Word is finally getting out about Sandstorm Gold (SNDXF.PK), which along with its sister company [Sandstorm Metals and Energy (STTYF.PK)] continue to be the two most aggressive royalty/streaming companies over the last year. While I have written several articles on Sandstorm Gold, I wish to provide a brief update of its most recent albeit small acquisition as well as briefly talk about Sandstorm Metals and Energy and its enormous achievements in just one year as its own entity.
- Acquisition of Bachelor Lake stream from Mentanor for 20,000,000 up-front and an on-going per ounce cost of $500, for the life of the mine. This initially added approximately 12,000 ounces annually starting in 2013. Mentanor recently released a study showing this production target was achievable running at just 65% capacity. Increased production guidance will most likely follow the next resource update. Production could potentially increase up to approximately 90,000- 100,000 (the latter a possibility if recovery rates increase). Production estimates are expected to increase in 2012 following a resource update towards the of 2011.
- St. Elena 4 phase expansion - 1) Increase throughput to 2,500 tpd or 40,000 ounces annually. 2) Further increase tonnage w/ new processing facility (2012-2013) to 3,500 tpd or approximately 55,000 - 60,000 oz annually. 3) Develop St. Elena U/G mine - production estimates still unknown. Assuming 5,000-10,000, which is fairly conservative will bring production anywhere from 60,000 - 70,000 annually
- Brigus announced mill expansion at Black Fox- This will be a 2 phase expansion. 1) Mill Optimization to 2,200 tpd or approx 120,000-125,000 annually. 2) Mill expansion - Though not publicly announced yet, this will be a logical step given surrounding deposits in close proximity. Phase 2 would expand the mill to 3,500 tpd or between 175,000 - 185,000 ounces annually. (Sandstorm also has a 10% stream on the Black Fox extension).
- Acquisition of Bracemac-Mcleod stream from Donnor Metals, operated by Xstrata. In exchange for an upfront payment of $5 a year from now, Sandstorm Gold will have the option to purchase 17.5% of all the gold and gold equivalent (silver) for an on-going per ounce cost of $350/oz for the life of mine. While this will only contribute between 2m (GEO) annually, it is an excellent return on investment with tremendous upside potential in att production and mine life.
In short, Sandstorm shareholders are being shown just how important management really is and those who have been in from the beginning have been treated very well.
Sandstorm Metals & Energy
- Create the only 100% gold royalty company - Which should earn Sandstorm Gold a higher multiple.
- Create the first streaming company focused on the entire base metals and energy markets.
- Increase deal flow via doing joint streaming deals whereby one takes gold component of the deal and the other takes the base metals component.
While the royalty model and most recently "streaming" are becoming well known within the mining industry, the same can't be said for base metals or energy, with some exceptions such as Franco-Nevada, but never an entire royalty company. While Sandstorm Gold has and continues to remain one of my top holdings, I would be poorly served by not paying attention to the M&E Company. Other than great management and a brilliant business model, Sandstorm Metals and Energy has the added bonus of being the first "streaming" company in both these industries. I could easily see several more companies trying to mimic this model going forward, but given the aggressive growth strategies implemented by Sandstorm M&E, it should remain the largest in this new niche that is starting to develop.
Although Sandstorm M&E is earlier in its infancy relative to its brother company, it has already completed several streaming deals, focused on thermal and metallurgical coal as well as oil. Thus far, six coal streams, two oil streams and an overall company royalty have been acquired. Going forward, Sandstorm management has indicated its desire to complete the first of what will likely be many base metal streams. It also will look to acquire Uranium (royalties), Geothermal, Natural Gas, Copper, Zinc, Lead, Iron-ore, etc. The following is a brief summary of deals completed to date, valuation of its coal and oil streams and the financial capabilities to fund growth going forward.
1) Rex - Far and away Sandstorm's most lucrative asset -- the NPV of all future cash flows is worth more than the current market cap (more on this later). With cash flow expected towards the end of the year, investors should see a revaluation of the company after the bottom line reflects just how great of an acquisition this truly was. Rex is a Met Coal stream in the U.S, which is expected to produce 450-500k t/y and 2p reserves of >30m tons. In other words, barring a substantial increase in annual production, current reserves dictate a LOM >60 years!! Sandstorm will receive 25% until a pre-determined amount is produced, at which time it will decrease to 16%. Cost per ongoing ton is $75 with a guaranteed payback of 5 yrs.
