One of the guaranteed ways for investors to lose money is to rush into commodity stocks which are highly volatile when the commodity is the most loved it’s been in years. This is because these stocks are leveraged to the price of the commodity.
So, while they can soar in a period of rising commodity prices, that leverage exposure is not nearly as enjoyable when the tide turns.
We’re at the exact opposite juncture for investors in the Gold Miners Index (GDX). Stocks are being sold off on the news; whether good, great, or game-changing, sentiment is sitting at multi-year lows, and heading into September, the GDX sported a (-) 78% annualized return following a 42% rout in 95 trading days.
These are all conditions that suggest we have likely reached a point of near-capitulation, and in the commodity space, that is the exact moment to add long exposure.
Understandably, some investors might have little interest in miners in a rising-cost environment, especially with gold mining being a complex business already.
However, while the producers have been pummeled (down 30% year-to-date), the gold royalty/streaming companies that own royalties or streams on some of the best assets have been thrown out as well. This is evidenced by them being inflation-resistant yet being sold off similarly.
One name that stands out is Sandstorm Gold (SAND), a company with unrivaled growth and attractive diversification.
A Growth Story On The Sale Rack
Sandstorm Gold is a small-cap company ($1.81BB market cap) in the royalty/streaming space, which essentially means that it provides upfront capital to development-stage companies or operators to fund their construction or expansions.
In return, Sandstorm receives a portion of production over the mine life, either for the price of the commodity less smelting costs (97%+ margins) or ~20% of the cost of the commodity (streaming deals).
This makes Sandstorm similar to companies like Restaurant Brands International (QSR) in the restaurant industry, given that no matter the operator’s profitability, Sandstorm continues to receive a check each time gold is poured.
Recently, Sandstorm Gold acquired a portfolio of assets that included a silver stream and NPI on the massive Antamina Copper Mine in Peru and also acquired Nomad Royalty (NSR), a company with an industry-leading growth rate at an inflection point with 20+ royalties/streams.
The two transactions beefed up the company’s precious metals royalty portfolio, pushing its total assets to 250, and setting it up to generate nearly $190MM in revenue in FY2023.
This would translate to 65% revenue growth vs. FY2021 ($115MM) and up to ~$133MM in free cash flow.
However, the real story is its development pipeline, where multiple assets coming online by FY2025 are expected to push production from ~85,000 GEOs in FY2022 to ~155,000 GEOs in FY2025.
This represents a 22% compound annual growth rate, dwarfing the low single-digit production growth rate sector-wide.
Normally, a company with this type of growth would trade at a price to net asset value [P/NAV] of 1.50x or higher and more than 22x forward free cash flow, given its low-risk business model and phenomenal margins.
However, with the sector in the dumps, SAND is being given little respect, trading at just 16x FY2023 free cash flow estimates ($2.2BB enterprise value vs. $133MM in expected free cash flow).
The Fundamental Picture
Sandstorm reported revenue of $36MM in its most recent quarter (36% growth year-over-year) and is on track to generate annual EPS of $0.17, which might make the stock appear expensive at 37x earnings.
However, this aligns with its peer group, with FNV trading at 35x earnings with a much lower growth profile.
That said, the better way to value royalty/streaming companies is from a P/NAV standpoint (given that it properly values the development portfolio and cash flows over the mine life).
On this basis, SAND trades at just 1.05x P/NAV, a massive discount to its peers, which historically have traded at 1.50x – 2.4x P/NAV. Hence, the stock is significantly undervalued even after its recent 18% rally off its lows.
The Technical Picture
From a technical standpoint, SAND’s outlook was not great last month, with the stock hovering near multi-year lows and below its 20-day and 50-day moving averages.
However, with some normalcy finally returning to the gold sector and fundamentals beginning to matter gain, SAND has vaulted 18% from its lows, made a new 1-month high, and is leading the GDX from a relative strength standpoint.
This development has significantly improved the technical picture, placing momentum at the stocks’ back when it’s the most undervalued it’s been since the March 2020 Crash. Typically, momentum and value are a very powerful combination.
With SAND remaining well below its prior highs despite having a more diversified portfolio with impressive organic growth (80% over the next three years), I see the stock as a coiled spring with considerable upside ahead now that it’s regained positive momentum.
The Bottom Line
Based on what I believe to be a fair multiple of 1.70x P/NAV and an estimated net asset value of $1.8BB, I see a fair value for SAND of $3.06BB, translating to a price of US$10.70 per share.
This translates to a 68% upside to fair value, suggesting that this rally has considerable upside if positive sentiment can return to the gold sector.
To summarize, I see SAND as one of the best buy-the-dip candidates in the gold sector, boasting industry-leading margins, growth, and diversification. Therefore, I see this lower-base breakout as a buying opportunity.
Disclosure: I am long SAND
The above analysis of Sandstorm Gold (SAND) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one’s portfolio.
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