Today we’re looking at a pitch from Tom Dyson and his colleagues at Palm Beach Letter, they’re selling their Palm Beach Confidential service — and one of the ways they’re selling it is by promising that they’ve got an investment that could return eight times your money if gold goes up just $150.
What? OK, this seems like something we need to check out. Here’s part of the intro from the email I got:
“I just got off the phone with a friend who’s very connected in the gold industry. And he told me about a tiny company whose price rises exponentially when gold prices rise.
“In fact, if gold goes up just $150 more per ounce—this investment could return eight times your money.
“From 1999–2011, gold prices rose to $1,920… And a similar gold company returned an extraordinary 3,754%.”
And the “mea culpa” from the beginning of the ad…
“For personal reasons, I’ve withheld this very profitable gold trade from you… Along with several other promising opportunities only my friends and family know about. Here’s how I plan to make the situation right, starting today.”
He hasn’t withheld this “profitable gold trade” from us, of course, since we’re not subscribers — but he has apparently withheld it from people who’ve been paying for his ideas, and he’s now rectifying that by offering subscriptions to the far more expensive Palm Beach Confidential.
After all, the best ideas come from the most expensive newsletters, right?
And the pundits know in advance which ideas will be more profitable than others, and restrict those to the “upgrade” newsletter?
[Those who answered “yes,” I’ve got a special deal for you — I’ll offer you a version of Stock Gumshoe that costs one hundred times as much as our current membership. Don’t worry, it’ll all be top-secret stuff. It’s so cool I can’t even tell you all about it now. Just send me the money, believe me, it’ll be huuuuge.]
In a crazy bull market for a particular commodity, like we’ve seen for gold so far this year, it’s typically going to be the small cap stocks that are in that sector who show the most incredible gains (they’re also the one with the most horrific losses in a bear market), and it’s true that many newsletter publishers save their more volatile small-cap recommendations into higher-priced newsletters — both because those are sexier ideas that are more fun to sell, and more likely to generate possible 100-1,000% gains and get people excited about pricey letters, and because they’re the kind of stocks that can’t handle 20,000 people all buying them at once… you need a smaller group, or no one will have a chance to buy near a fair price and all your subscribers will be mad at you.
When thinking about newsletters and the promises they make in their ads I think it’s important to remember that these are, before everything else, marketing businesses — the basic business plan for most investment newsletters is essentially a funnel, they get in as many lowish-cost (under $100) subscribers or free subscribers as possible for “front end” or “entry level” newsletters, and that creates a hugely valuable pool of people to whom they can profitably sell their “back end” newsletter for $500 or $5,000 or whatever it is, and for a lot of publishers they spend so much on marketing that the “front end” letters really just break even — it’s those back-end newsletters that make the business work. You either need huge numbers of low-cost subscribers who you can acquire without paying too much for marketing and refunds, and who will renew for years (the marginal cost of fulfilling each new subscription is almost nothing, after all — it’s the cost of acquiring each new subscriber, even free subscribers, that can be high), or you need a pretty good “upgrade” rate to get those subscribers quickly up to the point where they’re generating high-margin returns for you. That’s why the advertising never stops, even after you’ve subscribed to an “entry level” letter — the person who just bought a $50 newsletter is, in many ways, the best possible candidate to pitch a $500 letter to, they’re already in “buying” mode and excited about their new purchase.
So, naturally, that’s what the Palm Beach folks are doing here — here’s how the ad from Tom Dyson puts it:
“Recently, my colleague here at The Palm Beach Letter, Teeka Tiwari, told me about a report he was putting together on gold.
“Teeka’s research suggested gold may have found its bottom this past January – and that an upswing was likely coming…
“So at the beginning of April 2016, he recommended gold at $1,218.
“Sure enough, the gold price has been climbing steadily ever since… to $1,331 per ounce – a nearly 10% gain in three months.
“But here’s what he just said to me ‘off the record’…
‘Tom, I can’t recommend this to all 120,000 Palm Beach subscribers. But if you really want to make a bundle on gold’s breakout… there’s a far better choice…
‘It’s a tiny gold company with the potential to make exponentially more than physical gold…’
“How much more?
“Historically, this special type of gold play has far outperformed investments like gold ETFs, gold coins, and any other type of physical gold.”
Oooh, what is it!? Come on, tell me!
“You see, the company I’m talking about is part of a rare subset of mining companies. Their unique business plan allows them to acquire gold (or silver or other precious metals) at a steep discount to the spot price.
“And they acquire this gold without engaging in any traditional – and costly – mining activities. They don’t survey, they don’t dig – and they don’t buy expensive equipment. The company has less than 20 employees!”
Ah, this is starting to sound kinda familiar.
