SND.to - Sandstorm Metals & Energy

[Bart]

Anyone have any thoughts on Sandstorm Metals & Energy - SND?

 

There are some really good write-ups on Above Average Odds (http://www.aboveaverageodds.com/?s=sandstorm), but if the story is really that good, my main question would be: why is not everyone doing this?

 

Also, have been burned on 'story stocks' in the past (FTP, to name one), so I'm looking for any counterarguments imaginable. On the plus side, Watson already has a remarkable track record at Silver Wheaton and Sandstorm Gold...

 

All feedback much appreciated!

 

Bart

[Liberty]

That's one that I've studied a lot in the past year, and read pretty much everything I could find on the company + seen/heard/read all the interviews with management out there. Definitely smart people, interesting model, etc.

 

I never pulled the trigger because I can't quite get fully convinced that the model is truly robust, and that the cashflow projections are worth much. In the time I've studied the business, the presentation on the website has changed so often and cash flows have been pushed back (ie. the Royal Coal fiasco) so often that it made me lose some confidence...

 

I still have a strong feeling this could do very well over time, but it would be more speculation on management and the model than anything else, and I haven't been ready to do that yet.

[ItsAValueTrap]

I'm never really comfortable with resource extraction stocks because the management team can always make overly optimistic projections about the future.  Time and time again, management teams overpromise and underdeliver.  I would only be comfortable with the management team if they are ethical (and usually that is extremely rare)... go with the guys who have a track record of success *and* a track record of treating shareholders fairly.  In other words, stick with the Warren Buffetts of resource extraction.  There aren't going to be many of them.

[naboo]

Finally, somebody mentioned Sandstorm M&E here.  I've held a small position for almost a year.

 

Nolan Watson plays big role in the this stock, people are expecting SND.v to be the next SLW.

 

In 2013 Q1 Donner Metal(DON.v) should be on production, it would generate $15M/year est for SND, 4 cents/share, if you use 15 times cash, SND should be 60-70 cents/share now.  NDX.v was almost failed, but there could be a turn around, coking coal price is expected to go up this year.  The home run might come from ThunderBird Energy(TBD.v).

 

My prediction is SND will be 80 - 90 cents at this end of this year, and $1.5 at the end of 2014.

 

 

Anyone have any thoughts on Sandstorm Metals & Energy - SND?

 

There are some really good write-ups on Above Average Odds (http://www.aboveaverageodds.com/?s=sandstorm), but if the story is really that good, my main question would be: why is not everyone doing this?

 

Also, have been burned on 'story stocks' in the past (FTP, to name one), so I'm looking for any counterarguments imaginable. On the plus side, Watson already has a remarkable track record at Silver Wheaton and Sandstorm Gold...

 

All feedback much appreciated!

 

Bart

[netnet]

I'm never really comfortable with resource extraction stocks because the management team can always make overly optimistic projections about the future.  Time and time again, management teams overpromise and underdeliver.  I would only be comfortable with the management team if they are ethical (and usually that is extremely rare)... go with the guys who have a track record of success *and* a track record of treating shareholders fairly.  In other words, stick with the Warren Buffetts of resource extraction.  There aren't going to be many of them.

 

This is a streaming company so it's not really an extraction company.  Watson has done it before in Silver Wheaton, that ended quite satisfactorily. (That said I have no opinion on the stock, save that I think Altius is the better deal and that I think US investors may have some tax issues with the stock.)

[AAOI]

That's one that I've studied a lot in the past year, and read pretty much everything I could find on the company + seen/heard/read all the interviews with management out there. Definitely smart people, interesting model, etc.

 

I never pulled the trigger because I can't quite get fully convinced that the model is truly robust, and that the cashflow projections are worth much. In the time I've studied the business, the presentation on the website has changed so often and cash flows have been pushed back (ie. the Royal Coal fiasco) so often that it made me lose some confidence...

 

I still have a strong feeling this could do very well over time, but it would be more speculation on management and the model than anything else, and I haven't been ready to do that yet.

 

Liberty - I can understand your doubts/caution (perhaps) on the energy side (given inherent differences in the nature of extracting them relative to metals) but personally I think its pretty unreasonable to doubt the robustness of the model in terms of the metal segment.

