Participants

Nolan Watson, CEO of Sandstorm Gold Royalties (SAND)

Nate Abercrombie, The Stock Podcast

Interview Transcript

Nate:     Nolan Watson, thank you so much for joining the podcast.

Nolan:   Well, thank you. I appreciate it.

Nate:     Well, I appreciate you coming on, and I’m really excited to talk about your company. But before we get to your company, could you provide listeners with just a little bit of your background?

Nolan:   Yeah, my background, born and raised here in Canada, and went through business school out of the University of British Columbia. Graduated with honors with a B-Com there, and then decided right away it would be a good idea to go in and do an accounting designation, and I went through my CPA program, finished first out of 1,000 people in Western Canada on a 13-hour final exam. Got a gold medal in accounting, and then decided I hated accounting, so I quit and went into finance.

Nolan:   And did a CFA, and then I’ve been in the mining industry basically my entire career, even right out of university when I was already declaring to be a CPA. I was a mining guy in the firm, and traveling the world and auditing and visiting mines, and as soon as I moved on from that job, got hired on by a company called Goldcorp, which was at one point in time, the world’s second largest gold mining company in the world. And they just got bought out, actually, a couple of months ago here, and are now part of the world’s largest gold mining company.

Nolan:   And so I worked with them for a couple of years, and then moved into a company called Silver Wheaton, which is now called Wheaton Precious Metals. I was their first employee. We grew that to about a $5 billion market capitalization. I was their Chief Financial Officer, and actually in that process, still hold the world record today for being the youngest Chief Financial Officer of any multi-billion dollar New York Stock Exchange listed company in the world.

Nolan:   And then I decided to go be an entrepreneur, and I left that job and went and started up Sandstorm, and have been running Sandstorm as President and CEO for over nine years, and have grown it up to a billion dollar market cap, and continuing to grow. It’s been a lot of fun.

Nate:     How old were you whenever you were the CFO?

Nolan:   I was 26 years old, and to put it in perspective, you don’t qualify to be a CPA until you’re 25. So I had been … Professionally received my designation and had it for an entire year before I became CFO of a multi-billion dollar company. It was pretty daunting. It was a pretty good job of pretending like I knew what I was doing.

Nate:     Could you talk just a little bit more about Sandstorm, about the history and the business model?

Nolan:   Yeah, so the business model’s one that’s been around for a while. Kind of the first company that brought in streaming in the world was a company called Silver Wheaton, which is the company I was CFO of, and they focused primarily on what you’d call silver streaming.

Nolan:   So, you’d go to either a silver mine or a base metal mine, say maybe a lead/zinc mine that is producing silver as a by-product, and you would say, “We’ll give you money today, up front, and you can use that money to build your mine, or you could use it to buy another mine, or you could use it to pay down debt. Use the money for whatever you want. And we’ll give it to you today, and what we want in return is a contract that allows us to purchase a certain percentage of the silver you’re going to produce, for the entire life of the mine. And we’re going to buy it at a fixed, artificially low number.”

Nolan:   So back then, silver was trading below $10 an ounce, and so we said, “We’ll buy your silver at $4 an ounce, and we’ll sell it at whatever the market price is. And we know the price of silver’s going to be more than $4 an ounce, and so do you, and that’s the reason we’re making this upfront payment to you. This upfront payment is the present value of your expected future profits from that silver stream you’re taking.”

Nolan:   And we went around and we did a number of those deals with mines around the world, and all of a sudden, what we had effectively created was a silver mining company that had profit payoff like a silver mining company. If silver prices went up, we made more money, if silver prices went down, we made less money. If there was exploration upside at the mines, we made more money.

Nolan:   But what we found very quickly is that we had two key benefits that a lot of the silver mining and other mining companies in the world didn’t have. The first is that we had fixed our exposure in terms of what the operating costs were, meaning we were buying at $4 an ounce, and we knew it was going to be $4 an ounce. Whereas, most mining companies in the world are absolutely notorious at overrunning at what their expected costs are.

Nolan:   So gold companies, for example, are notorious at saying, “It’s going to cost me $800 an ounce to produce gold,” and when they actually turn the mine on, it costs them $1,200 an ounce to produce gold. Then all of a sudden they’re not making any money, and everyone who invested in that gold company loses money when the share price drops precipitously. And so we had effectively taken that risk out of the business.

Nolan:   And then the second key difference is that we were able to diversify much more quickly. And so, generalist investors around the world started realizing hey, if you want to invest in a mining company, specifically at the time when I was at Silver Wheaton, if you want to invest in a silver company, you definitely want to do it into this silver streaming company, because they’re more diversified than a normal mining company and they don’t have the risk of cost overruns.

Nolan:   And so it was the type of business model that had a lot of appeal, and so the reason I left to start up Sandstorm was to create a company from scratch, from ground zero, that did that focused on gold. And so, Sandstorm is effectively a company that just does gold streaming, and we also buy gold royalties.

Nolan:   So, the difference between a stream and a royalty is, in a stream there’s that ongoing payment per ounce that’s fixed. So in gold, it’s usually around a $400 or $500 an ounce for us, whereas a royalty, you’re just getting the ounce for free, and/or they’re just giving you an amount of cash as they mine their mine, that’s equal to your percentage of their revenue that you’re entitled to.

Nolan:   So, for example, if you’re entitled to 2% of the revenue, at the end of every quarter they’ll figure out what the revenue was at the mine, and they’ll just cut you a check for 2% of it.

Nolan:   And so that’s what we do at Sandstorm now. We’ve built up a company with 189 streams and royalties around the world. We’ve got cash flow coming in from all corners of the earth, and we’re continuing to grow and diversify the business.

Nate:     Because you had that experience with silver, why did you choose gold?

Nolan:   Well, we’d gotten to a point in the business, at Silver Wheaton, where we had either done a deal with, or been told no by the company, for virtually every major source of silver production in the entire world. And so we’re sitting there going, “Well, there aren’t a lot of silver streams out there left to do deals on.” And I’m a fairly impatient person, and wanted to grow into a bigger space. And so I left, started up in gold, and have been growing it ever since.

Nate:     Yeah. And so do you have exposure to more commodities than … Or precious metals than just gold?

Nolan:   So, Sandstorm today is about 80% precious metals. The vast majority of that is gold. We do have a little bit of silver. And then we’ve got about 20% of our revenue comes from streams or royalties from base metal projects. The majority of that other 20% is copper from a couple copper mines around the world.

Nate:     I see. And what about location? Where are your different streams and royalties located?

Nolan:   Yeah, that’s one of the great benefits of a business model like this. You get to diversify very quickly. So we are all over the world. We’ve got a significant number of our assets in Canada, the United States, from Mexico, Brazil, Argentina. We’re in West Africa, South Africa, Turkey, Australia, Europe, and we’re continuing to look even in Asia. We’re looking all across the world.

Nolan:   In fact, if you look not only at the deals we’ve already done and the streams and royalties that we own, but also the things that we’re looking at acquiring actively, you’ll just see that it’s kind of spread out amongst the whole world. And that’s an important aspect of our businesses. Because I’m a firm believer that any political party, or any ruling government in any country can go crazy for short periods of time, and the best way to defend against that is just to be spread out amongst the whole world.

