All That Streams Is Not Silver
J. Keith is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Silver Wheaton's (NYSE: SLW) success is known to many investors, continuing as a strong investment in gold's shiny cousin. Nolan Watson and David Awram both were a part of SLW during its early years. In fact, at only 26, Nolan became the youngest multi-billion dollar company CFO listed on the NYSE. It seems that young Nolan found his niche.
Seeing streaming opportunities elsewhere, he, along with David, helped launch two more companies, Sandstorm Resources (Sandstorm Gold; (NASDAQOTH: SNDXF.PK), and Sandstorm Metals & Energy (NASDAQOTH: STTYD), both in Vancouver as well.
Sandstorm Metals & Energy spun off of Sandstorm Resources in April, 2010 in an effort to keep the gold pursuits of Sandstorm separate from other opportunities. In effect, Sandstorm Resources divided into Sandstorm Gold and Sandstorm Metals & Energy.
At this point the performance of Sandstorm Metals & Energy is difficult to gauge. Like SLW, it has low overhead. But will its pursuits result in the same type of performance we'd expect from precious metals?
The 2011 Annual Report is promising. Here are the highlights.
- The Company has over $40 million in cash with which to pursue commodity streaming transactions. In addition, Sandstorm has minimum cash flow guarantees from its partners totaling $80 million. The minimum cash flow guarantees and cash on hand totaling $120 million positions the Company well in the current market.
- The Company recorded an impairment charge on the Royal Coal assets in the amount of $14.6 million. With the recognition of this impairment charge on Royal Coal assets, the remaining carrying amount will not be considered material to the Company's operations going forward and will therefore, not require further public disclosure.
- On March 18, 2011, the Company entered into an Energy Stream agreement with Terrex Energy Inc. to purchase 25% of all oil and natural gas for the life of the Two Creek Jurassic A property and for five years of the Two Creek Jurassic B property and 15% of all oil, natural gas and natural gas liquids from the Strathmore property for per unit payments of C$15.00 per barrel of oil delivered and C$1.00 per 1,000 cubic feet of natural gas delivered. This stream marks the Company's entrance into the energy sector and a diversification of commodity exposure within a strong portfolio of stream agreements.
- On July 12, 2011, the Company entered into a Copper Stream agreement with Donner Metals Ltd. to purchase 17.5% of all copper for the life of mine at the Bracemac-McLeod Property. Under the agreement, the Company will purchase copper for per pound payments equal to the lesser of $0.80 per pound of copper and the then prevailing market price of copper. This stream marks the Company's entrance into the base metals sector and continues the Company's diversification of commodity exposure within a strong portfolio of stream agreements.
- On July 13, 2011, the Company entered into an Energy Stream agreement with Thunderbird Energy Corporation ("Thunderbird") to purchase 35% of all natural gas for the life of the Gordon Creek Property. Under the agreement, the Company will purchase natural gas for per unit payments of $1.00 per Mcf.
- On August 3, 2011, the Company completed an equity financing for gross proceeds of C$48.8 million ($51.4 million).
- In December 2011, the Rosa Mine achieved commercial production and commenced shipments of cleaned coal to customers in the coking coal and activated carbon markets.
- On February 14, 2012, Sandstorm and Thunderbird agreed to amend the natural gas purchase agreement whereby all minimum cash flow guarantees and drilling commitments at Gordon Creek will be deferred by one year. As consideration for this deferral, in March 2013, Thunderbird will issue to Sandstorm $2.55 million of Thunderbird shares at a deemed price equivalent to the 50 day volume weighted average trading price prior to issuance. In addition, the US$10 million that Sandstorm was to remit to Thunderbird in May 2012 will now be remitted in May 2013.
Their model is fairly simple, requiring minimal staff and low overhead. The major expense is securing the rights to purchase commodities.
Here's how it works:
- They work out an agreed amount that they're willing to pay to accomplish two objectives
- Add investment dollars to the project
- Secure the right to purchase all or a set percentage of specific commodities
- Purchase commodities as they are made available
- Sell commodities on the market
By following stringent guidelines they minimize risks. For instance, they don't enter into projects until they're at an advanced stage of development or already in operation. In other words; no startups. So far they've been able to secure rights to purchase commodities for the life of each of the nine projects they've invested in (a tenth, Two Creek Jurassic B, is part of a larger agreement and only lasts five years). Production costs are examined carefully in order to discern whether or not they're a candidate. Only those who are able to keep production costs low are considered. And they don't stop there. Management is examined as well as ability to expand on current projects.
The numbers from 2011 are encouraging:
- Profit per ton of coal ~$11 (48,961 tons sold)
- With oil price fluctuations, price per barrel averaged around $81. With costs ~$15/barrel, profit/barrel is ~$66 (11,935 total sold, with first barrels sold in Q2).
The challenge with this company is its youth. But that's what offers opportunity as well.
Having just started in 2010, there is no expectation that profits would be realized immediately. And comparing 2010 figures to 2011 figures is futile. However, as the 2011 numbers are tallied, it's apparent that inflows are growing substantially. Second quarter assets totaled $92 million, with third jumping to $138 million and fourth coming in at $126 million. Furthermore, the Sandstorm Metals & Energy posted its first quarterly profit in the third quarter, $371,000 (compare to 2Q -$549,000 and 1 Q -$279,000), though losses of $12.7 million were incurred for Q4. It must also be realized, however, that this startup had no income at all until the 1Q, 2011.
So what should we expect from this young company? It's a tough call with a startup. They seem on the right track, but a sharp drop in commodities prices could certainly offer them some challenges. A strong drop in the fourth quarter didn't help. But they explain the reasons in the annual report.
For a more confident investment, perhaps it would be best to watch them through 2012. On the other hand, more war in the Middle-east could cause oil prices to shoot through the roof. In such a case, this little upstart might start sailing. That could be a fun, and profitable, ride.
Whether you want to jump into this company or not depends on your particular goals, portfolio and what you're willing to put on the line for a young company like this. Having opened to the public in the summer of 2010 at $0.55/share, prices soared to over $1.20 during December, 2010 and January, 2011. However, it looks like the excitement has ended, with prices drifting from $0.60 in early 2011 to current levels around $0.40.
With the record of the current management and low overhead, if you have the stomach for a company like this, it might be a good time to jump on for the ride. Even a modest investment could return some nice rewards. And it's currently between its 12 month high of $0.66 (7/25/2011) and low of $0.25 (10/28/2011).
For the wary investor, I'd say let this one sit, but keep it on your radar. If they're posting profits for the next four quarters, next year at this time might be the time to jump on board.
I'm not big on penny stocks, and wouldn't have looked at this if not for the tie with Silver Wheaton. Management has experience and a good, proven, model. Also, there are no peers, i.e. no competition.
For the adventurous investor, Sandstorm Metals & Energy (OTC: STTYF.PK, TSX-V: SND) is attractive at current levels. Below $0.35 might call for a larger position, though I wouldn't expect to see $0.25 again. If you want to make a quick buck, sell at around $0.50 - $0.60, though I'd consider this a long ride. Consider Silver Wheaton; at $30 today, those who stuck it out with SLW at $5, though they could have doubled their money within a year, are happy they held.
For your prosperity,
J. Keith Johnson
The Gold Informant
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