 

I think you'll find that if you really peel back the onion on the Donner and Colossus deals you will see what I mean. I mean the power of these byproduct deals where they partner with Sandstorm Gold are really self evident when you dig deep and really try to understand them. Fwiw, I'd mention that Nolan sees around corners and protects the downside better than any executive I've ever known (and I've met some smart ones). In other words, to say the guys been lucky doesn't come close to doing justice to his incredible track record - and make no mistake, it is incredible.

 

For example vis a vi Donner, keep in mind the resource undergirding the copper stream is a ZINC mine and hence, if your familiar with the supply/demand dynamics and underlying drivers there you'd realize the positive pricing dynamics are supported by supply as opposed to demand issues (and hence aren't really at all dependent on say fixed asset investment in China in the same way that copper is). A couple of the other big secrets (and there are plenty with this stream), notice how the purchase price on copper resets depending upon on the copper price at any given time - why this matters is because even if copper dropped to say the '08 lows SND is essentially guaranteed a 50% GM on these volumes. Of course having a deep pocketed (world class) operating partner like Xstrata actually running it is pretty incredible as well. I could go on but my point is to dig deeper!!

 

Anyhow, I could argue (persuasively I think) that SND is cheap in the absolute sense based on the Donner stream alone. Think about that for a minute.

[AAOI]

I'm never really comfortable with resource extraction stocks because the management team can always make overly optimistic projections about the future.  Time and time again, management teams overpromise and underdeliver.  I would only be comfortable with the management team if they are ethical (and usually that is extremely rare)... go with the guys who have a track record of success *and* a track record of treating shareholders fairly.  In other words, stick with the Warren Buffetts of resource extraction.  There aren't going to be many of them.

 

Well that makes two of us and agreed on both counts (I think your dead on). Personally I don't do "bad businesses" any more, especially of the resource extraction kind.

 

The good news though is that SND isn't your typical resource business (in this sense they are more like the high margin, asset light guys that end up doing all the grave dancing as it relates to resource businesses). Also its model - at least as it relates to partnering with management teams - is very Buffett like, (in fact) its actually based on it so I think you'll find that BRK's "gifted owner operator" focus is very much in play at SND. Last but not least NW's track record - in terms of both grand slams and overall batting average - speaks for itself.

 

Point being, SND is the definition of a great business and I don't think its a stretch to say that if Nolan called Buffett tomorrow and offered to sell out and work for him at twice the current valuation, my guess is Buffett would write that check in a flash. I'd love to hear a counterargument to any of the above assertions :).     

[AAOI]

Finally, somebody mentioned Sandstorm M&E here.  I've held a small position for almost a year.

 

Nolan Watson plays big role in the this stock, people are expecting SND.v to be the next SLW.

 

In 2013 Q1 Donner Metal(DON.v) should be on production, it would generate $15M/year est for SND, 4 cents/share, if you use 15 times cash, SND should be 60-70 cents/share now.  NDX.v was almost failed, but there could be a turn around, coking coal price is expected to go up this year.  The home run might come from ThunderBird Energy(TBD.v).

 

My prediction is SND will be 80 - 90 cents at this end of this year, and $1.5 at the end of 2014.

 

Yup, those price target estimates are very reasonable imo.

 

Also agree that Thunderbird could ultimately be huge and the comparison to SLW entirely appropriate. In the long run, I think its fair to say SND will be much, much bigger than SLW given the size of its end markets/expanded opportunity set but no need to get ahead of ourselves. Bottom line here is that as Donner starts to produce, SND's cost of capital should decrease and in turn, it's multiple should start to rapidly expand towards something approaching sensible. I'll start to think about growth more when the market starts pricing the security like its not in terminal decline, which again I believe to be entirely ridiculous.

[AAOI]

This is a streaming company so it's not really an extraction company.  Watson has done it before in Silver Wheaton, that ended quite satisfactorily. (That said I have no opinion on the stock, save that I think Altius is the better deal and that I think US investors may have some tax issues with the stock.)

 

I'm stale on the name and remember having a high opinion of the guys over at Altius and what they've been able to accomplish. Remember thinking it was very cheap as well.

