Nolan Watson doesn’t let a little economic slowdown ruin his day. In a year when mining companies are glumly staring at 52-week lows in their share prices, Watson has a winning formula to keep junior mining companies like Entrée Gold moving forward.
As CEO of Sandstorm Gold, he says his streaming agreement last year with Entrée on its properties to the north and south of Rio Tinto’s $6.6 billion Oyu Tolgoi copper and gold mining project in Mongolia is a win-win for both Sandstorm and Entrée.
“We are both in a strong position in this deal,” Watson said in an interview from his Vancouver office. “We have capital in what is a very capital-constrained market. And they had a world-class asset that we didn’t [have].”
Sandstorm bills itself a “gold streaming company.” It makes money by advancing capital to mining companies in exchange for a revenue stream of gold and silver at a fixed price. Gold streaming was pioneered by Silver Wheaton, and it has made the company the largest of its kind in the world. Analysts say gold and silver streaming agreements have been growing in popularity, particularly in a year when willing investors are a scarce commodity.
At the centre of Sandstorm’s novel deal with Entrée is Rio Tinto’s plan to mine copper and gold in an underground mining project. Sandstorm’s agreement calls for a price of the lesser of $220 for each ounce of gold and $5 for every ounce of silver until 8.6 million ounces of gold and 40.3 million ounces of silver have been produced by the property, with the metal rates doubling after that production. Rio owns 66% of the property through its subsidiary Turquoise Hill and the Mongolian government has the remaining 34%.
Sandstorm’s ties to Mongolia run deep. Watson has been to the East Asian country several times, initially following mining there as an auditor to Robert Friedland’s Ivanhoe Mines, and later as Silver Wheaton’s chief financial officer. Sandstorm’s executive vice-president of corporate development, Claudia Tournquist, spent five years as lead of business investment analysis for Rio Tinto in London. She was very close to the Oyu Tolgoi deal and transaction and paid keen attention to Entrée Gold.
But Entrée really popped up on the company’s radar screen two years ago when TD Bank invited Sandstorm to meet with Entrée. After 18 months of negotiations, the deal was done. Watson estimated the cash agreement totalled more than $50 million, money that Entrée will be able to use on prospects elsewhere in the world.
The big plus for Sandstorm is that it gets gold credits – rather than the physical product from the mine – at a low fixed price without having to invest in exploration, development or maintenance. That’s a major advantage at a time when large and small mining companies are facing rapidly increasing exploration, construction and production costs and a falling price of gold. And Watson estimates the mine could operate for several decades.
It’s not all smooth going for Sandstorm though. Developing a mine in Mongolia is not for the faint of heart. Talks between Rio Tinto and the Mongolian government were faltering this spring over complaints of billions of dollars in high maintenance fees and cost overruns.
Nonetheless, Watson remains optimistic. “We think that in the long run – despite the fact that the Mongolian government tends to make a lot of noise while it is in the process of negotiating things – it has had a history of more often than not doing the right thing in the end.”
Sandstorm engaged two law firms – one with on-the-ground people in Mongolia, to get a good lay of the land and the current and future laws of Mongolia.
Jennifer Traub, a Cassels Brock partner and Sandstorm’s main legal counsel, says Canadian miners are accustomed to such risks in foreign countries.
“They [mining companies] obviously do a lot of technical diligence on the ground themselves and have to get comfortable with an asset. As lawyers we put all the risk factors around their public disclosure because with these governments you never know what they are going to do.”
In fact, Sandstorm is taking nothing for granted. As part of the agreement there is a clause that stipulates Sandstorm will get its money back if the government expropriates the mine.
The other risk taught Watson an important lesson: keep your investors on this side of the ocean well informed. Sandstorm announced the unusual deal on the same day that falling gold prices caused most major gold company shares to drop 5% in value. Sandstorm’s own shares dropped 2%.
Watson says Sandstorm’s investors were disappointed that Sandstorm wasn’t going to seek more equity, which would have prompted them to sell and buy back shares at a lower price using warrants.