Quick Review of the Company
My readers know that I highly suggest potential investors in traditional precious metal mining stocks consider streaming/royalty companies as a viable alternative. Many gold and silver companies have been under extreme duress as of late. Year to date the SPDR Gold Trust is down 6.5% trading at $151.60 (GLD) while the iShares Silver Trust (SLV) is down 9.1% at $26.70. Sandstorm Gold (SAND), my favorite long-term investment in the space, operates as a streamer. Today it just announced a major update described below. For those unfamiliar with the company or the business model, streaming is a unique and solvent business model in the precious metal sector.
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.
Specific details of these SAND's portfolio holdings and agreements can be found in my recent article.
Aurizona Gold Mine Operated by Luna Gold Corp. (OTCQX:LGCUF); SAND's Premier Deal
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.
Today (4/9/2013) SAND and LGCUF.PK Announce A Major Increased to Reserves
Adding to the compelling value of the company, Aurizona's proven and probable gold reserves were just updated and now total 2.36 million oz. This also includes 56 million tons or ore and an estimated average of 1.32 grams per ton of ore. This new update is over a 200% increased to the last resource estimate performed at the site in 2010. Further, measured and indicated mineral resources at the property include over 3.6 million oz of gold with an inferred mineral resource of another 1 million oz of gold. This represents a 15% and 44% increase in these indicated reserves and inferred resources respectively, compared to the most recent December 2011 resource update. 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. 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 estimates are based. Thus, it is highly possible that there are large potential reserves in other deposits that have yet to be thoroughly explored. Perhaps an even greater benefit of this update was that the entire life of the mine has been increased. Luna management now expects the life of the mine to last until 2027, or another 15 years. Given this increase in resources is at their premier site and the extended life of the mine, I continue to be bullish on the company and the stock going forward in the long-term as these resource sales will feed the top and bottom lines.
Stock Performance -- Attractively Valued
Shares of SAND currently trade at $9.00. It has a P/E ratio of 35., essentially flat from when I first highlighted the company last summer, though the multiple has contracted since that time due to higher earnings. The stock has pulled back over 40% 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. On average, approximately 475,000 shares exchange hands daily. The stock has ranged from $7.40 to $15.43 in the last 52 weeks. Given the company's prospects for growth I think the stock is a steal at these levels. I further expect the company to soon announce a dividend given their increasing profitability.
Shares of SAND are at attractive levels after falling 40% from the 2012 highs. With gold stabilized for now between $1550 and $1600/oz, along with silver in the 27-28 range, SAND's profit margins are not heavily pressured, and thus they will remain profitable now and into the future. 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, especially those who initiate or add to their positions at these levels.