The price of gold has been experiencing a significant surge this year, reaching new all-time highs. As a result, Stansberry has once again launched their “#1 Gold Stock” pitch, prompting us to revisit the details of their tease and share the solution to help answer any questions.
While individual investors didn’t seem to actively participate in the initial stages of this gold bull market, they are likely beginning to jump in now. The usual drivers of gold’s rise, such as fear, global instability, currency uncertainty, and inflation fears (essentially concerns about currency devaluation), are all at play.
Central banks, particularly in China and Russia, have also increased their gold reserves to reduce dependence on the US dollar. This push is partly motivated by the impact of US-led dollar-based sanctions, which have isolated countries like Iran and Russia from the global financial system.
To put this into perspective, here’s how gold has performed in US dollars over the past 20 years. (The S&P 500 is shown in purple, and gold is shown in orange.) Gold has gained about 10% annually- on average—just slightly below the S&P 500’s performance during this period. However, the two tend to move in opposite directions, often zigging when the other zags.
The long-term gains in gold are often tied to “dollar weakness,” as inflation diminishes the purchasing power and value of the US dollar (and other fiat currencies) over time. However, if gold had kept pace with dollar inflation over the past two decades, it would only be priced at around $1,200 per ounce today. The significant increases in gold prices have typically occurred during times of currency instability or loss of confidence, such as during the global financial crisis and the Euro crisis. For example, during the economic crisis, gold surged as people feared financial systems would collapse, and it rose again during the Eurozone’s troubles when there was serious speculation that countries like Greece, Italy, and France might leave the euro.
Gold’s appeal as a store of value is tied to its physical qualities—it’s shiny, rare, portable, and easily divisible. Unlike paper currencies, its production is limited by how difficult and costly it is to mine, which contrasts with the ability of governments to print money at will. These characteristics have helped gold maintain its position as a value symbol across different cultures for thousands of years. That’s why it’s been considered a reliable store of value for so long, unlike other commodities or currencies that have come and gone.
Despite gold’s long-standing role, some suggest that Bitcoin could become the “new gold” in the digital age. While Bitcoin has grown over the past 20 years, its extreme volatility means it still has a long way to go in establishing trust as a store of value.
Investment newsletters like Stansberry’s often begin circulating gold-related pitches as gold prices rise. While the usual “junior gold discovery” ads have been less frequent this time, likely due to the current political climate, the “gold rush” marketing is still picking up. This particular pitch is from Tom Mustin, a “financial reporter” who, like others before him, reads a script designed to promote Stansberry’s Commodity Supercycles newsletter.
While Mustin is more of a spokesperson than an expert, his pitch for gold stocks is part of a broader trend that emerges whenever gold prices surge. So, even though the details might be recycled from past gold boom periods, it’s still a pitch worth considering, especially if you’re intrigued by gold’s current market momentum.
We aren’t exactly sure who at Stansberry is backing this investment today, if anyone, since the person behind the recommendation is no longer with the company, and the “financial reporter” promoting this pitch is essentially just a voice-over artist reading a script… but at least we can explain what the idea is. It’s also worth noting that perhaps the ad continues to air not because Whitney Tilson or the analysts involved with Commodity Supercycles are particularly fond of the pick but because it has proven effective. It’s simple and inexpensive to update the year from “202″” to”“202″”.
For whatever reason, for the sixth consecutive year, Commodity Supercycles is pushing Sandstorm Gold (SAND) as StanStansberry’s “old Play.”
And” yes, gold royalties are my favorite way to get exposure to gold…, and I’ve personally owned Sandstorm Gold for much longer than that… but it has not been a great pick. Sandstorm has consistently been one of its peer group’s worst performers since this same newsletter first touted it as the “#1 “old Play for 2019.”
So, if half of those royalty companies are trailing the gold price, what exactly makes royalty companies attractive? Why do investors pay premium prices for them? Wouldn’t simply owning gold or investing in gold miners be better?
Well, sometimes it would — particularly with gold miners, especially smaller ones, which can experience significant leverage to rising gold prices when things are going well with their operations. However, on average, gold royalty companies also benefit from rising gold prices, and they tend to be far more consistent. They rarely lose money and are generally less risky when gold prices decline.