Nolan:   Now, if you’re a mining company it’s hard to do that, because you’ve got to spend a lot of time, effort and emotional energy trying to manage the politics of the country that you’re in, because you have to be on the ground every day, managing that situation. And so you only want to be in a few jurisdictions, because you just, you don’t have the ability to manage the politics as the management team, of more than a few countries.

Nolan:   Whereas at Sandstorm, because we’re a royalty company, we’re literally just collecting checks from these countries, that we can be diversified across the entire world, and we really don’t have to spend a lot of time thinking about it, other than on the day we make the initial investment decision.

Nate:     And for somebody who knows nothing about royalties and streaming royalties, could you walk me through sort of just the process from conception, so let’s just say that you’re interested in a development project in some country, that you’re maybe not familiar with the political and financial regime. Walk me through just the process of how you grow your portfolio and roll a new asset into the portfolio from idea, or whether or not it’s somebody that you know in the business who told you about this really great new asset, and then how you move down the road and ultimately acquire that asset.

Nolan:   Yeah, so at Sandstorm we’ve got a large corporate development team. And although there still are thousands of development stage mines around the world, we have looked at probably the majority of those development assets between someone on our team. So it’s very rare that someone comes to us and says, “Hey, there’s this cool new mine,” and we’ve never heard about it. Almost certainly someone on our team knows about it.

Nolan:   But when someone does come to us and says, “Hey, we’re about to go build a mine. We need, pick a number, $200 million, and we’re going to go raise some equity to do that. We’re going to take on some project … Some equipment financing, so we’ll do equipment financing for all of our trucks and mobile equipment, and we need some other, either debt or a stream financing for $150 million. And once we do all that financing, we’ll have enough money, we’ll go build out mine.”

Nolan:   So we’ll start talking to them about things, about preliminary looks at their technical data. So we’ll look at some of their drilling data at a sort of superficial level, look at some of their engineering data at a superficial level, and we’ll just say, just based solely on a high level review, if the data holds up when we do further due diligence later, which we are going to do, then these are the types of terms we’d be prepared to give you.

Nolan:   So if we’re going to give you $100 million, we want X percent of your gold production for the life of your mine, and we’ll pay you, pick a number, $500 an ounce. And so we’ll deal with them at a business level. And if they go, “You know what? Actually, that deal sounds good for us. We like the broad terms.” It’s one of the reasons they would do instead of borrowing is that we’re a lot more flexible and reasonable and understanding.

Nolan:   We’re a lot more patient capital, we understand the business better than the banks do, and so when there are delays or things that are happening during the construction process, we don’t yank their loan from them. We stand behind them and help them, and we’re a lot more reasonable.

Nolan:   So if they come to us and they say, “Yes, let’s do that.” We say, “Okay, well let’s sign a confidentiality agreement, and we’re going to dig into your data substantially.” And then we’ll go put several hundred, if not thousands of man hours into the technical due diligence of completely recreating all of their resource estimates.

Nolan:   And what that means, if you’re not in the mining industry, it means we take all of their drill data and we plot it all back up. We’ll put it into computer software programs ourselves, and we’ll create our own estimate of how much gold that we think is there in the ground.

Nolan:   And then we have our own underground mining engineers who actually look at that data and those models we create and say, yeah, are they going to be able to mine this effectively and efficiently, and cost effectively. And then we have metallurgists who will go in and say, okay, if they crush up the rock and they start trying to extract the gold, is the gold actually going to come out of the rocks.

Nolan:   That’s actually one of the main ways that investors lose money investing in gold mines is, yep, there’s lots of gold there, but when you crush up the rock, just chemically, you can’t get the gold out. It likes to stick to the minerals, and you can’t separate the gold out. And it becomes too expensive to do so, you lose money, and all your investors lose money.

Nolan:   So we have to go through all of those steps evaluating it. And then when we do, if it passes all those checks, we negotiate the definitive contracts and agreements, and eventually hand over $100 million, and we own a stream, and we go on looking for the next stream to buy, and we just keep on going, buying streams and royalties.

Nate:     Could you talk about just the pros and cons of the different types of royalties and streams.

Nolan:   Broadly speaking, there are kind of three different classes of streams or royalties. The first would be your typical stream, which is what I described before, which is the ability to purchase a certain percentage of their production for the entire life of the mine. So it might say we get to buy 9% of production for the entire life of the mine, and we’ll buy it at $500 an ounce gold. And that’s a stream. We do like those types of contracts.

Nolan:   The second type of contract would be what you would call an NSR royalty or a GSR royalty, which the N stands for net, the G stands for gross. And so in an NSR, it’s a net smelter royalty, it literally means … So the mining company will send their product, and the product is usually either a concentrate or a dore, which means it’s not pure gold yet. It’s in the form of something else that is highly concentrated into gold.

Nolan:   We’ll ship it off to a smelter, and it’s a third party smelter, that they’ll contract out to say hey, can you take this product, which is 95% gold, and turn it into 99.999% gold? And the smelter will charge certain fees to do that, and the smelter will say, “Okay, we got out this much gold, and here are the fees we’re charging you to get it to pure gold. And here is the net revenue that we’re going to pay to you.” Back to the mining company.

Nolan:   So an NSR, the NSR is, for example, 2% of revenue, we would get 2% of that payment that comes from the smelter to the mining company. So it’s basically 2% of the revenue off the top, before the mining company gets their check.

Nate:     I see.

Nolan:   The third type would be something called an NPI, and generally speaking, we prefer NPIs less than either streams or NSR royalties. The reason is that NPI stands for net profit interest, so it is a certain percentage of the profits of the mining company after deducting their costs. So in an NPI, you are taking the risk that the mining company does overrun on their costs, and that their profits are lower than you’re anticipating.

Nolan:   So the vast majority of our streams and royalties are either streams or NSR royalties. We have a couple of NPI royalties, one of which is definitely a material royalty for us. It’s the Hod Maden project in Turkey, and we have a 30% interest in the profits of that mine. It’s also happens to be one of the coolest, if not the coolest undeveloped gold mine in the entire world, and its cost of producing gold on a byproduct basis will be only $100 per ounce.

Nolan:   And even if … When your costs of production are that low, even if you do overrun 10 or 20 or 30 or 40% of what your expected costs are, it doesn’t really affect your bottom line or your margin percentage by very much. So we’re not concerned about that risk there.

Nolan:   So the goal is just keep growing Sandstorm by buying these streams and royalties, and trying to diversify risk and minimize our downside, and get all of the upside that an investor would get if they got invested into a mining company. So we still have all of the exploration upside if they invested in a mining company, we still have all of the commodity price upside, so if gold goes up we make a lot more money.

Nolan:   We just try to mitigate those downside risks.

Nate:     Yeah. And I can appreciate the desire to have some diversification, but it would be interesting to hear whether or not, if you had to choose between stream or NSR, which one you’d choose, and why.

Nolan:   Yeah, the NSRs, it really depends upon which jurisdiction you’re dealing with. There are a few countries in the world where an NSR contract is deemed at law to run with and be binding on the contract it is part of the mine, so to speak. So the mine can go through a bankruptcy and nothing ever happens to your NSR. You still own it, and whoever picks up the mine through bankruptcy still owes it to you.

