It has been a great year to have money in gold stocks. As of Thursday's close, the S&P/TSX Global Growth Index, which reflects the performance of a basket of 32 gold miners in Canada and the U.S., had gained 115% year-to-date.
And there is probably more to come. Low interest rates reduce the disincentive of holding gold, which pays no return. In fact, with about $10 trillion now invested in negative yield bonds, a 0% return from holding the precious metal looks pretty good.
So how should you invest? There are four options.
The metal. You can buy gold coins, wafers, or bars from a variety of sources including the Royal Canadian Mint. Most major banks also sell gold, with Scotiabank the acknowledged leader. All major sellers provide storage services, at a fee. Check their websites.
ETFs. A number of exchange-traded funds invest in gold bullion. Number one by far is the SPDR Gold Shares ETF (NYSE: GLD), which has assets of $42.5 billion.
Mutual funds. The average Canadian precious metals fund returned 106.9% in the first six months of this year. But be cautious. Over the past five years, not a single mutual fund is in the black.
Stocks. It has been a good year for most gold stocks. However, they are all rebounding from multi-year lows so, like the mutual funds, their long-term records don't look so hot. Still, we're looking forward, not back, and the prospects for at least the next few months look positive.
There are two types of gold stocks available. Most are traditional mining stocks such as Barrick Gold or Agnico-Eagle. The second, smaller group is the royalty companies. They're the ones I prefer because they don't incur the risks involved with exploration, development, environmental protection, etc. Rather, they provide the financing in exchange for royalty income.
Franco Nevada (TSX:FNV) (NYSE: FNV) is the most successful company of this type in Canada. It was recommended in the IWB by contributing editor Gavin Graham in July 2010 at C$31.69, US$30.45 and was trading on Friday afternoon at C$102.02, US$77.46. We continue to like the stock but the price may be expensive for some readers. For a cheaper alternation, consider Sandstorm Gold Ltd. (TSX: SSL) (AMEX SAND). Here are the details.
Background: Sandstorm provides upfront financing to gold mining companies that are looking for capital. In return, it receives the right to a percentage of the gold produced from a mine, for the life of the mine. Sandstorm has a portfolio of 131 streams and royalties, of which 20 of the underlying mines are producing. The company plans to grow and diversify its low cost production profile through the acquisition of additional gold streams and royalties.
Stock performance: The stock has been publicly traded since 2008. The shares hit a peak of about C$14 in late 2012 before going into a prolonged decline when the price of gold tumbled. They reached a low of C$2.82 in January before rebounding to the current level.
Why we like it: As mentioned, there are fewer risks associated with royalty companies than with traditional miners. Sandstorm is well positioned to expand its portfolio, with a fat war chest ($110 million) available for new acquisitions. The company is focused on acquiring gold streams and royalties from mines with low production costs, significant exploration potential, and strong management teams.
Recent developments: The company reported revenue of $29.1 million for the six months to June 30, down slightly from $30.7 million the year before (Sandstorm reports in U.S. dollars). Most of the revenue was from gold but the company also has some diamond and base metals revenue streams.
Reduced expenses and a gain in the revaluation of investments resulted in a profit of $18.4 million ($0.13 per share) for the period compared to a loss of $12.6 million (-$0.11 per share) for the first six months of 2015.
During the quarter the company used operating cash flow and proceeds from a recent stock issue to pay off its line of credit.
Risks: The price of gold is the obvious one. The share price will rise or fall with the movement of the price of bullion. Interest rate risk is another issue. The company's borrowings are all at a floating rate, meaning a rise in rates would have a negative effect on costs. A fluctuation in interest rates of 100 basis points (1%) would affect finance expense by approximately $0.4 million. Other risks relate to the output from the mines in which it holds royalties. Sandstorm has no control over mining operations; it just collects its money.
Outlook: Sandstorm expects production to be between 43,000 and 50,000 gold equivalent ounces in 2016. It forecasts that will increase to 65,000 by 2020.
Dividend: The stock does not pay a dividend.
Action now: Sandstorm is a Buy for aggressive investors. The shares closed Friday at C$7.60, US$5.77.
