Sandstorm Metals & Energy (Sandstorm) is a resource company that provides investors with direct exposure to the price of copper, palladium, coal, natural gas and oil. Sandstorm is a streaming company that operates in the same way as companies like Franco Nevada, and its sister company Sandstorm Gold (CVE:SSL).
How does streaming work?
Sandstorm’s business model works as follows. Rather than owning or operating its own mines, Sandstorm signs a purchase agreement with a partner company that does. In exchange for an upfront cash payment, Sandstorm receives the right to purchase a percentage of the commodity produced by its partner for the life of the asset (mine or well).
The purchase agreement also determines a fixed amount that Sandstorm will pay when it receives a given unit of the commodity.
Actual streaming agreement
Sandstorm has a commodity streaming agreement with a company called Colossus Minerals (TSX:CSI). Sandstorm provided Colossus with US$15 million as an upfront cash payment so that it can develop its Serra Pelada gold-platinum-palladium project in Brazil. In return Sandstorm will receive 35% of the palladium produced from the project for the life of the mine, at US$100 per ounce. The current palladium spot price is $690, and it’s worth noting that the price hasn’t been as low as $100 since the early 1990’s.
Advantages of the streaming business model
- A fixed payment is predetermined at the beginning of the contract. Therefore Sandstorm’s costs are fixed regardless of any cost increases that may be experienced at a particular project.
- Sandstorm has agreements with multiple resource partners, thus spreading and mitigating any potential risk.
- The deals Sandstorm has secured are for a percentage of the production for the life of its partner’s assets. Therefore any new discoveries benefit Sandstorm at no cost to them.
- The rising cost of producing an ounce of palladium or barrel of oil, for example because of higher labour or energy costs, does not affect Sandstorm since the price it pays is agreed in advance.
Sandstorm’s resource partners also benefit since they are able to access capital for the construction of a mine without having to issue additional shares.
Sandstorm currently has purchase agreements with five partners:
- Copper stream – Bracemac-McLeod (Canada): The Bracemac-McLeod project is a high grade zinc/ copper deposit located in the prolific mining district of Matagami, Quebec. The project is expected to begin production as an underground mine in Q2 2013, and at full production will produce 80,000 tonnes of zinc and 10,000 tonnes of copper per annum. Sandstorm has a copper stream agreement to purchase 24.5% of the life of mine copper produced from the Bracemac-McLeod Mine at a price of US$0.80 per pound, current price $3.57 per pound.
- Palladium stream – Serra Pelada (Brazil): Serra Pelada is a high grade gold-platinum-palladium deposit located in the prolific Carajas mining region in Para State, northern Brazil. Under development by Colossus Minerals since 2007, Serra Pelada is due to begin production by the end of 2013. Sandstorm has an agreement to purchase 35% of the palladium produced from Serra Pelada at a price of US$100 per ounce, current price $690 per ounce.
- Natural gas streams – Gordon Creek (United States): The Gordon Creek property, which is comprised of roughly 7,900 acres, consists of four producing wells, seven shut in wells and a 100% owned gas gathering and water disposal system. Owned by Thunderbird Energy Corp. (TSXV:TBD), Gordon Creek boasts approximately 20 Bcf (billion cubic feet) of proven reserves and approximately 32 Bcf of probable reserves as well as substantial undeveloped acreage. Sandstorm has an agreement to purchase 35% of all natural gas produced from Gordon Creek at US$1.00 per Mcf (million cubic feet).
- Coal Streams – Rosa Mine & Rex No. 1 (United States): The Rosa Mine & Rex No. 1 properties are owned by Novadx Ventures Corp. (TSXV:NDX). Sandstorm has an agreement with Novadx to purchase 25% of the first 3,800,000 tons of metallurgical coal produced (and 16% of the life of mine metallurgical coal produced thereafter) from the two mines at US$65 per ton.
- Oil Streams – Two Creek & Strathmore properties (Canada): Sandstorm has an agreement with Terrex Energy Inc. to purchase 25% of all oil, natural gas and natural gas liquids produced for the life of the Two Creek Jurassic A pool and for 5 years of the Two Creek Jurassic B pool. The agreement also stipulates that SANDSTORM will buy 15% of all oil, natural gas and natural gas liquids produced from the Strathmore property at $15.00 per barrel of oil delivered, $1.00 per Mcf of gas delivered, and $8.00 per barrel of natural gas liquids delivered.
Why own Sandstorm Metals & Energy
One of the most important attributes of a small cap company is a management team with a proven track record, and Sandstorm certainly has that. Prior to starting Sandstorm, the founders, Nolan Watson and David Awram, were the first two employees at Silver Wheaton, which was the first metal streaming company and is now the largest in the world.
Sandstorm also has a compelling business model that allows it to fix its costs upfront. As a result any rise in the price of copper, palladium, coal, natural gas or oil, translates directly into greater profit for the company.
Important also is the fact that Sandstorm’s projects, or rather its partners projects, are also located in politically safe jurisdictions.
A 3 year chart of Sandstorm Metals & Energy (CVE: SND) (Click on the chart for a larger version)
Chart courtesy of stockcharts.com
Sandstorm Metals & Energy trades on the TSX Venture Exchange under the ticker symbol SND.
Sandstorm Metals & Energy: Company data
|Company Name||Sandstorm Metals & Energyformerly Sandstorm Resources Ltd|
|Exchange / Ticker||CVE: SND|
|1 Year Performance||+40%|
|10 Year Performance||n/a|
|Earnings per Share (EPS)||-0.06|
|52 Week Range||0.24 – 0.60|
Source: Google Finance