While there has been back and forth between many of my readers about whether a "real bottom" is in or not for GLD and the gold miners, at $1,300 gold, one stock will remain highly profitable in coming quarters due to its unique business model. As gold and silver continue to rebound of the 2013 lows, Sandstorm Gold (SAND) stands to benefit in the long term. Since the highs of 2012 the stock has suffered a 68% decline from its 52-week high to touch as low as $4.75 per share in recent trading sessions. In my opinion, this stock has pull backed enough for investors to add to their long-term positions comfortably, given its focus on growth and future profit potential and that gold prices seem to have stabilized and are on the mend.
How does SAND operate?
SAND operates a unique and solvent business model in the precious metal sector known as streaming. I highly suggest potential investors in traditional precious metal mining stocks to consider streaming companies as a viable alternative. I believe the approach these companies take to seeking profits offers a stronger opportunity for share growth along with lower long-term overhead and will likely outperform miners in 2013 and beyond. In general, a streaming company generates its profits by providing up front financing for mining companies looking to expand and drill for precious metals. In exchange for the up-front financing of these companies, the streaming company acquires the right to purchase a portion of production generated from the mines at a fixed cost (figure 1). More specifically, SAND provides upfront financing for gold mining companies that are looking for capital for exploration and development. In return for upfront financing, SAND receives a gold streaming agreement giving SAND the right to purchase a percentage of the gold produced by the company. Further, SAND has the right to a percentage of a mine's gold production for the life of the mine.
Figure 1. Basic Visual Describing the Business Model of Streaming Companies.
SAND currently has a portfolio producing gold streams and royalties all over the globe, most of which are in politically stable areas limiting geopolitical risk to its assets (figure 2). SAND plans to grow and diversify its low-cost production profile through the acquisition of additional gold streams. SAND is a growth-focused company that is seeking to acquire more of these gold streams from companies that have advanced stage development projects or operating mines.
Figure 2. Geographic Distribution of Sandstorm Gold's Portfolio of Existing Streams And Royalties.
Sandstorm's Portfolio, Growing Rapidly And Leading to Record Revenues.
A basic description of each major agreement in SAND's portfolio is given below. Understanding which companies SAND does business with and understanding how SAND will profit from them is absolutely critical before committing investment dollars. After investigating their approach, it should become evident that this way of doing business, that is, financing companies to receive future royalty payments and/or being able to buy gold at a fixed cost (for example $500/oz) and subsequently selling it at current market prices (or future prices) is advantageous over a traditional miner in many respects.
Aurizona Gold Mine Operated by Luna Gold Corp. (OTCQX:LGCUF)
SAND has a gold stream agreement to "purchase 17% of the life of mine gold produced from Aurizona, located in Maranhao State in northern Brazil at a price of $400/oz. SAND made an upfront payment of $17.8 million in cash and 1.1 million common shares of SAND (5.5 million pre-consolidation) to acquire the stream in May 2009. If LGCUF.PK develops an underground mine on Aurizona, SAND has the right, but not the explicit obligation to purchase 17% of the payable gold from the underground mine, at $500/oz. For consideration, SAND would pay 17% of the capital expenditures incurred to determine the economic viability and to construct the underground mine."
SAND and LGCUF.PK recently provided an update to the proven and probable reserves at Aurizona in the Piaba deposit (Table 1).
Table 1. Proven and Probable Reserves at the Piaba Deposit, Aurizona Gold Mine, April 2013.
Proven & Probable
One key takeaway from this new estimate is that with the anticipated completion of Phase I Expansion nameplate processing capacity of 10,000 tons per day, Piaba's expected mine life has been extended to 2027. The new reserve estimate represents an incredible 222% increase in proven and probable reserves compared to the last estimate.
Serra Pelada Mine Operated by Colossus Minerals (OTCQX:COLUF)
SAND has a precious metals stream agreement to "purchase 1.5% of the gold and 35% of the platinum produced from Serra Pelada, located in northern Brazil at $400/oz of gold and $200/oz of platinum. Sandstorm made an upfront payment of $60 million to acquire the stream in September 2012. Until April 1, 2015, COLUF has the option to repurchase up to 50% of the agreement by making a $48.75 million payment to SAND, upon receipt of which, the percentage of gold and platinum that SAND is entitled to purchase shall be decreased to 0.75% and 17.5% respectively."
A recent development with COLUF.PK will result in delayed production. Apparently COLUF.PK has encountered some challenges with dewatering wells and pumps in the central zone of its Serra Pelada mine which requires additional dewatering capacity and has delayed gold production. Despite the setback, COLUF.PK continues its development to have multiple horizons ready for mining in 2014 and has made progress in the construction of its process plant.
The key thing is that although there is a delay in production, it WILL NOT impact Sandstorm's 2013 production guidance of 33,000 to 40,000 attributable gold equivalent ounces. In addition, the delay at Serra Pelada is not currently anticipated to affect the development timeline for the platinum/palladium flotation circuit, which is expected to be processing material in late 2014.
