Looks Bullish in Medium to Longer Term
president & CEO, Sandstorm Gold Ltd., talked briefly about world gold
mining industry, associated risk and future prospects while interviewed by Debajit
us briefly how a gold streaming company operates.
Sandstorm Gold looks
for companies that have advanced staged development projects and need funding
to advance those projects into production. The funding is provided in the form
of an upfront payment, in exchange for the right to purchase a portion of the
commodity produced from the mine, at a fixed price. What the business model
allows us to do is expose our investors to the typical upside that you would
get in a mining investment, while mitigated a lot of the downside risks.
investing in a gold mine, what risk factors does Sandstorm take into
The main risk factors
that we face are the quality of the asset, the quality of the management (and
of course we try to invest only in companies with good management teams and
although we don’t have a perfect record with respect to that, we continue to
focus on it going forward) and the overall financial health of the company. We
have a multi-pronged due diligence approach that focuses on analyzing all of
the technical aspects of the asset including metallurgy, mining method and
processing method as well as community/sustainability issues, corporate social
responsibility issues, political risk, permitting risk; so we have a
comprehensive due diligence process.
We also spend a lot
of time focusing on the actual financial health of the mining companies. We ask
questions like, is the company over levered? How much cash do they have? How
well capitalized are they? Are they able to raise more money? We try to understand
those risks before investing.
What's your opinion broadly on how the gold mining sector will perform in the
next three to five years?
There is a difference
between how the actual gold mining sector will perform versus the price of
gold. I think that over the next three to five years the price of gold is going
to continue to be volatile and it will have periods where it goes a bit lower
than $1,300 (which is where it is today) and it will spend periods of time
above the current price. I think five years from now the price of gold will be reasonably
higher than where it is today but that obviously depends on a number of
macroeconomic factors that have not been decided yet.
On the whole I would describe myself as medium to longer term bullish on
the price of gold.
If you translate that
into the gold mining sector itself, one of the things that you have to focus on
is the grades that are being mined at each mine and understand how that affects
the costs of operations. Right now one of the focuses of the gold mining sector
is to mine higher grades and ignore lower grades. That has the benefit of making it look like your cost of production is lower
but the actual costs of running the mine per year are the same, there are just increased
ounces because of higher grades, making it appear that costs are lower. The
problem is, eventually you run out of high grade material and eventually the
mines either have to shut off or you have to go process the lower grades later,
and costs per ounce go through the roof when you process the lower grade
So, right now the
gold mining industry appears to be recovering and seems to be doing okay but
the future doesn’t look very bright unless the gold price goes up. It is going
to be very tough for companies to make money five years from now if they spend
the next five years high-grading their assets. I think the price of gold will
need to continue to rise to provide a reasonable risk-adjusted rate of return that
incentivizes mining companies to keep investing in future mines.
4) At a
$1,200 priceof gold per ounce, how profitable is it for Sandstorm to invest in the
gold mining sector?
The benefit that
Sandstorm has is that the average cost of the ounces that we are buying from
mines that are now up and running and in commercial production under the
existing contracts that we have is only $400 per ounce. So even at $1,200 an
ounce, our margin is $800 an ounce on average and so we are still highly
profitable as a company and are continuing to accumulate cash to make future
Right now there are
not a lot of mines being built because the rates of returns that the actual
mining companies can get are not high enough to make sense for them to build
mines. Because very few companies are building mines, there will be fewer deals
that Sandstorm is doing unless the gold price either goes up enough, or the
cost of capital comes down enough, such that mining companies start building
more mines. Having said that, you can be assured that it is Sandstorm’s goal to
invest in streams that we will get a good rate of return; otherwise we are not
going to invest.
refiners are coming to India. Can they source primary raw material from you? If
yes, what is the procedure and if not, why so?
No. We buy refined
gold from our partners under all of our contracts. It is their obligation to extract
the ore, process that ore, and then send it to a refiner before delivering it
to us. We purchase the gold after it has been refined by the refiners.
last, can you give us a broad perspective on the worldwide mining industry and
how that relates to bullion?
are two prevailing themes in the worldwide mining industry. One is costs of
mining which appear to be going down, but in actuality the costs are not going
down because of the grade issue that I talked about earlier. The second theme is
the cost of capital issue. There has been a tremendous amount of capital that
has fled from the mining industry and it has driven up the cost of capital of
all of the mining companies. What that means is that company hurdle rates
become higher and they become less likely to find projects that are worth
investing in (that exceed the hurdle rate), so they stop building projects for
the most part and they scale back expansion plans.
a worldwide mining industry perspective, I think there will still continue to
be a strong demand for metals but you are going to see that demand met by
existing mines and there won’t be many expansions to their mines or new mines
built. I think you are actually going to see a similar effect as it relates to
bullion. The demand for bullion remains strong and it is going to continue to
go up. As ETFs stop liquidating gold in North America, the demand from various
parts of Asia and the Middle East and India will continue to drive the gold
price higher and eventually gold mining companies will do okay. But in the mean
time, the cost of capital is so high that it does not make sense to build many gold
mines. It is going to be volatile next five years for the mining industry and it
is going to be a challenging five years to make profits, but if gold companies
do the right things they will be poised to make money once the prices return to
Nolan Watson is the President
& CEO of Sandstorm Gold Ltd., a company he co-founded in 2008 and has since
acquired a portfolio of 8 gold streams and 27 gold royalties. Prior to
Sandstorm, Mr. Watson served as the CFO of Silver Wheaton Corp. where he helped
develop the silver streaming business model and raise over US$1 billion in debt
and equity to fund Silver Wheaton's growth. Mr. Watson has won numerous awards
for his professional achievements including the Canada's Top 40 Under 40 award,
CEO of the Year by Business In Vancouver and the Queen's Diamond Jubilee Medal.
Disclaimer: Views are personal
and not the views of the publisher.