Sandstorm Gold: Reaching Critical Mass

| About: Sandstorm Gold (SAND)

My regular readers will recall this graph from my previous Sandstorm Gold (SNDXF.PK) article:

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After adding June and September’s financial results, it now looks like this:

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The rescaling of the chart was done automatically by Excel, and for good reason, as the operating losses of just under $500,000 in June 2010 have been dwarfed by the recent quarters operating cash flow of $8,558,000. In fact, even June 2011’s results have been dwarfed, as September 2011’s cash flow is over 200% greater. This was a great quarter for Sandstorm (to which i will refer as SSL), who continues to deliver fantastic results on the sustained +$1,500 per ounce gold price.

The stock price has responded to these results, moving from $0.56 in December 2009 to $1.35 in December 2011:

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With the above chart, I’ve taken the stock price and operating cash flows on the day of the earning release. At the end of the chart, I extended the September 30th results to match up with Friday’s closing price.

This filters out much of the noise, and after doing so it becomes apparent that the market has recognized the cash flows of SSL. It also becomes apparent that the share price has not reacted as sharply as the recent earnings suggest it should, with the shares up 90% year to year, whereas the earnings are up quarter to quarter +200%. In addition, management continues to put new deals together, improving future cash flows, with the latest being for Bracemac-McLeod Mine. Although this deal is relatively small, it is one of many I expect management to close, as in 2 short years they have amassed an impressive record of deals.

The estimated gold production for each mine has far from peaked, with current deals in place not set to peak until 2015. This means more cash, which according to the previous chart, means a higher share price:

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Comparing SSL to Gold Prices, now that the mines are producing, it has become highly correlated with the price of gold with a correlation of +0.80 since June 2010.

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This indicates that much of the success of SSL will be dependent on the price of gold, although I was surprised by the price action when gold dropped to just below $1,600, as most PNAV calculations for SSL have a long range maximum price for gold of $1,500. Keep in mind, the average price per ounce that SSL pays is less than $450, thus they are cash flow positive well below the $1,500 range. Therefore, these dips are excellent buying opportunities.

There is one key reason I find the latest results especially encouraging-- SSL has now reached critical mass.

Imagine you were exerting effort to spin a massive wheel-- let’s call it the “wheel of fortune”-- as it functions similar to the game show, with the participants winning cash. Each push of the wheel represents an equity offering, and like an equity offering, pushing this wheel takes a lot of effort and there are significant opportunity costs. For instance, rather than spending time at a beach resort in Thailand, you’re pushing a massive wheel.

But eventually, this “wheel of fortune” picks up enough momentum to spin without additional pushes (equity offerings). You may still decide to push it from time to time, but that’s just to get it spinning even faster. Unlike the game show, this wheel never stops, and the faster it spins, the more money the participants make.

With over $8 million generated this past quarter alone, SSL is now on track to earn enough cash to fund additional deals without equity financing. Looking at the Aurizona, Santa Elena, Summit, Black Fox, Ming and Bachelor Lake projects, SSL is now on the verge of generating enough cash to fund one of these projects every 6 months:

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There still may be additional equity offerings, but only in the event of SSL closing much larger deals, meaning more speed for the wheel.

Sandstorm Gold has reached critical mass, and reached it with style. With cash flows up 200% from quarter to quarter, and the company still 3 years out from peak production on existing deals, the future is bright for this junior gold streaming company headquartered in Vancouver, BC. This is definitely a game show you want to participate in.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I have no personal position in this stock, although clients portfolios I manage and clients I advise are long Sandstorm Gold.

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