Hyperinflation's  Instablog

Aside from Silver Wheaton (SLW) trading at just over $3/share back during the peak of the financial crisis, I have not seen such a potentially attractive valuation among the Royalty Companies. Sure Royal Gold (RGLD); Franco- Nevada (FNNVF.PK) will provide investors with high annual returns over the next decade, but nothing compared to the returns some miners will produce. I'm a strong advocate of investing in mining companies, but believe having one or two royalty companies should be a core part of an individual’s overall investment in this industry. Over the last two months, I have been watching two precious metal royalty companies most have yet to hear of and am very impressed with one of them in particular, personally initiating a generous core position which I look to incrementally increase throughout the next year. The other, Gold Wheaton has resolved a huge hurdle making it far more attractive given its reduced risk profile. Though I think the valuation is very attractive, much of the potential value lies on the acquisition front.

 

About Sandstorm Resources(SNDXF.PK) - A gold royalty company focusing on advanced stage or producing mines. Though they have only been operating for a basically a year and a half or so, they have already completed four royalty acquisitions. This is amazing accomplishment given they are a micro/small cap company ( <200m market capitalization ). They have an amazing management team headed by CEO Norman Watson (former CFO of Silver Wheaton ). They are very well capitalized, following an acquisition in early March, with nearly 90m of cash on hand. This gives them ample room to deploy at least 60m of their cash balance off in the near term ( as they have a bit over 100m in long term debt). Available funding will dramatically increase, however, over the year as three of their four royalty streams will come online, with the fourth expected in 2011. They can also revert back to more equity financing ( which I personally think they should do ) as they recently moved up to top tier status on the venture exchange, thus they will attract more attention. They have made it clear they are and will continue to be very aggressive on the acquisition front going forward, recently commenting they are in several advanced stage talks with various companies. 

 

Similarities to Silver Wheaton - Silver Wheaton is recognized for their superior management as they have been able to grow future peak production levels from 0 in 2004 to 45m by early 2010 ( expected to be reached in 2013-2014). But what stands out is the fact they have been able make these acquisitions on extremely favorable terms, with all in costs amounting to more or less 8.00/oz of silver with the exception of a few deals such as Rosemont. One would expect having the former CFO of Silver Wheaton as CEO of Sandstorm, acquisitions would be on comparable terms. In fact, they are currently the lowest cost producer relative to Royal Gold, Franco-Nevada and Gold Wheaton. The average cost per attributable ounce is less than $400/oz. Additionally, like Silver Wheaton, they have little tax liability, another comparative advantage to Royal Gold and Franco-Nevada. The following is a brief rundown of their royalty agreements thus far:

·         Aurizona Project - 17% of attributable gold production for LOM, which will initially produce 60k oz/year, ramping up to 80k year with cash costs of $400/oz. They also have the option to purchase 17% of the gold produced from the underground mine ( should Luna Corp decide to develop it). In this case annual gold production will increase to a range of 100k-125k/year.

·         Saint Elena - 20% of attributable of the projected 40k annual production. The kicker here is the purchase price of just $350/oz. Additionally this mine has underground potential which Sandstorm will have claim to should they develop it. This would bring total mine production to an estimated 60-70k/year.

·         Summit Mine - Sandstorm will initially receive 50% of the first 10k mined, followed by a 22% interest in this small mine. Production estimates are expected to be between 12-14k/ year. Cash costs again are at the low end $400/oz. The operator also has the right to offer Sandstorm an additional 25% interest. This is a key example of generating immediate cash flow ( indicated through the provision above). 

·         Ming Mine - Production expected to commence in mid 2011. Initially Sandstorm will receive 25% of the first 175k produced followed by 12% thereafter. Gold production is projected to be between 20-25k annually with excellent upside potential. 

 

In other words, Production levels will grow from approx 10k in 2010 to 30k by 2012 ( assuming none of the companies decide to pursue underground mines and Summit mines does not offer the additional 25% interest) or approx 36-38k assuming they do. This seems like small pickings relative to the other royalty companies but you have to put it into perspective. Investments are made in hopes of making the highest possible return given the risk involved. Sandstorm resources offers just that: When it comes to valuation, assuming a long term gold price of $1,300/oz, my valuation ranges between $1.72-$1.90/share. Of course valuations are very subjective with regards to required rate of return, LT gold price, etc, but such a price to value disconnect in the valuation mentioned above makes it worth a look.

