Canadian Mining Eye - Q4 2016
Q&A with Nolan Watson
President and CEO of Sandstorm Gold Ltd.
Nolan Watson of Sandstorm Gold speaks to EY BC Transactions Leader, Michelle Grant, about the capital markets in the mining sector.
Following are the highlights of their conversation:
What’s your outlook for the sector in 2017?
I’m excited for 2017 because I think it will be the first year in a while that will be relatively balanced. Commodities, in particular, have a lot of boom and bust cycles and it appears that 2017 could be a year that we could actually get down to transacting business. It’s hard to do deals when prices are moving all over the place — deals get done when valuations get in a certain range from a buyer and a seller perspective. It feels like 2017 will be based on the fundamentals of each company and how they perform as opposed to wide industry swings.
Certainly over the last few years capital markets haven’t been very favourable to mining companies. What are your thoughts on streaming deals and what role do you see them playing in the market in 2017?
I think streaming has become an increasing part of both the capital markets and the mining and metals sector. My prediction is that 2017 will be a year when many streaming deals will be done. That said, the equity portion of the capital markets are working better than they were a year and a half ago, and I think that there will be reasonable equity for companies with good projects. That will make it more competitive and possibly more challenging for companies like Sandstorm to get streams done.
If you look back at 2014 through the beginning of 2016, most of the streaming deals were just to fix companies balance sheets and such deals did not provide new capital to go build projects. We’re starting to move back into the phase of the cycle where not all projects will be moving forward but good ones will be. Although equity will be available for those projects, it will be unlikely that those projects can be 100% financed with equity. So I think streaming will still have an important role.
Can you share your perspective on the streaming industry?
Over the years there have been different levels of competition in the streaming and royalty space. Back in 2004, there was almost no competition. Over the years, competition grew from new market entrants as well as improving equity markets, and by 2009 it was incredibly easy for mining companies to raise equity. All you had to say was that you were a mining company and you could raise nearly unlimited amounts of capital. The equity markets were broken in the other direction — they were being indiscriminate about capital and projects. You had a high number of streaming companies, a high level of competition from equity markets and therefore the availability of streaming product was low. Because of this, the streaming industry began to consolidate itself and there was a lower level of competition again.
Over the last few years there has been another expansion of royalty companies. I think we’re moving into the situation in 2017-18 where there’s high competition but also high availability of product. When the markets get really strong from an equity perspective again, I believe it will be back to high competition/low availability of product. I think the industry will have to start consolidating itself again if wants to be productive and not have too many streaming companies sitting out there. That’s how I see the next two to four years unfolding.
How will you position Sandstorm to be successful?
For the next two years we need to buy as many streams and royalties as we can get at a reasonable valuation. We find deals by trying to get there before other streaming and royalty companies do. We also like to focus on situations that are undervalued so you have a motivated counter-party. Sandstorm is not the biggest company, nor do we have the highest trading multiple —but we do have the ability to sit down and design deals that are creative, flexible and provide a good return for Sandstorm shareholders. Each of our deals look very different from others.
We hear a lot about innovation in this sector. Is there much innovation around capital raising?
I think innovation in financing is why we exist. It’s important to me that we’re always staying relevant and changing the way we do things to get streams and royalties. What speaks to our level of innovation is our ability to play in different parts of the capital structure, and to be willing to do it in different ways for companies that are in different stages of development.
One of the ways we’re trying to innovate is that we’re trying to build a group of interested mining investors so that when we approach a mining company, we can say things like, “We will buy a stream of royalties from you. We know you need to raise X number on the equity side to get your mine into production. Sandstorm will backstop all, or a portion of that, knowing that we have strong demand on the back end.” It’s almost replacing, to a certain extent, the role of equity and banker so they don’t need to deal with a banker separately. The more we can approach companies and offer Sandstorm as a one-stop shop, the more successful we’ll be.