As gold prices significantly increased over the last 12 months, many investors are looking for ways to ride the wave without buying hunks of metal. Gold mining stocks are a solid bet. Unlike ETFs, which aim to track gold's exact value, miners tend to outperform physical metal when times are good. Because of their consistent fixed costs and use of leverage, they can see profits explode when gold prices rise.
Sandstorm Gold (SAND -0.17%) is a gold stock with a unique business model. By engaging in the right to purchase agreements known as 'streams,' the company is shielded from many of the risks inherent to the sector. Sandstorm enjoys growing revenue and several massive growth drivers going into the 2020 decade. With gold spot prices holding steady around $1,500 an ounce, the company is well-positioned for an impressive fourth-quarter result on Feb. 18.
Catalysts for the gold market
Gold has posted significant gains over the last 12 months which look to be part of a long-term bullish trend. The metal is seen as a safe haven asset so it can benefit from geopolitical turmoil in the middle east and China. It can also get a boost from more fundamental factors like the Federal Reserve's monetary policy.
With interest rates at historic lows, gold should see continued support going in 2020 and onward. This is because gold prices tend to rise when interest rates are low and fall when they are high. This correlation may be due to the metal's inverse relationship with real yields (the return on treasuries accounting for inflation). When real yields are low -- or negative -- gold is seen as a better alternative to treasury bonds as a way to preserve wealth.
Sandstorm's edge
Led by Nolan Watson, the former CFO of Silver Weaton (NYSE: WPM), Sandstorm Gold employs a similar business model. Instead of exploring and mining for gold, the company functions as a creditor that lends to miners. It provides up-front capital in exchange for a share of future production at a set price per ounce.
This strategy protects the company from the risks associated with mining (such as cost overruns) while allowing it to benefit from increases in gold prices. It's a tried and true strategy. Nolan's old company used it to gain a market cap of over 12 billion. Will Sandstorm replicate that success?
Growth drivers
Sandstorm ended 2019 on the back of a record-breaking third quarter. And with gold prices holding steady, the company looks poised to replicate its performance when fourth-quarter results are announced on Feb. 18.
Driven by a ramp-up in production from the Aurizona mine in Brazil, Sandstorm sold 17,289 ounces of gold equivalent in the 3rd quarter of 2019. This is compared to 14,314 ounces sold in that same period last year. Management is guiding production of between 63,000 and 70,000 troy ounces in the full year of 2019, so expect between 15,284 and 22,284 to be sold in the 4th quarter.
Sandstorm should be able to hit its goals for the full year of 2019 due to Aurizona's ramp up as well as production starting in the Ecuadorian Fruta Del Norte mine.
Production from these two mines should help Sandstorm report fourth-quarter results at the high end of the 15,284 to 22,284 ounce range. But Sandstorm has even bigger growth drivers going into the 2020 decade.
Hod Maden, a project located in Turkey, is expected to start production in the fourth quarter of 2022. Sandstorm has a 30% net profits agreement with Lidya, the mine's operator. And by 2023, Sandstorm expects to produce 140,000 ounces of gold equivalent. This is around double current production -- and its due, in large part, to this Hod Maden's expected contribution.
Sandstorm's future is shiny
With all these massive topline growth drivers in its pipeline, Sandstorm is poised to reap a tremendous reward if gold prices hold steady or increase going into the 2020 decade. The company's unique streaming model shields it from many of the risks in the mining sector while keeping its upside intact.
Gold investors should keep a close eye on Sandstorm going into fourth quarter results. Gold equivalent production looks like the key to an earnings beat.