resolute

While gold remains a safe haven share for investors and funding it is also a great hedge against turbulent economic times, such as the current geopolitical and trade uncertainty weighing down on global economic growth as a result of the protracted US-China trade war.

In addition to this, there is another special role that gold fulfils – it serves as a specialised funding instrument that helps fund exploration and production projects for cash-strapped mining companies in the form of gold royalties and streams.

CHANTELLE KOTZE spoke to DAVID AWRAM, senior executive VP and director of Canadian gold royalty and streaming company Sandstorm Gold Royalties about the success of its royalty business model.

This article first appeared in Mining Review Africa Issue 8, 2019
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While mining companies may have very promising gold deposits, many of them lack the funding needed to move their projects into production – as building a gold operation requires large amounts of upfront capital.

This is where royalty and stream financing comes in, and in Sandstorm Gold’s case, helps fund these cash-strapped mining companies by making an upfront payment and in return receives a percentage of revenue or production from the mine.

While these royalties are usually a fixed percentage of the gold mining company’s production, typically over the entire life of the operation, they can differ in percentage over the life of the operation.

Companies aimed at collecting royalty income from mining operations have been around for little over 30 years, but the industry has changed drastically over the last 15 years and looks very different today, explains Awram.

Read: Securing investment – advice for junior miners

“These companies focused on the purchase and collection of royalties that already existed for mining operations (agreed upon by the original prospectors or exploration companies that explored the properties), while the newly formed royalties and streams were created for specific assets as a means to create financing opportunities for the operators of these mines.

The roots of royalty streaming

Awram explains that the idea behind the creation of royalties and streams was really first pioneered by Silver Wheaton Corp. (now Wheaton Precious Metals Corp.) which itself started as a spinout of Wheaton River Minerals (which today is part of Newmont Goldcorp).

The aim of creating Silver Wheaton was a way for Wheaton River Minerals to create additional value for its shareholders from the silver by-product that it – as a primary gold-copper mining company – produced.

The silver was therefore spun out into Silver Wheaton in the form of a silver stream.

Thereafter, Swedish-Canadian billionaire businessman, Lukas Lundin, the current chairman of Lundin Mining approached Silver Wheaton to explore ways of capitalising on the silver by-product from a zinc mine in Sweden – and so streaming, as we know it today, was born.

Since the initial birth of royalty streaming in 2004/5, it has transformed from the initial concept of creating additional value from specific by-products at specific mines, into something that companies all over the world can do.

The concept has consequently developed into a tool that royalty and streaming companies could use to get better value for a specific stream of metals – more value than the mining company itself.

This is because royalty and streaming companies do not have the same level of exposure to risk (including capital overruns and variability in costs) that mining companies themselves have.

This provides investors with more confidence and, in turn, a higher share value in the market, Awram explains.

Finding and promoting unique deals

Many of the royalty streaming companies that exist today have created the bulk of their value from funding existing mining companies on their existing assets – as funding these types of mining operations have been quite accretive and low risk way in which streaming companies could acquire  capital, notes Awram.

What sets Sandstorm Gold apart from other royalty streaming players in the industry and what makes its business model unique is its appetite to provide funding for projects that haven’t produced gold but which require development capital.

Sandstorm Gold specialises in finding economically-viable assets held by single-asset companies – the type of companies that many entrepreneurs and traditional mining financiers have turned their back on due to the high risk nature of the investment.

Awram explains that the commonality among these single-asset developers is that they only have very expensive capital options (such as equity) available to them, making royalty streaming almost always a more viable funding option for these single-asset developers.

This royalty streaming option has been particularly effective in Africa, says Awram, noting that many entrepreneurs and financiers in the mining industry are worried about their capital outflows and are therefore reluctant to invest in projects with expensive cost of capital.

African case study

Sandstorm Gold was involved in a deal with True Gold (which was later acquired by Endeavour Mining) in syndication with royalty and streaming company Franco Nevada for the Karma gold mine in Burkina Faso.

Read more about mining in West Africa

The construction of the mine was financed exclusively through equity and a US$125 million stream from Sandstorm Gold and Franco Nevada.

Awram believes that the stream was instrumental in the successful financing of the project, which was delayed by nine months as a result of a coup within the country soon after project construction began.

He explains that if debt had been used to finance this, the equity holders in True Gold would have received essentially nothing should the project’s debt financing have had to be restructured.

However, because royalty companies are perceived on the cumulative net assets value of its assets, there were effectively no penalties faced by True Gold for the delayed development of the mine.

Although the company’s share price was initially impacted, it rebounded relatively quickly, he notes.

“Karma mine is an excellent case where having royalty financing in place was more beneficial to the shareholders than a more traditional equity and debt financing model,” says Awram, adding that the risk was significantly lower for both the company and the asset.

Exploration upside drives value

Despite the fact that Sandstorm Gold is only 10 years old, Awram and Nolan Watson – the co-founders of Sandstorm Gold – have been leaders in the industry since they first pioneered the royalty streaming model of today while still at Silver Wheaton.

Since then, the pair have completed countless innovative deals, which have benchmarked Sandstorm in the industry. It is this intimate knowledge of the industry that has set Sandstorm Gold apart from other royalty streaming companies is its ability to create value for its shareholders.

For Sandstorm Gold, exploration upside of projects is key and is the most effective and most important aspect of driving value for shareholders.

“While we take on the risk of commodity cycles, we benefit from the upside potential that these assets offer,” says Awram.

Despite some of its contracts being front-end loaded, Sandstorm Gold is looking for life of mine royalty streaming contracts with the gold companies with strong economics, experienced teams and proven exploration models.

The company has found most of its success investing in assets that are not as well known, not as well understood and that have not had a lot of capital investment prior to construction, with an initial mine life of at least seven to ten years.

Endeavour Mining’s Houndé mine in Burkina Faso, which had an initial seven year mine life with significant upside potential, was one such mine that Sandstorm Gold successfully invested US$42 million dollars.

Since its initial investment, Endeavour Mining has added 700 000 oz of additional gold into reserve, increasing the mine life by an additional three years.

“Our success has been in actively seeking out unknown projects that we believe could become the leading projects of the future,” says Awram.

The African frontier

With a stable base of 21 cash-flowing royalties and counting, with several more in development, the bulk of Sandstorm Gold’s revenue currently comes from South and North America.

Much of its future revenue however is expected to come from Africa. Africa has been one of the jurisdictions in which Sandstorm Gold has recorded the most growth in the last three years – with two of the company’s larger revenue streams coming from Africa.

“West Africa in particular has been very prolific for having very successful mines open up in a number of different countries, with East Africa also developing into a promising mining region owing to government support and infrastructure establishment,” says Awram.

Read more about mining in East Africa