 

That said (and again, haven't done the work on the company in over a year) but I would be really surprised if that actually was the case given my recollection (regarding it being a better deal). If memory serves, Altius is more of a book value biz in its current form is it not? Seems it would likely never garner the multiple that a mature Sandstorm will. Anyhow, would love to hear the Altius case but again, would be surprised if the company had the type of latent, embedded upside that SND does, not to mention the near term (hard) high probability catalysts.   

[ItsAValueTrap]

There's a big long thread on Altius.  The brief story is:

 

1- Repurchasing shares.  Whereas SND looks like they might become serial issuers of equity?????

*I hate serial issuers of equity.  Usually the company ends up paying around 6% to underwriters.  Various other fees add up (filing fees, legal fees, stock promotion costs, etc.).  This is a huge and avoidable business expense.  If the shares are overvalued, then I like to see shares being sold... but then why am I in the stock in the first place?!

 

2- Brilliant management team.  Compounded book value at over 20%/yr per share.  (Can't remember the exact figure... it might be higher than 30%/yr.)

 

3- They try to take royalties instead of taking more equity.  This is brilliant because the equity is usually poorly managed, management teams overbuild and overexplore, etc.  Overbuilding and overexploring helps the royalty holders since they see benefits without putting up any capital.  I believe you could make similar positive arguments about streaming deals.

 

4- Book value understates intrinsic value.  The Voisey's bay royalty is carried at far below what it should be worth... on books for less than $10M and depreciating every year, while it throws off around $4m in royalties.  You could easily ascribe a value of over $35M to it (I would use a higher multiple or better yet assume at least a 30yr mine life and do discounted cash flow).  The iron ore royalty on Alderon's project is also worth a lot... some folks on this board insist that it is worth more than Atlius' 25% stake in Alderon.  Both the royalty and Alderon stake are undervalued if you think that Alderon's Kami project has a high chance of becoming a mine (I do).

 

5- In my opinion, the quality of the management and prospect generation team is more interesting than its discount to liquidation/private market value.

 

*Altius shares moved up in price recently, so it's not quite as good a deal as it once was.

[Otsog]

Talk by Nolan from December.  Pretty interesting description of the history of the streaming model since 2004 and how it is changing for the future.

 

 

 

 

AAOI,

 

In all my research of SND I only came across a mention once about a tax shield that will reduce SND's tax liability to 0. Do you know anything about this?

 

Oh hey, I found it http://www.valuewalk.com/2012/02/investment-analysis-sandstorm-metals-energy-cve-snd-sees-candies-at-a-sanborn-maps-price/

Zero tax liability given Bermuda domicile

[Otsog]

New Copper streaming deal in Mongolia (SSL in as well for the Gold)

 

http://www.marketwire.com/press-release/sandstorm-metals-energy-announces-metal-credit-purchase-agreement-with-entree-gold-tsx-venture-snd-1757374.htm

[Liberty]

You guys that were looking at it take note, its down almost 10% right now.

[Liberty]

Nolan Watson on BNN:

 

http://watch.bnn.ca/pdac-2013/clip878845#clip878845

[augustabound]

Nolan Watson on BNN:

 

http://watch.bnn.ca/pdac-2013/clip878845#clip878845

 

I missed that one, thank you.

 

Here's a short one with Nolan Watson from the same event.

(Speaking to his recent deal with Entree Gold, not specific to his Metal's and Energy company)

 

 

[AchilliesValue]

I haven't finished doing the work on this idea yet but the enterprise value has dropped below 100 Mil with the only news I found that could possibly be related being the Xstrata merger closing (Xstrata operates the Bracemac-McLeod Mine).  Insiders were buying 2 weeks ago at above .40 with the shares closing at .32 today.  Not familiar with the exact terms but due to the nature of the business I believe insiders are very restricted as to when they can make purchases.

 

On the surface this looks like a home run.  Projected cash flows of >20 Mil by 2015 yields 20% at todays prices plus they should generate some cash in between.  However investors who took the projections at face value several years ago got burned.  I think the real test of the business model is going to be the coal assets.  The management team touts that their agreements are senior secured asset backed agreements with little chance of permanent capital loss.  We'll see if that holds true.

 

 

 

[ItsAValueTrap]

The MD&A filed Mar 26, 2013 shows that book value is $90M.

At 32 cents, the market cap $101M.

 

I haven't done a lot of work and figured out the rough market value of all their streams.  But I doubt that the market value of Sandstorm's streams is that much different than book value.  I just don't see extreme undervaluation here right now.

