I added/pasted the piece re: Sandstorm Gold from the article.
Perched On The Knife's Edge With Jay Taylor
November 8, 2012
TGR: Your top-tier gold producers, or what you call your Progress A1 companies, were up a combined 22% as of Oct. 17. Which do you expect to be steady performers in an environment of high gold prices?
JT: Sandstorm Gold Ltd. (SAND) has been my No. 1 pick all year, and would stay No. 1 especially in a more inflationary environment.
That is because Sandstorm enters into agreements with start-up mining companies whereby it can buy gold at the cost of production for the life of a mine in exchange for providing startup capital required to get into production. Assume that gold went to $5,000/oz, and the cost of production goes up to $4,900/oz. That would squeeze the producers' margins. But Sandstorm would still be buying some agreed to percentage of life of mine production at, say, $400/oz, which is more or less its current cost of gold purchase. That provides Sandstorm a gigantic profit margin, even at current gold prices of around $1,600-1,700/oz. Not only that, Sandstorm does not have to invest more for sustaining capital through the life of a mine as the operating company must do. As per its agreement, after it supplies startup capital, Sandstorm doesn't have to spend any more money to keep buying gold at the cost of production, usually based on feasibility studies when the project went into production. A typical arrangement would have Sandstorm being able to buy between 10% and 25% of a project's gold production at cost.