Is it Time to Buy This Precious Metals Streamer?

A combination of weaker gold and some disappointing results saw the market heavily mark down precious metals streamer Sandstorm Gold (TSX: SSL)(NYSE: SAND) during August to see its down by almost 21% since the start of 2018. This decline in value is roughly triple the 7.3% lost by gold over the same period. While higher interest rates and a firmer U.S. dollar are weighing on precious metals stocks, this has created an opportunity for contrarian investors, especially when Sandstorm’s latest results are considered.

Now what?

Sandstorm owns a portfolio of 188 royalties across a globally diversified selection of gold, silver, base metals, and diamond mines. This is an important attribute to note, because it means that unlike smaller gold or silver miners, it is not dependent on a single or small number of operating mines to generate earnings. That key dependency risk is highlighted by Tahoe Resources’s plight in Guatemala, where a legal dispute forced it to cease operations at the Escobal mine, which was responsible for the majority of its production.

Sandstorm also generates 52% of its revenue in the mining-friendly and stable jurisdiction of North America, thus reducing the geopolitical risks associated with its operations.

For the second quarter 2018, Sandstorm reported a healthy bump in the volume of gold sold, which rose by 13% year over year to 14,465 gold equivalent ounces. This — along with firmer gold — caused revenue to surge by 18%. The ability to expand production at such a healthy clip is an important attribute in an environment where the price of gold is rising.

Disappointingly, earlier this month Sandstorm reported that it had sold approximately 14,300 gold ounces during the third quarter, which is 1% lower quarter over quarter, although it is a marginal increase compared to a year earlier. That doesn’t bode well for an outstanding third quarter, particularly when gold’s weakness over the quarter, which dipped to well under US$1,200 per ounce during August.

Sandstorm believes that it will achieve its 2018 guidance of 54,000-60,000 ounces sold for the year, which, at the top end, represents a 10% increase over 2017. That will help to boost earnings and make up for what’s shaping up to be a difficult operating environment because of weaker gold.

Because Sandstorm is a precious metals steamer, it doesn’t engage in hazardous or costly mining activities. For that reason, its expenses are quite low. For the second quarter, it reported average cash costs of US$296 per ounce sold, which were US$6 an ounce greater than a year earlier. That can be attributed to a noticeable increase in the cost of sales, which rose by 16% year over year. Those low costs, however, mean that Sandstorm can remain profitable at levels where gold miners cannot, thus reducing much of the financial risk. It also denotes that as gold rises, the streamer’s profitability will expand at a greater rate than many miners, which should give its stock price a solid boost. 

So what?

Sandstorm is an attractively valued play on gold. While the outlook for the yellow metal is under some pressure because of poor fundamentals, there is every sign that Sandstorm’s market value will appreciate over coming months, particularly if gold should rally once again.