Black Fox Mine Operated by Brigus Gold (BRD)
SAND has a gold stream agreement to "purchase 12% of the life of mine gold produced from Black Fox Mine located in Ontario, Canada, and 10% of the life of mine gold produced from the Black Fox extension (which includes a portion of the Pike River concessions) at $500/oz of gold. SAND made an upfront payment of $56.3 million to acquire the stream in November 2010. BRD has the option, until the end of 2012, to repurchase 50% of the gold purchase agreement by making a $36.6 million payment to SAND, upon receipt of which, the percentage of gold SAND is entitled to purchase shall be decreased to 6% for the Black Fox mine and 4.5% for the Black Fox extension".
Santa Elena Mine Operated by Silvercrest Mines (SVLC)
SAND has a gold stream agreement to "purchase 20% of the life of mine gold production from Santa Elena in Northern Mexico at a price of $350/oz. Sandstorm made an upfront payment of $12 million in cash and 700,000 common shares (3.5 million pre-consolidation) to acquire the stream in May 2009. If SVLC decides to develop an underground mine, SAND will have the right, but not the explicit obligation to purchase 20% of the payable gold from underground for an upfront payment that is equal to 20% of the upfront capital expenditures made by SVLC plus ongoing payments of $450/oz.
Deflector Mine Operated by Mutiny Gold
SAND has a gold stream agreement to purchase 15% of the life of mine gold produced from Deflector Mine in Western Australia at a price of $500/oz of gold. SAND made an upfront payment of $38 million to acquire the stream. For a period of 36 months, MTYGF has the option to repurchase up to 50% of the agreement by making a payment equal to the greater of $24.7 million or the value of 14,472 gold oz to SAND, upon receipt of which, the percentage of gold that SAND is entitled to purchase shall be decreased from 15% to 7.5%."
Bachelor Lake Mine Operated By Metanor Resources (OTC:MEAOF)
SAND has a gold stream agreement to "purchase 20% of the life of mine gold produced from Bachelor Lake in Quebec, Canada, at a price of $500/oz. SAND made an upfront payment of $20 million to acquire the stream in January 2011. MEAOF has provided a guarantee that SAND will receive a minimum of $20 million in pre-tax cash flow by the end of 2017."
Ming Mine Operated by Rambler Metals and Mining (OTC:RBMTF)
SAND has a gold stream agreement to "receive 25% of the first 175,000 oz of gold, and 12% of the life of mine gold produced thereafter from the Ming Mine of Northwestern Newfoundland. SAND made an upfront payment of $20 million to acquire the stream in August 2010." RBMTF has provided SAND with a few guarantees, such as that "within 24 months of commencement of production, RBMTF will have produced and sold a minimum of 24,000 oz of payable gold or SAND will have the option to require a partial refund of the upfront deposits." Second, SAND will receive minimum cash flows from the gold stream of "$3.6 million in the first year of production, $3.6 million in the second year of production, and $3.1 million in the third year of production."
Hugo North Extension and Heruga Mine Operated by Entree Gold
SAND has agreed to "purchase metal credits equivalent to 25.7% or 33.8% of Entree's 20% share of the gold and silver by-products produced from the Heruga and Hugo North Extension deposits, respectively. SAND will make ongoing payments equal to $220/oz of gold and $5/oz of silver (subject to inflationary adjustments) until approximately 8.6 million oz of gold and 40.3 million oz of silver have been produced from the joint venture property. Thereafter, the purchase price will increase to the $500/oz of gold and $10/oz of silver." SAND made an upfront cash deposit of $35 million to acquire the stream in February 2013.
Ann Mason Royalty Project also Operated by Entree Gold
SAND has a "0.4% net smelter returns royalty on the future sale of any metals and minerals derived from a portion of the Ann Mason Project in Nevada. SAND made an upfront payment of $5 million to Entree Gold to acquire the royalty in February 2013. In addition, Entree has granted SAND a right of first refusal on any future royalty or metal stream financing for the Ann Mason Project."
SAND has a "2.4% net smelter returns royalty on the Mount Hamilton gold project. SAND made an upfront payment of $10 million to XPL and another $4 million on January 15, 2013 to acquire the royalty in June 2012. If XPL enters into a gold stream agreement with Sandstorm that has an upfront deposit of no less than $30 million, XPL will have the option, for a period of 30 months, to repurchase up to 100% of the net smelter returns royalty for $12 million. In addition, XPL has provided SAND with a right of first refusal on any future royalty or gold stream financing for the Mount Hamilton project."
Coringa and Cuiu Cuiu Mine Operated by Magellan Minerals (OTCPK:MAGNF)
SAND has a "2.5% net smelter returns royalty on the Coringa gold project and a 1.0% net smelter returns royalty on the Cuiu Cuiu gold project. SAND made an upfront payment of $7.5 million and subscribed for one million shares of MAGNF at a price of $0.50 per share to acquire the royalties in May 2012. As part of the agreement, MAGNF has provided SAND with a right of first refusal on any future royalty or gold stream financing at Coringa and Cuiu Cuiu."
