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Executives

Denver Harris - IR

Nolan Watson - President & CEO

Erfan Kazemi - CFO

David Awram - EVP

Analysts

Heiko Ihle - Euro Pacific Capital

Shane Nagel - National Bank Financial

Sandstorm Gold Ltd. (SNDXF.PK) Q2 2012 Earnings Call July 27, 2012 11:30 AM ET

Operator

Good morning and welcome to Sandstorm Gold Q2 conference call. This call is being recorded. I would now like to turn the call over to Mr. Denver Harris. Sir, please go ahead.

Denver Harris

Good morning everyone. I want to thank you all for being part of today's Q2 conference call. With me I have Nolan Watson, Sandstorm’s President and Chief Executive Officer; Erfan Kazemi, Chief Financial Officer and David Awram, Executive Vice President.

Before we get started, I would like to bring to your attention that some of the commentary on today's call may contain forward-looking statements. There could be no assurance that forward-looking statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Lastly, it’s worth noting that any discussion of financial figures is in US dollars.

I will now turn things over to Nolan for a second quarter summary.

Nolan Watson

Thank you Denver and thank you ladies and gentlemen for participating in today's conference call. On this morning’s call, I am going to provide a high level company update and then Erfan Kazemi our CFO, will provide a summary of the financial results and then David Awram will provide an operational update.

The second quarter marked our ninth consecutive record quarter of gold sales with our 9,200 ounces sold and as our cash costs were under $300 an ounce, we recognized record operating cash flow of $11.3 million and production is continuing to ramp up at our producing mines. But I should note that during the quarter, Rambler began commissioning its copper flotation circuit which is a good thing at its Ming Mine.

And as a result, they have currently transferred the mining focus from 1806 gold zone to the 1807 zone, which is higher in copper grade and lower in gold grade. Having said that, there is significant upside to the 1806 gold zone which we believe will bear fruit in the future and David Awram will provide a more detailed update on that in a few minutes.

With respect to our 2012 gold sales guidance, we have narrowed our guidance range to 28,000 to 33,000 ounces of gold for the year, increasing to over 50,000 ounces per year by 2015. And as I mentioned on the last quarter’s conference call, that guidance of over 50,000 ounces per year assumes that Luna Gold never ramps up its Aurizona mine beyond 100,000 ounces a year, assuming that SilverCrest does not build an underground mine and assuming that Rambler does not produce from it’s 1806 gold zone and we believe that all three of those things could happen. So we believe there is upside potential to this guidance.

In terms of corporate development update, during the quarter, we acquired two NSR royalties from Magellan Minerals and one from Solitario Exploration. In addition to the upside of these royalties, we also ensured that in each case we received a right of first refusal on potential future gold streams on the project. So in effect, through these royalty acquisitions, we’re attempting to build then sources of potential future growth for portfolio of gold streams.

In addition, as many of you are aware during the quarter the equity capital and debt markets continue to deteriorate and as a result we are getting a lot of inbound calls from companies looking for capital. We are evaluating a number of opportunities now and with our $50 million undrawn revolving line of credit we have the capital available to take advantage of those opportunities although we are going to proceed in a selective manner.

While we’re continuing to grow the company, we’re also continuing to complete an NYSE market listing in the US. We have given previous guidance on last quarter’s call that we anticipate having that completed by the end of Q3 and we believe we are on track to accomplish that and it’s our anticipation that in the few weeks to come we’ll have more detailed guidance on the exact date of that listing.

And with that I am going to hand it over to Erfan Kazemi.

Erfan Kazemi

Thank you, Nolan. As Nolan mentioned, we had record gold sales of over 9,200 ounces, an increase of 17% from Q1 2012 and over a 150% increase from Q2 2011. When comparing the results from Q1 2012 to Q2 2012, the main driver of the increase was an 84% increase in the gold sales attributed to the Santa Elena Mine, primarily related to the sale of 660 ounces which were held in inventory at the end of the first quarter of 2012 and a 28% increase in deliveries relating to the Ming Mine as Rambler continued mining and processing ore from the high grade gold 1806 zone.

