There is a new breed of royalty streamers, employing a somewhat different strategy than their larger peers like Silver Wheaton (SLW) and Royal Gold (RGLD). Gold Wheaton [TSE: GLW) and Sandstorm Resources (SNDXF.PK) both have unique characteristics when it comes to the deals they make. I also think they will employ a whole new strategy altogether, shocking the rest of the royalty world. Let me first explain their individual differences, then go on to what I see going forward.
Gold Wheaton: Its royalty streams are made up of a unique mix of gold, palladium and platinum. Though subject to change and variations, it is essentially 50% gold, 30% palladium and 20% platinum in GEO. It also does deals with companies whose interests lie elsewhere, other than gold (such as First Uranium). It has a director of the board who started as Silver Wheaton's CFO and is now the CEO of Sandstorm Resources.
Sandstorm Resources: It undertakes VPP deals which are commonly large in number but small in size, though its deals have been getting bigger and the company has transformed from a cash pool to a free cash flow operator with lots of growth in front of it. It did something no other royalty company has done: Spun off a metals and energy subsidiary (Sandstorm Metals & Energy) so that it can do joint deals under which Sandstorm gets the gold and its subsidiary gets base metals and energy such as uranium. Nolan Watson has done an incredible job building this company from the ground up, just as he did with Silver Wheaton.
Sandstorm recently completed a transaction with Brigus Gold and its Black Fox Mine & Extension, its fifth stream acquired in less than two years. It is Sandstorm's biggest deal to date, nearly three times larger than its next biggest, Aurizona. Meanwhile, its newly spun-off subsidiary has yet to do a single transaction despite Sandstorm's option. Gold Wheaton, on the other hand, has been rather dormant on the transaction front, with uncertainty in one of its flagship cash-flow generators, which now looks to be resolved as it reported record GEO deliveries in the most recent quarter. Both have cash on their balance sheets and continuing operating cash flow.
Given Nolan Watson's relationship with both companies, coupled with the fact that Sandstorm has a subsidiary and Gold Wheaton has already done deals with non-primary gold producers, a joint venture could be in the works. It makes perfect sense: The companies could undertake much bigger deals with three companies than they can individually. Gold Wheaton is obviously comfortable with doing a stream from a uranium company, so it would fit into its strategy thus far executed.
Given that Gold Wheaton is better capitalized than Sandstorm, it would either get a larger portion of the gold stream and/or all of the palladium and platinum if it engaged in such a deal. Sandstorm would get either a small gold royalty (if it were a byproduct) or split it with Gold Wheaton and take a smaller portion. The base metals or energy would then obviously be given to Sandstorm Metals & Energy, thus completing a three-way joint venture. This would be a win-win-win opportunity for all three entities, as well as for their shareholders.
Of course this may not even happen, but it sure is a great strategy and opportunity for this collective group of companies and their shareholders. In such an event, they could go after bigger streams where they see more upside potential or can negotiate the streams on better terms than they otherwise would be able. It would also allow them to do several more smaller deals should they do them together, providing diversification, something Gold Wheaton shareholders would likely embrace since they have only made two deals since inception.
Disclosure: Author has positions in Gold Wheaton, Sandstorm Resources.