Why is the royalty space generally more attractive than the mining sector?
Mainly because mining is a complex and often unprofitable business.
Sure, mining offers the thrill of turning dirt and rocks into gold, but it’s far from easy. It’s expensive, messy, and almost always takes much longer and costs more than anticipated.
Once a mine is up and running, and you can start generating revenue—often more than a decade after the initial discovery of a mineral deposit—you have to contend with fluctuating local taxes, changing regulations, rising costs for things like fuel and labor, broken equipment, floods, labor strikes, and other unpredictable challenges. Sometimes, just as you’ve spent tons of money building up a project, luck turns, and the mine opens right when gold prices peak and fall for a few years.
Even though big miners often talk about becoming more disciplined in each commodity cycle, they still get carried away during bull markets, overpaying for junior miners and borrowing too much money. As a result, the hoped-for profits from turning dirt into gold often disappear.
While there are some successes, even fairly consistent ones, the average large mining company could be a better business. This has been true for a long time. Since the launch of the first major gold mining ETF in 2006 (the VanEck Gold Miners ETF, GDX), you would have been better off simply buying an ounce of gold and holding onto it than relying on the performance of the companies that extract those ounces.
Generally, royalty owners experience a smoother ride than natural resource operators. They gain from rising prices without the downside risks of increasing operating costs or other operational issues. Most royalty and streaming deals are structured from initial rights that a landowner or explorer holds on a property or discovery, or more commonly today, from mine developers selling royalties and streaming rights to finance mine development.
Each royalty and streaming deal is unique, but the core idea is that you receive a share of the operation’s gross profits without taking on the ongoing responsibility for problems or costs arising at the mine. You’re simply a passive partner benefiting from the top-line revenue. This business model works well in virtually any economy sector—companies like McDonald’s (MCD) and Universal Music Group (UMG.AS, UMGNF) also generate royalties from long-term growth businesses. However, the model is exceptionally straightforward and appealing in the mining sector.
What makes royalties so powerful, especially in mining, is the double leverage that comes with having a share of the top line, even as a passive participant. Royalty financiers benefit not only from higher gold prices but also from the fact that most mines that get built end up larger than initially planned—sometimes by a significant margin.
Why does this happen? Primarily because drilling and resource definition are expensive. When a gold discovery is made, exploration often burns through millions of dollars. The goal is to drill enough to “prove sufficient reserves to justify building a mine and secure construction financing. There’s not much incentive at this point to keep drilling for years to fully understand the extent of the deposit.
The initial royalty or streaming deal is usually based on the reserves and mining plan, but it often includes any potential for expansion beyond the first stage. Once the mine starts operating and generating cash flow, miners use excess cash flow to continue drilling. The initial infrastructure is already in place, and they want to keep the mine running to generate more returns. Often, this leads to the discovery of additional gold beyond the initial plan, and the mine grows far beyond its original expectations.
That’s the “double leverage.” A well-chosen royalty project allows investors to benefit from both higher gold prices and the extended life of a mine, leading to more ounces being produced. This can exponentially increase returns over time. It requires patience and discipline, but this is how large gold royalty companies grow despite owning royalties on many projects that may never be developed.
A prime example is Pierre Lassonde’s, Lassonde’s first royalty purchase. In 1986, his Franco-Nevada bought a royalty on a small project called Goldstrike, located on the Carlin Trend in Nevada, for $2 million. Over the next few years, new operators discovered more gold at depth—far more than expected—and it eventually became one of the largest gold mines in the world. Franco-Nevada’s returns from this royalty have been staggering. Last I checked, it still generates over $25 million annually from its Goldstrike royalties. The mine has produced nearly 50 million ounces of gold and still holds at least another 50 million ounces in reserves for decades.
Goldstrike was a crucial asset in the rise of both Franco-Nevada and Barrick Gold (GOLD). Yet, as the chart below shows, Barrick has severely underperformed the price of gold (in orange) since 2007 despite owning some of the world’s largest gold mines, including Goldstrike. Meanwhile, Franco-Nevada (in blue) has soared above it all. This shows that, even with great assets, miners often underperform as investments, while royalty companies tend to thrive.
