Sandstorm Gold's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Sandstorm Gold (SAND)

Sandstorm Gold Ltd. (NYSEMKT:SAND)

Q4 2012 Results Earnings Call

February 19, 2013 11:30 AM ET


Denver Harris - Investor Relations

Nolan Watson - President and CEO

Erfan Kazemi - Chief Financial Officer

David Awram - Executive Vice President


Eric Winmill - Casimir Capital

Don MacLean - Paradigm Capital

Richard Grey - Cormark Securities

Marc Johnson - MPartners


Good morning. My name is Jonathan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sandstorm Gold Year End Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instruction)

Thank you. Mr. Denver Harris, you may begin your conference.

Denver Harris

Thanks, Jonathan. Good morning. And thank you for participating in today's fourth quarter conference call. With me I have Sandstorm's President and CEO, Nolan Watson; CFO, Erfan Kazemi; and Executive Vice President, David Awram.

Before we get started, I’d like to bring to your attention that some of the commentary on today’s call may contain forward-looking statements. There can be no assurance that forward-looking statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements.

Now I'll pass things over to Nolan.

Nolan Watson

Thank you, Denver, and thank you ladies and gentlemen for joining today's conference call. There are number of things that I want to talk about on today's call, including our recent operational and financial results, our 2013 guidance, our recent acquisition of the gold stream from Mutiny Gold. Our recent acquisition of the 60% of Premier Royalty, our recent acquisition of the precious metal stream with Entrée Gold and I would also like to talk about, remind everyone of our policy for raising additional equity in the company.

So starting off, with first things first, during 2012 we had a record year with just over 33,500 ounces of gold sold and we have a low fixed cash cost, so that resulted, having operating cash flow of $37.6 million.

Going forward for 2013 we are forecasting gold sales between 33,000 ounces to 40,000 ounces, increasing to approximately 70,000 ounces of gold equivalent by 2016 and that's based solely on our existing streams and royalty deals. And that guidance does not include any acquisitions that we plan on making in the future.

And as a reminder for everyone, we generally provide at the beginning of every year a range for which we believe there's an 80% chance that actual results will fall within that range and 10% chance of under performance and 10% chance of over performance.

It's also important to note that our guidance is more conservative than what the actual mining companies are guiding and it reflect our general experience that when mines are starting up and ramping up production, it takes longer than people generally expect it will. So Sandstorm's guidance is more conservative than the underlying mining companies have for guidance.

Having said all that, we do expect our production to approximately double over the next few years as Colossus starts up, as Mutiny starts up, as Bracemac starts up and as Luna ramps up, and as Metanor ramps up. So there are good things to come from Sandstorm with respect to future production.

And the next thing I'd like to discuss is the Mutiny Gold transaction. It's been a while since we completed it. We completed it back in December. We haven't had the opportunity to talk about it in a public form or any of our calls. So I'll just walk you through that briefly.

As many of you know, Mutiny Gold is an Australian-based mining company with the gold-copper development asset named Deflector in Western Australia. Sandstorm acquired a gold stream for 15% of Mutiny Gold's production at $500 an ounce, which we estimate will provide us with approximately 7,500 ounces per year to our credit, which is just about $10 million of cash worth today's gold price.

A few weeks ago Mutiny received the last of its key government approvals and soon -- and as soon as Mutiny has completed the debt financing which they are currently working on. They will be able to begin construction. That's worth noting that prior to announcing this acquisition Sandstorm had negotiated a full intercreditor agreement in detail with Mutiny's currently planned lenders and the credit process is in the final stages.

Now the way we structured this agreement, Sandstorm does not have to remit the $38 million upfront payments until the credit agreements are completed. However, I would expect this to occur within the next few months, at which point Sandstorm will remit the $38 million and full mine construction will begin.

So shortly after the Mutiny transaction, Sandstorm acquired, this was few weeks ago now, we acquired a 60% interest in one of our competitors Premier Royalty. Premier Royalty has been operating and building its business and pipeline of deals over the last year and they've put together an experience management team and a few reasonable cash flowing royalties.

And after we announced the acquisition of the 60% interest, some of our investors immediately liked the transaction. However, there were some investors that were concerned that we have paid a high price and others were concerned with the complex nature of the transaction. In particular, some investors were wondering why we had also lent Premier Gold $70 million and why we had issued Premier Gold’s special warrants instead of Sandstorm shares.

And so just to walk everyone through the rationale for why we wanted to do the transaction and how we came about. And secondly, how we ended up with this transaction structure, I believe once I walk everyone through it, it will become clear as to why we did it, the way we did it.

So in terms of our motivations to why we were interested in purchasing the controlling position in Premier Royalty and it stemmed not from the lack of alternative opportunities but largely because of the significant number of companies that are looking for stream and royalty financings from Sandstorm.

