Junior Miners Better Off With Streams Over Debt: Sandstorm CEO

POSTED ON August 26, 2014 BY Tommy Humphreys
CATEGORY Sandstorm,

Nolan Watson (Sandstorm Gold photo) will be speaking at our Subscriber Summit in Vancouver - Oct 9, 2014 (Details)

GoldInvestingNews.com has an interview out with Nolan Watson, 34, CEO of Sandstorm Gold (TSX:SSL, NYSE:SAND), an approx. $750 million market cap gold streaming and royalty company based in Vancouver, Canada with assets around the world.

Mr. Watson was the first employee brought on to the newly formed Silver Wheaton after Chairman Ian Telfer decided to spin out Goldcorp's undervalued silver assets into a separate company. At 26 Watson was the youngest CFO of a company listed on the New York Stock Exchange. Silver Wheaton quickly became the world's largest silver company.

Watson left Silver Wheaton to found Sandstorm Gold in late 2008, and amazingly he raised over $40 million during the depths of the financial crisis, in March of 2009 as I recall for his gold streaming venture. His firm is the only streamer that was created from a standing start, without a royalty and spin out from a parent company.

"In the six years since the start of Sandstorm, the average gold mining company in the industry is down probably 40 percent. Sandstorm is up probably about 200 percent, but it certainly did not happen at the beginning of the story until we got cash-flow," Nolan says.

He reflects that Sandstorm Metals and Energy , recently acquired by Sandstorm Gold, was unsuccessful in the base metals sector, because they didn't have enough scale and capital required for base metals projects, which are typically massive.

"Base metals mines tend to be huge, earth-moving operations with CAPEX in the high hundreds of millions and usually billions of dollars. Thus, in order to be a relevant financial provider to a base metals mining company, you have to be able to offer them huge streams. Historically, there hasn’t been anyone who has been able to start up a base metals royalty company with $3 billion in cash to start to actually make a true and honest success of it. That is going to be a very high hurdle for anyone wanting to start. We tried to do it earlier with Sandstorm Metals & Energy, but the reality is that you need billions of dollars to make that business model work."

Watson presented his streaming business model, warts and all.

"All Sandstorm has is a right to purchase a certain percentage of what they produce, whatever that production may be. If production is lagging during a period of time, we’re purchasing less gold under the stream. Generally speaking, we try to work with them to raise the capital one way or another to get the mine up and running. Sometimes it doesn’t work. Sometimes the mining company never gets there and the mine fails — their shareholders lose money and so do we."

He said his deal criteria includes assets with robust economics, low cost operations, and exploration upside of at least double or triple. Sandstorm also prefers companies with debt free balance sheets.

"I believe that true debt is a very bad idea for a one-asset company. That’s because if you have any technical problems, or any permitting problems on that one asset, and you can’t pay back your debt, you violate your debt and go insolvent immediately. If you are a one-asset mining company, you need to have financial providers whose interests are aligned with yours. The most aligned are equity investors, and the second best would be streaming and royalty providers. And you need to finance with a combination of those two things."

"Debt, I just think is a bad idea. However, I think debt has a place in the market for the right company. I think it makes a lot of sense for Rio Tinto (LSE:RIO,NYSE:RIO,ASX:RIO) or BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT) or Goldcorp (TSX:G,NYSE:GG) to have debt on their balance sheet, but I don’t think it makes sense for the junior mining companies."

Here's the full interview: Sandstorm Gold’s Nolan Watson on the Future of Streaming and Royalty Companies | Gold Investing News

FYI Nolan is speaking at our October 9, 2014 Subscriber Summit in Vancouver (Details and registration).

Here's our own interview with Nolan, taped 2 years ago this week, easily one of our best ever.

Tommy Humphreys

Tommy Humphreys, 30, is an entrepreneur, investor and writer from Vancouver, Canada. He founded CEO.CA, a popular junior mining and Canadian finance blog, in 2012. He has been the president of Pacific Website Company Inc., a private marketing and web development company, since 2007. Tommy has authored articles for Globe and Mail, Financial Post and others. He speaks at select conferences. Reach him by email: tommy@ceo.ca. Follow him on Twitter: @TommyHump More →

Twitter: @tommyhump

tommyhump@gmail.com

Tommy Humphreys

Twitter: @tommyhump

tommyhump@gmail.com

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