Young Gun Nolan Watson Waits to Pull the Trigger
Issue 51, July 2013
In 2004, following a 3-year buying binge that caught the bottom of a 20-year gold bear market, Wheaton River Minerals found itself flush with assets, producing 600,000 ounces per annum at $50 per ounce. Copper revenue however meant that it was not trading at a precious metals multiple. The company decided to spin its silver production into a separate vehicle, Silver Wheaton, which issued stock and expanded its asset base, paying $50m for silver from Lundin Mining’s zinc mines in Sweden.
The deals created a new financing mechanism: Silver Wheaton paid cash upfront for the right to buy future output at a low, fixed price. The premise was to extract silver revenue from base metals miners, funneling it into a debt free and unhedged vehicle that would trade at a loftier multiple.
Silver Wheaton however remained a corporate shell. Accountant Nolan Watson became its first employee and in 2006 was promoted to finance director, aged 26. Rolling out the so-called streaming model, Silver Wheaton’s market cap grew to $3bn by 2008, when Watson left to list his own company, Sandstorm Resources.
The model has “evolved considerably,” he tells Global Mining Observer. “It was purely a value arbitrage idea. It’s now a financing mechanism to help companies go build mines.” Whereas Silver Wheaton’s early deals were over byproduct from existing mines, Sandstorm (which has separately-listed arms for gold and base metals) buys primary output from pre-production projects.
In 2009 for example, it paid Brazil-based Luna Gold $17.8m in cash plus shares for the right to buy 17 per cent of output from its Aurizona gold mine at $400 per ounce. The mine entered production in 2010, with output rising to 17,200 ounces in the last quarter.
Similar deals have been struck with Brigus, SilverCrest and Entree Gold in Canada, Mexico and Mongolia. It has also bought 60 per cent of Premier Royalty, which Watson calls a “cash rich vehicle” able to focus on smaller assets.
Watson’s application of the streaming model has evolved with the clauses of each deal, which include repurchase windows that give the operator flexibility and back-out rights that “ensure our investors are not on the hook.” In a $38m agreement with Australia-based Mutiny Gold, Sandstorm offered a further $5m should the company ramp up its planned run-rate from 50,000 to 80,000 ounces per annum. “Obviously the 80,000 ounce per year mine has a lot more value to Sandstorm.”
As a counterparty, Sandstorm’s interest is in maximising production and keeping an operator afloat. On Monday it waived its right to Donner Metals’ copper output for the current calender year, leaving the junior headroom as it ramps up production at its Bracemac-McLeod joint-venture with Glencore. Since mines often exceed their budgets, Watson argues, ordinary lending to the industry is flawed. He describes “true debt bankers” as “guys that’ll take your asset at the first bluster of trouble.”
As Sandstorm has widened its offering however, the company has edged into both equity and debt, extending a $20m credit line to Luna to fund an increase in annual production to 125,000 ounces. “We’ve recognised that usually a stream is not the only capital required to build a mine. We’re not going to buy a tonne of equity if it’s overpriced. Having said that, we look for situations where we believe there’s tonnes of exploration upside and usually therefore the equity is undervalued relative to our view of the asset.”
Low cost production and exploration upside are the common threads to Watson’s deals. Luna has all-in costs of $1,033 per ounce and has increased resources threefold to 3.6m ounces since its original deal with Sandstorm, giving Watson’s shareholders claim to additional ounces at zero expense. “There’s an exploration aspect to all our deals,” he says, “without exception.”
Pre-emptive clauses capture further upside. If Mutiny finds nearby deposits outside the original stream, Sandstorm has the right to fund part of the capital costs, earning an equivalent stream.
Sandstorm is at the forefront of an industry less than 10 years old, but for all its innovation the company remains beholden to the operators with which it deals. “If gold goes to $500, no-one is going to produce it and that includes our partners, but at $1,200, Sandstorm is making very good cash flow.”
Quarterly earnings show attributable production of 8,581 ounces at a cost of $427 per ounce. Cash of $97m in its gold arm is bolstered by an undrawn $100m credit line, aimed at opportunities should equity markets shut down. “We have deals in the pipeline,” Watson says, “but we are very cognisant of the risks to the industry over the next 12 months. We’re taking our time and being very choosey over where we pull the trigger, and when.”
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