While the cyclical bear market in the S&P-500 (SPY) has created buying opportunities, the real value can be found in the Gold Miners Index (GDX).
This is because the sector has endured a 22-month bear market, sending many names down 60% from their highs.
Although several names offer compelling buying opportunities, two stand out as offering a rare mix of growth and value. These are i-80 Gold (IAUX) and Sandstorm Gold Royalties (SAND).
Investing in the precious metals sector can be treacherous and intimidating, with several names to choose from, multiple pitfalls, and lengthy technical reports describing each mine.
For this reason, the sector is often avoided by generalist investors. The proposition becomes even less interesting if we mix in a declining gold price.
However, there is one key trait in gold miners that allows investors to worry less about the gold price: production growth. The key is selecting names with growth and low-risk business models with a high probability of successful execution, which is easier said than done.
Sandstorm Gold Royalties (SAND)
Sandstorm Gold Royalties is a precious metal royalty/streaming company, giving it a lower-risk business model within the sector. This is because it provides upfront capital to operators/developers to construct/expand mines, and in exchange, it receives a portion of metal production over the mine life.
The result is that it’s highly diversified (dozens of revenue streams and jurisdictions), and it’s protected from inflation as it doesn’t have to pay for sustaining capital or get hit by rising operating costs.
In addition, it enjoys very high margins (80% plus gross margins), with it simply receiving gold deliveries of metals at a low fee ($10/oz to $500/oz gold) vs. $700/oz to $1,300/oz costs for operators.
The other major benefit of this model is that any discoveries on properties where it holds royalties are gravy, given that the mine can continue to deliver ounces for decades even if the mine life was estimated at only several years initially.
A couple of examples are an investment in Goldstrike which turned $2.0 million into $1.0 billion paid in royalties, and an investment in Cortez which translated to a 500% plus return for Royal Gold. This is why royalty/streaming companies commonly trade at a premium to their net asset value. Continue reading "Two Standouts in the Gold Sector"
