Update: Sandstorm Gold Buys A Stream On True Gold's Karma Project In Conjunction With Franco Nevada

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 |  About: Sandstorm Gold Ltd. (SAND), Includes: FNV, RVREF
by: Ben Kramer-Miller

Summary

Sandstorm Gold and Franco Nevada are buying a stream on True Gold's Karma Project.

This deal will provide True Gold with the capital it needs to get the project into production.

This fits with my investment thesis -- published just hours earlier -- that Sandstorm Gold is getting aggressive in this depressed metals market environment.

I think this is an excellent deal for Sandstorm Gold, and I am reaffirming my bullish stance even with the stock trading higher in the after hours.

Sandstorm Gold (NYSEMKT:SAND) just announced yet another big deal -- it is buying a stream on True Gold's (OTCQX:RVREF) Karma Project in Burkina Faso in conjunction with Franco Nevada (NYSE:FNV). Sandstorm Gold will own 25% of the stream while Franco Nevada will own the remaining 75%. Here are the details.

  • True Gold receives $100 million upfront ($25 million from Sandstorm).
  • In exchange Sandstorm and Franco Nevada (aka "the Syndicate" get 20,000 ounces of gold per year (5,000 ounces attributable) for 5 years in exchange for 20% of the spot price ($260/oz. at $1,300/oz. gold).
  • For the duration of the mine's life the Syndicate gets 6.5% of production at the same price. This should be roughly 6,000 ounces or 1,500 ounces attributable to Sandstorm Gold.
  • True Gold can request another $20 million ($5 million from Sandstorm Gold) in exchange for 8 quarterly payments of up to 30,000 ounces (7,500 attributable) of gold depending on how much of this $20 million is drawn upon.

The mine's life is expected to be 8.5 years, so it doesn't produce far beyond the initial period of 20,000 ounce payments. However the Karma Project is on an enormous land package and it has a whopping 3.75 million ounces of reserves, meaning that the project can potentially produce for years beyond expectations. The Syndicate will not have to put forth any more money to get exposure to the gold that isn't already in the mine plan or any gold that is found on the Karma Project.

At the current gold price of $1,300/oz. this means that Sandstorm Gold is going to get 5,000 ounces of gold per year for 5 years and 1,500 ounces per year for at least 3.5 more years (and potentially much longer than this) once the project is built and production commences in 16 months. This means that Sandstorm will get roughly $5.2 million per year ($3.85 million after taxes) in cash-flow for 5 years followed by $1.56 million per year ($1.15 million after taxes) for 3.5 years. This totals $23.3 million in cash-flow assuming that no other gold is produced, which is highly unlikely.

This is an excellent deal for Sandstorm and it shows the company's devotion to gold bulls. This is also a deal that leaves True Gold with leverage to the gold price on the gold that it is selling, which is a strategy that we have seen from Royal Gold (NASDAQ:RGLD) recently with its streaming agreement with Rubicon Minerals (NYSEMKT:RBY) on its Phoenix Project. Sandstorm is guaranteed a profit while its partner retains some upside.

I remain bullish of Sandstorm Gold given that it is making this aggressive investment along with others that I outlined in a bullish case I put together just hours before this announcement.

Disclosure: The author is long RGLD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate a long position in Sandstorm Gold over the next several days.

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