“Teeka Tiwari just got off the phone with the most brilliant mind in this field – a 36-year-old wunderkind, the man who pretty much invented this type of mining company.
“Gold expert Doug Casey called him, ‘one of the smartest, most driven young men you’ll ever meet.’
“In fact, he’s already done the same thing with silver, when he helped run a similar company who saw their stock rise as high as 1,370%.
“Now he’s moved on to a new gold project – one he expects to do just as well as silver.”
And, of course, the “we just can’t tell everyone” bit…
“We’re handcuffed. Teeka simply can’t recommend this company to all Palm Beach readers.
“It’s beyond frustrating that we can’t share our best research. But these stocks are just too small and too “illiquid” to do it safely. If all 120,000 Palm Beach Letter readers tried to buy at the same time… we’d run the stock price up so high, no one would make any money….
“Anytime we come across an extraordinary opportunity that’s too small to show the more than 120,000 (and growing) Palm Beach Letter readers…
“We’ll write about it in Palm Beach Confidential—and send it off to a handful of people who would like to see it.
“And the first opportunity we’ll share with you right away is the ‘gold multiplier’ that could make you 800% if gold hits just $1,500 an ounce. If gold reaches its past highs, you could make 10 times your money or better.”
Incidentally, that Palm Beach Confidential service, they say, will be priced at $3,000 a year, though the current offer is $1,500 for “lifetime” access for lucky “charter” subscribers.
So what is this “Gold Multiplier” stock they’re hinting at?
Thinkolator sez it’s our old favorite, Sandstorm Gold (SAND). Nolan Watson is that “one of the smartest, most driven young men” fella (that quote is from a few years back, when Doug Casey’s group anointed Nolan one of the “next 10” young up-and-coming industry titans.
He was the CFO of Silver Wheaton (SLW) as it was pioneering the “silver streaming” strategy and later left with another Silver Wheaton exec to start Sandstorm Resources to apply the same basic strategy to small gold projects (for a while it split into Sandstorm Gold and Sandstorm Minerals, but the non-precious-metals wing of the business was built on a few weak assets, failed to catch fire, was re-absorbed by Sandstorm Gold a while back). Gold is the lion’s share of their business still, though they also have meaningful investments in diamonds and copper.
And if you’ve been around these parts for any length of time, you may well be sick of seeing notes about Sandstorm Gold — Watson “moved on” to this “new” project not all that recently, Sandstorm was founded in 2008 and I’ve owned the stock for a little over six years now since first buying in the Spring of 2010, always holding some but also trading in and out of both the warrants and the common shares through some good and bad times. I last added meaningfully to my position back in October of last year after they made their Yamana copper deal (I traded some options during the gold boom earlier this year, but am out of those now — I now hold only equity and a small residual warrant position that’s way out of the money).
Sandstorm Gold is both a streaming company and a royalty company now, in addition to having some small equity and warrant stakes in a few of the companies they’ve financed. Streaming deals and royalties are both ways of financing mining exploration and development without equity or debt issuance — typically, streaming deals give the owner of the deal the right to buy some set portion (usually pretty significant, often 10% or more) of the output of a mine or the output of a particular metal at a set price well below the market price at the time the deal is signed, and they’re often made when a project is fairly far along and close to actually getting built so they can provide a meaningful cash boost to a company finalizing a project. Royalty deals are much more common and are often made on earlier stage projects or exist as a legacy of land deals or extremely early financings, they typically give the owner of the deal the right to a set percentage, often much smaller (1-3%) of the actual metal smelted (usually NSR, net smelter return, though there are many variations) at no ongoing cost. Because they’re often created at the very early stages, even before a property is really explored, royalties on exploration-stage properties are often relatively cheap but also often amount to nothing (if a mine is never built, naturally, there are usually no cash flows from the royalty — though some do get structured with minimum payments or guarantees, particularly if the royalty is part of the payment for an acquisition).
The appeal of both of these kinds of deals, which for individual investors were really popularized first by Franco-Nevada (FNV) as they built their gold royalty portfolio starting decades ago, is that you can have a relatively small company with low overhead and you don’t expose yourself directly to all the cost overruns and hassles of building and managing a mine — you’re a mostly passive partner, you just get your check or your pile of gold each quarter or month or year and hope that prices and production are high enough that you get a good return on your initial investment.
