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Gold Prices Around $1500/Oz USD Not Helping Primary Gold Miners As Much As Anticipated

|About: Sandstorm Gold Ltd. (SAND), Includes: AUY, FNV, MMX, OR, RGLD, WPM
Summary

No major $100+ million dollar equity financings to help repair balance sheets of producing miners after botched $150 million dollar New Gold bought deal.

Very few new mines can be built at current prices because of lack of financing available.

Largest precious metals royalty and streaming companies will benefit from this price correction or sideways movement with best margins and helping producing copper, gold and silver miners repair balance sheets.

Industry wide, gold miners are struggling to maintain current production levels. Same for primary silver miners. Many primary gold miners have delayed for years large capital expenditure (capex) bills and many of them can barely afford or cannot afford the capex bills.

This is why Yamana Gold (AUY) sold their best producing, best margin, most economic copper and gold mine, Chapada. Yamana Gold did not have a good enough balance sheet to afford the capex bill of $220 million or so to upgrade Chapada. And in the near future, Yamana Gold will also have to sell their 50% Agua Rica stake because they cannot afford the capex bill on that either.

What this means is very few new gold mines will be funded (the only exceptions will be very high grade and low cost mines like Fruta Del Norte and Hod Maden or smaller gold mines with existing infrastructure already in place to lower construction capex like Americas Gold & Silver's Relief Canyon) until gold prices stay well above $1500/oz in US Dollars.

Gold prices would probably have to stay above at least $1600/oz before more than a tiny percentage of new gold mines can get built. Many institutional investors are not believers in this gold rally. At least not yet. Although some contrarian smart money investors like Sam Zell, Mark Mobius, and Jim Bianco, who I would not consider gold bugs, have disclosed that they are buying physical gold on dips.

The industry is talking about peak gold but it doesn't mean we're running out of gold to mine. The miners are running out of gold with AISC below $1k/oz to mine and with grades industry wide falling that means that costs will eventually rise again even if oil prices stay in a bear market. "Peak Gold" is a function of price. The higher gold goes in price, the more new mines that could be economic.

But, even producing gold miners right now cannot raise $100 million dollars or more to fix their balance sheets. I have not seen a PR of a gold miner announcing they raised that much since the New Gold bought deal for $150 million went bad in August 2019 and the Canadian investment banks syndicating that deal had to hold onto $50 million of the shares for 2 weeks before they could sell them for breakeven.  This has spooked all of the Canadian investment banks that were thinking about larger equity financings for other miners.

The current gold and silver market conditions should benefit cash flowing precious metals royalty & streaming companies like Franco Nevada (FNV), Wheaton Precious Metals (WPM), Royal Gold (RGLD) Sandstorm Gold (SAND) and Maverix Metals (MMX) in the long run by adding quality long term deals for more long term cash flows if management teams are prudent with not over leveraging their balance sheets, are careful about counter party risk on new deals and do not drastically deviate from the royalty & streaming business model like Osisko Gold Royalty (OR) has decided to do. 

What Osisko Gold Royalty has decided to do in the last few months is expose shareholders directly to mining risk and maintenance capex bill risks if the gold mine that Osisko now plans on building by itself does not come in on time and on budget with mine construction and also large surprise maintenance capex bills. Royalty and streaming company shareholders are normally protected from direct exposure to these risks as the risks are limited in a number of ways. My educated guess and why shares of Osisko are down so much is that many former shareholders are uncomfortable with the risks I just outlined.

While Osisko does have assets that are pretty undervalued right now, I am personally not comfortable with all of the risks that management has added to their growth pipeline in just the last few months and I would like to see Franco Nevada attempt a hostile takeover with their own shares and either spin out or sell off the mines (to mid tier gold miners) that Osisko has bought.

If this gold price correction continues or gold goes sideways for awhile, the precious metals royalty and streaming companies I already mentioned have the best margins and a portfolio of diversified cash flow assets to use for future growth. Right now, the growth opportunities for royalty and streaming companies are in helping producing copper, gold and silver miners repair their balance sheets and taking an immediately cash flowing gold or silver stream of reasonable size without destroying the long term economics of the mine. The best of these deals yet to come will also focus on future long term exploration upside.

Disclosure: I am/we are long SAND.