Over the last number of months the equity markets have dried up so badly that we are literally getting multiple inbound calls everyday and although, one might think this is a good thing, the downside of this is that the majority of these inbound calls are for deals under $20 million in size and $20 million only represents 2% of our market capitalization and our corporate development team has been getting completely bogged down in a number of things that are not at all material to Sandstorm's investors.

As a result of this, we have had a number of management and board discussions trying to address this issue, we have narrowed the -- we had narrowed the solution down to either, A, stopping, doing small deals altogether or, B, create a new but separate small deal team in order to free-up Sandstorm's existing corporate development team. So they can focus on things that are material for our investors.

And while we are in the process of making that decision, we ran into Premier Gold at a conference and after talking with them it became clear that they were willing to sell their controlling stake in Premier Royalty and it didn't take Sandstorm long to figure out this was actually an opportunity to kill three birds with one stone and that one, it would allow us to free-up Sandstorm's corporate development team, so they can focus on material transactions, thus adding more value to Sandstorm shareholders, and two, we could now work with Premier Royalty, so the Sandstorm shareholders can continue to make money up from smaller streaming and royalty transactions, and three, we can head off of potential future competitor at the past.

Therefore it became clear that the negatives of having to pay higher multiple and normal were significantly outweighed by the benefits of completing this transaction. Once we decided to do it, we actually originally offered cash consideration to Premier Gold to buy their shares of Premier Royalty’s, but it wasn't long until we realized that due to our strong pipeline of deals we would need all of that cash.

So when we offered to pay the cash, instead of paying cash we offered to pay Sandstorm shares, Premier Gold did express that they like the idea of having short-term access to cash in case they needed it.

So we came up with a compromise that was we would pay with shares and if they needed to, Premier Gold can borrow an amount of money equal to the share consideration and they could only do so up to the end of July this year.

And irrespective of whether or not they drew down on this, the facility would go away completely by the end of July. This entire loan falls away completely in July. So at the end of the day this transaction is basically just Sandstorm paying with shares.

And the other small complexity was when Sandstorm was negotiating with the bankers our revolver, they stated that they wanted us, if we are going to lend money to Premier Gold, they wanted us to ensure that we got security on something if they were to drawn the loan.

And technically you're not able to get security by law on your own shares but you can secure your own warrants. So instead of issuing them shares we issued them warrants, which we can secure.

And each warrant can turn into Sandstorm shares for no consideration at the request of Premier Gold. However, if they turn warrants into shares then the size of the facility that they can draw from us drops based on the value of the warrants that they converted to equity.

So, basically as they convert from warrants into equity the loan facility goes away if that happens before July. And so for example, just recently they transferred $15 million -- slightly more than $15 million of the warrants into equity and so they can no longer borrow $70 million from us between now and July. It's I think down to approximately $52 million I think they can borrow as an absolute maximum and again, at the end of July it goes away completely.

So, overall, we believe this transaction makes a lot of sense for Sandstorm because it allows Sandstorm's management team to better focus and add value to Sandstorm shareholders. It takes away a competitor and has us working with them and turns them into an ally that Sandstorm shareholders can now profit from.

And we fully intend on working with Premier Royalty’s to give them our small deal flow so that Premier can grow faster and more accretively, and so Sandstorm can make lots of money in the long run up from our share ownership position.

Owning shares of a streaming company tends to be more profitable when that company is smaller and for that reason I believe we help them execute well, Premier Royalty’s share should perform very well in the long run.

Since we made this acquisition just over the last couple of days Premier Royalty has announced another royalty acquisition and they still have $30 million of cash in the bank for future acquisitions.

So moving on, I think it's worth talking about the transaction that we announced last week with Entrée Gold. For those of you who are not familiar, Entrée is a company that has two main assets, the Ann Mason project in the United States which has 13 billion pounds of copper and resources, and have a PEA with NAV in excess of $1 billion. They also have a 20% joint venture interest in all of the surrounding ground around the world-class Turquoise Hill mine in Mongolia otherwise known as Oyu Tolgoi.

As a point of interest, my first foray into the mining industry was being down in Mongolia auditing Ivanhoe. This is well before they fully understood how amazing that deposit was. It was around that time years ago that Entrée Gold staked all of the land around Oyu Tolgoi and turns out that this deposit has extension on to Entrée's ground both to the North, which is called the Hugo North Extension and also to the South which is called the Heruga deposit.

A number of years ago Entrée agreed to a JV with Ivanhoe, Ivanhoe now being called Turquoise Hill, whereby Entrée received a 20% free carried interest in the project surrounding Oyu Tolgoi, including the Hugo North Extension and Heruga, and a lot of other exploration upside as well.