This is why investors often favor royalty stocks over gold miners—it’s the ideal situation many hope for when investing in royalty companies.
So, what’s Sandstorm’s outlook today, after years of underperformance compared to its peers in the royalty sector?
When I first invested in Sandstorm in 2010, it was an emerging company, and it quickly turned into a significant investment, benefiting from the 2011-2012 gold bull market. The company gained considerable attention when it was listed on the NYSE, led by the charismatic Nolan Watson, who had previously been the CFO at Silver Wheaton. However, after that strong start, it’s fair to say that Sandstorm faced some challenges—primarily because Watson sometimes moved too aggressively, acquiring royalties for projects that were far from production. This strategy, while ambitious, ended up diluting shareholder value. Recently, Sandstorm made two significant moves in 2022 to address the issues caused by some of these earlier deals.
The company nearly doubled in size two years ago by acquiring Nomad Royalty (NSR.TO) and another private royalty portfolio. They funded this expansion with a significant stock offering and some debt. Afterward, they simplified their business by spinning off some less appealing investments, including a 30% stake in the Hod Maden project in Turkey and a 25% shareholding in Entree Resources in Mongolia. They aimed to turn those harder-to-value assets into more traditional royalties and streaming deals, which they hoped would appeal more to investors.
While these changes have helped simplify the portfolio, they have not translated into happier investors. As a result, Sandstorm quickly became viewed as an undervalued royalty company, with a narrative of an overly ambitious CEO who overpaid for growth. Although this oversimplifies the story, and the company did face some bad luck, the perception persists. Sandstorm is working hard to change this narrative, with their investor presentation highlighting their lower valuation than peers (true) and better growth prospects (possibly genuine). Still, so far, this has yet to resonate with the market.
The deals were made when Sandstorm’s stock was already relatively inexpensive and unpopular due to investor frustration with delays in projects like Hod Maden. This created significant dilution for existing shareholders, further depressing the stock price. However, these deals also added valuable producing and near-producing assets to the company, diversifying its portfolio and improving its growth potential over the next decade. If gold prices perform well, Sandstorm could be a much larger company by 2030 than it is today.
This likely won’t happen in the near term—unless gold prices rise significantly. Like most royalty companies, Sandstorm also has older mines that either slow production or face temporary operational issues. As a result, the company is likely to see flat gold production in the next few years, meaning it will rely on improved investor sentiment or a higher gold price to perform well.
How Should We Value Sandstorm Gold Today?
To assess Sandstorm Gold’s current value, I primarily focus on cash flow from operations as the key metric for evaluating royalty companies. This approach allows for a consistent comparison across the sector. Some royalty companies achieve higher margins because they own royalties, while others in streaming deals operate with tighter margins. The critical factor is the net cash generated by royalties or streams, effectively captured through cash flow from operations. Using earnings as a valuation metric is less meaningful for these companies due to significant depletion charges. Similar to depreciation, these non-cash accounting adjustments reflect the value of mined metal that cannot be replaced, severely reducing GAAP earnings.
The general strategy involves analyzing current cash flow or projecting future numbers based on expected production from mining partners and gold price forecasts. It’s also important to account for the company’s debt, as Sandstorm’s balance sheet is weaker than many of its peers. While this isn’t overly concerning, in high-margin businesses, even minor differences can have an impact.
For 2024, Sandstorm anticipates producing 80,000 gold-equivalent ounces, with a range of 80,000–90,000 ounces expected in the following years. Growth is projected to exceed 100,000 ounces by around 2029, driven by contributions from projects like Hod Maden. Rising gold prices will also positively affect revenue, albeit with a slight lag. Higher gold prices should also enhance the margins of the company’s relatively fixed cost structure. Operating cash flow typically hovers around 80–85% of revenue, which fluctuates quarterly. Over the past four quarters, operating cash flow was approximately $140 million, which could rise to $160–170 million in 2024 if gold prices continue to climb.
If Sandstorm remains valued at a multiple of 10X cash flow from operations (CFO), as it has during recent periods of dilution and underperformance, the company’s valuation could stay near its current $1.8 billion market cap. However, if rising gold prices spark optimism across the industry and Sandstorm achieves a valuation closer to 15X or 20X CFO, its share price could begin aligning with peers. Such a shift might occur if investors regain confidence in management and their growth projects.