Nolan:   That’s only in a few countries, though, like Canada, the United States. The vast majority of countries in the world, an NSR is just a contract, just like a stream is just a contract. And so what you have to do for both a stream and an NSR is, get a secured mortgage charge against the actual mine and the mineral concessions and the equipment, so that if they don’t pay you, you can actually take their entire mine away from them and run it yourself.

Nolan:   We’d prefer not to do that, obviously, if we can. So there are some jurisdictions where we prefer an NSR, but outside of that, we’re pretty indifferent. The only main difference between a stream and an NSR royalty, is in a stream, you’re making that payment to $500 an ounce, whereas in a royalty, you’re effectively getting the whole ounce.

Nolan:   So in a stream, your profit is much more levered to increases or decreases in the price of gold, because your margin is changing more. So if gold goes up $500 an ounce and you have a stream, your profit goes up a much higher percentage than it would if you had a royalty, if that makes sense.

Nate:     Yeah, yeah, it does. Thanks for that. And so, with respect to … So, you have all these royalty streams, they’re essentially dividend checks, and you guys are providing capital. Why not operate? Or would there ever be a situation where Sandstorm would, maybe not operate, but at least participate in the production, and just have some boots on the ground? Why not incorporate an asset like that in the portfolio?

Nolan:   There’s no shortage in the world of mining companies to invest in. We’re trying to be something different, and we’re trying to reduce downside risk, and grow and diversify faster. Managing and operating a mine is very, very complicated. It is … It takes up a huge amount of management energy.

Nolan:   That’s why you’ll notice, if you follow the mining industry for any period of time what you’ll notice is that as companies grow and grow and grow, they’ll buy one asset, two assets, three assets. They get to about 10, and then when they buy their 11th asset, they sell their first two assets that they bought. Because they go, man, managing these mines is very, very challenging, and it’s just not worth our effort to keep managing these small ones. And when they buy their 12th, they sell their third and fourth, and so on and so forth, and they never really want more than X number of operating mines.

Nolan:   Where, one of the benefits of our model is we don’t have to operate anything. The last time we have to think about the royalty is on the day that we buy it, and it manages itself thereafter, and we’re just collecting checks. So the first royalty and the second royalty and the third royalty we bought growing Sandstorm, we’re still collecting checks from those. And it doesn’t matter if we get to a $10 billion market cap, we’ll still be collecting checks from those, and we don’t have to manage it, so we never have to sell it.

Nolan:   So we just keep growing and diversifying, and creating a more and more stable company as we go. So we will never operate a mine. You may see us own a minority interest, a non-operating interest in a mine that is a really low operating cost, kind of like Hod Maden, but we’ll never, ever operate a mine, and we’ll never try to be a mining company. We are first and foremost a streaming and royalty company.

Nate:     Yeah. So, you mentioned the bigger mining companies selling off assets when they decide to really dig deep into a new asset. If somebody came in and said, “Hey, look, I think that this royalty stream is extremely undervalued within your portfolio. We would like for you to sell it to us.” What would your response be?

Nolan:   I, candidly, haven’t had that situation. I think most people out there, most of our competitors out there know that we are a growth company. We are trying to accumulate a portfolio of streams and royalties that is attractive to some of the bigger players to potentially one day take out. And the portfolio is worth more as a whole, almost always, than it is individually, because it has that level of diversification and inherent lower levels of risk because of that.

Nolan:   And so our plan is to keep the portfolio together, and just continue to acquire royalties that … It’s not something that we generally entertain.

Nate:     And so, going back to the operator component of this. So, I did watch the video online, and something that your co founder had mentioned was just the fact that there’s a lot of people that don’t recognize your partners are now either majors or mid-tier … There’s a large percentage of your cash flow that is being mined by mid-tier or major mining companies. And so, why is that so important from, I guess, a risk standpoint and a diversification standpoint?

Nolan:   Yeah, I guess the answer is, in any commodity based business, you have boom and bust cycles. There are times when the commodity price is high, and everyone’s doing well and making lots of money, and then times the commodity price is low, and most people are doing poorly and very few companies are making money.

Nolan:   And it’s during those bust parts of the cycle that the investment capital stops flowing to the industry. And it stops flowing first to the most junior and smallest of the companies in that industry. So if we had done just a bunch of deals with a bunch of junior mining companies and junior mining gold companies, and then we went into a gold bust part of the cycle, we would very quickly find a lot of those small gold mines shutting off, and the companies trying to continue to operate them, and trying to raise equity capital to continue to operate them. That those companies would fail at raising that equity, that the mines would be starved of capital and eventually shut off. And then we would stop collecting our royalty checks.

Nolan:   So it is very, very important for a company like ours, with the majority of the revenue, which ours does, comes from major and mid-tier mining companies, the types of companies that have a low cost of operations, so the mines will continue to operate through a down cycle, as well as companies that have very good access to capital, that even if temporarily the cost of production went under water, that they would be able to continue to operate the mine, and we would keep collecting our checks. And therefore, our portfolio is more stable, less risky and more valuable to us, if our counter parties are stronger.

Nate:     Yeah. Is there any sort of high level thought, or something that you’d like to share about the mining industry today, that maybe investors don’t understand or aren’t aware of?

Nolan:   Yeah, it’s a very interesting time in the mining industry. This is … I’ve been in the industry for coming up on 20 years, and it is very, very hard, probably the hardest it has been in 20 years, to raise capital in the form of equity. We’re setting record lows in our industry for the amount of new equity capital coming into it. Which means that existing mines may continue to operate at today’s commodity prices, but very few new mines are going to be built, and you’re starting to see production, especially in gold, production starting to slowly decline as some gold mines run out of gold. And you’re not seeing the new mines start up at the same pace.

Nolan:   And so, unless gold prices go dramatically higher, I think we are at peak gold production worldwide, for now. And there’s a whole slew of companies in the industry that want to start up mines but they can’t, because they can’t get the capital. And a lot of companies want to explore for new gold mines, but they can’t because they can’t get the capital.

Nolan:   And so Sandstorm, and businesses like ours, are having our doors knocked down on a daily basis with companies looking for capital that can’t find it. We’re obviously a source of capital to them, and so we’re busier than we have ever been in the history of the company, looking and evaluating new deals, and so we’ve been growing a lot over the last few years, but I think the next few years we’ll be growing substantially as well, as we continue to siphon through and sort through these deals that we’re looking at.

Nate:     Why don’t you think mining companies, and not just gold, but why can’t mining companies attract capital? What is it about equity investors or private equity that just is unattractive in the mining industry from their perspective? I guess, from your perspective, when you think about the different types of pools of capital, why aren’t they interested in investing in commodities or mining?

Nolan:   Yeah, so the mining industry, especially in precious metals, is actually a fairly small space. Total value of gold around the world sitting in vaults is a high number, in the trillions of dollars, but the total value of gold mining companies, if you added all of them up, it still would be a small fraction of the size of Apple. Like, all of the gold companies in the world. It’s a pretty small space.

Nolan:   And so, if you look at historically the way it’s been financed, what it’s been is endowment funds, pension plans, sovereign wealth funds, have not attempted to invest directly in mining companies, because they can’t write big enough checks because the companies themselves aren’t big enough. So what they do is they seed resource specific investment funds, often in Canada and the United States. So you’d have … The landscape used to be littered with guys managing between $100 million to $700 million in a small fund, and it might just be a gold fund. And all they would do with that $700 million is invest in whatever gold companies they thought were the best.