 

It looks like more of a feint to me.  Sometimes insiders will buy shares just to promote the stock.  It's a little weird that all 3 of the insiders (CEO, CFO, other guy) decided to buy on the same day.

 

2- Looking into the assets more deeply:

 

It looks like Sandstorm has sold call options on its streaming deals.  Its partners can often buy back a portion of the stream for a fixed amount.  If they aren't exercising that option, then you can infer that the streaming deal isn't some kind of amazing home run.  (I also don't like that Sandstorm is making non-asymmetrical bets, but maybe I am too greedy.)

 

I do not like the fact that Sandstorm has been accepting payment in shares.  Owning shares of juniors is usually a terrible business to be in.  In aggregate, the juniors destroy capital.  I want to own royalties (or streaming deals that are like royalties) and I don't want to sell call options on them.  What sandstorm is doing looks a lot like junk bond financing.

 

I also see that Sandstorm is entitled to cash payments but have been deferring them for some other type of payment.  This may be a sign that its investment is going sour.  If people who owe you money can't pay you in cash on time, they may be in trouble.  Also, deferring cash payments allows you to defer impairing your investment.

 

 

Am I missing something...?

(*I'm too lazy to read Donner Metal's financials and to check their financial status.)

[kevin4u2]

The MD&A filed Mar 26, 2013 shows that book value is $90M.

At 32 cents, the market cap $101M.

 

I haven't done a lot of work and figured out the rough market value of all their streams.  But I doubt that the market value of Sandstorm's streams is that much different than book value.  I just don't see extreme undervaluation here right now.

 

It looks like more of a feint to me.  Sometimes insiders will buy shares just to promote the stock.  It's a little weird that all 3 of the insiders (CEO, CFO, other guy) decided to buy on the same day.

 

2- Looking into the assets more deeply:

 

It looks like Sandstorm has sold call options on its streaming deals.  Its partners can often buy back a portion of the stream for a fixed amount.  If they aren't exercising that option, then you can infer that the streaming deal isn't some kind of amazing home run.  (I also don't like that Sandstorm is making non-asymmetrical bets, but maybe I am too greedy.)

 

I do not like the fact that Sandstorm has been accepting payment in shares.  Owning shares of juniors is usually a terrible business to be in.  In aggregate, the juniors destroy capital.  I want to own royalties (or streaming deals that are like royalties) and I don't want to sell call options on them.  What sandstorm is doing looks a lot like junk bond financing.

 

I also see that Sandstorm is entitled to cash payments but have been deferring them for some other type of payment.  This may be a sign that its investment is going sour.  If people who owe you money can't pay you in cash on time, they may be in trouble.  Also, deferring cash payments allows you to defer impairing your investment.

 

 

Am I missing something...?

(*I'm too lazy to read Donner Metal's financials and to check their financial status.)

 

I agree. I would also short sandstorm gold.

 

I never understand the logic of a company raising capital, buying some assets, and voila they are now magically worth a multiple of the purchase price. Beyond this is the inherent risk is the exposure to the underlying commodity prices.

 

Sure many of these guys appear brilliant when commodity prices are rising, but skill is often confused with luck. As buffett would say, "A rising tide lifts all boats." If Mondays action in the gold market is any indication of what is about to come, the tide may be on its way out.

[ItsAValueTrap]

I'm not a fan of shorting stocks that resemble pyramid schemes, more so if part of it is an actual business.

 

I never understand the logic of a company raising capital, buying some assets, and voila they are now magically worth a multiple of the purchase price

Well... they work.  :/

 

The part-time CEOs who run them make a lot of money.

The brokerage houses make a lot of underwriting fees.

The brokerage houses' clients get to gamble.

The hedge funds get to post years of amazing performance.

Human beings have a weakness for pyramid schemes.

 

*Most of the companies aren't pure pyramid schemes.  They have elements of pyramid schemes and elements of a real business.

[AchilliesValue]

I haven't done a lot of work and figured out the rough market value of all their streams.  But I doubt that the market value of Sandstorm's streams is that much different than book value.  I just don't see extreme undervaluation here right now.

