How to Make Money In Mining – Nolan Watson of Sandstorm Gold Interview

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Transcript

FutureMoneyTrends.com: Thank you for joining us at FutureMoneyTrends.com. We’re here with Nolan Watson, he’s the CEO and founder of Sandstorm Gold and Sandstorms Metals & Energy. These are two very high quality junior resource stocks that are very unique because they’re a lender for the resource sector. He actually previously worked for Silver Wheaton, which I know everyone will know. Nolan, thank you for joining us.

Nolan Watson: Thank you. Thanks for having me.

FutureMoneyTrends.com: Nolan let’s start off. First of all, we’re at the Casey Summit. You are on their NexTen list, this is a special list for people who are under 40, correct?

Nolan Watson: Yes.

FutureMoneyTrends.com: So you’re under 40 years old, very successful, you’ve already made these guys a lot of money, and your company is unique, I don’t think anyone else in there is a royalty company. So if you could just introduce people to what is the idea of a royalty company. Because most people when they buy a gold miner they buy these guys who are drilling holes and they’re mining it. What do you guys do at Sandstorm Gold?

Nolan Watson: Well at Sandstorm Gold we are what you would call a streaming and/or royalty company. So we have right now nine gold streams from mines around the world. The majority of those gold streams are in production. What a stream effectively is, is we’ll give a mining company money on day one so they can go build their mine. What we get back in return is a contract that allows us to buy a certain percentage of their production at a fixed price per ounce and we go on and sell it at spot. So the contract might say something like: ‘We get to buy fifteen percent of their production at 500 dollars an ounce and every time they give us an ounce we buy it at five hundred and sell it the same day for spot price’. And so we have this stream of cash flow coming back because we’re buying and selling the gold from various mines around the world. And that’s why we call ourselves a streaming company. But we also, we just actually closed the acquisition of a royalty company as well, so we now have 25, I believe, royalties around the world, and those royalties a number of them are paying cash flow as well. So it’s a good place to be to have positive cash flow in this environment.

FutureMoneyTrends.com: Yeah, how does it work when gold collapses the way it has, from 1900 down to 1200? How does that affect your agreements? Do you have something in there? What if the mining companies who you’ve loaned money to, they’re not even profitable… How is their obligation then to you? How does that work?

Nolan Watson: Yeah, so right now 84% of our production comes from assets that have cash costs in the 600 dollar range and all in sustaining costs when you include exploration and GNA and all those types of things in the sort of thousand to thousand fifty dollars an ounce. So, even in today’s gold price, which has come all the way down to 1300 dollars an ounce, the vast majority of our partners are producing quite a bit of profit actually. And that’s actually fundamentally what we’re trying to do when we go and do these deals. We get calls every week from companies that we have to say no to because we know that they’re going to be high cost operations. What we are looking for, what our technical teams are looking for, what our corporate development guys are looking for are what’s going to be low cost producers. So that’s what we focus on.

FutureMoneyTrends.com: How about the capital markets in general for the junior resource sector? How are the mining companies doing as far as money and cash on hand.

Nolan Watson: Generally speaking, they’re doing terrible. It is absolutely brutal out there. There is almost no cash to be had, there’s a number of mining companies trying to raise money that cannot raise money. There’s been a record low number of financings, it’s a record low amount of financing rates this year. It is very very dire circumstances. A lot of companies are going insolvent. Even this morning actually as I was walking through this conference here, I received an email from a bankruptcy firm that is putting various gold assets up for auction and wanting people to bid on insolvent gold mines. It’s really really bad out there. Now having said that, I think there is positive signs for bottom-feeding investors who recognize that valuations are low, and right now there are deals to be had in the mining industry, it’s just nobody wants to be first. They don’t want to try to catch the falling knife.

FutureMoneyTrends.com: Now how about you guys? You just said you made a big acquisition, bought another royalty mining company. Does this become a good time for you guys because you guys have cash? Are you interested in loaning money to these companies.

