Buy, Sell, or Hold: Sandstorm Gold

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Sandstorm Gold (NYSEMKT: SAND  ) today, and see why you might want to buy, sell, or hold it.

Incorporated in 2007 and based in Vancouver, Sandstorm Gold sports a market capitalization of about $1 billion. (You may possibly know it by its previous name, Sandstorm Resources.) The stock has doubled over the past year, leading some to want to jump in and others to wonder whether its big surge is behind it.

Buy
Sure, gold is appealing to many people, and many would like to include some gold or gold-related companies in their portfolios for diversification's sake. Sandstorm Gold, though, has a business model that's arguably even more exciting: Instead of mining for gold, which carries some risks, as it's not always found or is not found in qualities or qualities expected or desired, Sandstorm mainly bankrolls gold miners. In exchange for financing, it collects a cut of the output, typically at much-reduced rates.

For example, Sandstorm has deals with companies such as Colossus Minerals, SilverCrest Mines, Luna Gold, and Brigus Gold. The deal with Colossus, for example, gives Sandstorm 1.5% of all gold produced at Colossus' Serra Pelada mine, and more than a third of its platinum output. Better still, Sandstorm will pay just $400 per ounce for the gold and $200 per ounce for the platinum. Consider that gold has recently been selling for more than $1,600 per ounce, as has platinum. There's a lot of potential in these deals. Brigus Gold's Black Fox mine, for example, has become more productive lately, and Sandstorm is in line to receive 8% of its output.

If you like growth, you've got it with Sandstorm. In its short life, revenue has risen from about $3 million in 2010 to $55 million recently, while earnings per share have gone from $0.05 to $0.28.

Management is another draw for the company, as its CEO used to work at Silver Wheaton (NYSE: SLW  ) , which has been successfully employing the metals-streaming royalty model for quite a while. Its annual revenue has risen from about $175 million in 2007 to $754 million recently, reflecting a successful business model. Silver Wheaton's earnings have also kept pace, rising from $92 million to $553 million in the same period. If you're noticing really hefty net profit margins there, you're right! Sandstorm's net margins aren't quite that high, and they've dropped recently, but they still top 30%, which is very steep.

Sell
If you're looking for dividend income from your investments, then move right along, as Sandstorm offers no yield. (That's common for smaller, younger, faster-growing companies.)

Also, despite solid revenue and earnings growth, Sandstorm has been posting negative free cash flow in recent years. To be fair, its operating cash flow has grown, but its capital expenditures have grown significantly, too.

One concern is stock dilution, as the company's diluted share count has gone from about 33 million in 2010 to 84 million recently. Such growth dilutes the value of existing shares, and if it continues, can hurt results for shareholders.

Sandstorm's valuation doesn't suggest a screaming buy, either, with a P/E ratio recently above 50 and a price-to-sales ratio of 19, which is very steep.

Meanwhile, the company is very young, without a long track record of profitability and strong management execution. It only went public in 2010, after being founded a few years earlier.

Hold (off)
Given the reasons to buy or sell Sandstorm, it's not unreasonable to decide to just hold off on it. You might want to wait for it to become cash-flow positive, or for its valuation to drop a bit.

You might also check out some other interesting companies in a similar business, to see if they seem like better bargains than Sandstorm. Royal Gold  (NASDAQ: RGLD  ) and Franco-Nevada (NYSE: FNV  ) , for example, are similar, but bigger, as is Silver Wheaton. Franco-Nevada has been growing revenue by double-digit rates in recent years (with a little dip in the last year), though earnings growth has been choppier. The company has been pressured by weak commodity prices, but its future seems promising.

You might also look at miners, instead of these financiers. Thompson Creek (NYSE: TC  ) , for example, is a major molybdenum miner, which serves the steel industry, among other things. It's trying to work its way out of penny-stock territory and has its fans, despite its stock having fallen in recent years and other concerns, such as debt and a dearth of free cash flow.

The verdict
I'm holding off on Sandstorm for now, but it may well appear in my portfolio in the future, as it seems rather compelling in many ways. Everyone's investment calculations are different, though. Do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.

If you are looking for a company whose success is determined by the metals market, but without involving itself in the risks of physically mining the metals, then Silver Wheaton provides a unique play on the future of silver. SLW chooses to finance the mining of silver; it has grown sales and net income every year since 2008, and also has increased competitive advantages over its limited peer group. More details about our outlook for Silver Wheaton can be found here in our Motley Fool analyst report.



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