Nolan:   And slowly over time, as this whole ETF movement and passive capital thing has happened, those funds have been repatriated out of those small, direct resource funds, and put into exchange traded funds and other forms of passive capital, and so these funds are disappearing. And there’s probably 70% of the funds in the last 10 years have disappeared entirely, and the ones that remain manage probably on average less than 40% of the capital that they used to.

Nolan:   So the vast majority of the resource specific precious metal capital is no longer there. But it is sitting in ETFs, and the problem with ETFs is that they manage their money based solely on the algorithms that, say, quarterly rebalance based on market cap and liquidity and whatever other metrics they take into account. So they’ll go and they’ll buy Newmont or Barrick, or … And they’ll buy them in big amounts. So you’re seeing the valuation of the senior gold companies go up.

Nolan:   But those ETFs can never make an investment decision into a financing. So if you’re a junior mining company or a mid cap mining company saying I need to raise capital to go build a mine, you would normally have, five years ago, 10 years ago, gone out and done a road show, and sat down with all those fund managers. Well, they’re all gone. You can’t meet with them anymore, because they don’t have their jobs.

Nolan:   And you can’t also go down and sit with all the ETF fund managers, because they won’t meet with you, because they can never write a check into an equity financing. All they can do is buy you, if in the quarterly rebalancing, their models say they have to buy you. And so nobody can raise any money structurally in the industry, and our industry hasn’t found a solution to it.

Nolan:   And this is also starting to happen in other industries as well. But the difference between those other industries and mining is, mining is incredibly capital intensive, so if you cannot raise large amounts of capital as a small and mid-tier mining company, then you can’t create the company. And so our industry is being hit harder because of those structural dynamic changes in international finance.

Nate:     Yeah. I can’t tell you how refreshing it is to hear you say that. I haven’t heard another CEO or CFO ever talk about that dynamic within their industry, at least not on this podcast. I know that, you know, I mentioned earlier about why I started this podcast, and the midstream companies were going through the same sort of problem back in 2016, 2017, and … Which is, again, one of the reasons why I started this podcast.

Nate:     And again, I’m doubly impressed that you recognize that whole dynamic, and you definitely have articulated it much better than I ever could, so thank you for that.

Nate:     And so, have returns come up?

Nolan:   Way up. Way up over the last five years. Yeah, normally … You were starting to see things in 2011 and 2012, really stupid rates of return in terms of on the low side. There was a couple streaming royalty companies that doing deals at 3% real rates of return, which is maybe a 5% nominal rate of return, which just doesn’t make any sense in the long term. If that’s your business model, hand back your money to shareholders and go home and find a different job.

Nolan:   But right now, we’re starting to see rates of return out of the gate over 10%, plus you add on the exploration upside and whatnot, and you’re 12, 13, 14, 15%, even on an after tax basis. So the rates of return are quite high right now.

Nate:     So, could you talk about Hod Maden. So again, I’ve watched the videos online, and I have to say kudos for the fact that you guys have put all this material on your website, is just absolutely fantastic, and any investor who wants to learn more about your portfolio, your business, all they have to do is just go on your website, and you just have so many different videos on there. I can’t say how great that is from an investor’s perspective.

Nate:     But could you talk a little bit about Hod Maden and just how the transformational characteristics of this asset, what it’s going to do to your cash flow, and what it’s going to do to your risk profile?

Nolan:   Yeah, absolutely. So, first of all, I agree. Our marketing team is pretty strong, and one of the things they try to do is realize, because of those changes in the international financing market that I was just talking about, that one of the things that we have to do is provide relevant content for retail investors, just regular people, if they want to learn about our company, that we have to start treating them the way we used to treat institutional investors, and bring them up to speed and educate them, and so that’s one of the things we focused on. So yeah, thanks for recognizing that.

Nolan:   With respect to Hod Maden specifically, it’s one of our growth assets in our company. We’re actually fortunate to be in a position where each quarter for the next several quarters we have a new mine turning on. We just had Orezone turn on, and we have a 3-5% slice, NSR there. They just poured first gold last week.

Nolan:   We’ve got Puerto del Norte, which is another major royalty that we purchased for just about $40 million. That turns on towards the end of this year. Next year, we’ve done a deal with a company called America Silver, and that turns on next year. And then Hod Maden should be a year or so after that.

Nolan:   Hod Maden by itself is, as I mentioned, one of the if not the coolest gold mine in the entire world. So to put it in perspective, this ore body is about 40 meters wide by several hundred meters long, and it goes several hundred meters deep. And normally … And it comes right to surface. So, it doesn’t take much infrastructure to get down mining it. You don’t have to do a lot of digging, because it comes right to surface. And it’s 40 meters wide.

Nolan:   So, a lot of mines around the world are what you would call narrow vein mining. So the veins would be one meter wide, maybe two meters wide, maybe three meters wide. If you ever get a four meter wide vein, that’s amazing. And in narrow vein mining, usually the grade you need is five to seven grams per ton gold, and that works out to be … Grams per ton effectively means parts per million. And so five to seven grams per ton gold gets you an economic ore body over two to three meters.

Nolan:   And so this ore body is 40 meters wide, and it averages 13 grams per ton gold. So it’s twice the grade you need to make an economic mine if it was a narrow vein. But it’s 10 times to 20 times the width of a normal vein mining. And what that means is it’s just so much lower cost to operate your mine, because instead of having to be very selective in how you mine, and being very careful and making sure when you’re underground, you don’t pull in any of the wall rock, because the wall rock doesn’t have any gold in it. If you send rock that doesn’t have any gold in it to the mill, the mill does a whole bunch of work and doesn’t spit out any gold.

Nolan:   Whereas you don’t have that issue here, because it all has gold. You’ll always be mining in rock that has gold ore. And so conversely, you could compare it to an open pit mine, because this mine comes right to surface. And a normal open pit mine that’s 40 meters wide, because you do get 40 meter wide ones sometimes when they’re open pitable, you’d be able to make money at it at 1.4 grams per ton, which is about 12% of the grade of this ore body, which is 12 grams per ton.

Nolan:   So, the ore body is just incredibly high grade, over very significant width, and it comes right to surface. It literally is a miner’s dream. I personally in my career have never seen a project this economic, that I’ve been associated with, and we’re just excited to see it continuing to move forward.

Nolan:   When we first bought that 30% interest in the profits, they had just completed something called the pre feasibility study, and they’ve done a bunch of work over the last year since we’ve owned it, and they’re now … Our team is actually down in Australia right now, talking with consultants, and they’re kicking off and doing a full feasibility study that should be done sometime either later this year or first quarter next year. And so we’re excited to keep moving that asset forward.

Nate:     Yeah. Sometimes I think that success in business has a lot to do with luck. And maybe not sometimes, maybe more often than not. And I’m just kind of curious whether or not you think that this … You guys discovering this asset was, was at least part of it was luck, or was there something else about your business model or your team that enabled you guys to find this before another big gold company could, and just step in and take the 30% interest.

Nolan:   Yeah. When I was young I didn’t use to believe in luck, but I guess the older you get, the more you realize that there is definitely sometimes you have to be lucky to be good. And I previously mentioned, even on this call, that very rarely do we ever get a phone call from someone that says, “Hey, I found this really cool mine at so-and-so here in the world,” and we have never heard of it before.

