One of the best ways to consistently outperform the market is to look for attractive businesses that are undervalued due to short-term issues or shifts in sentiment.
One can then allocate exposure to these stocks until sentiment shifts back in favor or a positive development leads to a more normalized trading multiple for the stock.
Of course, this is easier said than done, and two there are many pitfalls with this strategy.
The first is buying too soon and not being able to accurately gauge when a business is sufficiently underpriced so that it’s likely near the low. The second is picking the wrong business entirely.
When it comes to the gold sector which is highly volatile and full of proverbial land mines, one must exercise extreme discipline to make this strategy work.
In addition, development companies are almost always undervalued and while some prove to be long-term winners, 95% are not worth owning given that they have several risks that many investors may struggle to properly quantify or identify.
However, the royalty/streaming model is much simpler, with royalty/streaming companies providing producers or developers an upfront payment for a portion of the production of a given mine/project.
This insulates these companies from operating and capital cost inflation, it allows them to diversify with ease given that they can acquire well over 200 royalties, and these are just two of the reasons that these stocks have provided a safe way to get precious metals exposure without the headaches.
However, one company in particular has been left in the dust on the recent gold rally, hurt by an ill-timed capital raise that dented investor sentiment and a weaker balance sheet than its peer group, temporarily impeding its ability to transact on big deals.
For investors in the stock, the underperformance has been frustrating, with it lagging peers by over 2000 basis points on a 1-year basis.
However, for new investors, they’re able to buy the most undervalued name in the sector at a deep discount to fair value.
Left In The Dust
Sandstorm Gold Royalties (SAND) is a $1.74 billion company in the precious metals royalty/streaming space, with 250 royalties across several continents.
The company’s portfolio includes well over 20 producing royalties, and it has several irons in the fire with key royalties on world-class projects like Greenstone (Canada), Hod Maden (Turkiye), Platreef (South Africa), MARA (Argentina), and other impressive projects such as Robertson (United States), and Blackwater (Canada).
This is an enviable position to be in given that these royalty and streaming assets are already bought and paid for meaning that Sandstorm Gold Royalties has all the upside of exploration success, mine life extensions, and expansions at these projects without any additional cost.
For those unfamiliar, there are a couple of heavyweights in the sector that now have market caps ranging from $22 billion to $30 billion in the royalty/streaming space, but they also started out with choppy share-price performance in their earlier years as they used equity to buy new royalties/streams vs. solely using cash flow and debt today.
With Sandstorm completing two major deals last year and then needing to do a follow-on equity raise for $92 million, I see the company near an inflection point in that this is likely the last major capital raise we will see for the company given that it can finally fund its growth through its revolving credit facility and cash flow and not shares like it has in the past.
So, why the poor share price performance?
Aside from the ill-time raised, Sandstorm has nearly $500 million in net debt and its priority is now paying down debt which means it can’t compete for large transactions with some of its peers and can’t actively grow its portfolio further.
However, this is only a temporary issue and given that the company added over 40,000 gold-equivalent ounces in production to its portfolio last year which is above that of peers of its size, it doesn’t need to transact to grow, it can simply sit back and allow its portfolio to mature.
The other issue is that investors were blindsided by the 6% dilution and sentiment remains in the gutter for the stock.
Although the negative sentiment has hurt the stock and may be a temporary anchor as investors are hesitant to start new positions or add to their positions if they’ve been burned before, this is a company that just generated record revenue of $148.7 million in FY2022 with attributable production of 82,400 gold-equivalent ounces.
Meanwhile, cash flow from operations (excluding working capital) increased 32% to $109.8 million and given its recent transactions, this figure could improve to north of $210 million by 2026 if gold prices remain above $2,000/oz.
Despite this growth (the potential to nearly double operating cash flow over the next four years), Sandstorm trades at the lowest price to net asset value [P/NAV] multiple among its peer group, sitting at just ~1.0x P/NAV vs. peers trading at 1.40x – 2.40x.
Meanwhile, it also trades at the lowest forward cash flow multiple of just ~15.3x cash flow vs. peers that trade in a range of ~18.0x cash flow to ~36.0x cash flow.
So, even if Sandstorm were to just trade up the lower end of this range, it would have 20% upside from current levels. Herein lies the opportunity in my view, with much of this negativity more than priced in at $5.80 per share.
The Technical Picture
While Sandstorm may not be in a clear uptrend and making new 52-week highs like some of its peer group, the stock has finally made a clear set of higher lows, with its March low at $4.70 being above its October low at $4.50, and the stock looking like it’s in a position to put in a higher low in the $5.70 – $5.80 region.
This is a positive development that suggests the lows are likely in for the stock.
See the Full Technical Analysis Report for SAND
Meanwhile, the stock’s 50-day moving average is set to cross above the 200-day moving average this week, marking a golden cross which is typically a bullish development on a medium-term basis.
However, the stock still remains more than 45% from the multi-year highs of $10.60 reached when gold was at a lower price in Q3 2020.
Some of this can be attributed to the ~6% share dilution suffered last year in a capital raise that surprised investors, but one could argue that Sandstorm has a much better portfolio today given that it has industry-leading diversification, increased scale, and its top-4 development assets are much closer to initial production.
So, once the balance sheet is improved and more debt is paid down (~$450 million in net debt), I would expect the stock to trade back to its prior highs near $10.00 per share, which could happen in the next 18 months if gold prices continue to remain favorable.
The Bottom Line
Based on what I believe to be a fair multiple of 20.0x cash flow for Sandstorm Gold and FY2024 estimates of $0.44, I see a fair value for Sandstorm of $8.80, pointing to a 51% upside from current levels.
Meanwhile, from a P/NAV standpoint, I see a fair multiple of 1.40x NAV, and using an estimated net asset value of $1.94 billion, this translates to a fair value of $2.72 billion or $9.05 per share. So, on a blended basis, Sandstorm’s fair value comes in at $8.93.
This represents a very attractive upside for a low-risk business with considerable upside to metals prices.
And these price targets assume that Sandstorm continues to trade at significant discounts to its larger peer group, suggesting that these fair value assumptions are conservative.
So, with the stock pulling back nearly 10% from its highs and still being left behind in this sector-wide rally, I see this pullback to the $5.80 level as a gift in regards to starting a new position in the stock.
Disclosure: I am long SAND
The above analysis of Sandstorm Gold Royalties (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.
Is Sandstorm Gold Royalties (SAND) A Buy or Sell?
Based on MarketClub’s technical analysis tools, Sandstorm Gold Royalties (SAND) is moving in a sideways pattern and is unable to gain momentum in either direction. Beware of choppy movement and consider a sidelines position until a stronger trend is identified.
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