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Gold bars are stacked in the Pro Aurum gold house in Munich, Germany, in 2014.

MICHAEL DALDER/Reuters

It has been an outstanding year for most gold stocks. The S&P/TSX global gold index, which is designed to provide an investible index of global gold securities, is up 112 per cent year to date.

However, the stocks are rebounding from multiyear lows, so 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 Corp. or Agnico Eagle Mines Ltd. The second, smaller group is the royalty companies. I prefer them because they don't incur the risks involved with exploration, development, environmental protection, etc. Rather, they provide the financing in exchange for royalty income.

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Franco-Nevada Corp. is the most successful company of this type in Canada. I first recommended it in July, 2010, at $31.69 and it closed on Monday at $102.49. I continue to like the stock but the price may be expensive for some readers. For a cheaper alternative, consider Sandstorm Gold Ltd.

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 $14 in late 2012 before going into a prolonged decline when the price of gold tumbled. They reached a low of $2.82 in January before rebounding to its Monday close of $7.71.

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 U.S.) 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.

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Recent developments

The company reported revenue of $29.1-million (U.S.) 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 (13 cents a share) for the period compared to a loss of $12.6-million (11 cents) 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 one percentage points would affect finance expense by approximately $400,000. 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

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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. Consult your financial adviser before acting.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to buildingwealth.ca.

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