 

Added Bonus- Sandstorm recently announced the proposed spinoff Sandstorm Base Metals and Energy whose business model will mirror that of its brother company but focus on base metals, oil & gas. Each shareholder of Sandstorm resources will receive 1 for 1 of the new company. Though it will dilute the brother company by 1/36th ( in order to give some financing to Sandstorm base metals & energy), the new company already has 500k of working capital in addition to an option on the Eagle Lake Uranium project. This will give investors two royalty companies which focus on a range of commodities.

Disclosure: Long: SSL.V, RGLD, FNNVF.PK, SLW 

Disclosure: long sndxf.pk,slw,rgld

 Despite the 20% increase in the price of silver and a corresponding run up in silver mining companies, bargains can still be found in the smaller juniors and advanced stage exploration companies. The current valuation attached to Bear Creek Mining(BCM.TO) proves this point. Bear creek’s future keeps getting brighter as they increase total resources and more importantly 2p reserves at a furious pace with plenty of drilling still on the horizon.

 

About Bear Creek: Mining operations are focused on the most silver rich nation, Peru, and host to the world class Corani Project in addition to their Santa Ana operation, both having vast upside potential. Bear Creek will have their first mine on-line (Santa Ana in 2012). There are many things that separates bear creek from their peers, most notably the speed at which BCM will go from exploration to a 20-22m ounce producer and the low capital requirements needed to bring Santa Ana to commercial production.

The Santa Ana Project – Feasibility study is currently nearing completion but due to the low initial capital requirements, Santa Ana will be in production in 2012. Though not nearly as lucrative as their flagship Corani, Santa Ana is a great first step in building taking bear creek from an exploration company to a silver mining juggernaut.

·         Internal rate return in excess of 75% due to extraordinarily low capital requirements – $51m to construct the mine and cash costs of $7.50. Currently expected to have a 12-14 year mine life with an annual production of 4.5-5.0m ounces.

The Corani Project – In addition to being one of the largest undeveloped silver mine, the Corani mine, like Santa Ana also requires minimal capital investment relative to the size and annual production (15-17m oz/year).

·         Proven Reserves – 258m oz Silver(and an additional 100m in Silver resource), 2.9B of lead and 1.4B oz of Zinc. Total silver equivalent ounces, however, up 2P reserves to nearly 500m oz. This trumps numerous top tier silver miners i.e Hecla Mining among others.

·         Sports a Incredibly Internal rate of Return (Click here to view the calculations), in excess of 50% (54%) as initial capital outlays will be less than 350m. net of Bi-products, cash costs will be approximately $1.15/oz.

·         The Initial mine life was 27 years but Bear Creek will maximize the mill throughput to reduce the life of mine to 20 years. This will increase annual production by several million ounces such that average annual production will be between 15-18m ounces.

Valuation:

·         Each share has 7.6 ounces of silver resource and nearly 3.5 ounces of proven reserves.

·         An EV/NAV ratio of .21 (at $21/oz) – fully valued is 1.

·         Cash Flow Valuation of $19/Share using a price deck of $21/ounce and a costs of capital of 13.5%.

Though Bear Creek can finance all their capital requirements and exploration budget, Bear Creek looks like a likely takeover target. To top all this off, Bear Creek latest resource update saw total resources at Santa Ana climb 39% with more drill results on the way. Drill results and Resources/Reserve updates will act as catalysts for the next year or so as the Santa Ana mine is being constructed. Keep in mind many drilling results will be coming out over the next two years at Corani, which I believe will add a substantial amount of 2p reserves and possibly guide annual production even higher. Feel free to message me for the valuation spreadsheet and internal rate of return calculations.

Short Term Price Target (6-18 months) - $10.50

 

Long term Price Target (2-3 years)- $25

My Top Takeover Canidates:

1)      Exeter

2)      Bear Creek

3)      Avion Gold 

Disclosure: long bcm.to,xra

Disclosure: long bcm

 Aside from Silver Wheaton (SLW) trading at just over $3/share back during the peak of the financial crisis, I have not seen such a potentially attractive valuation among the Royalty Companies. Sure Royal Gold (RGLD); Franco- Nevada (FNNVF.PK) will provide investors with high annual returns over the next decade, but nothing compared to the returns some miners will produce. I'm a strong advocate of investing in mining companies, but believe having one or two royalty companies should be a core part of an individual’s overall investment in this industry. Over the last two months, I have been watching two precious metal royalty companies most have yet to hear of and am very impressed with one of them in particular, personally initiating a generous core position which I look to incrementally increase throughout the next year. The other, Gold Wheaton has resolved a huge hurdle making it far more attractive given its reduced risk profile. Though I think the valuation is very attractive, much of the potential value lies on the acquisition front.

