Seymour Schulich, the founder of Canadian gold royalty company Franco-Nevada Mining Corp. (TSX: T.FNV, Stock Forum), once described mining as a “mug’s game.”
Not for him the risky process of raising hundreds of millions for mining projects that often struggle under the weight of cyclical commodity prices.
It is a sentiment that could easily be shared by Nolan Watson, the 33-year-old President and chief executive officer of Sandstorm Gold Ltd. (TSX: V.SSL, Stock Forum), and its sister company Sandstorm Metals & Energy Ltd. (TSX: V.SND, Stock Forum).
Like Franco-Nevada, Sandstorm doesn’t require its employees to don hard hats and dig metals out of the dirt.
Rather it earns its keep by providing mining companies with up front financing to fund the cost of exploration drilling or mine development. In return, Sandstorm gains the right through agreements known as streaming to buy a percentage of the metals over the life of the mine at a fixed price.
It also has a small portfolio of royalties that permit the company to take a percentage of the profits and revenue from operating mines.
So instead of digging for metals, Sandstorm employees spend their time looking for opportunities to invest in companies with good mining assets and competent management teams, who can deliver metal streams to Sandstorm.
As large swaths of the mineral exploration sector struggles to raise money, there is no shortage of opportunity.
“Our team is getting calls every day,’’ said Watson, during a telephone interview with Stockhouse.
A commerce graduate from the University of British Columbia, he learned his trade while working at Silver Wheaton Corp. (TSX: T.SLW, Stock Forum) from 2005 to 2008 under the direction of Ian Telfer, who is now Chairman of Goldcorp Inc. (TSX: T.G, Stock Forum) (NYSE: GG, Stock Forum).
“I was the first guy they hired to help run Silver Wheaton and I was the CFO for a number of years,’’ said Watson.
He and [Sandstorm executive vice-president] David Awram left in 2008 with the intention of starting a company that would invest in a portfolio of base metal and bulk commodity streams.
However, when stock markets crashed in the wake of the Lehman Bros meltdown, he found that he could not raise the necessary investment capital.
“So we launched a gold streaming version of [Silver Wheaton] instead.’’
Since Watson became CEO in September 2008, Sandstorm has assembled a portfolio of 10 gold streams and three royalties. The most important of those is the gold purchase agreement with Luna Gold Corp. (TSX: T.LGC, Stock Forum) and its Aurizona gold mine in Brazil.
Luna is ramping up to 125,000 ounces of gold production per year. “We get 17% of that production at $400 an ounce. At the current gold price, we should be making about $20 million per year on that stream for some period of time,’’ he said.
Outside of that, Sandstorm Metals has agreements with companies such as Silvercrest Mines Inc. (TSX: V.SVL, Stock Forum) and its Santa Elena mine in Mexico, Metanor Resources Inc. (TSX: V.MTO, Stock Forum) and its Bachelor Lake mine in Quebec, Brigus Gold Corp. (TSX: T.BRD, Stock Forum) and the Black Fox mine in Ontario and Colossus Minerals Inc. (TSX: T.CSI, Stock Forum) and the Serra Pelada mine in northern Brazil.
In 2012 the company reported record cash flow of $37.6 million, and a net profit of $21.9 million on 33,514 ounces of gold sales.
Attributable production for 2013 is targeted to be 33,000 to 40,000 gold equivalent ounces from seven active mines, rising to approximately 70,000 ounces by 2016.
But as growth forecasts are based on the company’s current portfolio of gold streams, Watson wants the company to get bigger.
With roughly $200 million available in cash and lines of credit, it is clear that he has the means to achieve his goals.
“We are very much in the acquisition hunt for more plain vanilla streams,’’ he said. Our whole team is focused on trying to find streams in politically stable jurisdictions from mines that our ready to be built.
Spun out three years ago, Sandstorm Metals is at a much earlier stage in its development and currently has four commodity streaming agreements.
They include an agreement with Donner Metals Ltd. (TSX: V.DON, Stock Forum) on Xstrata Canada Corp.’s Bracemac McLeod mine in Quebec, a zinc mine with a by-product copper stream that is expected to deliver its first cash flow by the end of this year.
Under the agreement Sandstorm Metals can buy 24.5% of the copper production at 80 cents a pound, unless the spot price of copper falls below$2.75 a pound. In that case, the purchase price drops to 55 cents.
“The team is spending a lot of time trying to find good, smart acquisitions for it,’’ Watson said. “We really do want to grow aggressively now.”
Sandstorm Gold was trading this week at $9.62, leaving Sandstorm with a market cap of $853 million, based on 88.7 million shares outstanding. The 42-week range is $14.99 and $6.95.
Sandstorm Metals traded at 42 cents, leaving it with a market cap of $140 million, based on 333.4 million shares outstanding. The 52-week range is 60 cents and 24.5 cents.