Nolan Watson - Chairman, President and CEO
Sandstorm Gold Ltd. (SAND) Denver Gold Forum Conference Call September 23, 2013 1:15 PM ET
The next presentation is from Sandstorm. Sandstorm Gold is – we have President and CEO, Nolan Watson. He not only leads the company, he founded it and his background is very much founded also in the streaming business. He was the former CFO of Silver Wheaton prior to forming Sandstorm.
Good morning ladies and gentlemen. So I'd be happy to just take you through a little bit about Sandstorm, a little bit about our story and our portfolio, and hopefully I'll leave some time for questions at the end here.
Before I get going, let's talk about the cautionary notes, so some of the things I am going to be talking about obviously have not happened yet, and therefore I'd caution you all on that. One of the things specifically is that we prepared this presentation on the assumption that our acquisition of Premier Royalty, which we're currently undertaking closes -- is expected to close in the next two weeks.
And as a bit of an update on that acquisition, so we already own 60% of the company. We'd made an offer to buy the remaining 40%, and we've now – actually this morning, I was shown the voting total so far, 80% of all of the shares have been voted and 100% of those have been in favor so far. So I think it's fairly complete at this point.
So in terms of Sandstorm, right now we have 9 gold streams. We have 25 royalties upon closing this acquisition with Premier. We have $100 million of cash. We have absolutely no debt, but we do have $100 million revolving line of credit. And in terms of revenues and costs, over the next two years, we expect approximately an 80% increase in revenues just from an organic growth perspective or I should say an 80% increase in forecasted gold production over the next two years.
In terms of costs, we're actually not unlike a lot of mining companies out there. We are focusing on cost reduction. The Premier acquisition will allow us to eliminate a number of redundancies, and we're also reducing the G&A at Sandstorm proper as well. We're targeting a 35% reduction in our G&A from what it was in Q2 and that run rate to what it would be in Q1 2014, and we're actually candidly talking about even potential further G&A reductions.
The whole point of what we do at Sandstorm is to create as much value for shareholders as possible, as much cash flow, and then be able to eventually return all of that to shareholders. So, we have a very low cost base.
There's a lot of discussion, and you've seen presentations now from Royal Gold and Franco-Nevada and Silver Wheaton, and they've all talked about the advantages of the streaming business model and what they do with teams in terms of what types of assets they look at, and our historical presentations have sort of extolled those virtues as well, but rather than talk about -- to begin what I decided to do was show empirical evidence of that.
What you see up here on this slide is the actual Global Gold Index Fund since we started Sandstorm back in 2009, and you can see that it's been a little bit of a negative return obviously because of negative returns over the last couple of years. One of the things that we always try to do at Sandstorm is when we're choosing streams and counterparties for streams, we're choosing what we believe is companies that will outperform the industry.
And so, we try to do deals with companies that we think will do better than the average company out there. And so, in terms of empirical data, although it only works out to about 3% or 4% annually compounded, actually I think it's about 5% annually compounded; the Sandstorm partners, which is that blue line there has outperformed the Global Gold Index Fund.
In terms of the benefits of the streaming business model, the next line up there is the average of Silver Wheaton, Royal Gold, and Franco-Nevada since we started Sandstorm. They've dramatically outperformed not only the Global Gold Index Fund, but also the Sandstorm partners. Part of that is because of the benefits of the streaming business model, things like low exposure to upfront capital expenditure overruns, no exposure to sustaining cap, and no exposure to the operating cost increases, et cetera.
I also do truly believe though part of it is because of the leadership of those companies; Franco-Nevada, Silver Wheaton, and Royal Gold, they all have very good leaders. In Sandstorm, we've had the benefit of having made some very good investments, and so you can see there the actual performance since we launched Sandstorm compared to all those Sandstorm counterparties to the other streaming companies in the Global Gold Index Fund, we've outperformed them by several 100%.
And although I say that, you can look at – there's been a bit of a drop since the peak in 2012, so it has been a bit of a humbling year over the last year, and we are very focused on growing Sandstorm, doing it accretively, doing it in an intelligent way for shareholders, and my goal as CEO is to ensure that we continue to outperform companies in the gold industry.
In terms of where we've actually made our investments, you can see this is the geographic breakdown. The gold slides are assets that are currently producing, and the blue flags are the non-producing assets, and the ones that are currently being developed or being built or being explored on. The vast majority of all of our assets are in North and South America. That's a trend that in the long term I think you'll see continue. We will continue to diversify around the world. We do believe that in the benefits of diversification that we really are more comfortable in North and South America than we are in a lot of other countries.
