Precious metals have had an absolutely amazing month. The SPDR Gold Trust ETF (GLD) was up 4.9% last month, while the iShares Silver Trust (SLV) was up 13.5%. While the fast money has been made in the metals and mining stocks, I believe there are still profits to be made in the gold and silver companies near term and without question in the long term. I pounded the table in August on the gold miners and the silver miners as I repeatedly encouraged investments in the Market Vectors Gold Miners ETF (GDX), the Market Vectors Junior Gold Miners ETF (GDXJ) and the Global X Silver Miners ETF (SIL). I further highlighted some of the major individual mining companies such as Barrick Gold (ABX), Goldcorp (GG), Silvercorp Metals (SVM) and Pan American Silver (PAAS). Through my research on these prior recommendations, I became familiar with a unique business model in the gold and silver space known as 'streaming.'
A precious metal streaming company generates its profits by providing upfront financing for mining companies looking to expand and drill for precious metals. In exchange for the upfront financing of these companies, the streaming company acquires the right to purchase a portion of production generated from the mines at a fixed cost. I would like to highlight two companies involved in silver and gold streaming that I am closely watching over the next 12 months that I believe could outperform traditional miners. These companies are Silver Wheaton (SLW) and Sandstorm Gold (SAND).
SLW is one of my favorite companies in all of the silver space. I believe it could not only outperform silver in the next year, but also the bulk of other silver companies. SLW is a worldwide silver streaming company is one of the most efficient run companies in the mining and metals sector. SLW has contracts with companies around the world to purchase silver production in bulk at prices well below market value. Once SLW acquires the silver at the predetermined upfront investment cost, it then proceeds to sell the silver at higher prices. The company currently has 14 long-term silver purchase agreements and two long-term precious metal purchase agreements whereby it acquires silver and gold production from companies located in Mexico, the United States, Greece, Sweden, Peru, Chile, Argentina, and Portugal.
According to the company "the predetermined price that SLW pays for future silver production is approximately $4.00 per ounce, with a small inflationary adjustment, ensuring that costs are fixed." SLW represents an excellent investment to gain exposure to silver as SLW offers significant leverage to the price of silver with minimal downside risks. No additional capital expenditures or exploration costs are required by SLW besides the initial payments they make to silver miners to secure the rights to purchase low cost silver. Further, SLW benefits from the production and exploration growth of its operating partners. It does not face the rising labor cost issues that actual miners face. So long as the mines are producing, SLW will have a consistent stream of silver and in turn a stream of revenue. The higher the price of silver goes the better the top and bottom lines will be. This efficient business model creates long-term shareholder value.
SLW currently trades at $34.60 and has a 52-week trading range of $22.94 to $42.50. On average, about 4.2 million shares exchange hands daily. The company trades at a 22 P/E multiple but only a 0.87 PEG ratio and currently yields 1.2%. Earnings per share are estimated to grow at a rate of 37% in the next five years. The company also has a great balance sheet with a debt to equity ratio that is minimal at 0.7.
In the gold space, the premier streaming company is SAND. What is interesting about this company is that it is headed up by CEO Nolan Watson. Nolan Watson served as the former CFO of SLW and thus he is familiar with the business model of streaming. Mr. Watson has demonstrated success. During his time with SLW, the stock moved from about $8 a share to over $20. I think he will deliver for shareholders of SAND as well.
In comparison to SLW and other well-established gold companies, SAND is somewhat speculative. As with SLW and silver miners, 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. More specifically, SAND has the right to a percentage of a mine's gold production for the life of the mine. SAND currently has a portfolio of seven gold streams, five of which are now producing gold and two royalties. SAND plans to grow and diversify its low-cost production profile through the acquisition of additional gold streams. SAND is a growth-focused company that is seeking to acquire more of these gold streams from companies that have advanced stage development projects or operating mines.
SAND was just listed on the American stock exchanges last week. Given the increased exposure this move should have for the stock it is definitely one to consider. The stock was recently hit for about a 10% haircut following news that the company increased its financing unexpectedly from $75 million to $130 million in a recent offering. I believe this increased deal could provide the company a strong return on investment as it will be used for future purchases of precious metal streams.
SAND's most recent quarter was strong as it reported record sales and revenues. In its Q2, SAND sold 9,259 ounces of gold and had cash flow of over $11.3 million. The standout statistic of the quarter in my opinion was that SAND paid an average of $298 per ounce of gold leading to cash operating margins of $1317 an ounce. Based on existing gold stream agreements, the forecasted attributable production for 2012 is 28,000 to 33,000 ounces of gold and is seen increasing to over 50,000 ounces of gold per annum by 2015.
The current share price of $9.75 represents an excellent entry point in my opinion as the stock is still depressed following the sell-off after the recent financing announcement. On average, approximately 85,000 shares exchange hands daily. The stock has ranged from $4.45 to $11.19 (this takes into account when it was listed in the OTC markets).
In summation, I believe precious metals are in a long-term bull market. Given the underperformance of the gold and silver companies in the last few years I believe they are now poised to outperform the metals in the next 12 months. The streaming business model is rapidly becoming one of my favorites as the risk is much lower compared to traditional miners. Thus I will be watching both SLW and SAND closely in the next 12 months and think it is likely the stocks could outperform those of the traditional mining companies.
Disclosure: I am long SLV.