Nolan Watson: Yeah, we are interested in doing more streams and/or royalties, and so right now we have 90 million dollars of cash on our balance sheet, we have no debt, but we do have a hundred million dollar revolving line of credit, so we can borrow up to another hundred million dollars to go do deals. And we’ve got 30 to 40 million dollars of cash flow coming in and a bunch of assets that are ramping up. So our cash flow’s going up. So we have a lot of capital that we need to invest, in fact, over the next sort of year and a half there’s over a quarter of a billion dollars that we would like to invest. We’ve got a big corporate development team, they’re out there looking for things right now. I’ll admit, even we were sort of holding back for a while here, because things were getting so bad, we wanted to see where things settled out. We didn’t want to catch a falling knife either. But I’m feeling very confident about the market now in the longer term. I am very bullish on gold, I think gold is going to go up in the longer term. It’s going to be much much higher in the future than it is today, and I’m highly confident about that. And so we’re looking to buy things.

FutureMoneyTrends.com: What is your share price at now and what was its high?

Nolan Watson: It’s high was $14 per share.

FutureMoneyTrends.com: When?

Nolan Watson: And that was about 18 months ago, and today it’s at $5 a share, so it’s come down dramatically, but we have more cash than we’ve ever had, and we have as much as more cash flow as we’ve ever had, so we’re doing pretty well.

FutureMoneyTrends.com: That’s pretty much the question. Your company has gone from 14 to 5 in share price, but in value, assets, projects, growth. What has happened, has your company shrunk?

Nolan Watson: Not at all, no. We’ve got more cash flowing assets than we’ve ever had before, we have more cash flow than we’ve ever had before. I think this year’s going to be record cash flow for us by the end of the year, and I think 2014 will be even higher. And we’ve got more capacity to do deals than we ever had before. So the fundamentals are very good, and we kind of just ignore our stock prices. It’s like Warren Buffet, ‘Mr. Happy Market, Mr. Sad Market’. Because we don’t have to issue equity like all the other companies out there we’re less concerned about our stock price. We’re just going to execute the business.

FutureMoneyTrends.com: How about Sandstorm Metals and Energy, what’s the story over there?

Nolan Watson: Yeah, so right now it’s at a very very tough time. It’s our smaller sort of sister company. Its market cap is only 50 million dollars. It’s had a few of its partners go insolvent here. The benefit is we didn’t take on any debt, that was something that we did very much on purpose. So right now we have cash on hand, we have no debt, and so we don’t have to raise equity either, we’re just gonna ride out the storm. It’s actually next month, fingers crossed, that we anticipate getting our first royalty check that will turn us into a positive cash flowing company. So, fingers crossed, November we should become a positive cash flowing company.

FutureMoneyTrends.com: That’s great. I have some questions from subscribers, and they’d like to ask you since you are one of the expert mining CEOs that we know of. Why do mining companies sell their products for less than the cost of production? I think that baffles some people, because it’s a depleting asset. Wal-Mart would never do this, but the mining companies do it. Why can’t they either just stop production, or just say “You know what, I’m not selling silver for 20, I’m going to sell it for 25.”

Nolan Watson: That’s a really good question. I think there’s two reasons behind that. One is, even if CEOs of gold or silver companies believe that the price of the commodities is going to be going up in the future, the problem is they’re under-capitalized. It costs a tremendous amount to actually produce that gold or that silver, so if they were going to continue to produce it and stockpile it, they would go bankrupt in the process, because they’d have expenses and no revenue. So correspondingly, I think the other main reason that people will purposefully continue to operate at a a loss, which you see this throughout the industry, is that because the minute that you decide to shut down your mill, most people don’t have an appreciation for how complex this is, and you send your one thousand employees home, and that mill sits there; it starts to rust. And you’d be surprised at how quickly everything starts falling apart at the mine if you don’t have this massive amount of ongoing care and maintenance to keep everything fresh and all the parts changed out. And so, if you decide, say, let’s shut down for three years and wait for higher prices. When you come back three years from now to restart that mine up, you’re going to have to refurbish almost the entire mill. And that can cost hundreds of millions of dollars; you might have lost your permits in the process, if you were inactive. And then you’ve got to deal with all of the working capital of hiring a thousand people again, and you’ll never get the capital to do that. So everyone in the mining industry knows, the day you shut off your mine, it’s not starting back up again for years without a significant cost. So you will operate at a loss as long as you can until you go bankrupt just so that you don’t have to do that. And that’s what we’re seeing the industry do right now. A bunch of people are operating at losses and a number of them have already gone insolvent.

