More Good News For Sandstorm Gold, But The Market Doesn't Seem To Care

| About: Sandstorm Gold (SAND)


Sandstorm Gold recently provided asset updates at various projects it owns streams and royalties on.

This was a pretty positive update for a few reasons, and didn't even mention a takeover of one of Sandstorm's royalty partners.

I'll discuss this update and give a brief preview of Q4 earnings.

Sandstorm Gold Gives Positive Asset Update

Sandstorm Gold (NYSEMKT:SAND) recently provided an asset update for the various projects the company owns streams and royalties on, but for some reason, the stock continues to underperform.

This was actually a very positive release in my opinion, and I think the stock deserves a higher valuation because of it. Here, I'll break down the asset update, and give a quick preview of upcoming earnings.

True Gold: On Track for Initial Production

First, there's news from True Gold's (OTCQX:RVREF) Karma project. Sandstorm owns a gold stream agreement to purchase 25,000 ounces of gold over 5 years, and 1.625% of the gold produced thereafter from Karma (at a price of 20% of the spot price of gold).

Sandstorm says that the project is now 94% complete with commissioning activities underway and highlighted numerous accomplishments, including the completion of piping and solution collection systems for leach pads, construction of 3 process solution ponds, and the near-completion of the absorption, desorption and refining (ADR) plant.

What's more: True Gold's stock has been soaring lately. The stock is up from a low of $.16 per share to the recent price of $.36 (on the TSX), and the company now carries a market cap of $147 million. A stronger True Gold is obviously good news for Sandstorm, as True Gold is more likely to be able to raise money in the future if it needs to (although it doesn't have to at this point in time).

This stream is pretty important to Sandstorm's success in my view: with 5,000 ounces of gold expected annually at 20% of the spot price of gold, Sandstorm would earn $6 million in revenue and $4.8 million in cash flow based on gold price of $1,200; it should make up more than 10% of Sandstorm's operating cash flow in 2017 based on company estimates.

Excellent Drill Results at Hot Maden

As readers may know, Sandstorm recently struck a deal with Teck Resources (NYSE:TCK) to acquire 56 royalties for $22 million. One of the best royalties acquired in that deal was a 2% NSR on the advanced exploration Hot Maden project, owned by Mariana Resources Ltd.

As mentioned in that article, the resource at Hot Maden contains an ultra high grade component of 967,000 gold indicated ounces at 29.2 g/t and 379,000 gold inferred ounces at 36.2 g/t (in addition to a significant amount of copper). However, Mariana recently reported some pretty impressive drill results that indicate this deposit could be much larger in size and higher-grade than previously thought.

The intercepts from Mariana's eight drill holes include 71 metres of 32.7 g/t gold and 1.9% copper from 55 metres downhole, including 22 metres of 83.9 g/t gold and 1.8% copper. Another drill returned 63.6 metres of 14.5 g/t gold and 3.4% copper from 46.8 metres downhole, including 21 metres of 38.9 g/t gold and 5.1% copper (most impressive results bolded).

Mariana is planning a maiden preliminary economic assessment of Hot Maden that is expected to be completed in Q4 2016, so investors should keep a close eye on this company and its progress at Hot Maden.

While this project is still likely at least several years away from being a mine, things are starting to look quite promising and I wouldn't be surprised to see a takeover of Mariana in the future, based on the success of drilling and small size of the company.

Lake Shore Announces Initial Resource at 144 Gap

Investors may not realize this, but Sandstorm holds a 1% NSR royalty on the 144 Gap Zone Deposit, which was acquired in the Premier Royalties acquisition a few years ago.

Now, Lake Shore owns the Timmins West Complex and mine, and the 144 Gap Zone is a discovery located just southwest of the Thunder Creek deposit; it provides an opportunity to "significantly extend mine life and grow production from the Timmins West Complex," according to the Lake Shore Gold website.

Sandstorm announced the completion of an initial resource estimate for 144 Gap; the deposit contains 301,700 ounces of indicated gold resources at 5.41 g/t, plus 319,200 ounces of inferred gold resources at 5.19 g/t.

However, following completion of the initial resource, Lake Shore also completed an additional 47 holes (10,134 metres) of drilling that have yet to be included in the resource.

In addition, Lake Shore Gold recently announced a business combination with Tahoe Resources (NYSE:TAHO), a $2 billion global mining company. This is actually positive news for Sandstorm, since Tahoe is a much larger miner than Lake Shore Gold ($588.5 million market cap), therefore, is in a better position to raise money and can likely develop the 144 Gap at a faster pace than Lake Shore.

Other News: Magellan to Be Acquired by Anfield Nickel

Sandstorm owns a 2.5% NSR on the Coringa project, located in Brazil and owned by Magellan Minerals. Coringa is actually a pretty small, but high-grade project, as it contains 553,000 ounces of measured and indicated gold resources at 7.88 g/t, and 360,000 ounces of inferred gold resources at 5.43 g/t.

A preliminary economic assessment says the mine will produce 50,885 ounces of gold annually at cash operating costs of $531 per ounce. At $1,300 gold, this mine carries a net present value (5% discount of $96.85 million; at $1,500 gold, the value jumps to $148.92 million.

This is a forgotten-about royalty in my eyes since Magellan is a tiny company with a market cap of just $10 million, with little cash to continue advancing the project and a tough time raising money in this gold environment.

However, a company called Anfield Nickel has entered into an agreement to acquire Magellan in an all-share deal. Following completion of the deal, the new company will have a market cap of approximately $48 million.

This is obviously good news for Sandstorm because there's a much better shot the mine gets built now; what once looked like a dead asset could be producing cash flow to Sandstorm in a few years, although it will certainly depend on gold prices as well. Investors should certainly keep an eye on the new company.

What to Expect from Q4 Earnings

With solid production from the Santa Elena, Black Fox, Bachelor Lake mine, the Diavik royalty and other royalties producing steady cash flow, and new production from the Chapada and Minera Florida assets acquired in the Yamana Gold (NYSE:AUY) deal, I expect more of the same from Sandstorm in Q4: strong cash flow.

Investors might be wondering: is Sandstorm done doing new deal following the Yamana Gold and Teck deals? Or will the company either increase its debt or issue new shares to complete new deals? It will be interesting to hear the company's thoughts on the conference call. Without any new deals, the company is on track to increase its annual production from 40K ounces to 65K ounces annually by 2019, but personally, I'd like to see Sandstorm get more aggressive here and make new deals if the opportunities are presented.

Disclosure: I am/we are 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.

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