Is This Stock the Next Silver Wheaton?

$1,000 in Silver Wheaton 10 years ago would be worth $9,130 today. Can this company deliver similar results?

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The Motley Fool

Streaming metal companies have outperformed every major asset class for the past decade – rising twice as fast as gold prices.

If you had invested just $1,000 into Silver Wheaton (TSX: SLW)(NYSE: SLW) in 2004, your position would be worth $9,130 today and you would be collecting a 12.9% dividend yield.

If you put that $1,000 into the gold royalty company Franco-Nevada (TSX: FNV)(NYSE: FNV) in 2007, you’d be sitting on over $1,700 in profits.

But you can’t buy past performance. Today, many investors are buying these companies in the hopes of similar returns. But with the market capitalizations of both companies pushing $10 billion, neither name is likely to sustain these growth rates.

So if you want to achieve a similar result in your portfolio, you have to find the next Silver Wheaton or the next Franco-Nevada. And Sandstorm Gold (TSX: SSL) may just be the stock investors are looking for.

Could this stock be the next Silver Wheaton?

Investors love Sandstorm’s low-risk royalty business model. The company provides an upfront cash payment to miners in exchange for the right to purchase a percentage of its future production at a set price. The deal is good for both parties; the miner gets the cash to fund development costs, and Sandstorm gets to buy precious metals at a discount.

Sandstorm is positioned as an alternative source of funding for mining companies that may not be able to access capital markets. And the company is carving out a lucrative niche by targeting deals too small for bigger peers like Silver Wheaton, Franco-Nevada, and Royal Gold (Nasdaq: RGLD).

Relative to a traditional mining company, this is a much better business model. Royalty and streaming metal companies don’t have to worry about fluctuating production costs. This means they avoid the typical risks associated with operating a mine. And because streamers don’t provide operational management, these companies can build large portfolios without significant general and administrative costs.

Sandstorm Gold is only about five years old and it is already off to a better start than its larger rivals. That’s because this company already has 14 gold streams producing with more coming online early in 2014. Last year the firm’s production totalled more than 30,000 gold equivalent ounces and management expects this figure to increase by more than 50% over the next two years.

Of course, in a fast-growing resource play like Sandstone, everything comes down to financial flexibility and the quality of the management team. However, the company has a strong balance sheet with $100 million in cash and no debt. Incredibly, Sandstone has been able to put together this portfolio of streaming deals without paying any more than U.S. $500 an ounce. This means the company can generate ample cash flow even in the face of lower precious metal prices.

Chief Executive Nolan Watson is no stranger to the mining business. He was the No. 2 man at Silver Wheaton between 2004 and 2010. With him at the financial helm and guided by legendary businessman Ian Telfer, Silver Wheaton market capitalization grew from $300 million to $9 billion over seven years.

Foolish bottom line

To be clear, Sandstone Gold is one of the riskier names in the streaming metals space. While the stock trades at a discount to peers on an enterprise value to cash flow basis, this valuation is deserved because the company has more to prove. However, if Mr. Watson can deliver for shareholders again like he did at Silver Wheaton, this company could have the most upside in the group.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robert Baillieul has no positions in any of the companies mentioned in this article. Silver Wheaton is a recommendation of Stock Advisor Canada.

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