Breaking down our production of gold sales by mine, Aurizona had another great quarter whereby Sandstorm sold 2,215 ounces. From Black Fox Mine, we had just over 2,000 ounces, an 11% increase over Q1 2012 reflecting the continued ramp-up of operation.

Although, we indicated during the last conference call that attributable ounces from the Ming Mine will decrease in the second quarter, we actually saw 28% to increase over 2,500 ounces from Ming. Rambler had recently announced a production of the first copper concentrate and thus expected declines in gold productions that we spoke of will likely be realized in the third quarter. We sold close to 2,400 ounces from Santa Elena due to carryover of inventory from last quarter.

Moving on to other metrics, gold was sold at an average $1,615 per ounce with an average cash cost of about $300 per ounce. This is the lowest cash cost per ounce that Sandstorm has posted to-date and although our average realized gold price fell slightly to $1,615, our margins were strong at over $1,300 an ounce. The decrease in cash cost was driven again by production of the Ming Mine where Sandstorm does not make ongoing payments for gold delivery.

When you see other mining companies provide revised guidance on cash cost and capital expenditure, our results clearly demonstrate the strength of our business model where we maintain low and predictable cash costs.

Our cash position at quarter end was $25.1 million. We had $11.3 million in operating cash flow and net cash inflow from financing activities of $1.5 million from the exercise of warrants and options. These inflows were offset by $21.7 million in investing activities largely related to the royalty acquisition Nolan described.

Overall with $25 million cash on hand combined with an undrawn $50 million revolving line of credit and over $3 million cash flow coming in on a monthly basis, you can see that Sandstorm is well positioned to continue to grow to additional gold streams.

That’s all I have from the financial side of things, so I’ll turn it over to Dave.

David Awram

Great thanks Erfan. So quick asset update, what I would like to do is talk about a little more about the two acquisitions that we did on this quarter and then also give you just a quick update on some of the other assets. And of course any questions you might have of more detail information feel free to have some at the Q&A session at the end or else you can feel free to call our Investor Relations line too, we sort out some of those answers offline as well.

So really the first thing I wanted to talk about was the Magellan and Solitario acquisitions. So this is a little bit different than the previous stream acquisitions that we have done in the past; what we really wanted to do with these projects is really put together a bit of a long-term growth story for us and get our foot in the door on what we felt were very accretive deals that we can turn into streams at some point in the future.

They do really represent the long-term growth, our entry point in these projects what we felt was very strong and very clear forth. And when we look at these projects, what we really feel that they really are mines and we wanted to have a clear link to the cash flow coming off of these rather than going out making an equity investment in them, looking to start off by putting our foot in the door to a royalty and roll from these assets.

Specifically, on these projects Solitario’s Mt. Hamilton project located in Nevada; it’s a very simple mine. The grade is very good and the metallurgy is very good and it got a very effective plant going into it. We are waiting for some permitting results to come out of there and really the process to get into the permitting. But overall, we see this as an asset that has some excellent expansion potential want and has some excellent upside that hasn’t really been demonstrated yet, but has some good historical results that should be -- really you will be able to see through to them as we done more work on it over the next few years.

Magellan’s assets, the Cuiú Cuiú and the Coringa projects; they are in a little bit earlier stage and even something like Mt. Hamilton but what we like particularly of the Coringa project was the high grade of it and the ability for them to increase the resource by a significant amount with so little drilling.

That is the project that we expect will have few barriers to getting into production, but they still do have to get down and move down that path. I think even before it gets into production, you will see substantial increases in resources in there and increases in plants. In fact, they are actually updating their PEA as we speak and are expected to release something before the end of the year on that.

