Sandstorm Gold (NYSEMKT:SAND) has had a rough couple months as the price of gold has declined substantially. But it had remained profitable. Before we get delve into the issue that has developed with partner Colossus Minerals (OTC:COLUF) and Serra Pelada in Brazil, lets quickly review a few of SAND's key portfolio holdings and its business model.
SAND's business model
You must know how SAND makes money to understand the issue that has developed. SAND operates a unique and solvent business model in the precious metal sector known as streaming. In general, a streaming company generates its profits by providing upfront financing for mining companies looking to expand and drill for precious metals. In exchange for the upfront financing of these companies, the streaming company acquires the right to purchase a portion of production generated from the mines at a fixed cost. 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.
SAND has numerous holdings in its growing portfolio. Quickly we will review these so we know that panic is not necessary.
Aurizona Gold Mine Operated by Luna Gold Corp. (OTCPK: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. 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.
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".
So What The Heck Is Happening; Why Have Shares Of The Partner Been Halted??
Rest assured the main holdings of the company provide most of the revenues. However, we learned that partner Colossus Minerals (OTC:COLUF) is backing out of a huge deal with SAND. COLUF and SAND have an underground development deal at the Serra Pelada mine in Brazil to reduce ongoing costs. SAND says it will need additional funding in order to proceed with the project, and will review its investment for a partial or full impairment as there can be no assurance that adequate funding will be available for Colossus in the future. What was this project entailing and what was the original deal?
SAND had 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."
When Did Trouble Begin?
One troubling development with COLUF occurred that initially was going to result in delayed production. Apparently COLUF encountered some challenges with dewatering wells and pumps in the central zone of its Serra Pelada mine which delayed gold production. Despite the setback, COLUF had continued its development to have multiple horizons ready for mining in 2014 and had made progress in the construction of its process plant.
What Does The New Information Mean?
Although we are just seeing the ramifications of the deal being backed out, back in November COLUF warned that development delays at Serra Pelada had resulted in a change to the anticipated production start date at the mine and that additional capital would be needed. COLUF needs about $70 million to meet the Company's existing obligations and progress Serra Pelada to production. So, in direct impact to SAND, COLUF has ceased underground development at Serra Pelada in order to reduce ongoing costs. COLUF will continue with the dewatering program at the mine and commence underground definition drilling in connection with the preparation of a National Instrument 43-101 compliant resource estimate for Serra Pelada. COLUF has cash issues and will need additional funding in order to proceed with the strategy outlined by its board of directors. How does it impact SAND? SAND "will be reviewing its investment in the Company for a partial or full impairment as there can be no assurance that adequate funding will be available for COLUF in the future."
What Do SAND Shareholders Do?
Its simple. DO NOT PANIC. Shares are down 6% on the news to bargain basement pricing of $3.95 at the time of this writing. The key thing is that although there is a delay in production and a halt of the deal at Serra Pellada, 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. I suspect COLUF will find funding; given the depressed prices of gold, a lucrative deal could be found. Shareholders of SAND need to remember that revenues were not heavily reliant on this project (though future revenues could be temporarily impacted). Instead of panicking, realize that there is still massive upside in SAND given its business model, once gold and silver return to favor. Revenues will still be derived from many other projects, including Santa Elena Mine ran by Silvercrest Mines (NYSEMKT:SVLC) Deflector Mine operated by Mutiny Gold, Bachelor Lake Mine operated by Metanor Resources (OTCPK:MEAOF), Ming Mine operated by Rambler Metals and Mining (OTC:RBMTF) among numerous others including the flag ship deal with Luna Gold's Aurizona and the Black Fox Mine with BRD. I am not panicking. You should not either. Instead, use this temporary setback as an opportunity to expand holdings in this quality company while it is on sale.
Disclosure: I am long SAND. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.