 

I'll try to address your concerns one at a time so forgive me for the length.  Also full disclosure I just began looking at this earlier this week. I've had it on my watchlist since I read AAOI's write-up a few weeks ago but didn't get around to it until I noticed the price decline so forgive me for any mistakes. I wanted to post on the thread with the hopes of starting a discussion since it seemed to be buried back a bit.

 

Also I think the price decline is due to the crash in copper in palladium prices. I don't really pay much attention to the commodities markets so I didn't notice til I was doing this response.  Doesn't really change the thesis but I understand the decline now.

 

Unfortunately the BV doesn't really tell the intrinsic value of the streams and you have to go through the agreements and do a little work.  On the balance sheet the streams are carried at cost less accumulated depletion so intuitively if the market is pricing the company just slightly above book (and the carrying value of the streams makes up nearly all of book) then its implying that the company will merely break even on the cost it paid for the streams.

 

Fortunately the IV of the streams seems to be much higher than the carrying value.  Take the Bracemac-McLeod copper stream. The carrying value on the BS is ~$24 Million.    The agreement allows SND to purchase 24.5% of the mine production at $0.80 / lb or $0.55 / lb if copper is below $2.75.  They're projecting producing 21 Million lbs of copper per year beginning in May. Assuming a copper price of $3.20  implies cash flows of slightly over $12 Million.  That implies a 50% CROIC on the carrying value assuming all goes well.  Obviously you'll want to discount their production projections for a margin of safety but I think even applying a huge discount the returns justify a premium to carrying value.

 

As far as the insiders go the reason it was on the same day is because its when their lockup window opens up which Watson mentions on the latest CC. I think more telling than the purchases is the decision to pay the $15 Million liability in cash rather than issuing shares at $0.30 (it was at their discretion).  He speaks pretty frankly on the conference call how it was a relatively easy decision as it came down to is the IV of the business greater than $0.30.

 

I agree with you that ideally I wouldn't want to see the buyback options either.  However the way they structure them sets up an incentive or bonus per say if the mine production ramps up earlier than expected.  For instance the Donner option was set to expire this year (they amended the agreement so its no longer around) with production set to begin this year as well. The Palladium option is set to expire in April 2015 with production scheduled to begin YE 2014. So the way I see it the option will only be exercised if the mine is financially secure and producing which benefits both the company and Sandstorm.  It has a way of aligning interests where if the mine operators can meet or beat their production schedules they have a chance to reduce the obligation.  Also worth noting that the options do provide a return on Sandstorm's tied up cash.  The Palladium option is $9.75 Million for a stake costing $7.5 million an implied 30% return over 30 months.  Not the kinda of returns we're looking for but not value destroying either.

 

I don't attribute the share payments to much of any value.  I consider their cost part of the overall cost for the streaming business which is their main business.  If anything the shares are pure upside as I consider the cost of receiving them part of the cost of the royalty. Your right in pointing out the issues of deferred payments. I think in the case of Thunderbird (nat gas) it was a sign of competence rather than the investment blowing up as it didn't make sense to extract Nat Gas when prices were in the $3 range.  The coal streams as I mentioned in my first post appear to have been mistakes.  I like how Watson has handled it though rather than blaming the harsh macroeconomic environment (which was brutal for coal) he talks about the failure on his part of investing in low margin businesses that are small and would have difficultly raising capital in tough environments.

 

Obviously in this business counterparty risk is huge.  Even though the agreements are secured if bankruptcy were to occur it would tie up capital for years. Just starting to work my way through all the partners statements. Other risks I see are if this really makes so much money what's to stop other firms from entering? I know this management team is competent and somewhat flexible (seen with Thunderbird) but is that really a moat? I think JM would take the lowest cost over anything and could easily see price competition.

[AchilliesValue]

 

I agree. I would also short sandstorm gold.

 

I never understand the logic of a company raising capital, buying some assets, and voila they are now magically worth a multiple of the purchase price. Beyond this is the inherent risk is the exposure to the underlying commodity prices.

 

Sure many of these guys appear brilliant when commodity prices are rising, but skill is often confused with luck. As buffett would say, "A rising tide lifts all boats." If Mondays action in the gold market is any indication of what is about to come, the tide may be on its way out.

