Sandstorm's Exploration Strategy Outclasses Its Peers

Aug. 08, 2021 9:28 AM ETSandstorm Gold Ltd. (SAND), SSL:CA16 Comments
Ben Car profile picture
Ben Car


  • Exploration upside and pending Hod Maden updates make Sandstorm attractive.
  • Sandstorm's exploration strategy appears to be working.
  • Material Hod Maden updates could be closer than people think.

Gold prices soaring in a bullish market. Green arrow going up over gold bars. Concept digital 3D render.
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Exploration Upside And Hod Maden Updates Make SAND Attractive

Sandstorm’s strategy of acquiring assets with good upside exploration potential appears to be working. This trend has been established even without Hod Maden up-and-running and only stands to accelerate when that asset comes online. With several Hod Maden project updates expected in the coming months, I suspect the chance to buy Sandstorm at the current price is not likely to last very long.

Exploring The Exploration Upside Argument

In a video presentation posted in February of 2021, Sandstorm CEO, Nolan Watson, said, “. . . One of the things that we think differentiates Sandstorm is our extreme focus on exploration upside. We really believe that one of the ways to get above-average risk-adjusted returns to shareholders is to invest in projects that have enormous amounts of exploration upside because, as a streaming and royalty company, you get that exploration upside for free.”

I wanted to try to glean from financial metrics if Sandstorm’s strategy was bringing value to their shareholders. Below is a chart that compares gross profit margins for four of the five largest precious metals royalty and streaming companies over the last ten years. Included in the comparison are Sandstorm Gold (NYSE:SAND), Franco-Nevada (FNV), Royal Gold (RGLD), and Wheaton Precious Metals (WPM). I excluded Osisko Gold (OR) because they were founded only seven years ago. I chose to look at gross profit margins for this analysis. Sandstorm is represented by the orange line near the bottom.

(Source: Seeking Alpha)

Because the number of employees at royalty and streaming companies is low and doesn’t really change over time, and because of the relative simplicity of the business model, the main cost for more mature companies in the space largely boils down to what the gold they sell costs them to acquire. Rising gross profit margins over time suggest to me either that long-held assets are coming online at a time when gold prices are substantially higher than they were at the time of the acquisitions, or that mining companies are discovering more ounces on projects that a royalty company has a claim to. You might argue that it could also mean that assets are producing for longer than expected, but I consider this to overlap with discovering gold on existing properties. Of the four companies considered above, the two youngest companies, Sandstorm and Franco-Nevada, demonstrated the best performance in this regard, which suggests that margins are more likely changing as a function of gold being discovered and not as a function of long-held projects coming online.

Over the last ten years, Sandstorm improved its gross profit margin by 8%. The next best performer in this measure was Franco-Nevada, who expanded by only half a percentage point during the same stretch. Wheaton and Royal Gold both contracted in this regard. The Hod Maden project, which is expected to feature fantastic all-in sustaining costs of $374 when up-and-running, is set to propel gross profit margins even higher for Sandstorm in the future, relative to their peer group.

For context, it’s worth considering the gold price over the last ten years. Notice how the wide price range had only a muted effect on the margins of the four companies considered above over the same period. I think this is a testament to the business models that underpin the mature royalty and streaming companies, who enjoy comfortable margins even when the gold price is low.

(Source: Seeking Alpha)

Hod Maden Speculation

Because Hod Maden is expected to have such a large positive impact on Sandstorm, and because the mining industry is risky in general, positive news about the Hod Maden project moving forward is likely to significantly move Sandstorm’s share price.

In an interview for Bloor Street Capital’s Precious Metals Royalty Conference, Sandstorm CEO, Nolan Watson, was asked a question about expected news flow for the back half of 2021. He said, “. . . We’ve got a number of our development assets that are going to be moving forward, probably the most significant one of which is Hod Maden. That’s a big piece of our growth going forward. It’s an asset in Turkey. I think right now the market is not pricing it into our stock and assuming that the asset never gets permitted and never moves forward and never gets built.” He continued, “I think the catalysts you’re going to see this year, as related to that asset: I think there’s going to be an EIA granted by the government, I think there’s going to be a feasibility study put out by Sandstorm, I think they are going to start construction of their long lead items including a road, I think they’re going to work the EPCM contract, and I think all of that is going to happen in the last half of this year. And so I think that will be a major catalyst for Sandstorm stock prices if all of those things happen and I do believe they all will happen this year.”

Roughly 174,000 people live in Artvin, Turkey, where the Hod Maden project is located. If we consider five-year Google search trends for the words “mining” and “madencilik”, the Turkish word for “mining”, and we only consider searches that occurred in Artvin, we can see an uptick of activity concentrated over the last six months and a large recent spike in July.

(Source: Google Trends)

I would expect activity tied to the development of the Hod Maden mine to ramp up leading to the feasibility study and the EIA announcement. My thinking is that Lidya Madencilik would be eager to bring Hod Maden, a world-class asset, into production as soon after getting the green light to do so as possible, and would start calling around early to arrange to have the construction work done on the mine. In other words, I suspect that the change in search volume in Artvin for mining-related terms improves the likelihood that the Hod Maden project is near to releasing major milestone announcements and moving forward with construction.


Hod Maden developments are watched closely because it’s an important asset for Sandstorm. If the project hits setbacks that delay the production timeline, there is an opportunity cost to shareholders who have to wait longer to realize Hod Maden-linked gains. It’s worth noting, too, that Sandstorm’s expanding gross profit margins might not be explained by something that is core to their strategy, but rather something I haven’t accounted for that may reverse moving forward.

This is probably a good spot to remind my readers that the population of Artvin is fairly small. Recent searches in Artvin for mining-related terms could easily be due to a range of things that aren’t related to the construction of Hod Maden. It wouldn’t take much search traffic tied to an unrelated inquiry to send a false signal.

Bring It All Together

This article doesn’t account for other catalysts that I believe Sandstorm will benefit from, including a potentially higher gold price over the next two years. Still, I continue to find reasons to admire Sandstorm’s business model. Nolan Watson doesn’t think Hod Maden is currently factored into the SAND stock price now, which suggests that bad news might have limited downside risk. I suspect that Sandstorm’s demonstrated ability to expand gross profit margin without Hod Maden, and the fact that they own many streams and royalties, further limits long-term downside risk. I also think the Hod Maden project is less risky than an average gold mine for several reasons, including its exceptional gold and copper grades. Watson has hinted that the company is close to paying a dividend, which may suggest that SAND is a good long-term option for a Roth IRA account.

This article was written by

Ben Car profile picture
I am not a professional investor. I'm just a normal-ish guy who 1) can handle thinking about numbers and systems for a long time, 2) has intermediate programming skills, 3) realizes he has to make good decisions about finance for the well-being of his family as he gets older, and 4) can become obsessed with certain things from time to time. I subscribe to the basic concepts that 1) the Federal Reserve is worth watching closely to guide investment decisions, 2) at current the Fed is somewhat cornered into keeping interest rates low and accepting relatively high inflation for a while, 3) candlestick charts, and "head and shoulder" patterns don't really pass my gut check as being reliable indicators, 4) many of the financial talking heads don't pass my reasonability standard and have far too short an investment timeframe, 5) AI offers a beautifully logical system for understanding large amounts of data, which I increasingly rely on to guide long-term investment decisions, and 6) I do my best, but I realize I am just as foolish as the next guy.

Disclosure: I/we have a beneficial long position in the shares of SAND, FNV, WPM, RGLD, OR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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