Seeking Alpha
Growth, gold, base metals, oil & gas
Profile| Send Message| ()  

Two news releases by Sandstorm Gold (SAND) aroused our interest this week.

First up on January 29, Sandstorm Gold announced the purchase of 33.7M shares and 7M warrants of Premier Royalty (NSR-TSX) from Premier Gold Mines (OTCPK:PIRGF). (Let us all make a mental note here to distinguish between Premier Royalty and Premier Gold Mines from here onwards). Then on January 30 Sandstorm Gold followed up with another announcement reporting the purchase of additional 11M common shares of Premier Royalty from an undisclosed source, increasing the total tally to 46.7M shares or 59.9% of the currently issued and outstanding shares (plus 7M warrants). (Numbers are rounded for convenience).

Before we continue we would like to get a few explanations out of the way:

Sandstorm Gold has a business model called gold streaming whereby Sandstorm Gold provides capital for companies to develop gold mines, and in return receives a gold streaming agreement giving Sandstorm Gold the right to purchase a percentage of the life of mine gold at a fixed (and usually heavily discounted) price.

Premier Royalty owns a number of net smelter return royalties.

"Net Smelter Return is the gross revenue (total revenue minus production costs) that the owner of a mining property receives from the sale of the mine's products less transportation and refining costs. As a royalty it refers to the fraction of net smelter return that a mine operator is obligated to pay the owner of the royalty agreement."

Same, same but different (as a south-east Asian friend of ours would put it, but we digress) On with the story!

Since we entertain a keen interest in Sandstorm Gold, we decided to set out and learn more about this development. A press release by Premier Royalty on January 31 indicated surprise about this move and left us none the wiser. We decided to research the genesis of Premier Royalty in order to find out more.

As it turns out we needed to start our quest with Premier Gold Mines (remember the mental note above). Premier Gold Mines describes itself as:

" … a North American focused exploration and development company with multiple gold projects located in the heart of proven mining districts in North America."

In November 2011 Premier Gold Mines announced:

" … the formation of a wholly-owned royalty subsidiary to be named Premier Royalty Corporation. The new subsidiary is being established to hold a number of royalties owned by Premier, and is intended to be a vehicle for growth in the future."

In August 2012 Premier Gold Mines signed an agreement to merge Premier Royalty with Bridgeport Ventures Inc. The merger closed in November 2012 and Premier Royalty started trading on the TSX in December 2012. Premier Gold Mines retained an interest in the merged entity which they seem to have sold on now to Sandstorm Gold. In actual fact, the consideration for this transfer of interest was paid in Sandstorm Gold warrants on the one hand, and a credit facility for Premier Gold Mines on the other.

Premier Royalty have a market capitalisation of $155M, compared to Sandstone Gold's market capitalisation of just over $1B. The portfolio of cash flowing royalties owned by Premier Royalty is impressive and includes royalties from mines operated by some of the finest gold miners on the market. Additionally, Premier Royalty owns a number of royalties from mines that are still under development promising future growth. And they have $40M cash in the kitty.

One can't help but speculate as to what intentions Sandstorm Gold might have in the future with this purchase of almost 60% interest in Premier Royalty. Sandstorm Gold's CEO Nolan Watson is on record stating:

"Premier Royalty has a base of existing royalties and a strong team that is capable of growth through accretive acquisitions. Owning a significant interest in Premier Royalty gives Sandstorm continued exposure to smaller stream and royalty acquisitions, allowing Sandstorm's team to focus on transactions that are material to our shareholders. Today's acquisition is the beginning of a strategic relationship between Sandstorm and Premier Royalty, one that we believe will be beneficial to shareholders of both companies."

Premier Royalty seemed rather surprised and issued a tight-lipped news release quoting their CEO Abraham Drost saying:

"We wish to confirm our willingness to work with the board and management team at Sandstorm. We believe it continues to be 'business as usual' for Premier Royalty as it continues to seek to optimize shareholder value as we realize on cash-flowing acquisition opportunities in the mining royalty space."

The news release went on to report that "In light of these transactions, Premier Royalty's Board is reviewing the need to appoint a financial advisor."

The market reaction so far has been subdued. Sandstorm Gold's shares are up 2% since the first announcement, Premier Royalty's shares are also up by about the same percentage. Interestingly, Premier Gold's share price is down by about 12%, stoking our suspicion that Premier Gold did not sell from a strong position.

The acquisition makes a lot of sense strategically for Sandstone Gold. The two business models are similar and Premier Royalty could have been viewed as an up-and-coming competitor for Sandstorm. The two entities are now very firmly tied together and one can assume that there will opportunities to profit from future cooperation.

Assuming a share price of $11.8 for Sandstorm Gold and $1.98 for Premier Royalty, it appears that Sandstorm did not pay a premium worth the mention for their block of Premier Royalty shares (unless one considers the credit facility for Premier Gold Mines a premium).

All up our keen interest for Sandstorm Gold has been reinforced by this latest turn of events. We continue to wait for an advantageous entry point.

Source: Sandstorm Gold's Latest Move