2) Rose Mine - Currently producing met coal, Sandstorm has a 25% streaming interest, which will drop back to 16%. Annual Production is approximately 150k tons with on-going cash costs of $75/t. *
3) Ikerhd - Production soon to come-online for this thermal coal stream. Like the previous coal streams, Sandstorm will initially have a 25% streaming interest, dropping back to 16%. Estimated production is 320k tons annually @ $55/t. *
4) Big Branch + BB extension - Currently producing approximately 500k tons of thermal coal annually, which will increase courtesy of the extension to 800k tons annually. Sandstorm currently has an 18% streaming interest, which will fall back to 12% @ $55/t. *
5) SID - Advanced development, with completion expected in early 2012. Like Big Branch, Sandstorm will initially have a 18% streaming interest, which falls back to 12% @$55/t. Annual Production is estimated to be 500k tons annually. *
6) A 2.7% Royalty on all assets owned by Royal Coal.
7) Two Creek (Jurrasic A pool for life of ops, 5 yrs B pool) - Enhanced Oil Recovery with guaranteed pay back. Sandstorm will recieve 25% of all oil, nat gas & NGL produced foe the life of asset @ $15/bbl, $1/mcf, $8/ngl. **
8) Strathmore - 15% of all oil, nat gas and nat gas liquids produced @ $15/bbl , $1.00/mcf and $8/ngl for life of asset.**
9) Bracemac-Mcleod – 17.5% of all copper produced for the life of mine @$.80 cents until 16mlbs have been delivered, increasing to $1.05 thereafter. Although this was negotiated by Donner Metals (DONFF.PK) (who has a 35% interest in the company), Xstrata (the operator) agreed to the arrangement which essentially is 50% of Donner’s attributable production. Sandstorm absolutely stole this stream, commencing production in 2013. Current estimates are for 24m lbs in 2013, 16m lbs in 2014, 21m lbs in 2015 & 2016. Although current 2p reserves will only support a 4 year mine life, the actual life of this project is likely well in excess of 10 years. M&I reserves are substantial additional resource updates to come. Sandstorm was able to steal this stream as Donner was financially over extended and did not want to engage in equity dilution. At current spot price, payback of $20 million will be achieved in the first two years. While Donner has the option to repurchase half this stream for 24 months, it seems unlikely as it will cost them 14 million. If this should occur, however, Sandstorm would have acquired an 8.75% stream for just $6 million.
10) Gordon Creek – Sandstorm Metals and Energy also announced the $25m acquisition of a 35% natural gas stream from Thunderbird Energy (TBDYF.PK). While current production estimates are only projected for the first year of operation (2014) - 2Bcf @ $1/mcf and 20% of the market price above $4/mcf.
* - Guaranteed paypack within 5 years ** - Subject to buy down right of 50% of stream (Two Creek - 12.5%) (Strathmore - 7.5%).
Valuation - Using a DCF with inputs of 10% required rate of return, 2% long term growth, $90/oil, met coal : $250/T, thermal coal : $75/T & oil : $90/barrel into perpetuity, translates into a valuation ranging from $1.79 - $1.93. But given the fact many of these are very long lived assets, replicating this model via European call options seems more appropriate as DCF will not grasp a 60 year asset life. On a NAV basis using 8% discount rate and no long term growth, it yields nearly .90 cents per share. Using the lower option bound in option valuation, yields a value of $3.25/share.
Going Forward: With operating cash flow now online and increasing in the years ahead, Sandstorm M&E is financially positioned to fund substantial growth going forward. Given the fact they have over 30m in net cash following a recent $55 million dollar financing and growing OCF, it wouldn't be unrealistic to say it is likely to acquire several streams a year. Management said they are still looking to close 2-3 more deals before year end. It was not until just recently in which Sandstorm Metals and Energy became the first diversified metals and energy company.
Disclosure: I am long SNDXF.PK, STTYF.PK.