Nolan:   But that was actually the case with Hod Maden. Hod Maden, we first found out about it at the end of 2015. It was owned and operated by a private Turkish multi billion dollar conglomerate that was doing exploration early in 2015. And we were in the process of buying a portfolio of royalties from a different company here in Vancouver, called Tech Resources. They’re one of the world’s larger mining companies.

Nolan:   We bought a portfolio of 52 royalties from them, and in that portfolio of 52 royalties was this thing called Hod Maden. It was a 2% NSR. And so we went, “Well, what’s that? We’ve never heard of this thing.” And as we were looking into what it was, they had just put in the discovery hole to discover this amazing world class mine. And so we were right there, right on it, and it was still a private company, so no one in the public capital markets had really heard of it.

Nolan:   And the company that owned this 30% profit interest was a small little UK listed company that no one had ever heard of. And so we went out and bought the largest equity position in that company, which kind of gave us a blocking position in it, and then we just bought out the entire company in a corporate takeover. And we now own that 30%.

Nolan:   So we were lucky that we were in the right place at the right time, had bought a portfolio royalty that had this thing in it and forced us to look at something that was still in the private company domain. So yeah, we got lucky on that one.

Nate:     Yeah. No, that’s great. I appreciate the background. Could you talk a little bit about just the internals sort of hurdle rate or benchmarks that you have in order to invest in a new asset? Something like Hod Maden … I mean, Hod Maden was probably just a no-brainer. For other assets, what is the sort of benchmark, hurdle rate that you guys target?

Nolan:   Yeah, so obviously we’re trying to get a high rate of return for our investors, and the actual hurdle rates that we’re looking at really depend on the specific type of transaction and it’s size and it’s safety.

Nolan:   So for example, if we’re doing a deal on a mine that’s already up and running, it’s operating, it’s had 10 years of operational history, it’s going to operate for the next 30 years, it’s a low cost producer, it’s sort of an absolute layup in terms of knowing you’re going to get a decent rate of return. We’d be okay with a situation where we’d be making 8% to 10% return on our capital, and what we’re hoping is that there’s exploration upside to that to take that 8% to 10% and turn it to something closer to 12 to 13, 14% rate of return.

Nolan:   If we’re doing deals that are earlier stage, that are on smaller assets, or even sometimes we’ll buy a small exploration royalty for a million dollars. We’re trying to get much higher rates of return than that. And especially when we’re getting into the exploration stuff. We stop thinking about IRRs when we’re talking about exploration, and we start thinking about multiple returns on capital.

Nolan:   If we can’t see ourselves getting 10 times or more our money back, then we know we’re taking enough risk that it’s not worth us doing it. So we’ll pass on it if we can’t get several returns on our capital.

Nate:     And could you talk about mine life? So, I know that Hod Maden, in the video you mentioned that it’s 11 years, and then there’s another dialogue around extending the mine life, and you never really know what’s under the soil until … Or under the rocks, until you start digging. So could you just sort of provide maybe a good example of either how much longer the mine life is relative to initial forecasts, or the potential to extend the mine life, with all the different assets in your portfolio.

Nolan:   Yeah, it’s interesting. There was an old analyst who, he’s unfortunately retired now, but probably seven years ago, there’s a guy at CIBC. He did a comprehensive analysis on most of the major mines in the world, and basically what he was studying was, on the day that you built your mine, what did you think your mine life was? And then, before it shut down, how many years had it operated? And did that across the entire industry over several decades.

Nolan:   And what he found was that the average mine runs twice as long as you thought it was going to be based on its mine life on the day that you started building the mine. So, if mine life was 10 years on the day you built it, it usually operated for 20 years. And most of that is just continued exploration in and around the mine, to find more economic ore, and one of the reasons that that happens is because it’s very expensive, actually, to drill.

Nolan:   So if you’re an exploration company that doesn’t have much of a drilling budget, you’ve drilled up 10 years of life, it’s just so expensive to keep drilling, because you’re not making any money. You’re having to raise equity and deal with your shareholders every time you raise money to drill. So they go okay, we’ve got 10 years here, let’s go build a mine. We’ll keep drilling the rest of the ore body out once we’ve built the mine, and we’ll drill it with cash flow from operations.

Nolan:   And so you see that over and over again. And one of the things that we try to do at Sandstorm is, our goal is to beat that. So our view is that, if that’s the average, where mines double over their lives, that within the individual mines around the world, some don’t double and some more than double, and a lot of the ones that don’t double, and have very little exploration upside, you can usually see it on the day that we do our financing deal with them. A lot of them will be open pits with small land packages, so there really is nowhere to find new ore. There just physically isn’t space on your property.

Nolan:   Or they’ll be discrete ore bodies, where they’re not winding vein systems through the earth, it’s just one sort of discrete ore system that has been deposited, and it’s clear that there’s not a lot of exploration upside.

Nolan:   And so we just don’t try to acquire those types of things. We’ve tried to fill our portfolio with streams and royalties where we think there’s huge amounts of land, lots of exploration upside, and that we’re not looking for doubles in mine lives, we’re looking for triples and so forth.

Nolan:   And so we’re actually starting to see that thesis play through empirically inside our portfolio, so three years ago we had, for the first time, more gold ounces found through exploration on our properties that we have royalties on, than were mined on those properties. Meaning, we started the year with a certain number of ounces, you got all of the cash flow for the entire year, and at the end of the year, you had even more ounces on the books, just from organic exploration.

Nolan:   And the same thing happened in 2017, and then the same thing happened in 2018, so we’re three years running now, where for every ounce that was mined on the property, more than one ounce was found through exploration. And so our portfolio is growing by itself without us having to invest. And then in addition to that, we’re continuing to buy more streams and royalties.

Nolan:   So our investors are getting the bump of two things, is organic growth in ounces plus acquisition of ounces with the cash flow that comes from the mining.

Nate:     That’s impressive. And so, just assuming, using this case study that the CIDC analyst came up with, if mine life extended to 22 years instead of 11 for Hod Maden, what’s the NPV at that point?

Nolan:   Yeah, it’s interesting, because your next 11 years, although you get hit with the time value of money, you don’t have any of the upfront main capital required to build the mine, to offset it. And so you get quite an NPV bump. Still, it would probably be $250 million incrementally to Sandstorm in our NPV which is, you know, market cap is only a billion dollars, so that would be a 25% increase in the value of Sandstorm just based on the exploration that I personally believe will happen.

Nate:     Yeah.

Nolan:   Just from one mine.

Nate:     Yeah. And I appreciate you beating me to the punch. That’s where I was going with this, which is just amazing. Have you had a lot of questions about Hod Maden from investors, are investors concerned, or … Because you guys have been talking about it quite a bit. I mean, has there been pushback from the investment community?

Nolan:   There was originally pushback when we first did the deal, and part of the pushback was hey, it’s in Turkey. And some investors weren’t comfortable with that. And some investors are comfortable with that. And so one of the great things about being a public company is some people can sell their shares and some people can buy.

Nolan:   So we had a bunch of people sell their shares when did the deal. I think our share price was $4 per share US when we did the deal, and it dropped all the way, I think below $3 a share. So a bunch of people just ran for the exits, thinking oh, it’s Turkey.