FutureMoneyTrends.com: With Sandstorm Metals and Energy, will you guys ever get into uranium?

Nolan Watson: We haven’t done any uranium deals, we have talked about it actually, and we are sort of relatively bullish long term on uranium prices. That isn’t a decision we have made, as of yet.

FutureMoneyTrends.com: I was just wondering because I’m somewhat familiar with the story, so I saw that there was obvious opportunity.

Nolan Watson: Yeah.

FutureMoneyTrends.com: Another question from a member, this has to do more with personal finance. The question is, ‘could you do it again? If left with nothing, could you become a millionaire and how would you do it?’

Nolan Watson: Could I do it again? The answer is yes. With me, I would do it the same way. If Sandstorm didn’t exist, I would go and start it up tomorrow. It’s a skill set that I’ve sort of been training for my entire life, which is, is mining industry, deals, and streams. And I know how to do that, I’ve done more streams than anyone else in the world, and certainly I would do that. If I wasn’t in the mining industry, I don’t know how, but I would certainly try pretty darn hard to do it.

FutureMoneyTrends.com: In general, what are some of the things as far as investing money right now for your company. What are the best things you can do for your company right now that you are doing? For regular mining companies it’s do you spend money on exploration, do you spend money on production. When you guys are looking at things right now and how you’re going to spend your dollars, are you guys looking for things that are, production is imminent, and you’re just giving them that last dollar to put them over the top.

Nolan Watson: The vast majority of deals that we’re looking at are that. They’re ready to go build a mine, they want to go build a mine, and we’re giving them the capital to do that. Every now and then we’re taking bets a little bit earlier on out. We believe that the risk adjusted reward is worth it. But I guess the heart of what you’re asking is what do we do with our cash and how do we invest it, and how do we think about it? For any of your readers or listeners I think one of the things I would recommend, it’s actually a book that was given to me by one of my shareholders, and it’s a book called “The Outsiders,” and it’s not the old old “Outsiders” fiction book, it’s one about eight great CEOs who are capital allocators of all time, and the way that those eight CEOs looked at things is: every decision that they had was a capital allocation decision. So they’re always looking at the acquisitions that they could make, or the reinvestment in their business, or the shares that they can buy back in their own business, and always looking at which one has the higher return for them. So you have this perpetual ongoing analysis of: if I buy back my own shares, my inherent rate of return is x, if I buy new acquisitions, my inherent rate of return is y, and which one is better. So that’s really how we’re looking at things at Sandstorm is, we’ve got cash, and we’re always going to look to determine the highest way to deploy that.

FutureMoneyTrends.com: In closing, I assume you probably travel a lot. You talk to investors from all over the world. What’s your overall thoughts about the global economy? Are we going into another big recession?

Nolan Watson: I think there are too many central bankers printing too much money for us to have any prolonged period of recession. It may be an actual recession in real dollars but in nominal dollars it won’t be a worldwide recession because so many people are printing so much money. I think in the long run, I think the world is going to do okay. There’s going to certainly be challenges. The U.S. economy, I don’t think is nearly as healthy as people think it is, and I think that they’re going to have to keep printing money to keep things going.

FutureMoneyTrends.com: Nolan, if someone would like to reach out to you guys, where is the best place for them to go?

Nolan Watson: Yeah, they can look us up on our website, which is SandstormLTD.com, and the phone number is listed on there. Feel free to give us a call.

FutureMoneyTrends.com: Thanks so much for your time, sir. Appreciate it.

Nolan Watson: Thank you.

 

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