 

About Sandstorm Resources(SNDXF.PK) - A gold royalty company focusing on advanced stage or producing mines. Though they have only been operating for a basically a year and a half or so, they have already completed four royalty acquisitions. This is amazing accomplishment given they are a micro/small cap company ( <200m market capitalization ). They have an amazing management team headed by CEO Norman Watson (former CFO of Silver Wheaton ). They are very well capitalized, following an acquisition in early March, with nearly 90m of cash on hand. This gives them ample room to deploy at least 60m of their cash balance off in the near term ( as they have a bit over 100m in long term debt). Available funding will dramatically increase, however, over the year as three of their four royalty streams will come online, with the fourth expected in 2011. They can also revert back to more equity financing ( which I personally think they should do ) as they recently moved up to top tier status on the venture exchange, thus they will attract more attention. They have made it clear they are and will continue to be very aggressive on the acquisition front going forward, recently commenting they are in several advanced stage talks with various companies. 

 

Similarities to Silver Wheaton - Silver Wheaton is recognized for their superior management as they have been able to grow future peak production levels from 0 in 2004 to 45m by early 2010 ( expected to be reached in 2013-2014). But what stands out is the fact they have been able make these acquisitions on extremely favorable terms, with all in costs amounting to more or less 8.00/oz of silver with the exception of a few deals such as Rosemont. One would expect having the former CFO of Silver Wheaton as CEO of Sandstorm, acquisitions would be on comparable terms. In fact, they are currently the lowest cost producer relative to Royal Gold, Franco-Nevada and Gold Wheaton. The average cost per attributable ounce is less than $400/oz. Additionally, like Silver Wheaton, they have little tax liability, another comparative advantage to Royal Gold and Franco-Nevada. The following is a brief rundown of their royalty agreements thus far:

·         Aurizona Project - 17% of attributable gold production for LOM, which will initially produce 60k oz/year, ramping up to 80k year with cash costs of $400/oz. They also have the option to purchase 17% of the gold produced from the underground mine ( should Luna Corp decide to develop it). In this case annual gold production will increase to a range of 100k-125k/year.

·         Saint Elena - 20% of attributable of the projected 40k annual production. The kicker here is the purchase price of just $350/oz. Additionally this mine has underground potential which Sandstorm will have claim to should they develop it. This would bring total mine production to an estimated 60-70k/year.

·         Summit Mine - Sandstorm will initially receive 50% of the first 10k mined, followed by a 22% interest in this small mine. Production estimates are expected to be between 12-14k/ year. Cash costs again are at the low end $400/oz. The operator also has the right to offer Sandstorm an additional 25% interest. This is a key example of generating immediate cash flow ( indicated through the provision above). 

·         Ming Mine - Production expected to commence in mid 2011. Initially Sandstorm will receive 25% of the first 175k produced followed by 12% thereafter. Gold production is projected to be between 20-25k annually with excellent upside potential. 

 

In other words, Production levels will grow from approx 10k in 2010 to 30k by 2012 ( assuming none of the companies decide to pursue underground mines and Summit mines does not offer the additional 25% interest) or approx 36-38k assuming they do. This seems like small pickings relative to the other royalty companies but you have to put it into perspective. Investments are made in hopes of making the highest possible return given the risk involved. Sandstorm resources offers just that: When it comes to valuation, assuming a long term gold price of $1,300/oz, my valuation ranges between $1.72-$1.90/share. Of course valuations are very subjective with regards to required rate of return, LT gold price, etc, but such a price to value disconnect in the valuation mentioned above makes it worth a look.

 

Added Bonus- Sandstorm recently announced the proposed spinoff Sandstorm Base Metals and Energy whose business model will mirror that of its brother company but focus on base metals, oil & gas. Each shareholder of Sandstorm resources will receive 1 for 1 of the new company. Though it will dilute the brother company by 1/36th ( in order to give some financing to Sandstorm base metals & energy), the new company already has 500k of working capital in addition to an option on the Eagle Lake Uranium project. This will give investors two royalty companies which focus on a range of commodities.

Disclosure: Long: SSL.V, RGLD, FNNVF.PK, SLW