On to some of our other existing streams, another project that's getting close towards commercial production is North Bachelor Lake Mine. They have announced very recently that they obtained their environmental certificate of approval for commercial production which will allow them to produce 900,000 tonnes of gold ore from the Bachelor Lake Mine.

They have processed over this quarter over 5400 tonnes of ore from the underground bulk sample. They have operated the mill and they have got recoveries of over 97% higher than what was in the model. And they have also about 25% more ounces than they expected in that bulk sample. So I have always thought that the Bachelor Lake Mine has got some great potential on it and that they have very good veins and have a good system there. They have done an excellent job of really moving that in, in budget and really on an effective timeline for us.

I also have the opportunity to visit a couple of our other producing assets. Just a few weeks ago, I visited Black Fox Mine. It's operated by Brigus. That project is doing very well. They continue to increase on their underground tonnages at a very good grade. They are expected to reach 800 tonnes per day in the third quarter of 2012, and they are accessing more stokes all the time and they should be on track to increase to 1000 tonnes per day by the end of this year or early next year.

They are also ramping up the underground exploration there and they will be drilling some of the deeper plunge zones that they were targeting early on in that asset, and they should get some exploration results out by the end of this year and by the start of next year.

I have the opportunity to really see first hand how they mine and it certainly seems to be an improvement. The workforce there is really getting in and hitting their stride and you have to commend the management at Black Fox for really getting that project up and going and operating successfully.

I also visited very recently the Ming Mine in Newfoundland operated by Rambler Metals & Mining. So as Nolan pointed out before, they have been mining the 1806 zone, high grade gold zone all the way up through Q1 and parts of Q2. But they have now switched over to the massive sulfide high grade 1807 zone.

The 1806 zone still has lots of open faces that they can access, but this really is a copper mine at this point. What they will be doing from this point on is mine it from both the lower Footwall zone and the 1807 zone. And the 1807 zone they are not having any trouble finding good ore and good faces to mine off of. They have done an excellent job. On the geology side, Larry Pilgrim the chief geologist has been spending a lot of time looking at the project and really understanding and re-interpreting how that geologic model works in that asset and really understanding the deposit.

They’ve got some very good theories on where to start looking for more large massive sulfide copper zones and also more gold zones. So that’s going to be a priority for them as they enter towards the end of this year and the start of next year, but they’re doing an excellent job. I am actually quite surprised how well things worked out on the gold zone and it seems like things have really coming together well as they produce their concentrate going forward.

So, we’re looking forward to see news coming out of actually both those assets, Black Fox and the Ming Mine over the next several quarters as they start putting out exploration results and put out additional production results going forward.

And just a couple of quick notes on some of the other assets, the Santa Elena project by SilverCrest. They're having a very good Q2. Their cash costs are very solid, right where they wanted to do and they are consistently hitting guidance quarter-over-quarter.

They're also working on the expansion program which would include putting in a mill, seeing increased recoveries on the gold and on the silver side. And then also the expansion of the open pit and also expansion of the underground operations. So they're working on a lot of that over this year. They should be putting out more news on how that develops as we go through Q3 and Q4.

Aurizona, they've done an excellent job as well too. They're consistently quarter-over-quarter and month-over-month and beating their targets or beating their previous months production and they're certainly on track to get out to their 100,000 ounce expansion. They are also looking to do some additional drilling and they are also looking to look in towards more potential expansion of that mill going forward as well.

Overall, I am exceptionally pleased with how all the operations are going at this point. They are really are beating and what we had expected when we did the transactions and beating what their timelines and then how well they produce you have to commend their management teams with each one of those assets going forward.

So with that, just quickly on really assets that we are looking at and potential acquisitions; certainly we do have a strong pipeline especially in this market environment. We do want to do some more deals before the end of the year, but it certainly is a matter of really going out and finding those right transactions, finding the right projects it’s all about the right assets and finding projects that can be profitable and management teams that can execute on that.