 

I think you need to look at this business model.  Its not dependent on the rise in commodities prices (like most producers) to make substantial profits.  The contracts they set up are purchase agreements to a percentage of future production at a fixed price which is at or below the low cost producers cash cost. I'm a bottom up investor but I think you'd be hard pressed to convince me that owning future rights to a diverse basket of commodities at a fixed price below cost of production is a bad thing.  I'm ok purchasing nat gas @ $1 / Mcf, copper at $0.80/lb or $0.55 if Cu is < $2.75, and Palladium for $100/oz for years to come. 

[Packer16]

Isn't the model suseptable to cram down in future financings?  If SND provides the last financing before CF break-even then the model works, however, if the firm requires more capital to reach CF break-even what is to prevent a cram-down.  This happens in other contexts (VC and BK for example).

 

Packer

[AchilliesValue]

Isn't the model suseptable to cram down in future financings?  If SND provides the last financing before CF break-even then the model works, however, if the firm requires more capital to reach CF break-even what is to prevent a cram-down.  This happens in other contexts (VC and BK for example).

 

Packer

 

Interesting point. I find it hard to imagine anything outside of bankruptcy leading to a cram down.  The contracts are structured so that SND has no obligation to fund future capital, exploration, or operating expenditures.  I know the Sandstorm Gold agreements are structured with right of first refusal I would assume M&E are the same but you know what they say about when you assume.... Something to ask IR before thinking about putting cash to work.

 

The other defense would be the minimum cash flows guaranteed under the contracts.  Basically these cash flows are like a senior bond, backed by assets and at the top of the totem pole during a restructuring.  From what happened with Terrex it seems that they have some power to enforce minimum drilling, etc and violation allow SND to seize assets.  Again very interesting to see whats going to happen with Novadx and Royal Coal.  They've written them down to only $4 mil on the BS but as they mentioned on the latest CC this was so they wouldn't have to keep providing constant updates on their restructuring and removing the distraction.

[ItsAValueTrap]

It has a way of aligning interests where if the mine operators can meet or beat their production schedules they have a chance to reduce the obligation.

They have that incentive anyways.

 

I have a slight distaste for positive carry trades and selling call options.  However, selling options in itself is not problematic and even Warren Buffett does it when people are overpaying for options.  In Sandstorm's case, I don't think that they are selling options to people who are overpaying for them.  They don't have the perverse incentives (like GenRe) or fear that would cause them to make dumb options trades.  Some of these guys are making deals because they are distressed.  (Especially Donner, who looks like they are going to pay 14% interest for debt.)  When dealing with distressed sellers, you can usually buy options/warrants from them cheaply.  Warren did that in 08/09 with the preferred deals.

 

But anyways, them selling call options on their steams is not that big a deal.

 

I consider their cost part of the overall cost for the streaming business which is their main business.

The reason why Sandstorm goes for streaming deals in the first place is because they DON'T want the equity.  Their presentations explain why they go for streaming deals in the first place.

 

They've written them down to only $4 mil on the BS but as they mentioned on the latest CC this was so they wouldn't have to keep providing constant updates on their restructuring and removing the distraction.

That sounds like a poor excuse.  Companies write down investments because the accounting rules call for them.  If they don't follow the accounting rules, they won't get a clean audit and they may face legal repercussions.

 

There is some "leeway" in the accounting rules.  If your debt isn't going to be repaid, you can restructure the debt so that you defer the default.  You don't need to impair debt until the default happens (or is extremely likely to happen, but that's subjective so you won't get into trouble).

 

---

Sandstorm's business model might actually be smart.

 

But they got unlucky on their investments.  Natural gas prices falling is not their fault, but it really hurts them.

 

Donner Metals, while I haven't looked into them that much, is really distressed right now.  They're the counterparty in the Bracemac-McLeod copper stream.

 

2- They know how to mine the public markets, which I dislike.  Sandstorm Gold is a pure play on gold... they know that pure play companies are easier to explain to investors and easier to promote.  You know they're trying to deceive you into overpaying for shares.

[AAOI]

I'm going to stay hush on this publicly outside of to say that what type of idiot would short SND at this price is beyond me (with it as a PO Rec I can't really get into details anymore). Anyhow, woe to the poor soul that shorts this stock at this valuation, I'll happily be on the other side of that trade.

 

Itsavaluetrap, you have a gross misunderstanding of the set up currently, the individual streaming assets and the business as a whole. Trust me on that.

 

That is all.