These deposits are part of the overall project. However, it will be at least four years before the first drifts are put into Entrée's ground for which there will be a small amount production from the underground development, but it won’t be for around 10 years or so until the Hugo North Extension really starts producing in earnest.

If you look up Turquoise Hill's 2010 development plan and I'm going to let Dave about this, Dave Awram, more specifically at the end of the call, it's a technical report filed under Entrée. They show a small amount of reserves but they went on to show what the life of mine plan was for the mine which technically is NI 43-101 compliant. But at the end of the day they had actually created an entire plan for what this mine is going to look like over the next 60 or 70 years and that is available to look at.

What excites us about this transaction is, if you take that life of mine plan on its base, at $1,400 per ounce of gold, Sandstorm would realize $300 million of life of mine cash flow from its stream and potentially another $300 million from its indirect ownership of the JV via our 12% ownership of Entrée for total potential cash flow of $600 million.

Now, some of our assets you know this, some of our investors who know this asset well, but are not privy to the details of the contract that we signed with Entrée. They initially provided us with feedback, if they understand the waiting 10 years on a world-class asset is worth it for huge potential in terms of money like this. However, they were concerned that because Mongolia has a risky jurisdiction that it was too much political risk for us to take on.

And I agree that Mongolia is the riskiest jurisdiction, we have done a deal with -- deal in which why, A, we ensured that it was only 4% of our market capitalization, so investors would not have to worry about whether their investment could be impaired by Mongolia.

But also, and B, more importantly, we have specifically put in a clause that says, that if political risk could causes Entrée JV percentage to decrease then our stream automatically adjust and a portion of our money is due back to us right away. So for example if 50% of the JV is lost than 50% of the money is due back to us if a stream drops by 50%. So the stream automatically adjusts for any political risk.

Therefore, overall, I view this transaction as, one, where we receive a tremendous deal because of the Mongolian political risk perception and then contractually we took out most of the Mongolian political risks, which is in keeping with Sandstorm’s philosophy of getting exposure to all of the upside and contractually mitigating as much downside as we can.

I think it's also worth noting that the $600 million life of mine cash flow numbers that I just quoted, actually assumes that the deal does get cut in half and we get half of our money back. If Entrée's portion of the JV stays at 20% and the full life of mine plan is mined we can make cash flow close to $1.2 billion over the life of the mine through the stream and our indirect ownership of the joint venture interest.

So the potential for over $1 billion of cash flow were mitigating political risk. We view this as providing great future upside to our shareholders. And this deal has a potential in my mind to provide more life of mine cash flow than any other deal we have done before, potentially even including Luna.

So now that I've gone through all of that, I think it's worth reiterating, that despite all of the capital that we've invested over the past several months, we will not raise equity unless we have specifically identified in-diligence to deals which are accretive to shareholders.

Also we have a $100 million in an undrawn revolving line of credit which we can use for future acquisitions and we also anticipate $50 million in operating cash flow over the next 14 months at today's gold prices.

And 14 months from now we anticipate receiving another $45 million from warrant exercises, which means we can invest over $200 million over the next 14 months without having to raise any additional capital. I think it is interesting when we announced this, Entrée transaction late last week I received a number of calls and emails from banks. In fact, five banks contacted me to basically say, it looks like you may need more capital soon. We're going to go talk with our sales reps and see what the demand is for you raising more capital, and what I want to tell everyone on this call is the same thing that I told all of those bankers is that we will not raise additional capital unless we have specifically identified in-diligence deals.

As it currently stands, we do not have such deals exceeding our current capacity and therefore, we have absolutely no plans to raise additional capital at the moment. We do plan to aggressively continue growing Sandstorm and we are highly confident that we will able to do so. However, we do not yet have deals exceeding our capacity and therefore, we do not have any plans to raise many in the near future. As everyone can see, we've been extremely busy over the last six months, and we've been working hard to build our business and add value for Sandstorm shareholders and we plan on continuing to do so in the future.

And so with all of that, I would now like to hand it over to Erfan our CFO and he can walk us through on more details on some of the financial results.

Erfan Kazemi

Thanks, Nolan. Sandstorm had an excellent year in terms of financial results. It was driven by the number of gold ounces sold, which increased 81% from 2011 to 33,514. During the year, gold production came from five active mines, including Aurizona, Black Fox, Santa Elena, Ming and Bachelor Lake.

At the Aurizona mine, we saw 65% increase in gold deliveries to 11,554 ounces, reflecting the ramping up of milling operations and the first full year of operation since the mine achieved commercial production.

Black Fox and Santa Elena mine continued to ramp up operations, delivering 8,391 ounces and 6,967 ounces during the year respectively. The production represented a 37% increase in gold sales at Black Fox Mine and a 49% increase in gold deliveries from Santa Elena for Sandstorm.

