The surprising resiliency of junior miners: Sandstorm Gold

Sandstorm Gold’s CEO expects more mining juniors to survive the downturn than some analysts predict.

In an interview with earlier this month, CEO Nolan Watson estimates that 200 mining juniors in Canada will shut down due to insufficient working capital. Last month the PDAC released a report estimating that 600 mining mining juniors in Canada do not have enough working capital to keep them running through the next 12 months.

“You’d be surprised at how well some management teams are able to shutter the door, spend nothing and keep their project on ice until things recover,” says Nolan.

“They find very resilient ways to stay alive.”

While Watson believes more companies will survive the commodity downturn than predicted, some still won’t make it.

“There are some companies that aren’t going to have a choice. Their working capital is already close to zero if not negative. Those companies are probably going to go insolvent. The days of putting the project on ice have come and gone because they can’t raise the working capital.”

Sandstorm Gold (TSX:SSL) provides financing to near production miners in return for a gold streaming agreement.

Watson, who is still in his thirties, began his mining career at Silver Wheaton where he was employee number one and became the company’s chief financial officer. Watson then founded Sandstorm Gold and its sister company Sandstorm Metals & Energy (TSX-V:SND), which now have a combined market capitalization of around $750 million.

The tough market is a mixed bag for Watson’s streaming company.

“Candidly this is an environment where often a stream cannot be 100% of the capital to put a mine into production. You need another form of capital, and it comes in conjunction with equity financing.

“The equity market is totally and completely dead right now. It is down and out and there are no signs of it coming back anytime soon. So a lot of those situations where we were advanced in discussion with mining companies we have to put those discussions on hold until the equity markets come back.”

When taking on a project, Watson says the team must be experienced. Time and again what does does surprise Watson when considering a deal is how many people still underestimate costs and time to complete a mine.

“I know it’s been the mantra of cost over runs but still even today in this environment with all the history of all the companies people still come into the office and say we are going to be able to produce gold at $700/oz after our technical team looks at it and realizes its going to be close to $1,200 or $1,300 and they are not going to have any gross margin after they pay for their G&A.”

Watson says the smart money in this market is finding the means to be very defensive and move to cash or near cash companies.

“The smart money is bearing down to core positions to the types of companies that are well run with good management and good cash balances. So the number one thing that smart money is doing right now is looking at companies, deciding how badly that company may need to raise money in the next six months.

“If the answer is they will need to raise money, smart money is selling.”