There’s a flip side too, of course, you have few employees and no obligation to pay for cost overruns and pretty minimal operating costs compared to the miners — but you also get very little input into company decisions, and if a company has terrible cost overruns or mine construction or permitting or labor issues that delay or cancel a project, you might well be out of luck and out of a lot of money with not much in the way of returns. Each deal is different, sometimes there are guarantees — but guarantees are not terribly meaningful if prices are falling and companies are going under and sometimes the financiers feel the pain too. Sandstorm has learned some of those lessons, particularly a couple years ago with Luna Gold when that company’s underground mine project flooded and they felt obligated to throw more money into the project to keep their streaming deal from becoming worthless. Deciding whether to “throw good money after bad” to try to rescue an investment is tough, and you’d like to only invest meaningfully into projects that are going to be well-financed after you invest but life is rarely that clean or simple. That’s a big part of the reason why Sandstorm has moved to do more deals with larger companies in recent years, since their financial wherewithal to get mines built or expanded is usually much greater than is the case with the little juniors who were Sandstorm’s first partners when they were starting out.
The leverage that you can see from streaming deals is pretty impressive, which is part of the reason why Sandstorm has more than doubled off the lows of January and February — if you have a deal to buy 8% of gold production at $524 an ounce (that’s just an example pulled from Sandstorm’s portfolio, the Black Fox mine) and gold is at $1,100 an ounce, you get a nice $576 per ounce net cash from the mine… if gold goes up 23% or so to $1,350 you net $826 per ounce so your net cash flow from the mine increases by 43% without you having to do anything.
There are really two keys that drive the success of these kinds of operations: They have great leverage to higher prices; and they typically have “free” exposure to mine extensions and to increases in reserves and production and expected mine life. That last bit is more important, probably, because if the pricing environment is OK there’s a strong probability that mines will grow over time and become larger than they initially envisioned. Miners don’t invest in proving out 30 or 40 years of reserves if they can get the mine financed by proving up 12 years of reserves, but after they start generating profits they start doing more drilling to see if the deposit is larger than they proved with their initial exploration… which is often the case. Not always, for sure, but royalties and streaming deals are lucrative because of their long tails — they often take years to break even, Sandstorm originally was shooting for deals that would break even in five years, but they can keep producing for many years after the original projected mine life… and if you’re fortunate, the price of the commodity you’re mining can also rise.
Sandstorm has grown substantially larger and more diversified over the past six years — it started with a handful of streaming deals with tiny miners or near-miners, and after a number of acquisitions, including accelerated acquisitions over the past two years as companies were more desperate for financing than they had been during the gold bull market, and as they were able to pick up some portfolios of royalties at appealing prices, they now have royalty and streaming deals on 20 operating mines and another 90 or so deals on mines that are not yet producing (some are close to production, others are years away or might never be built).
But, as you might imagine after a good year, the stock does not look particularly cheap unless you’re optimistic about gold and copper prices — and frankly, it didn’t look cheap when it was at $3 at the turn of the year, either (remember, not everyone was excited about gold miners then like they are now, not with gold dropping to $1,000 an ounce).
Their performance has continued to be fairly solid, in my opinion — the net income numbers have fluctuated a lot because they have to revalue their equity and warrant investments and write down some streaming contracts when projects are delayed or troubled, but their basic operating costs have been kept pretty manageable and the expectations for production are pretty solid still. As of the latest quarterly report (press release here), they’re anticipating a total of 43,000-50,000 ounces of gold in 2016 (at average costs per ounce below $300) and growth to 60,000 ounces a year by 2020. They raised some equity earlier this year and paid off all their debt, so they have a great balance sheet and about $100 million in “revolver” financing available if they find something else they want to buy.
If they can keep their overhead costs (mostly property evaluation and SG&A costs) to about $10 million a year, which is more or less where they’ve been of late, and if gold is at $1,500 an ounce in 2020 (a wild guess) and per-ounce costs are at $300 (higher than they were this quarter), then you could be looking at $62 million in free cash flow by then. With a market cap of over $900 million now, that’s obviously not dirt cheap — 15X 2020 forecasted free cash flow. So even though those forecasts would be much worse with gold at $1,000 an ounce or much better with gold at $3,000 an ounce, you’re talking about a fairly steep multiple with some optimism built in.
If you compare it to the bigger and more stable players like Royal Gold (RGLD) or Franco-Nevada (FNV), though, the price looks quite a bit better — both of those biggies trade at steeper multiples and (I think) have less growth potential. So you aren’t getting a discount here on a cash flow or earnings basis… but if you want exposure to gold and growth it’s a leveraged play on gold (and a bit on copper and diamonds) that’s not as risky as the exploration-stage miners who are thirsty for drilling capital or the “land bank” speculations like First Mining Finance or Brazil Resources (both of which I own, but which may be getting a bit ahead of themselves), and it will do very well if those prices rise a lot and quite poorly (but probably not as poorly as the miners) if prices fall.