At the Mind Mine, Rambler was mining and processing ore from the 1806 high grade gold loan during the first half of 2012, which was the major factor in the 5,205 ounces in gold deliveries. Rambler has since commissioned the copper concentrator and is mining from the 1807 copper zone. Lastly, an additional 1144 ounces in gold sales came from the Bachelor Lake Mine, as Metanor began mining and processing the bulk ore sample from the mine.

During the fourth quarter, gold ounces sold were down 20% to 7,242 ounces, which was largely attributable to 25% pure gold sales ounces from the Aurizona Mine. The decrease was primarily driven by timing of shipments. Gold was sold in average of $1,715 per ounce with an average cash cost per ounce of $410, resulting in operating margin of $1,305.

Our resulting net income was $7.4 million and cash flow from operations was $6.5 million, leaving our cash position at year end at a $127 million. Since year end, we've continued to deploy cash for acquisition, most recently for the Entrée Gold streams.

At the same time, we've also increased our revolving credit facility to $100 million and given our current cash balance at over $3 million in cash flow coming in on a mostly basis. We'll be able to meet ore commitments and continued to complete smart transactions.

As more of our partners mines come online in 2013, we expect that it will be another strong year in terms of production and cash flow.

And with that, I'll turn over to Dave for an update on our assets.

David Awram

Great. Thanks, Erfan. So for the asset updates, I would like to just briefly touch on Aurizona, Serra Pelada and then talk about Hugo North and Heruga projects with the latest Entrée deal. If there's going to be any interest in other projects on a technical basis, you should ask me in the Q&A section.

So for, Aurizona, they have recently provided some new guidance for close to 100,000 ounces in 2013 and with improved cash cost and very robust all in cost. And so we've been seeing vast improvements on month for months really from that asset, really seeing it coming to its own as they get it through this Phase 1 Expansion. We are really eagerly following the progress in that Phase 1 Expansion and are expecting an updated resources and reserves in the first half of this year.

The ramp up to the high production is expected to gradually take place over the year and so we don't know we'll be able to provide some guidance as we progress through the quarters on that. Later on this year, we're also expecting results of the studies for the Phase 2 expansion program. Those that have been paying close attention to the asset will know that they have been and still been busy generating new targets on the exploration side and also drilling out existing resource area.

And then progress on the Phase 1 Expansion on these five primary aspects of it, are occurring concurrently with just the installation of the high rates thickeners expected to run into Q4 of this year, everything else should be done by then. Overall, for the asset, we have no reason to expect anything other than good news out of the asset, as they continue to pursue their expansion plans and continue on their exploration path forward.

On to Serra Pelada, Colossus is moving this project along full production in the second half of this year. Guidance has to start at 250 tons per day of operation and ramp up from there. Construction of the mill is about 60% complete with almost all of the engineering complete on this, but really a very important milestone that they've reached this recent bulk sample, which has displayed very good geotechnical characteristics that were well within the expected parameters, what they are expected to see. There are going to be experimenting with different types of mining methods to see which is really going to be the most efficient for this type of ground. This underground access is extending throughout the year, another 600 meters before the end of the year. It's also allowed for some better targeting for the definition drilling, which we use to calculate an upcoming reserve and resource statement in the next several months.

Estimates for their progress and development work over 2013 seem very achievable from our point of view, and we have confidence in their current team of being able to implement a mill and implement a new mining throughout the year. The gravity portion is planned and it's well underway and we don't anticipate any problems with their schedule on that. Overall, we're very quite pleased with the progress since the transaction and see the asset is been on track. We are excited to see the development and the progress this year and see the results of the bulk sample in the underground drilling.

Now on to Oyu Tolgoi and the Heruga and Hugo North deposits, I just wanted to really kind of clarify which portions of the deposits that our transaction applies to, how we currently see the production schedules and what the upside scenarios might be on this asset. So, Oyu Tolgoi currently is in production in the open pit and they are working on access to the Hugo deposit via a production shaft. They already have the exploration shaft gone into that.

So the deal that we have is really on that entire joint venture area of the asset, so the entire area that Rio Tinto is currently working on. In the current plan, development into the Hugo North Extension is expected in 2015 and 2016 with production expected to hit in 2021 and 2022 in that joint venture area where the transaction occurs in.

The current reserves pertain only to lift one, and the extensive indicated inferred resource material on Hugo North would be accessed from the second lift. This was amongst all of the highest grade material on the property and to get really a better picture, what Nolan was alluding to earlier, he had a better picture of really what the production plan looks from the current IDP10 which Rio Tinto is focusing on.

You really have to look at this technical report from June 2010. And even more specifically if you so looking on pages 400 and above, you'll see what was really been illustrated as the life of mine plan, which really goes on for 60 plus years on both the copper side and [molyb] side even breaks out the gold and the silver on this asset. So, for better idea of really the concept that’s going forward from miner from that, you can refer to that type of document.