Nolan:   And then there were far more people who were excited about the asset than ran away from it, and so we’re sitting here today at the exact same gold price, so the environment hasn’t changed, the gold market hasn’t changed, but our share price is $5, $5.50 US, so we’ve made quite a bit of money for shareholders, and the share price has appreciated pretty strongly since we’ve done the transaction.

Nolan:   And at the end of the day, that’s kind of how I evaluate as not how do shareholders react on the day you do something, it’s once they’ve been given time to absorb it and think about it, and reflect on it, are they excited about it and do they want to buy more shares? And so, the proof has been in the pudding, and the shareholders have been rewarded who stuck with us.

Nate:     Yeah, yeah. What’s the concern with Turkey? Is it that people think that it’s the Middle East, or they don’t realize that this is a country that almost joined the EU, or what is the concern? They just think it’s … I’ve spent a lot of time in Turkey, and I love that country. And I think it’s a very stable country. What is the concern that you hear from investors? Or at least the guys that sold shares, what did they say?

Nolan:   Yeah, it’s kind of funny. You can tell, it’s almost all under traveled people who haven’t been to the rest of the world, including to Turkey. And I would agree. Turkey is, without exception, my favorite country in the entire world to travel to, as just as a tourist. And also from a business perspective. And it’s actually quite stable from a doing business perspective, and their government is one of the most pro-business governments in the entire world.

Nolan:   But their government makes a lot of newspaper headlines, so people that all they do is just sit at home and read the newspaper or surf the internet and watch CNN, who don’t really know what they’re actually talking about, I think overreact and are under-educated about the situation. So we’re very happy to be in Turkey, and have great Turkish partners, and it’s been a great experience for us so far.

Nate:     Yeah. So, does Sandstorm have a competitive advantage when it comes to M&A?

Nolan:   Well, M&A, candidly, M&A is just a people game. And so, what I would say is that our management team has been involved in almost nothing but M&A for 15 or 20 years, but our entire corporate development team is made up of experienced M&A people, including high performing investment bankers. And so our capability on the M&A side is as high as you will ever see in a single company inside the money industry. So we’re quite proud of that.

Nate:     So could we talk about financials just a little bit? And you know, you’ve got a solid M&A team, and that probably doesn’t come cheap. I’d like to know what your cost structure is. And so when you think about your costs, what are the maybe four or five items that come to mind, and I ask the question because, if you’re producing a widget, you definitely have cost of goods sold. But for a royalty company like yours, it’s a little bit different.

Nate:     And so would just like to hear, what are the costs that you incur, and the costs that you keep an eye on most specifically?

Nolan:   Yeah, it’s actually fortunate for me that my job is pretty simple that way. Normally cost containment is a big issue in business. For us, the portfolio, all of the costs for buying the gold and the silver are fixed, and we just have this portfolio that generates this huge amount of cash.

Nolan:   So the cash the portfolio’s going to generate this year will be, depending on the gold price and depending on production, $50 to $60 million. And once Hod Maden is up and running, and some of these other assets that we’ve already bought are up and running, it should be upwards of $130 million US a year. So we’re pushing close to $200 million a year Canadian that the portfolio will be generating here over the next few years. And again, based solely on the things we bought.

Nolan:   And then the only thing that we have to deduct out of that cash flow that the portfolio is generating is the costs of the due diligence team, the cost of the corporate development team, and the admin staff. And so the way we look at it is the cash cost of that entire team and all of those functions works out to about $7 million US per year. Sometimes it’s six and a half, sometimes it’s eight, but it averages around seven.

Nolan:   And it’s that size of team that we think can take us from here, to doubling and tripling the size of the company without having to add to the team. It’s a pretty high-powered team, and so the incremental cash loss of running the business is very, very, very low. It’s one of the benefits, again, of the business model. Whereas I could see one day waking up and having a portfolio that cash flows $600 million a year, and the total cost of running the business might be $11 million, or something like that.

Nate:     Wow. And so, assuming no change to the portfolio and stable commodity prices, you’ve outlined this in your video, but I’d just like to have it on the podcast. So, what is a good range for both cash flow and free cash flow over the near to mid term? I mean, I know you guys have projected out to 2023, and … But I’d just like to hear about sort of the free cash flow profile and then also the cash flow profile. And then if you could just reconcile the two.

Nolan:   Yeah. So we’ve got a presentation on our website with a cash flow chart, and it’s on slide five. This cash flow chart is done on an after tax basis, so it is true free cash flow, except for that $7 million a year cost of running the business.

Nolan:   And so, what it’s showing is about $60 million a year of cash flow this year, before G&A, and that increasing to just about $130 million a year by 2023. So that’s all free cash flow.

Nolan:   We’re using some of the cash flow in 2019 to buy back our shares, so we’re trying to shrink our share float by about 10%. And once we’re done, that cash flow from 2020, 2021, 2022, the vast majority of that is going to go toward just continuing to grow our portfolio.

Nolan:   So we also, at the end of that presentation, have a couple slides that talk about the availability of capital that we have to do new deals with. So what most people don’t appreciate is we have a revolving debt facility to the tune of $225 million that we can use for future acquisitions, and we’ve only drawn $40 million on it. So we have $180 million of available revolving debt capacity based solely on our existing assets. And as we continue to grow, that debt capacity will grow as well. And so we’re trying to be able to grow the company creatively without having to issue equity.

Nolan:   What we also have, that a lot of people don’t appreciate is, we have $84 million US in debt and equity investments in other mining companies. So sometimes when we go to them and say, “We’ll buy a stream for you for $100 million,” at the same time we’ll say, “And, if you need it, we’ll give you a $10 million overrun debt facility, and we’ll buy $5 million of your equity.” And over time, those amounts have been adding up, and we now own $84 million of debt and equity in other mining companies, that we will be liquidating and recycling that capital to go buy more streams and loyalties.

Nolan:   So we have lots of levers to pull on the balance sheets, without having to issue equity.

Nate:     Yeah. And then, with respect to just fluctuations in your cash flow, is it purely a mechanism of commodity prices?

Nolan:   Yeah, so one of the great things is, what we do is we tell investors, here is a guidance range. So our current guidance range is 64,000 ounces to 70,000 ounces in 2019, at an average cost of, call it $300 an ounce. And it’s very easy for people to do the math. All they have to do is pick what gold price they think it is, and they can figure out what our cash flow is going to be. It’s a very, very easy business to project cash flows for.

Nate:     Wow. For those people who aren’t good at math, including me, is it … So, if gold prices go from, if they double, if they go to $2,600, does your cash flow double?

Nolan:   So, a good example would be, today gold’s $1,300 an ounce. Our cost per ounce is below $300 an ounce. So our margin is just over $1,000 an ounce. If gold were to go up $100, our margin would increase by 10%. So conversely, you could say it this way: If gold went up 10%, which is $130 an ounce, our margin would go up 13%. And therefore, our cash flow would go up 13%.

Nolan:   So we’re quite levered to the gold price, but at the same time, we’ll never, ever operate at a loss, because our cost is so low. The gold price will never go below our cost, so we’re a business that can’t really lose. We’ll never go free cash flow negative from operations.