In terms of today's production for 2013, 84% of our production is coming from four different sources which is Luna Gold’s Aurizona project in Brazil, SilverCrest and their asset in Mexico, Brigus Gold and their asset in Canada, and then a portfolio of royalties that we're acquiring from Premier Royalty.
One of the focuses that our investors have had is what is the underlying cost base of your portfolio of Sandstorm? And the answer if you look at this slide, Luna Gold may have cash cost of $600-and-something per ounce for an all-in sustaining cost of production including exploration, et cetera; of around $1000 an ounce. That number is coming down as they're in the process of a ramp up right now expanding the mine.
SilverCrest, they're even below Luna there. Premier Royalty, the majority of their portfolios is with large companies on low cost producing assets, and Brigus Gold has a reasonable cost of production as well. So, relative to the rest of the industry, I think when you invest in Sandstorm, you are investing in a lower than average cost of production profile.
On this slide here, you can see a number of the other investments that we have made over the last several years, and these are just some of the companies that we have done deals with. I don't have time to go through all of those streams for royalties, but what I do want to do is just sort of update you on some more recent things.
So in terms of Colossus Minerals, they're actually at this conference. They're presenting on Wednesday, and if you have some time, I'd recommend that everyone go and get the full update as to where their technical aspects are. They had raised some money back in summer, I think it was $25 million, and then a couple of months ago they raised another $38 million. And so, they've demonstrated the ability to continue to raise capital as they build this mine. This is a mine that's going to be going into production here over the next year, and the actual above-ground infrastructure, the mill itself, is almost complete construction already.
Columbus Gold, this is a very small investment that we made. We did it over the summer, and we gave them $5 million for 1% NSR and the right of first refusal to do a stream financing if and when they choose to do a stream financing. And this is an asset that had 4 million ounces in resources. It's about 1.5 grams per ton open pit, and our geologists think that they can double or triple the size of that with fairly low exploration dollars.
So we made this investment, and a few months later, they've now publicly announced that they're actually joint venturing the project with Nord Gold who is going to be putting quite a bit of capital into this, push it forward rapidly, and it's an asset that once it gets up into production, we think it could produce several hundred thousand ounces a year. So, we could actually cash flow more than the purchase price of this asset every year for decades to come once it gets up and running.
Canadian Zinc, this is a Canadian – it's actually a Vancouver-based company that has been permitting for over a decade now in Canada, and they've got an incredible silver-lead-zinc mine in for a few million dollars. We bought 1% royalty on the silver that they're going to produce. And last week they actually got their Class A Water License after a decade of permitting. So, these assets are continuing to push forward, and it's another example of just a very, very small investment that Sandstorm has made, and it's going to be a very long life producer. We think that this asset should be able to run for several decades.
So, if I move into specifically the actual cash flow that we think we'll be getting over the next several years, you can see by 2016, we think we should be able to cash flow. This is done at $1350 per ounce to be approximately $66 million or thereabouts, and 2016 is the year that we start thinking that we'll be paying some tax, so right now we've made a number of investments. We're deducting the cost base of those investments for tax purposes, and then beginning in 2016, some of the first tax bases are going to run out, and we will start paying some of that tax.
You can get a feeling from this slide though that we have a fairly nice diversification in terms of where that cash flow is coming from. One of the questions we get from our investors frequently is how much capital do you have to make future investments? And so we've prepared this slide and we keep it updated regularly. And this shows if you look at the gold line, it is how much cash we would have at any point in time over the next couple of years on hand unencumbered to make future acquisitions with. And so, you can see the blue line above that. That represents the additional capital that we would have available if we drew on our revolving line of credit, so that blue line at any point in time represents the amount of investments that we could make.
So, for example, at the end of 2014, you can see on that slide, we could make $270 million of additional investments without having to raise any equity. Let's put that in perspective. Our market capitalization today is only 500 million, so over the next year and a half, we would have the ability to invest an amount equal to half of our entire market cap without having to raise shares if we wanted to.
Turning that into an actual valuation for enterprise value to cash flow compared to the other companies, Sandstorm, we're now actually trading at below 10 times EV to cash flow for the first time in several years. We have a few of our assets that we believe will be ramping up over the next couple of years as well, and if they do that, then we think that that 9.5 EV to cash flow number would drop to below 8. So, we think we're getting an incredible value in terms of Sandstorm because our share price has pulled back so dramatically over the last year.