With 297 million shares outstanding, a $1.8 billion valuation equates to roughly $6 per share, aligning with recent trading levels. Should sentiment improve—through higher gold prices, progress on critical projects, or fading frustrations with management—Sandstorm’s stock could rise to the $8–12 range while maintaining a discount to its peers. The potential for more substantial gains exists in the event of a gold price surge leading to exuberant market valuations. For example, a 20X CFO valuation at $180 million in cash flow could bring the stock to around $12 per share.
Sandstorm’s balance sheet does present some challenges, notably $40 million in annual interest expenses, which weigh on cash flow. Adjusted for these expenses, the company trades at about 15X CFO minus interest, compared to competitors valued at over 20X. Despite this, Sandstorm remains significantly undervalued relative to its peers.
Historically, 20X operating cash flow has been a reasonable benchmark for gold royalty companies over the past two decades, representing a 5% cash flow yield. While this is a premium valuation compared to other industries, the potential upside from rising gold prices and the resilience of well-managed royalty companies justifies it.
I remain invested in Sandstorm Gold, optimistic about its strategy and growth potential. CEO Nolan Watson has emphasized that much of the company’s future growth is already embedded in its portfolio, reducing the need for aggressive acquisitions. However, risks remain, including the potential for disappointing decisions or unforeseen challenges.
Although I hold a significant position in Sandstorm, I will likely add more if its valuation becomes too attractive to ignore. Among larger royalty companies, Royal Gold (RGLD) has long been a favorite of mine due to its steady growth. It, along with Triple Flag Precious Metals (TFPM), has occasionally traded below the 20X CFO threshold, though recent gold price increases have elevated most valuations above this level.
Historically, gold royalty companies’ valuation multiples have risen sharply during gold bull markets. For instance, Sandstorm’s valuation jumped from 10X CFO to over 20X in less than a year during the 2016 gold rally. Similar trends occurred in mid-2020 during the pandemic-driven gold surge. As investor enthusiasm grows, these valuations may continue to climb, with Sandstorm positioned as one of the most attractively priced players in the sector.
This analysis isn’t a thorough comparison—it doesn’t account for the impact of Sandstorm’s debt. To confidently invest in and hold companies like this long-term, you must closely examine their portfolios, projections, and the key projects that drive their performance. Most major royalty companies rely heavily on a few standout “tentpole” projects that significantly outshine the rest. If gold maintains an average price well above $2,500 per ounce this year, these companies are likely to see strong growth in cash flow, which could translate into even higher stock valuations.
Conversely, the situation could become dire if gold drops to around $1,000, a price near the lowest level of the past decade. Many mines might scale back production, and new projects could be shelved, reducing the volume of gold royalty companies receive and the price per ounce. However, as they did during the 2013-2015 downturn, these companies will likely endure, keeping operations running while waiting for better times.
A primary concern with Sandstorm is the potential for a significant gold price crash soon before they can meaningfully reduce their acquisition-related debt. Although they’ve already repaid about 25% of the debt incurred in 2022 and are positioned to continue making substantial payments over the next few years, such a downturn could pose challenges. If gold enters another bear market soon, this debt could become heavier than most royalty companies carry. However, this risk is also part of why Sandstorm trades at a discount compared to its peers.
Reflecting on my strategy, I’ve noticed a tendency to favor undervalued assets rather than paying a premium for higher-quality ones. This approach has had mixed results. For example, my investment in Royal Gold (RGLD) has performed well since I began buying it, but Sandstorm (SAND) has yielded only a modest 5-6% annualized return, dragging down the overall performance of my portfolio.
That’s my perspective as we navigate the current gold market. Stansberry has again promoted Sandstorm Gold as its “#1 Gold Stock” for the fifth consecutive year. As Irregulars know, I’ve ventured into speculative gold investments, including shares in a small, emerging royalty company. However, Sandstorm and Royal Gold remain central to my gold equity portfolio. Your strategy may differ, and I’d love to hear about it—feel free to share your thoughts in the comments below.