Heruga is currently not in a reserve mine plan, but it is good and extensive material as well. In addition to that resource, the transaction covers the entire mining license which like I said before is the current exploration focus by Rio Tinto. So really talking about upside scenario for this, when we looked at this asset we really kind of consider, really why we see Hugo North and Heruga fitting into their plant.

And the concept because they are really so far up for production, there is a lot of different scenarios, where you could really see some of this material moved up, because we really kind of design this to such a way that in almost any given year once they start production at Hugo North Extension Area, we will be receiving a cash flow which almost equals our initial upfront payment. So, if any of those productions and any of that material moves up in any kind of significant way in the mine plan, we’re seeing a real increase to the overall NPV and seeing enormous positive effect to that based on the contract.

And then in addition to that of course, there are -- this was over a 30 kilometer trend of material in this Oyu Tolgoi mining trend. Some of which is, they have had some very good discoveries, some of which they’ve been drilling and certainly over the period of this contract and over the period of this asset, they may very well find some great material that could be folded into it, either in a open-pit scenario or more underground type material.

So really it is not going to take a whole lot of changes in moving up the mine plan and finding new discoveries on this incredibly prolific belt to really be able to see us see an enormous positive effect on this contract. And that’s really why we like this project so much, is that the optionality are on the transaction area is so enormous for us going forward and is really going to have a big budget thrown at it from Rio Tinto, because it really is going to be one of the primary copper assets going forward and really the number one world-class asset that’s coming online over the next several years.

And like Nolan said, free cash flow we will create almost on an annual basis will equate to almost our upfront payment in a single time and the life of mine cash flow could be as high as $1.2 billion or even above. And that’s really just using the plan that’s outlined in that June 2010 technical report.

Enough on the Entrée, I think for now. I just wanted to say a few words on the Munity and the Deflector projects. This is a very high grade copper gold project that will produce copper concentrates, where last year the project has made considerable progress on an increasing grade and the resources on the asset.

They’ve also made good progress on engineering and are entering into a construction low in the Western Australia mining industry. So maybe able to see some better projections than what they on costs than we’d hope to or at least, something that’s a little bit more malleable than what we’ve seen in that part of the world.

We consider this to be one of the most exciting and most economically strong Australian assets. So we’re excited to see how this comes along over the year. Another important aspect of the transaction is that it has opened up the concept of streaming to a vast array of Australian listed and Australian based companies that have not really seen streaming as a financial alternative.

This has in the last several months led to a number of new potential opportunities on the corporate development side. We’re hoping that it’s going to provide plenty of opportunities for us to chase up, as Sandstorm becomes a valid financial alternative in a whole new market down in Australia.

So with that asset update finished, I’ll just like to pass it off to the operator and we could start off our Q&A section.

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question comes from the line of Eric Winmill. Your line is open.

Eric Winmill - Casimir Capital

Good morning, guys and thank you for taking my call. I just wanted to see if I can get a little more clarity on the Q4 gold deliveries, especially at the Arizona. I know there was some refinery issues there that prevented timing of shipments and whether or not that impacted your numbers in Q4?

Nolan Watson

Right. So those timing shipments with respect to moving on the Arizona mining as for the Q4 deliveries, what we saw is based on the timing of shipments in those ounces than we would have expected in Q4 and that’s coming online in Q1 2013.

David Awram

Yeah. I think, to be more specific, there was approximately 1000 ounces, which hit the week after the December 31st.

Eric Winmill - Casimir Capital

Okay. Thank you. And in terms of the 2013 outlook are you able to provide any more detail on the breakdown and do you anticipate giving attributable portion of production from the Premier assets as well?

Nolan Watson

That -- okay. So, on the actual breakdown although we don’t publicly disclose where we are varying from the mining company’s guidance, we’ve done that in the past. And they tend to not be super excited with us, when we do it.

Having said that, one of the areas which I can probably shed some more light on is with respect to Rambler and their Ming mines. So the way we had to structure that agreement originally was to refresh everyone’s memory, we were discussing with them as to whether or not we believe that they would get the 86%, the gold recoveries that they had anticipated that they would. And our technical guys thought it was going to be closer to 65% recovery.

So the way that agreement worked is it says if you hit 86% recoveries or higher then Sandstorm only gets to buy 25% of the gold in the following year. So at the end of every year, you look back and say what were our metallurgical recoveries last year and that’s the percentage for the upcoming year.

So during the 2012 year, Rambler produced from their high grade gold zone through the cyanide leaching plant and got very high recoveries. So that set the percentage for 25% for the 2013 year. Now, they have stopped producing from the high grade gold zone and putting it through the cyanide leaching plant and they are now producing their normal run of mine ore -- life of mine ore. And they are putting us through the copper concentrator and they are in fact getting the 65% recoveries that we and our technical people thought they would.

