Sandstorm Metals & Energy (OTCPK:STTYF) is a company with a unique business model. It is a well-diversified streaming company and a sister company of Sandstorm Gold (NYSEMKT:SAND). Sandstorm Metals & Energy has been overlooked by investors primarily because of its low coverage by media and analysts. Currently, the company has a market capital of only $112.78 million. However, the underlying business model of the company is strong and its future outlook is positive.
Sandstorm has adopted some great ways of managing the company.
Good Business Model
Sandstorm Metals & Energy has incorporated a unique business model known as commodity streaming. It operates as a non-operating streaming company in the metals and oil industry. With commodity streaming, Sandstorm Metals & Energy provides capital to junior mining and energy exploration & production companies and in return gets the right to buy a certain percentage of the output produced by the companies at a fixed price. Therefore, Sandstorm has the opportunity to sell these commodities produced at a higher price in the market. The capital provided by Sandstorm to the mining companies basically consists of an immediate upfront payment which is utilized by the mining companies in building the project and for other capital expenditures. The second kind of capital is the ongoing production payments by Sandstorm to these companies in order to assist them in their working capital requirements.
Advantages of the business model
Sandstorm Metals & Energy's business model has some advantages which set it apart from the traditional mining companies. The model allows the company to operate at a lower risk than a traditional mining or E&P company as the risks of building a high capital intensive project is reduced in the case of Sandstorm. The operational risks associated with running these projects is also minimized for Sandstorm. This allows Sandstorm to operate as an asset light company and helps it to increase revenue by strategically investing in good projects. The different problems associated with the traditional mining companies like capital expenditure overruns, sustaining capital requirements, production delays and inflating costs are also mitigated through the business model of Sandstorm.
Another big advantage is that the business of Sandstorm is well diversified and its commodity streaming portfolio includes copper, natural gas and palladium. Such a well-diversified portfolio has some advantages as it gives investors leverage to commodity prices, exposure to production rate upside and exposure to exploration upside.
Thus the business model of Sandstorm maximizes the upside potential and minimizes the downside risks.
Great Management Team
Sandstorm has a great management team lead by its President and CEO, Nolan Watson. Nolan founded the company with David Awram (Currently, Sandstorm's Executive Vice President). Nolan and David worked earlier at Silver Wheaton (NYSE:SLW), which was the first streaming company in the world. Nolan was the CFO at Silver Wheaton and he has incorporated the model of silver streaming at Wheaton to metal & energy streaming. The success and charisma of Nolan Watson can be judged from the fact that he was one of the youngest ever billionaires at the age of 26. The top management consists of experienced professionals from the domain of mining, oil, energy exploration and production.
Backed by a Well Known Value Investor
In addition to a great management team, Sandstorm Metals & Energy is also backed by a well-known value investor. Jim Roumell of Roumell Asset Management LLC, who is known for finding value plays, is the largest shareholder of Sandstorm Metals & Energy with the exception of company insiders. Roumell's funds have consistently outperformed the S&P 500, as you can see below. Sandstorm Metals & Energy was one of the top 10 holdings of Roumell Opportunistic Value Fund at the end of March 31, 2013.
Currently, Sandstorm has four commodity streaming projects:
Bracemac-McLeod Mine - with Donner Metals in Canada - Copper Streaming
The initial production is expected to start in Q2 2013 and around May. According to the agreement, Sandstorm will get 24.5% of the copper production at $0.80/lb. In the long run the production is expected to increase to 21M lbs of copper per annum.
Serra Pelada Mine - with Colossus Minerals in Brazil - Palladium Streaming
This deal is joint deal done by Sandstorm Gold and Sandstorm Metals and Energy with Colossus Minerals. According to the deal, Sandstorm Metals and Energy has paid $15 million to Sandstorm Gold and in exchange will get 35% of the palladium produced from the mine. Sandstorm Metals and Energy is not obliged to provide further capital to Colossus. The production is expected to begin by the end of 2014.
Gordon Creek - with Thunderbird Energy in the US - Natural Gas Streaming
Production has begun from eight new wells since December 2012 and it is expected to reach its full production by 2014. According to the deal, Sandstorm will purchase 35% of the natural gas produced at the Gordon Creek Property, located in Utah in the US.
Hugo North Extension & Heruga - With Entrée Gold in Mongolia - Copper Streaming
For the year 2012, the net loss of the company was $37.8 million which has increased from $13.1 million for 2011. The main cause for the increase in the net loss is the non-cash impairment charge of $33 million paid by the company in relation to the Novadx assets. Recently, US Inc. a joint venture of Sandstorm Metal and Energy and Novadx announced the acquisition of coal assets in Tennessee Properties from Premium Coal Company, National Coal, and Jacksboro Coal Company for US$8.5 million. In 2012, Sandstorm was benefited by Novadx stream as it achieved a 48% increase in coal tons sold and a 6% increase in the realized selling price of Novadx coal.
There are some risks that need to be weighed before an investment in STTYF should be made. For instance, while the company has substantial collateral now, if commodity prices collapse further, the company will end up with assets that are worth less than the loan that was issued by them. The company is very dependent of the expertise of its CEO and founder, Mr. Nolan. If anything happens to him, while the company has a continuation plan, no one currently at the company can fulfill the roll as well as the current CEO. Again, if the company ends up having direct ownership of too many mining properties, it may not have enough talent or capital to convert to an operating company.
However, it is my belief that the potential rewards far outweigh the risks in this company. Investors can be comforted by the fact that the management has done this kind of business before, and has delivered an increase in shareholder values each time.
Sandstorm has invested in good projects which will start their production in a couple of years. The cash flows for Sandstorm are expected to increase in the future with the increase in production. The prices of metals and natural gas are expected to increase in the future and the business model of Sandstorm will help the company in leveraging the upward increase in the price. With a unique underlying business model, Sandstorm Metals and Energy can be said to be a good example of a well-managed company.