And finally one of the last things that I want to talk about and it's been talked about a little bit here already is the deal environment. So, this is a slide of the actual amount of equity that's been raised in the mining industry over the last number of years, and you could see 2012 is the worst year on record for several years, 2013 is on track to be a much worst year than that.
And in a horrible equity environment, that's actually not a great environment to be doing these streaming deals with, maybe picking up royalties, but from a streaming perspective what you want to ensure is that if and when the mining company is building the asset overruns on their capital, because that's happened in 100% of the situation that I've ever seen in my career is if the mining company does overrun on that capital, when that happens, not if that happens, that they will be able to raise some additional capital to keep themselves going.
So what we do want fundamentally is some semblance of a functioning equity capital market, and we are actually beginning to see very early signs of that. The capital markets have not come back, and they're not strong and that's not what I'm saying, so please don't take that away and you all know that, but there are some early signs of people looking to deploy additional capital, and because of that we are now working really hard to redevelop the pipeline of opportunities to be prepared to start making investments again.
As I mentioned, we have the ability to invest almost half of our entire market cap over the next couple of years without having to raise equity, and we are working very aggressively to find those opportunities that will make sense for our shareholders.
So that's it from the Sandstorm perspective. I think we have a few minutes for questions and I'd be happy to answer them.
Yes, we do have a couple of questions if we could maybe get a mic upfront.
Can you remind me about your investment in Mongolia and what's going on there?
Yes, absolutely. So we've made investments in a company called Entrée Gold which has significant – has a joint venture interest and a significant land mass around the Oyu Tolgoi deposit. And I don't want to sort of divulge the conversations that are happening between Entrée and its various counterparties, but needless to say that there is a lot of progress being made in terms of ensuring that that asset gets pushed forward, and it is one of the best mines being built in the entire world, and one of the only copper mega projects that's been built in the last several years. And we're still very happy to be a part of what we believe to be a sustainable amount of cash flow in the future, so none of that cash flow is in any of the slides or presentations that I showed today that excludes all of that. We do believe that although it will take a number of years for that to come to fruition that we will make a reasonable amount of capital off of that.
Nolan, it seems like you're obviously competing for slightly different streams than some of the bigger companies, but do you find yourself up against them as well because they are scalable, can they compete just as effectively where you are as some of the smaller companies?
We actually find that there is quite bit a difference between royalties and streams with respect to the amount of work that has to go into them. So for example on some of the royalties that we bought, we'll do the due diligence for a month or so, but the actual time required from the business people to close the transaction is very, very short whereas the time to close a streaming deal can take anywhere from two months to we've seen it take a lot of handholding to come up with the additional capital and intercreditor agreements and those types of things, and those things take sometimes more than a year.
So what we find in terms of competition from the big players is that where there is a huge amount of work required on the upfront, there's just only so much human capital that Franco-Nevada, Royal Gold, and Silver Wheaton have, and so on a $30 million size stream, that's not worth their time and effort, it's not a good way for them to be spending their time for their investors, and they don't -- they don't waste their time doing that. So we have a pretty fair runway for those types of streams.
For a royalty, it does not take very much of their time. So, if they would pick up, say, a $30 million royalty, we do see Franco-Nevada and those types of companies bid on those things because it doesn't take a lot of their time. So we do see some competition on the royalties but not so much on the streams.
And maybe just – I know that Silver Wheaton over time has moved more from making larger upfront payments and smaller delivery payments to actually paying a bit more on delivery than they pay upfront. Do you have any thoughts on how that applies to you?
Yes, and we're fighting the same thing, but voluntarily. It's actually quite interesting. When we actually go into a room to discuss streaming financing with a mining company, a lot of our investors think, boy, you must have to try really hard to negotiate them down on that payment, and it actually kind of works the other way around. We'll actually put an excel spreadsheet and a cash flow model up on a projector, and we'll say here's how we have calculated what the upfront payment should be to you and how we've made that determination, and it doesn't take them very long to figure out that if they reduce that ongoing payment to us, their upfront payment goes up.
And very frequently they'll come to us and say, can we pay – can you pay less going forward, so we can get more money now to build our mine. And it's actually in my experience that streaming companies are the ones that have to say no. The reason that that payment exists is to cover a reasonable portion of the costs of producing that ounce of gold, and therefore if you drag that down to zero and you're not covering any of that costs, it causes disincentives and [indiscernible] too much of the profits of the mine, so that's not really been too much of an issue. It is going up but it's going up because we're forcing it up.
Okay. Are there any other questions for Nolan? Well, great. I think we'll leave it there then. Thank you very much.