But with that I will pass it back over to you operator for Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Heiko Ihle from Euro Pacific Capital. Your line is now open.

Heiko Ihle - Euro Pacific Capital

Just two quick questions, first of all you guys purchased two NSRs in the quarter three essentially three NSRs in the quarter. Should I expect to see you guys do that going forward or should I more look into gold streams going forward?

Nolan Watson

The answer to that is our business is primarily focused on gold streams. We have purchased a couple of royalties as you pointed out but in each case we negotiated to write a first refusal, these are transactions where if the assets had been more advanced we would have liked to done gold streams on them but we aren’t prepared to put up a significant amount of capital for the stage or develop that these assets are at.

So what we see ourselves doing is getting NSR and basically tying up an opportunity for future potential gold stream you'll find that whether we are providing a small loan to some one or buying NSR, at the end of the day the vast majority of all of our activities are focused on just trying to get more gold streams.

Heiko Ihle - Euro Pacific Capital

Very fair and then what sort of sizes should I look into between now and the end of the year, should I be shocked to see you guys raise more funds for something larger or it depends $7.5 million ranges is that less more or less model out?

Nolan Watson

We are looking at monetary transactions and $7.5 million and in fact I think it is fair to say that we aren’t looking at anything currently that is [asked] for. We are (inaudible) of the deals that what we are going to do, it is going to depend likely on when that cash is due. So for example, we anticipate significant amounts of cash flow over the next two years.

We have some more money that will be coming in over the next couple of years and so we have the ability to do larger deals to the extend that we can pay for those deals overtime in the future and to be honest with respect to whether or not we are going to raise capital, we do not have any current plans to raise capital, but if we find the rate transaction we would consider it, it was within the shareholders' best interest to pull off that transaction but like I said we don’t have that transaction in hand right now and we are not planning on it.

Heiko Ihle - Euro Pacific Capital

And just to clarify I just want to double check I have the right number, you said you have $25.1 million of cash on hand, correct.

Nolan Watson

As at the end of the quarter.

Operator

Your next question comes from the line of Shane Nagel [National Bank Financial].

Shane Nagel - National Bank Financial

Just want to confirm guys, the top end of the guidance came down about a 1000 ounces. Obviously Black Fox, Santa Elena everything has performed pretty well. That's largely related I guess just to the Ming Mine in the back half of the year?

Nolan Watson

No, at the beginning of every year we create a wide guidance range and quarter-to-quarter everything unfolds as we originally anticipate, we sort of narrow the top end and the bottom end and end up in the middle of our original guidance. So we just -- the original guidance at the beginning of the year was 25,000 to 35,000 ounces with 30,000 being in the middle and we are continuing to be right on track where we thought we would and anticipate fishing either right in the middle of that original guidance or above it and there's still five months left in the year, so we will see how it unfolds.

Shane Nagel - National Bank Financial

And in the Ming Mine itself there is the minimum I guess recovery once you get into the copper concentrate of 85%. It's just, if they don't reach that recovery rate, I mean I just want to confirm that you guys get 25% of at least 85% of the goal that's fed to the mill. I think that's how that calculation works.

Nolan Watson

Yeah, I mean how it works out for this first year for the copper concentrate, we get 32% of the gold production that comes from there and then that does get adjusted depending on really where that ultimately the recovery obstacle is. So depending on really kind of where it would end up at 25%, is if they get I think 82% or 83% recovery of the gold into the concentrate so and then our percentage would increase as that number from 82 or below, if that’s the actual number. But it’s kind of a moving average that ends up getting picked after I think two or three years of production from the asset.

Shane Nagel - National Bank Financial

It is not just this year, it is kind of – you will get some feedback from that.

Nolan Watson

No it ends up – we've kind of just taken the average and one ends up falling out from that project over the first three years.