And they are ramping up production this year. So not only is this going to be a ramp-up production year from the copper concentrator, we’re getting a lower percentage of it because of all of the gold that we got last year. So the Rambler production will be lower in 2013.

At the end of 2013 then we do that calculation again. So based on current metallurgical recoveries of gold, you would see that percentage shoot up to perhaps 34% or so for 2014. So in 2014, they will higher production and we will get a higher percentage of it. So you’ll see the number of ounces that we purchased almost double from Rambler in 2014 over 2013. Outside of that, feel free to give us a call anytime that we can maybe guide you to the right direction to come up with the detail.

Eric Winmill - Casimir Capital

Okay. And just to confirm, you don’t have any trivial production for the Premier assets in your 2013 outlook?

Nolan Watson

Correct. Correct. That outlook is Sandstorm proper only.

Eric Winmill - Casimir Capital

Okay. And just lastly I guess on Ann Mason, can you give any updates there on the status and the permits and what’s happening in the project?

Nolan Watson

Well, for Ann Mason down in Yerington, in Nevada, I mean, it’s pretty early stage. I mean they have completed PA level type of studies. It’s going to be an offshore going long process. I mean, this is a big project. I mean it really is. It’s truly enormous but it will be a long process going through that. They will have to go to EIS type of process for project like this.

Certainly, it’s kind of right in the area if anybody is familiar with a couple of other just different projects that they are going through permitting or else have been past mines of these large porphyry and skarn-related type deposits. But it is, I mean we took a view point that it’s kind of a very long term before you would ever get into production from that, well beyond five or six years before any kind of permits on plants.

Eric Winmill - Casimir Capital

Great. Thanks a lot guys.


Your next question comes from the line of Don MacLean. Your line is open.

Don MacLean - Paradigm Capital

Good morning guys. Maybe just if you could give us a bit more color on the risk side of Oyu Tolgoi and the Mongolian risk. Nolan, you had mentioned 10% versus 20%. In many ways, this is reminiscent of, I guess, when Franco acquired there, original royalties on gold strike for, get things compared where they turned out to be, but it was quite a while before they delivered.

This is a shift in strategy for you guys, it looks like for a lot of us. So maybe touch on the risk side, but also the context of your strategy you’ve talked about with closer term production of which the deviation you are going to make in the future?

Nolan Watson

Yeah. That’s a good point. When we were actually deciding at the board level whether or not we wanted to do Entrée transaction to generally characterize the decision that we made and the issues that we had, we knew that anytime you can try to tie down potentially billion dollars of potential cash flow for a very, very small upfront payment that it was worth doing that especially if we are building the company for the long-term, which we are.

At the same time, we were concerned though that investors might see this transaction and think, they are going to start doing a whole bunch of long data transactions and they are changing their philosophy and changing their ideal target deal. And so I just want to be very clear with everyone nothing has changed. This was a one-off that was just too good to pass up.

We don’t have any deals in our pipeline and that literally mean us to maybe 60 things we are looking at to 100 things, zero of them are like this. And so we felt that this was an important thing to do for shareholders for the long-term. But it will not be something that shareholders see us do regularly. And we certainly won’t be doing it again anytime soon.

With respect to the risk that we have tried to mitigate in our contract, we believe that the risk here is not that the asset gets appropriated. I don’t -- even the Mongolian governments is not asking for that. All they are asking for is the ability to vend into various entities, joint ventures. And what we are trying to illustrate to our shareholders is that even if that happens, this is still a very, very good deal for us. And we have structured our contracts that automatically adjust for that.

So we’ve never overpaid and then lost something. And so we view this as being able to get all of the upside without having many of the downside risks associated with this country risk. And it’s actually interesting, we -- despite the fact that we aren’t taking on the same country risk as the company is directly operating in Mongolia, we do recognize that some investors will have a tough time rapping their heads around the fact that just the word Mongolia will scare them off, even though we are not taking a Mongolian risk.

So at the same time, we felt that it was important to not put more than say 4% or 5% of our company in one country that would give any one investor cause for concerns. So, just to be clear, we haven’t had a shift in our approach. We are looking for near-term cash flow things in the vast majority of the deals in our pipeline right now. Our traditional normal streams was closer term cash flow.

David Awram

Sorry. Its David here too. Just a kind of expand on that. I mean, one of the things that we saw was missing from our strategy, which a lot of the other streaming companies have in place, is really that long-term growth and kind of life of mine plan as a -- life of mine plan that go beyond that 15 years. So this is really an aspect of building up that longer term but still having the bulk of our assets in almost all of our NAV built up in these assets that kind of have anywhere between, kind of, five and 10 or 12 years life of mine, but expanding at the same time too.

