by James Brumley | April 17, 2013 12:59 pm
To say it’s been a bad past few days for gold would be an understatement. It’s been a horrifying past few days for gold, with the precious metal’s prices falling 12% since just last Thursday. Almost needless to say, owners of SPDR Gold Shares (NYSE:GLD) are still a little shell-shocked.
Gold’s slump has also hit the gold miners, though harder. Since last Thursday, the Market Vectors Gold Miners ETF (NYSE:GDX) has given up over 19% of its value, while the Market Vectors Junior Gold Miners ETF (NYSE:GDXJ) is off by nearly 24% for that same span.
The reason miners have been under more pressure than gold itself has? Because at under $1,400 per ounce, gold prices are getting dangerously close to — if not already below — the costs incurred by some miners to dig the stuff up in the first place.
There’s a small sliver of the mining industry, though, that’s at least partially immune to the problem of rising mining costs and falling gold prices. If you absolutely must have some gold exposure in your portfolio, then the savvy way to play may be with a so-called streamer.
Though they’re not uncommon, most investors may not be familiar with what the industry refers to as a streaming company. In simplest terms, a streamer acts like an angel investor, providing financing to miners who have a great prospect or property, but don’t have the money to dig the mine into production.
In return, the mining company gives the streaming company the rights to buy a certain amount of the mine’s gold (or silver, or whatever) at prices well below market rates for a fixed period of time … sometimes for the life of the mine.
The upside and the downside are the ones you’d assume. The streaming company risks a big chunk of cash upfront betting that the miner actually has a good prospect, but if it works out, the streaming company can look forward to years of low-cost gold they can turn right around and sell for a big profit. The miner takes on the risk of cost overruns, but enjoys the fact that someone else put up the cash to get a mine up and running.
There’s one situation where both the miner and the streamer can find themselves on the losing side of the table, though, and that’s when the price of gold drops, as it has — precipitously — over the past few days. Falling gold prices crimp margins for everyone.
Still, for some well-managed streaming companies that have negotiated sweet deals, the recent pullback in commodity prices isn’t a problem. Two names rise to the top of that heap.
It’s safe to say Sandstorm Gold Ltd. (AMEX:SAND) isn’t on many investors’ radars. With a market cap of only $627 million and a history that’s not easy for American investors to pin down (it’s a Canadian company), it’s just not had much opportunity to attract attention. That doesn’t mean it hasn’t deserved some though.
Sandstorm’s lead project is a partnership with Luna Gold (PINK:LGCUF) to develop the Aurizona project in Brazil. The open pit mine is already up and running and Luna thinks it could yield 60,000 ounces of gold on an annual basis. Indeed, that deal just got a little sweeter a few days ago when the probable gold reserve for the mine was upped to 2.36 million ounces. That’s about $3.2 billion worth of gold. Sandstorm has dibs on 17% of its output for as long as the mine produces.
And the company’s cost to buy that 17% of what’s apt to be 2.36 million ounces? Only $400 per ounce, versus gold’s current price around $1,380.
Another name to consider scooping up here in the aftermath of gold’s implosion is streamer Silver Wheaton Corp. (NYSE:SLW). Yes, it’s primarily a silver streamer, though it does have a handful of gold interests. Either way, silver has suffered the same setback as gold has of late, and SLW shares fell in lock-step with silver’s dip. Big mistake.
There’s no way to deny that Silver Wheaton has been a smashing success. Revenue has grown from 2010’s $425 million to $849 million last year. Net income improved from $153 million in 2010 to 2012’s bottom line of $586 million. Granted, much of that growth stemmed from the meteoric rise in silver prices during that time, but the company played it perfectly.
For perspective, Silver Wheaton’s cash costs for an ounce of gold in 2012 was only $4.06. That’s a pittance compared to current silver prices of around $23 per ounce (and that’s factoring in the recent slide).
That cut-rate silver price is only likely to get better in the near future too. Its deal with Barrick Gold (NYSE:ABX) to get Chile’s Pascua-Lama silver mine up and running should start to produce revenue sometime in 2014. The companies believe it should net Wheaton 8.75 million ounces of silver per year for the first five years of production at a price of only $3.95 per ounce.
Proverbially speaking, a lot of babies got thrown out with the bathwater when the market dumped any stock even remotely-related to the gold mining business. Not every one of these names is in dire straits though, even if gold prices slip a little further.
Two of those companies were just discussed, but SLW and SAND are hardly the only streamers out there. If you want to play gold, similar companies definitely seem like a solid bet.
As of this writing, James Brumley does not have a position in any of the aforementioned securities.
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