Sandstorm Bets on Buying Not Finding Gas, Gold

Sandstorm Bets on Buying Not Finding Gas, Gold
Sandstorm Gold Ltd. CEO Nolan Watson says the price of bullion will extend its upward trend as long as the global economy stays mired in the aftermath of the 2008-2009 economic crisis. Photographer: Paul Taggart/Bloomberg

Nolan Watson, whose Sandstorm Gold Ltd. has risen five-fold by buying and selling gold rather than mining it, says his smaller company focused on base metals and energy has even more growth potential.

Watson co-founded Sandstorm Gold to buy bullion from mining companies in so-called streaming deals that pay in advance for a percentage of output at a discounted fixed price. He then sells the gold to reap the spread between the purchase price and the spot price. Watson set up Sandstorm Metals & Energy Ltd. in 2010 to apply the same financing model for companies in non-precious metals, oil and gas.

“I firmly believe it will be the larger of the two entities in the long run just because the space is so much larger,” Watson, 33, said in an Oct. 25 interview at his Vancouver office. “The companies are bigger, the mines are bigger, there’s more of them and we’re going to take advantage of that.”

As the cost of building mines and developing petroleum deposits soars, Watson is positioning the Sandstorms as alternative sources of funding for natural resources companies that may not be able to sell debt or equity.

Watson is developing a lucrative niche by carving out deals too small for heftier peers such as Silver Wheaton Corp., Franco-Nevada Corp. and Royal Gold Inc., said Ian Armstrong, co-founder and chief operating officer of New York-based Clear Harbor Asset Management LLC, that owns shares in both of Watson’s companies.

Youngest CFO

“We have 100 or 200 mining companies come through our offices every year and the source of funding for those companies just isn’t there right now,” Armstrong said in a phone interview. “That’s a fantastic runway for companies like the Sandstorms.”

Three-month implied volatility, a measure of expected volatility in the stock over the next three months, has risen from a low of about 30 percent on Aug. 17 to 46 percent at the end of last week.

The shares have more than doubled in the past 12 months on the Toronto Stock Exchange’s Venture bourse for a market value of C$1.18 billion ($1.18 billion), compared with a 20 percent drop in the junior exchange’s 418-member composite index and an 18 percent decline in the broad Standard & Poor’s/TSX Global Gold Index. Sandstorm fell 1 cent to C$13.65 at 4 p.m. in Toronto. It has soared from C$2.78 when Watson was appointed CEO in 2008.

Brazil Mine

Armstrong attributes Sandstorm Gold’s success to Watson, who said he became the youngest chief financial officer of a multi-billion-dollar company listed on the New York Stock Exchange when the then 26 year old was appointed CFO of Silver Wheaton, North America’s largest metals streamer with a market value of more than C$13.9 billion.

Watson is chief executive officer of Sandstorm Gold and the metals streamer. His 1.1 percent stake in Sandstorm Gold is worth C$12.7 million, according to data compiled by Bloomberg.

“We have incredible confidence in him and his team,” Armstrong said. “Being on the smaller side, they have the ability to be more nimble and with the sister company -- Sandstorm Metals -- they have the ability to look at multiple streams.”

Last month, the Vancouver-based companies said Sandstorm Gold agreed to buy gold and platinum from Toronto-based Colossus Minerals Inc.’s Serra Pelada mine in Brazil while Sandstorm Metals also acquired a palladium stream at the same project.

The deal came after Sandstorm Gold raised C$150 million selling shares to banks and brokerages including Casimir Capital Ltd. Watson’s in no hurry to deploy the cash.

Capital Costs

“Our goal is to only do good deals and there may be years in the future where doing only good deals means there may be years that we don’t do any,” said Watson, sporting a neatly trimmed reddish beard.

Those deals involve high-quality resource projects under development by small companies that have a high cost of capital that will ultimately translate into out-sized profits for his companies, Watson said.

“We don’t want to be a lender of last resort,” he said.

Watson says the price of bullion will extend its upward trend as long as the global economy stays mired in the aftermath of the 2008-2009 economic crisis.

“As long as there’s quantitative easing, central banks printing money, or other fundamental things that will weaken currencies, gold goes up,” he said.

A higher gold price may help keep Sandstorm Gold’s share price aloft, shielding the company from being swallowed up by one of its peers, Watson said.

“Our goal is to trade at valuation multiples similar to the other streamers so it just doesn’t make economic sense for any of them to take a run at us,” he said. “The risk reward wouldn’t make sense.”

Not Applicable

Sandstorm Gold has never paid more than $500 an ounce for gold and typically sells its share of incoming production within two weeks, Watson said.

Prospects for growing Sandstorm Metals to be bigger than the gold company hinge on how much time Watson and his 15 employees can devote to the little sister, said Eric Winmill, a Toronto-based analyst at Casimir.

“As they turn more and more attention on Sandstorm Metals, I can only think that they can eclipse Sandstorm Gold,” Winmill said by telephone. “Nolan has tremendous support from his institutional and retail investors.”

Sandstorm Metals may not have what it takes to outpace the gold company, said Clear Harbor’s Armstrong.

“I don’t think the model is quite as applicable in the non-precious metals space” because those companies have more access to traditional funding, Armstrong said. “We’re disproportionately interested in precious metals streaming companies.”

Watson said amid the gold company’s success, Sandstorm Metals has stumbled on ill-timed bets on “a bunch” of natural gas and metallurgical coal projects.

Sandstorm Metals rose 5.2 percent to 51 cents on the venture exchange, for a market value of C$162 million. It has risen 52 percent this year.

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