So this is really too -- really back up and I think a prudent decision to really put together, make sure that and show and illustrate directly to shareholders that yeah there is this good long-term life of mine cash flow, coming from at least one of our assets, as the other assets kind of build up and get through their exploration and their expansion programs and really emerge as larger projects to that we ultimately envision them as.

Don MacLean - Paradigm Capital

And just for some clarification, Nolan you used the example of how 10% the life of mine cash flow would be about $600 million at 20%, 1.2. What happens to your purchase price under those two scenarios? Maybe you could walk us through what happens there?

Nolan Watson

Yeah. So just to break down those numbers, when I say $600 million, half of that, it would be coming from the stream and the other half would be coming from the fact that we own kind of indirect through Entrée 12% of the joint venture agreement. What would happen basically under the agreement is if the stream size or if the joint venture interest were to drop. And this is again something that we aren’t necessarily anticipating. We just want to ensure that all basis are covered.

If that were to happen, then we would get to that percentage of our upfront payment back. So for example, if the deals size drops in half, we get half of our money that we paid to them back to us immediately.

Don MacLean - Paradigm Capital

And half of the 35?

Nolan Watson

Half of the 35, yeah.

Don MacLean - Paradigm Capital

Okay. Thank you. That’s great. Thank you.


Your next question comes from the line of Richard Grey. Your line is open.

Richard Grey - Cormark Securities

Hi guys. Just a few questions, just on Don’s question. So that’s -- that pay back kind of option is for the life of the stream, correct?

Nolan Watson

It’s not an -- yeah, it’s an option to us.

Richard Grey - Cormark Securities

Right. But there is not a definitive time period for that. It’s just any time over the course of the mine.

Nolan Watson


Richard Grey - Cormark Securities


Nolan Watson

As an indefinite time period, it’s the life of the asset.

Richard Grey - Cormark Securities

Okay. That’s helpful. The other question I have is just on the Deflector payments. So that $9 million upfront has not been paid yet. Is that correct?

Nolan Watson

Of the $38 million upfront payment that we have to make to Deflector, we have advanced them approximately $4 million thus far which will be credited against the $38 million. So we have $34 million to advance them which will likely happen over the next one or two quarters here.

Richard Grey - Cormark Securities

Okay. And my last question is, any payments to Deflector, any payments to Entrée. Are they going to come out of cash, are they going to come out of your credit facility?

Nolan Watson

We have enough cash to make all of those payments.

Richard Grey - Cormark Securities

You don’t plan to use facility for any of those.

Nolan Watson

We don’t need to.

Richard Grey - Cormark Securities

Okay. Just wanted to be sure. That’s all I got. Thanks.


Your next question comes from the line of [Mark Potter]. Your line is open.

Unidentified Analyst

Hello. I think you answered my questions about Entrée and other projects, Ann Mason. But I am curious about these roughly 12% stake you have in Entrée Gold as a result of this. Is this the cause of your optimism about the whole project portfolio including the American piece or is it more of a management seeing eye to eye about the whole portfolio of projects including Oyu Tolgoi?

Nolan Watson

This is primarily our interest in the Oyu Tolgoi portion of their asset base. Now, we have in the past had the policy of every now and then, when we would do a stream we would, say, buy a small amount of the equity of the mining company to cash them up a little bit more. We have always in the past been very vigilant about liquidating that equity very quickly because we know that we are not a hedge fund. Sandstorm is never going to try to be a hedge fund. And we never want to managing equities of other companies and taking strategic bets.

We leave that to our institutional investors and retail investors to choose to do that it if they want to. This is perhaps a bit of a one-off in the sense that what Entrée effectively owns is not entirely dissimilar from a stream. It’s a free carry joint venture interest on a world-class project. And so we are thinking that there may be some strategic value in continuing to own this if at some point in the future there is a second-step transaction to be done either with Turquoise Hill or Rio or Entrée, we are not quite sure. But -- so we would consider this as a little bit of a one-off to in terms of why we purchased the equity.

Unidentified Analyst

Good. That’s terrific. And my other question is about the nature of relationship currently between Rio Tinto or Turquoise Hill and the Mongolian gold post, that seem right ups saying that Mongolia is moving the gold post, very reminiscent, just sort of the 1970s and 80s attitudes towards mines and passed some jurisdictions. And I am just wondering, is there going to be a change of sediment there that could alleviate any political risk?

Nolan Watson

I will refrain from commenting on the status of anything between Rio and the Mongolian government. First of all because I am not privy to those conversations and second of all, I don’t think it would be helpful. What is interesting to me that was worth noting knowing is that there are presidential elections coming up over the next three or four months here in Mongolia.

