Thursday, March 15, 2012

This is starting to look interesting

One tiny segment of the stock market carries the label "Royalty Companies."  No, you don't get to buy a share of Buckingham Palace. You get to buy a share of a company that finances the development of mines, oil wells and other resource developments in return for a piece of the action.

The appeal of Royalty Companies is simple.  They put a boundary around the kinds of risks that an investor in these areas is exposed to.  Country risk?  Lower if the Royalty Company invests in several jurisdictions.  Exploration risk?  No, they invest in developments where the exploration has already delivered proven results.  Production risk? Some, but diversified.  Price risk?  Well, yeah, some price risk, but many of the deals actually hedge price risk in some way.

Who are these companies?  In Canada, Silver Wheaton (SLW) is not the oldest but is a great example.  Royal Gold, Franco Nevada are other well-known, reputable firms.  These guys are listed on major exchanges and provide interesting exposure to precious metals prices.  And when precious metal prices take off, these firms leverage the gains.  After all, they have no operating costs to worry about, the way actual miners do.

One junior firm that caught my eye a couple of years back is called Sandstorm.  Sandstorm operates a Precious Metals firm called Sandstorm Gold (SSL on the Canadian Venture Exchange) and a non-Precious Metals firm called Sandstorm Metals & Energy (SND on that same exchange). The brains behind Sandstorm used to be the CFO of Silver Wheaton; he knows whereof he speaks.

Sandstorm has come to the attention of some reputable investment analysts. I am not one of them and this is not investment advice.  Don't lose your mind here.  But I do own shares in both SSL and SND.

Here is what I find interesting.  Both companies have been rising for the past months, but the ratio between SSL and SND may have stopped rising.  If you were to buy just one of the two, which would you buy?  For the past six months, the SSL buyers would have laughed at the SND buyers.  Now it looks as if it is the turn of the SND buyers to begin to laugh. The ratio is just dropping below the blue 50 day moving average line.  Stay tuned!

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