So there’s no magic pixie dust in this stock, and you’d need really strong gold prices to see “38 times your money” returns from Sandstorm — if you want to look for returns that are that high, you’d better either take more risk (with a junky little explorer that could easily go bankrupt in a bad year) or have great optimism about gold going to $5,000 an ounce and the patience to wait a decade or more for that kind of return from Sandstorm. Those “38X your money) examples don’t match exactly with what the big royalty companies have done, but they’re pretty close to the performance that Royal Gold (RGLD) had from 1999 to 2011, so do keep in mind that the teasing they’re doing is referencing a really, really long time period.
It might help to look at the history of some of the comparable companies during ups and downs — Royal Gold, for example, has returned about 200% to shareholders over the past decade since it first hit the billion-dollar market cap size that Sandstorm has now… not bad, and that doesn’t mean SAND can’t do better given their growth prospects, management, and the possibility of substantially higher gold prices, but that’s a far cry from the life-changing returns that newsletter salesmen like to throw at you. That’s if you start with RGLD as a billion-dollar company (where SAND is now) in 2007 or so. If you go back to the time frame teased by Dyson, from 1999 to 2011, then the gains were over 2,000% (depending on which specific dates you use)… but Royal Gold’s market cap at that time was only about $60 million, it was a teensy little fella.
On that note, in the past eight years or so SAND has acted like a levered play on Royal Gold, as you can see from this chart:
Doesn’t mean that will continue, but it’s an indication of what happens in both up and down markets — thanks to its smaller size and reliance on some smaller miners (like Luna) that hit trouble, along with (in retrospect) some irrational exuberance when they first got their NYSE listing as gold was riding those 2011 and 2012 highs, SAND has not been anywhere near as resilient as RGLD when gold prices fall (that red line is the gold price).
So that’s a note of caution about a company that’s really just now starting to “grow up.” This is my largest individual gold equity investment these days, as it has been for a long time… though my holdings in the SGDM ETF are larger (and the two have, frankly, more or less had the same returns since the start of the year — a reminder that in exciting commodity bull markets everything often goes up in unison). I obviously still really like SAND as a long-term holding, and I’ve been patient with it for a long time, but from the looks of the ad my expectations are quite a bit more muted than Teeka Tiwari’s.
To re-loop around to the “gold goes to $1,500 and your investment goes up 8-fold” bit of the tease, here’s how I think through that “promise”: If gold goes up by $150 to roughly $1,500 in the next year, then SAND’s annual cash flow from royalties and streaming should max out at about $60 million (assuming the high end of their projected gold ounces for this year), subtract about $10 million (as we did in the earlier exercise) for cash operating costs and you’ve got something similar to Free Cash Flow (not the official definition or a real accounting number) of $50 million for the year. Even if they could get something like the lofty price/free cash flow multiple that Franco-Nevada has right now (about 40X, far more than the 23X of Royal Gold) that would mean a market cap of about $2 billion. The market cap now is $960 million, so that’s roughly a 100% gain from here.
That seems to be within the realm of near-term possibility with a $1,500 gold price, though I personally think that’s valuation multiple aiming a little high… but an 8X return anytime in the next year or two looks way out of reach given those basic metrics (possible on a longer time frame? Maybe, if some big projects pan out and gold goes WAY up to hit or surpass old highs of $2,000 or so, but I like to keep my expectations a lot more tepid than that).
You could perhaps put up better numbers than that on Sandstorm if things go your way and you used a leveraged derivative instead, like options on SAND or one of the publicly traded warrants in Canada (Sandstorm notes the details of those here), but neither of those options is particularly cheap these days — the options only go out four months and are pricing in a pretty big move, so you don’t have much time to absorb any dips along the way, and the most appealing warrants from their financing last year, the SSL.WT tranche with a $4 strike price and November 2020 expiration, are priced well over $4 right now (which means that if SAND doubles between now and November 2020 to $13, the warrant and the common equity would have pretty much identical returns — the warrant is a bet that the return will be substantially higher than that, and you have less liquidity and much higher downside risk), and the way-out-of-the-money SSL.WT.B warrants (the ones I still have a few of) expire in September and have a nearly-out-of-reach $14 strike price (that makes sense only if you anticipate a return of greater than 100% in a year, which is possible but awfully optimistic for my taste, though I haven’t sold the warrants since it’s a small position and I don’t mind holding out a little hope).
With that I’ll leave you to your own thoughts — think SAND will be a good one for the years to come? Have a gold stock or one of the royalty or streaming stocks that you like better? Prefer the actual miners, or the land banks, or the ETFs for your gold exposure, or even just the metal itself? Let us know with a comment below.
Disclosure: I own shares and/or long option or warrant positions on Sandstorm Gold, First Mining Finance and Brazil Resources among the companies mentioned above, and have allocations to both the GDX and SGDM ETFs as well as exposure to physical gold. I will not trade in any of those mentioned investments for at least three days after publication per Stock Gumshoe’s trading rules.