And I have been involved in mining in a lot of different political jurisdictions around the world. And I find that rhetoric is at its highest right for an election and then it tends to come down right after. So what is worth, that’s the way we see it. But I am not privy to any of the conversations.

Unidentified Analyst

Thank you.


Your final question comes from the line of Marc Johnson. Your line is open.

Marc Johnson - MPartners

Good morning. Thank you for reviewing the projects. What we’ve got, could you give us an update as to how you are looking at macro issues for metal prices and may be just to touch on kind of the cost side of mining? A lot of the mining stocks, the larger companies have really come under a lot of pressure here, recently. And I’m just wondering what the -- what your overview is on the industry and pricing in general?

Nolan Watson

Yeah. So in terms of the actual prices of commodities going forward, in particular, with gold although there is some softness right now in the market. You are seeing some U.S. dollar denominated strength and you are seeing some bullish sentiment associated with the U.S. economy and the U.S. housing markets coming back and the U.S. banks are lending more and houses don’t tend to water anymore.

And you are getting a little bit of push from that. I think in the longer term, the fundamental belief that I have in the over leveraged nature of the governments around the world is going to continue to precipitate the valuation of currencies and gold is going to continue to go higher.

But at the same time, it’s very, very tough market right now for mining companies in particular. Sandstorm, our average cash cost is just over $400 per ounce and it’s fixed. And we can tell you that our cash costs are going to be 10 years from now. And overtime, if gold prices go up in the long term and our cash costs don’t, our gross margin is going to continue to increase.

But that’s not the same for the mining companies, because -- maybe I will hand it over to David. He could shed a little bit more insight on some specifics, but for the last several years, the cost of mining has been going up faster than the prices of the metals have been appreciating. And I think if that’s likely to continue for the next several years. But Dave, I don’t know if you have any comments on that.

David Awram

Yeah. I mean, Nolan is absolutely correct. What we have been monitoring on a regular basis on a quarter-by-quarter basis is really just seeing what costs are being. I mean, as you see even this quarter, quarterly updates coming out, those -- we’re still seeing that increase of those costs as we go forward. And especially what has been notable, especially has been the CapEx going into the construction of these assets. I mean there has been a number of large scale projects that really been continually updating with higher and higher capital cash cost, initial cash costs to get the assets into production.

So certainly that’s now story and also a big part of the story has been operating a lot of these operations, these assets at much lower grades than what they originally sort of designed for and anticipated to operate, which on a per unit basis. And this is -- even if the cost on a per ton mining basis aren’t increasing because of the lower actual metal content or recoverable metal content in each of these -- in the rocks that are actually mined. Their costs are just increasing on -- unit costs are increasing just by that much.

So it's kind of an ongoing problem. I mean, that’s why we didn’t want to get ourselves attached to a project like OT. I mean OT has in terms of bulk tonnage in a large scale deposits and projects out there. This is one of those assets that really has the ability to sustain itself through all sources of commodity price ranges over the little long term.

That’s one of the things is that we had to anticipate and which is important to know is that mining is not something that’s done over one or two years. Mining on the large scale of these assets is done really over generations.

So you have to take that really long-term point of view on these projects and tie yourself to projects that are going to have good economics in all sorts of metal price environments, because it is going to cycle one way or another in over some period. And that’s really with the strategy that we are trying to tie ourselves to is developing and dealing with some of the smaller junior assets that are going to exposed to a little bit of higher to their capital risk to get them into production, but really with strong underline economics.

And then also doing what we can, when we get the opportunity to tie ourselves to this big enormous world class projects that are one of the few that really have those primary really good strong long-term economics and building a company around that. So that’s really what we're seeing and we got to go with that really. We have to take that, where we are the ultimate long-term invested in these projects and make our investments appropriate to that style.

Marc Johnson - MPartners

Makes sense to me. Thanks.


I will now turn the call back over to Mr. Watson.

Nolan Watson

Well, thanks very much everybody for joining this conference call and for asking the questions. And as always, if you have any further questions, feel free to either contact Dave or Denver or myself or Erfan or anyone on our management team for that matter. We’d be more than happy to answer any questions that may come up. We have been working hard over the last number of months to grow Sandstorm in a way that’s going to do well for Sandstorm shareholders in a long run.

We are focused on the long run. And I know sometimes it's tough for short-term fluctuations in the markets and especially for investors that have to market their book to market. It’s tough when the industry is having struggles, but at Sandstorm we are building this company for the long term. We think it's going to work out well for us the acquisitions that we have recently made and we are going to working hard for our shareholders.

And I just wanted to thank everyone for their patience in these various transactions. And at Sandstorm we are super, super excited about these things. And overtime, we are confident that our investors will become as excited as far as we are. So with that thank you very much everyone and have a great day. Talk to you later.


Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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