)

12. Summit Mine Operated by Sante Fe Gold

The Flagship Agreement Offering the Most Value: Aurizona Gold Mine Operated by Luna Gold Corp. (OTCPK:LGCUF)

The premier agreement that SAND has in place is a gold stream agreement to "purchase 17% of the life of mine gold produced from Aurizona at a price of $400/oz." The Aurizona Gold Project is located in Maranhão State in northern Brazil and is 100% owned and operated by LGCUF.PK. Aurizona is an open-pit mine that is in commercial production and produced approximately 16,000 oz. of gold in the first quarter of 2012. Luna is targeting at least 60,000 oz. of annual gold production in 2013.

Aurizona is an orogenic gold deposit hosted in a greenstone belt of the São Luis Craton. There are a number of mineralized bodies on the property, but work to date has focused on the Piaba and Tatajuba deposits on which the current resource is based. Thus, it is highly possible that there are large potential reserves in other deposits that have yet to be thoroughly explored. SAND made an upfront payment of "$17.8 million in cash and 1.1 million common shares of SAND (5.5 million pre-consolidation) to acquire the stream in May 2009. If LGCVF develops an underground mine on Aurizona, SAND has the right, but not the explicit obligation to purchase 17% of the payable gold from the underground mine, at $500/oz. For consideration, SAND would pay 17% of the capital expenditures incurred to determine the economic viability and to construct the underground mine."

Recent Update of Reserves at Aurizona: Value Added

Aurizona's measured and indicated mineral resources were recently updated and now total 3.63 million oz. and inferred mineral resources are now 1.04 million oz. This represents a 15% and 44% increase in these reserves and resources respectively, compared to the most recent December 2011 resource update. The update incorporates an additional 6,933 meters drilled at the Piaba deposit and 7,478 metres drilled at the Boa Esperança, Ferradura and Conceição deposits throughout 2012. A pit optimization exercise was also conducted for the Tatajuba deposit. Measured and indicated gold resources now total 82 million tons at 1.38 grams per ton gold, or 3.63 million oz. of gold. Inferred gold resources now total 18.5 million tons at 1.74 grams per ton of gold, or 1.04 million oz. of gold.

Nolan Watson said of the update: "The Aurizona gold stream is our flagship stream and [the] announced resource update represents additional value for Sandstorm shareholders. I want to commend Luna for their success to date and we look forward to seeing how the resource grows as exploration continues."

Given this increase in resources is at their premier site, I am quite bullish on the company and the stock going forward as these resource sales will feed the top and bottom lines.

Basic Stock Fundamentals

Shares of SAND currently trade at $9.71. Shares are now up about 6% from when I first highlighted the company last summer. The stock has pulled back over 35% from the highs of 2012 and I think now is a very good entry point for the long-term investor as I see significant upside potential in the future. The stock had been very oversold, as the relative strength index recently came in at 23, signaling technically sellers were exhausted and a bottom was potentially forming. That of course depended heavily on the price of gold and silver in recent weeks, and the trouble in Europe helped stabilize gold and silver prices, as well as SAND shares. On average, approximately 450,000 shares exchange hands daily. The stock has ranged from $7.40 to $15.43 in the last 52 weeks.


Shares of SAND are at attractive levels after falling 35% from the 2012 highs. With gold stabilized for now at $1600/oz, SAND's profit margins are not heavily pressured, and thus they will remain profitable now and into the future. Given the company's growth focus and the number of profitable deals it has in place, SAND is my top pick for 2013 among gold stocks. With SAND's robust and expanding global portfolio of holdings, management is ensuring long-term prosperity of the company. Thus, long-term I believe shareholders will be rewarded handsomely. In conclusion, I believe that SAND is a strong buy for the long term.

Disclosure: I am long SAND. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.