Nate:     So, could you talk a little bit about your capital structure, and I have heard you, again, going back to those videos on your website, you mentioned not issuing equity. Is the goal going forward, I mean, barring some sort of scenario where a really interesting royalty asset comes up for sale and it’s a billion dollars. Could you talk about just your appetite for debt, and your need for equity, and your interest in issuing equity over the next … Well, for the foreseeable future?

Nolan:   Yeah, so we haven’t issued equity in years now, and we’re currently buying back our own stock. So we have no plans to go and issue equity going forward over the next couple years. I would give a caveat that if, for example, if we found an acquisition that was amazing, it was currently cash flowing, it was $400 million in size, and we figured we can use our revolving debt capacity to the tune of $200, $250, $300 million, would we consider taking $100 million so that we could buy that anchor asset and totally transform the company? We absolutely would consider that. We’re not so rigid in our thinking that we’re going to say no, never, under no circumstances would we ever raise equity.

Nolan:   But barring that situation, our plan is not to raise equity. And in fact, that’s why we’re buying back our shares, as we think we’re undervalued at these share prices, and we want to continue to shrink our share float right now.

Nolan:   So in terms of, to answer your question about capital structure, we’re almost entirely equity financed on a billion dollar market cap. We only have $40 million of debt, and we would cash flow that over a matter of two or three quarters, and so we don’t really have any functional long term debt at this point.

Nate:     Yeah. And at a point where you are … The company’s bigger, so call it several hundreds of millions of dollars in cash flow from royalties and streams. Would you consider taking on leverage for the long term?

Nolan:   I’m a big believer that, in a business where you cannot control the selling price of your product, that you should not have debt as a permanent part of your capital structure. So, I view, and the way we run Sandstorm is that debt is a useful tool to temporarily avoid equity dilution, to make an accretive acquisition, and that you should never borrow more money than you could conceivably pay off within two, maybe three years at the most.

Nolan:   If it’s beyond three year time frame, I think you’re putting yourself at too much risk, because I cannot control the price of gold. All I can control is what I buy and what my balance sheet is, and I want to make sure that those two things are done well.

Nate:     So could you talk a little bit about shareholder returns? So, you’re buying back shares, but could you talk about what your long term aspirations are for the shareholder return story? So, do you plan on instituting a dividend, do you continue to just want to buy back shares, what are your thoughts around shareholder returns?

Nolan:   That’s a great question. So, returning capital to shareholders is obviously an important part of a business. If you never return capital to shareholders, your business isn’t worth very much, unless you’re solely waiting for a buyout. I would have bet, if you would have asked me this question two years ago, if you would have said, “By the end of 2019, will you be a dividend paying company?” I would have said yes, I think we would be.

Nolan:   And the only reason we’re not is because our share price is sufficiently and materially below what we believe it’s NAV is, so we just think buying back our own shares this year is a more prudent way of returning capital to shareholders. But in the not-to-distant future, I absolutely believe we will be a dividend paying company. Certainly at the board level, I only get one vote, but my vote would be to become a dividend paying company. And so I think it’s just a matter of time.

Nate:     Yeah. And what do you think the appropriate yield is, at least where your stock is yielding today?

Nolan:   Well, I think candidly, what we would do is we would start very low, just showing people that we are committed to the end game of being a materially and large dividend paying company with a good yield. But we’re still a growth company, and we have to balance that. So the message I think we would send with a dividend is, “Yeah, we know it’s small, but we’re growing. We want to use most of our capital for growth, and as we do that and as we continue to mature the business, this dividend’s going to go up every year.”

Nate:     Yeah. One more thing that I’d really like to hear is, in the video, again, 160 royalties that aren’t currently cash flowing. Could you talk about just sort of some of the assets that you have in the portfolio that aren’t currently cash flowing, that could potentially have a meaningful impact on cash flows, and if you want to call out a particular asset or mine or resource, I’d be happy to hear it. Or, if you’d just like to talk about it in general, that’d be great.

Nolan:   Yeah, so if you look at a typical mining company that have a certain percentage of their portfolio of assets in production, a certain percentage of them would be what you would call development assets, so we’re ready to go build this thing, but we haven’t built it yet. A certain percent would be advanced explorations, so we think we found a gold mine here, but we’re still in the early stages of understanding. And then a certain percentage of their assets will be grass roots exploration, so this is a good area to explore for gold, but we haven’t found any yet, that type of stuff.

Nolan:   And what we try to do at Sandstorm is mimic that mining company portfolio. So we’ve got the vast majority of the value of Sandstorm is tied up in assets that are producing today, or will be producing within a couple of years. But we also have a development pipeline of other things that are being built or we think will be built eventually. And then we’ve got advance exploration royalties and earlier stage exploration royalties.

Nolan:   I think where most of the hidden value in Sandstorm, that’s not currently appreciated by our investors or prospective investors is in that development phase, because if you go to our presentation and you look at what cash flow we’re projecting, when we project that cash flow, we make the conservative assumption that, unless the mine is actively being built right now or a decision has been unofficially made by management to build it and they have access to the capital to build it, and we know it makes sense to build it and we know they will build it, which is only a handful of assets, that we assume it’s not going to go into production ever, and its cash flow does not show up on our slide five in our presentation.

Nolan:   And so we’ve got a significant number of development assets that have quite a bit of value that just don’t show up anywhere in that presentation. So a good example would be in northern Canada, there’s an asset called Hackett River. It’s a silver/lead/zinc mine, and it’s owned by one of the world’s largest mining companies called Glencore, and we own a 2% NSR on that. They’re studying it right now and they’re doing various levels of early stage permitting, and permitting a road, those types of things. All the kind of un-sexy stuff around pushing an asset forward slowly.

Nolan:   And once that asset is up and running, we would get about $9 million a year, every single year, US, of cash flow from our 2% NSR. It’s a fantastic, huge mine. But you won’t see that $9 million a year anywhere in our presentation. And we have a number of other assets like that, like Lobo Marte in Chile, and a few others. So there’s quite a bit of potential cash flow that could turn on if one day we get the phone call saying, “Hey, guys, we’re going to go build this thing.”

Nate:     What is a question that you wish you would hear during investor meetings, that you never hear? Something that you just … You’d like to tell this part of the story, but you never have the opportunity to do so, because investors are too focused on Turkey and Erdogan, or you know, you wish you could focus on this aspect of the story, and you just never get the chance to do it?

Nolan:   Yeah, that’s a good question. I would say, one question that I think is important and therefore I wish I heard it but never do is, people asking questions about our advanced exploration assets, because there is also a lot of latent value sitting in those, and they’re having some incredible success.

Nolan:   But my frustration with the average institutional investor right now is that, when they say things like, “I’m a long term investor,” what they really mean is, “I might consider holding your shares all the way until the end of the year, maybe. I definitely don’t think three or four or five years out.”

Nolan:   So when you’re talking about this amazing drill hole that just discovered an incredible mine in Mongolia, and you say, “Yeah, but it will take five years to get into production, but it’s amazing, so you should look at it,” they go, “Yeah, yeah, I don’t care about … Five years? I don’t care about that. Like tell me, like Q3, what’s your cash flow going to be?” People are so focused on the short term.

Nate:     Yeah, yeah. Long term doesn’t mean long term anymore. Knowing what you know about your business, and assuming you weren’t a shareholder, what do you think is the most important thing that you would need to get comfortable with, in order to make an investment in Sandstorm?

