2 Key Reasons Why Gold Streamers Are Superior to Miners

Buy Sandstorm Gold Ltd. (TSX:SSL)(NYSEMKT:SAND) today and profit from higher gold in 2020.

| More on:

Growing economic and geopolitical uncertainty coupled with firmer gold that’s trading at a multi-year high of around US$1560 per ounce makes now the time for investors to bolster their exposure to gold.

There is every indication that the yellow metal will rally further and break through the US1,600 an ounce mark because of trade tensions, the confrontation between Iran and the U.S. and growing volatility.

While many investors think about miners when considering how to bolster their exposure to gold, a superior means of doing so is by investing in precious metals streamers. They provide the same levered exposure to gold but are far less risky, making them a superior investment.

Here are two key reasons to add gold streamer Sandstorm Gold (TSX:SSL)(NYSEMKT:SAND) to your portfolio.

Lower risk

In exchange for receiving a royalty on the gold sold by a miner or the right to acquire a fixed volume of precious metal at a deep discount to the spot price precious metals streamers provide finance to miners.

This means that streaming companies possess the same commodity price leverage and exploration upside as miners, but with significantly less risk.

Mining is a capital-intensive activity where tremendous costs are incurred for exploration, mine development, operations and reclamation, which makes miners highly dependent on a small number of operations for their precious metals production and hence earnings. It creates significant risk because an outage at a single facility can sharply reduce production and hence earnings.

Tahoe Resources travails at its flagship its Escobal mine in Guatemala illustrates just how badly things can go. Escobal, the world’s third largest silver mine, was forced by Guatemalan courts to shutter operations in 2017 after its licence was suspended, causing Tahoe’s production and hence earnings to plummet to unsustainable levels.

Tahoe was unable to recommence operations at the mine and was eventually acquired by Pan American Silver at a considerable discount to its value prior to Escobal being shuttered. The mine has yet to recommence operations, and there are signs that the mine won’t be restarting any time soon.

Streamers, however, can assemble a large geographically diversified portfolio of royalty and streaming agreements across various jurisdictions.

Since 2009, Sandstorm has amassed a globally diversified portfolio of around 200 royalty agreements across North and South America, Africa, Asia and Australia.

That considerable diversification across mines and jurisdictions substantially reduces the impact of operational, regulatory and geopolitical risk on its financial performance.

Greater profitability

Mining is a financially intensive activity that consumes large amounts of capital to develop a mining project and bring it to commercial production, while considerable investment is required to sustain as well as expand operations.

Streamers, because they don’t need to invest capital to develop and sustain mining operations, have far lower costs, making them more profitable than miners.

Sandstorm reported third-quarter 2019 cash costs of US$288 per gold ounce sold compared US$710 for the world’s second-largest gold mine, Barrick Gold.

This illustrates that not only is Sandstorm more profitable than most gold miners, but it can also remain operationally profitable even if gold plunges to levels that cause miners to operate at a loss.

Significantly lower operating costs free up capital that can be used to acquire further royalty and streaming agreements that will boosting assets, production and portfolio diversification.

It’s important to note that streaming and royalty agreements are typically attached to the mine, not the operator. That significantly reduces risk for a precious metal streaming company because in the event of the miner going bankrupt or the asset changing hands, the agreement still stands.

Foolish takeaway

Sandstorm, which rallied by 50% over the last year, substantially beating gold and the broader S&P/TSX Composite Index, is an ideal precious metals streamer to profit from higher gold.

For the aforementioned reasons, it is a less risky play on higher gold than miners. The company expects its annual gold output to grow by 115% between now and 2023, which, in an environment where the yellow metal is rising in value, will give earnings a solid boost.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any of the stocks mentioned.

More on Metals and Mining Stocks

Concept of multiple streams of income
Stocks for Beginners

Lock Up This 9.2% Dividend Yield From a Top Royalty Stock

Royalty stocks have a strong advantage when it comes to creating passive income for investors. But this one has the…

Read more »

Safety helmets and gloves hang from a rack on a mining site.
Metals and Mining Stocks

Is First Quantum Minerals Stock a Good Buy Right Now?

First Quantum is a TSX stock that trades 61% below all-time highs. However, the mining stock still trades at a…

Read more »

nugget gold
Metals and Mining Stocks

The Best Gold Stock to Invest $1,000 in Right Now

Here are two of the best Canadian gold stocks that can yield some eye-popping returns in the long run.

Read more »

nugget gold
Stocks for Beginners

The Ultimate Mining Stock to Buy With $1,000 Right Now

This mining stock just saw a drop, but don't let that keep you from diving in. This miner is due…

Read more »

A plant grows from coins.
Metals and Mining Stocks

Canadian Mining Stocks: Buy, Sell, or Hold?

Explore 2025’s top Canadian mining stocks – gold, uranium, and base metals offer big potential in a dynamic, commodity-driven market.

Read more »

farmer holds box of leafy greens
Metals and Mining Stocks

3 Reasons to Buy Nutrien Stock Like There’s No Tomorrow

Nutrien stock has lost 34% of its value just this year alone and looks incredibly cheap today. Yet, secular trends…

Read more »

Canada national flag waving in wind on clear day
Tech Stocks

Trump Trade: Canadian Stocks to Watch

With Trump returning to the presidency, there are some sectors that could boom in Canada, and others to watch. But…

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Metals and Mining Stocks

Invest $7,000 in This Dividend Stock for $672 in Passive Income

High yield can be an essential requirement when you need to start even a modestly sized passive income with a…

Read more »