Bracemac-Mcleod Mine Operated by Donner Metals (OTCPK:DONFF)
SAND has a gold stream agreement with DONFF to "purchase amount equal to 24.5% of the gold and gold equivalent produced from the Xstrata operated Bracemac-McLeod mine. Pursuant to the agreement, SAND made an upfront cash payment to DONFF of $8 million and will make ongoing per oz payments equal to the lesser of $350 and the then prevailing market price of gold."
Summit Mine Operated by Santa Fe Gold
SAND has a gold stream agreement to "purchase 50% of the first 10,000 oz of gold, and 22% of the gold thereafter from the Summit mine at a price of $40/oz. Sandstorm made an upfront payment of $4,000,000 to acquire the stream in September 2009."
Prairie Creek Royalty Project by Canadian Zinc Corporation (OTCQB:CZICF)
SAND has a 1.2% net smelter returns royalty on precious metals produced from Prairie Creek via a back-to-back agreement with Sandstorm Metals & Energy (OTCPK:STTYF). SAND made a cash payment of US$3.2 million to acquire the royalty in May 2013. According to the company, "the Prairie Creek Mine is an advanced staged zinc-lead-silver project that is 100%-owned by Canadian Zinc Corporation. Prairie Creek is located in the Northwest Territories in Canada and contains a Mineral Reserve of 5.2 million tons grading 9.4% zinc, 9.5% lead and 151 grams per ton silver. Prairie Creek is an underground operation that will utilize multiple mining methods to access readily available ore. Canadian Zinc has the majority of the required infrastructure in place including a 1,000 ton per day mill, 5 k, of underground workings and related equipment, a heavy duty and light duty surface fleet, 3 exploration diamond drills and a 1,000 m airstrip.
Two Most Recent Quarters
On February 18th, 2013, SAND reported its 4th quarter results. For the quarter, gold sales totaled 7,243 oz. Operating cash flow during the quarter was $6.5 million. Margins were strong as the "average cash cost per oz was $410 resulting in cash operating margins of $1,305 per oz." Net income for the quarter was $7.4 million. During 2012 SAND had a record year with just over 33,500 oz of gold sold and at its low fixed cash cost, resulting in operating cash flow of $37.6 million.
Going forward for 2013 SAND is forecasting gold sales "between 33,000 oz to 40,000 oz, increasing to approximately 70,000 oz of gold equivalent by 2016, estimates that are based solely on existing streams and royalty deals." This guidance does not include any acquisitions that SAND plans on making or will make in the future.
On May 8th, 2013 SAND reported its 1st quarter results. For the quarter, record revenues for the company were achieved of $15.4 million. This revenue was generated primarily from the sale of 8,581 oz of gold, about a 17% increase from the prior quarter in sales. The average cash cost did increase by 3$ to $424 per oz, up from $410 in the prior quarter. They also upped their revolving credit facility to $100 million. Even more impressive is the company will likely be able to add about $100 million annually to their credit facility whilst simultaneously upping its free cash flow (figure 3). This will enable SAND to deploy more capital and invest in more lucrative streaming/royalty companies over the next few years. Overall in this recent quarter, the company suffered a net loss of $12 million, primarily due to a charge of $14 million from the premier royalty business arrangement. The company still forecasts production for 2013 at 33,000 to 40,000 gold equivalent ounces coming from seven active mines. Attributable production is still expected to approximately double to 70,000 gold equivalent ounces by 2016.
Figure 3. Projected Increased to Sandstorm Gold's Credit And Free Cash Flow in The Next Five Years.
Basic Stock Fundamentals
Shares of SAND currently trade at $5.95. Shares are now down 36% from when I first highlighted the company last summer. The stock has pulled back over 60% from the highs of 2012 and I think now is a very good entry point for the long-term investor as I see significant upside potential in the future. The stock is a levered play on the price of gold. The future price action is of course heavily dependent on the price of gold and silver in the coming weeks. On average, approximately 650,000 shares exchange hands daily. The stock has ranged from $4.75 to $15.43 in the last 52 weeks.
Shares of SAND are beaten down along with the precious metals sector. However, with gold at back above $1300/oz and rising, SAND's profit margins are still in place, and thus they will remain profitable now and into the future. After such a large decline in 2013, gold, silver and shares of individual companies are due for a rebound. In the long-term, with SAND's robust and expanding global portfolio of holdings, management is ensuring long-term prosperity of the company. Thus, long-term I believe shareholders will be rewarded handsomely. In conclusion, I believe that SAND is a strong buy for the long-term, with limited downside (my low target is $5.00) and potentially large upside. A return to 2012 highs would be a 150% gain, and I see the stock heading to $9.00 in the near term so long as gold prices remain stable/ creep higher. It could surpass its 2012 high in the years to come if gold prices rebound significantly from the 2013 lows and return to the $1600 level.