Nolan:   I think getting comfortable with the top five assets, five or six or seven assets in the company. If you can wrap your head around the value of those five assets and the cash flow that will be coming from those, it’s very easy to make an investment in Sandstorm, because we’re sufficiently undervalued that, based solely on five or six or seven assets, you can go, yeah, that makes sense to own the company.

Nolan:   And if the other 180 royalties have any value, then that’s a bonus.

Nate:     Yeah. What do you think the market most misunderstands about your company?

Nolan:   I think that the market most misunderstands the exploration upside piece. A lot of investors, especially institutional investors, they’ll just go, oh, who covers you? And you give them a list of banks. And they’ll go look at the banks. And none of the analysts at the banks spend any time attempting to understand any exploration upside. They literally just take … We have these things called 43-101 reports, which are reports on what the reserves are and what the mine life is. They literally just take those numbers, they make a discounted cash flow spreadsheet, and they say here’s what the company’s worth. And they kind of trade in line with that.

Nolan:   And that despite the fact that we have huge amounts of exploration upside and several more year of mine life that aren’t even found, they just haven’t been put into these 43-101 reports and refreshed yet. And so, that’s a bit of a frustration of mine is that people just … They don’t understand how much value is sitting there, and they don’t actually bother taking the time to do the work to realize it.

Nate:     So, because you’ve talked about development and exploration, it would be great to hear just the distinction between the two, for those people who maybe aren’t resource investors, or for a mining company, what is that distinction for the exploration assets, the development assets?

Nolan:   Yeah, so for gold mining companies, exploration is simply the process of trying to figure out if there’s economic gold anywhere in the ground that could be extracted in the future. So usually, companies will start out with things like geophysics, so they’ll run electromagnetic air surveys to try to understand that there are different magnetic differences in the earth. And then they’ll run an induced polarization surveys where they’ll see if different parts of the earth are holding different amounts of electricity.

Nolan:   And then they’ll do soil grids where they literally have guys walk around with GPS coordinates, and they’ll just pick up dirt, stick it in a bag, and label it with the GPS coordinates, send it all off to a lab. And then they’ll overlay all of this stuff and see is there a chemical anomaly with higher levels of gold associated with any of these induced polarization anomalies or magnetic anomalies.

Nolan:   And they’ll start going okay, we want to do diamond drilling to pull out core from the earth to see if there looks like there’s high grade gold. It’s too expensive to do that blindly. We don’t want to … You know, it costs hundreds of thousands of dollars sometimes, to put down a deep hole into the earth. And to start up a mine you have to have thousands of those into the earth, and it’s very expensive.

Nolan:   So you don’t want to blindly drill unless you’ve done this exploration work. And once you drill, if you hit, you keep drilling out, and you start seeing, can we put together in a 3D model something that looks like something we could mine. And if the answer is yes, it looks like we can mine it, you start doing various studies on it, and that’s when it goes into kind of the development phase where you study the prospective developments of it for several years.

Nolan:   And then the true development phase is okay, guys, let’s go build this. And you spend another few years actually building the mine.

Nate:     What’s the first headwind that comes to mind for either the industry or for your company?

Nolan:   Right now, it’s access to capital. Absolutely is the number one headwind that our industry has, and it’s as capital intensive as an industry’s ever going to be, and there’s not a lot of capital in it. So it’s a tough time for most mining companies. It’s a great time for Sandstorm, because it gives us good opportunities to allocate that capital, but you know, it’s not … Even though we’re getting great deals, it’s not always fun coming to work in an industry that’s full of depressed people all the time.

Nate:     Yeah. I’ve been there. What’s the first tailwind that comes to mind?

Nolan:   I think with precious metals specifically, the economic climate in the US is starting to show signs that maybe we’re not at a top but we’re getting close to it. And there is record levels of government debt, corporate debt and personal debt in the US, especially government debt. And people are starting to talk for the first time about hey, if this economy does roll over, we’re in trouble with the amount of debt that we’re holding.

Nolan:   And when people talk like that, psychologically it starts making people nervous, and it makes them want to invest in more real assets, and gold is one of those real assets that they run to. So gold prices start creeping up when that kind of talk happens. And so I think the tailwind we’re going to have is I do think the gold price is going to start going up over the next couple years, and that just makes everything a little bit easier.

Nate:     Yeah. You meet with investors fairly regularly, and I’ve been one of those investors, and I’ve asked dumb, stupid questions. And I know that from management’s perspective, sometimes those questions can be very, very funny. And I would be curious to know whether or not you have just a funny or interesting story from a conference, an investor meeting, something of that sort, that you’d like to share.

Nolan:   Yeah, I find one of the funny things about investors is how passionate that they are, that they’re the smartest person in the world and they, after only understanding your business for an hour, definitely know how you should do your job, and how you should run your business.

Nolan:   And there’s literally one roadshow that I was on where I had back-to-back meetings, and both of the meetings were the first time I had met the institutional investor, and the first institutional investor I met, at the end of the meeting said to me, “This business model is amazing because you’re trading at a certain multiple, and the good opportunities, the multiple to net asset value, and the opportunities that you have are so cheap, you can buy new assets below that net asset value multiple, so what you could do is arbitrage that difference by raise equity and buy assets, and then raise equity and buy assets and raise equity and buy assets. You need to raise as much equity as you can over the next several years, and buy as many assets.”

Nolan:   And then he finished it with, “And honestly, if you don’t do that, you’re stupid.” He actually said that. And then I went to the very next institutional investor meeting, and at the end of the meeting, he said, “This business model is amazing, and I don’t understand why, with such an undervalued portfolio, you would ever issue another share again. I think anyone in your position who would ever issue a single share is,” and he said this, “Is stupid.”

Nolan:   And I remember thinking, wow, I’m definitely going to disappoint somebody here.

Nate:     The other question that I had is a little bit off the map, but maybe it’s one that I might start asking a little bit more frequently. If there was one other mining company that you could invest in, and you couldn’t invest your money in Sandstorm shares, what company, which company would that be?

Nolan:   Yeah, that’s an absolute no-brainer for me. It’s a company called Turquoise Hill, which has the world’s best undeveloped copper mine. They own the majority of it, in Mongolia, their partner’s the Mongolian government. It is in operation right now, but the real juice of the asset is the underground, high grade portion costing them about $5 billion to build it. It’s all 100% financed, the International Finance Corporation has financed it with a syndicate of other banks, so it’s all fully financed.

Nolan:   They’re building it right now. It’s trading somewhere around 0.2 times net asset value, because building mines is risky, and they’re in that phase right now. But it is, people who don’t know mining, don’t understand that it is the best asset in the world that is currently being built right now. And it’s truly amazing, and it’s truly undervalued because of the noise of things like asset construction risk, and Mongolian government risk, and those types of things.

Nolan:   But it’s something that I was buying as late as last week, and will probably be buying next week as well.

Nate:     All right. No, I really appreciate that. It’s something that I’ll personally look into. Nolan, sincere thanks for coming on to the podcast. It’s been an absolute pleasure talking to you, and I’ve learned a lot, and I’m sure that my listeners have, too.

Nate:     And yeah, thanks so much for coming on to the podcast.

Nolan:   Well, thank again for having me. I appreciate it.

 

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