Shane Nagel - National Bank Financial

And then just go back to the acquisition strategy. Obviously the NSRs for longer-term, you did comment about staging acquisition costs for projects near term, where do you draw the line as opposed to looking for an NSR and a roofer on a future stream or just buying the stream, is it permitting or a feasibility study in hand or where do you kind of draw the line when you’re looking at acquiring their stream or royalty address?

Nolan Watson

Well, there could be a number of different things. It just depends on how we really view the risk from there. Clearly in places like the US and Canada, the permitting risk can be extraordinarily high. Whereas in other jurisdictions, there is a little bit more of a clear and more direct process to understand where the permitting goes. So it might be some other aspect like the financing aspect of the asset going forward or just additional testing and additional test work that needs to be done on these projects.

You know, you take a look at something like the Mt. Hamilton project, that’s an asset that, their mine plan as it sits right now, operates almost exclusively on (inaudible) land, which makes the process a little bit easier on the permitting side of things and they've also done a tremendous amount of metallurgical work and they've a lot of historical drill data and they've done a lot of work on that asset.

So it doesn’t have to clear too many more processes before we'll be ready to talk with (inaudible) about transforming that NSR into more of a stream type product. If you take a look more at the Coringa for instance, that asset, it hasn’t had quite as much planning done on it. It’s more of really was a grassroots project that Magellan discovered (inaudible) rather than a past producer like what Mt. Hamilton was.

So, it carries with itself a little bit more on that, not as much planning on as much development is being done on the asset itself. And so, it’s all going to vary but as you can see, between those two acquisitions, you know, it’s less than $17 million. It's by far the smallest amount of our overall NAV compared to rest of the streams.

You know, you're not going to see a huge amount of those deals for us going forward. The bulk of our cash is going to be spent on assets that are going to be cash flowing, it have more of a substantial plan in place in terms of really getting into that construction phase or even partly through the construction phase or even kind of the last money in on assets that you're going to be producing very soon.

That really is where the bulk of our efforts on the acquisition front are headed.

Operator

(Operator Instructions) Your next question comes from the line of (inaudible). Your line is now open.

Unidentified Analyst

I know you can't divulge information that’s not you know, it’s uncertain, but how many deals within a range do you think you might do between now and the yearend?

Nolan Watson

Yeah, that’s something that we haven’t given guidance on in the past just because on a deal-to-deal basis, you never know what's actually going to happen. We have given the guidance publicly in the past of doing one to three deals per year. This year we have done two small deals. We hope to potentially do another deal by the end of this year, we can’t guarantee it. There might be two, it might be one, it might be zero.

We are also working with Luna in SilverCrest. We think that SilverCrest is working towards a potential underground mine and so that’s going to be something that we would have to opt into under our existing contract with them. If they did build an underground mine, that would be another increase in production. It will be like a completely separate new gold stream. So we are hopeful that towards the end of this year beginning of next year that will be more clear.

Operator

Your next comes from the line of Kevin [Day]. Your line is now open.

Unidentified Analyst

I just wanted to commend you on the average cash cost per ounce of $300, it's very commendable. My question is simply this, how many employees does Sandstorm has?

Unidentified Speaker

Sandstorm currently has approximately 15 employees and that’s between the two companies.

Operator

Your next question comes from the line of Joseph [Levatel] from (inaudible) your line is now open.

Unidentified Analyst

Do you have a forecast of your royalty streams for 2014?

Erfan Kazemi

We do have a presentation that is up on our website that has a graph with our best estimate as to what our future production is going to be and there is an amount in there for 2014, so I will refer you to that. It can be downloaded off of our website. 2014 guidance is estimated to be slightly under 50,000 ounces, but somewhere in the 40,000 ounce range.

Nolan Watson

And that’s our base case scenario too. That's not taken into account, any of these expansions that potentially might be pursued, for instance, the Santa Elena expansion and anything that might happen at the Luna Gold asset.

Erfan Kazemi

Yeah so we are hopeful that those numbers could potentially be revised higher, but we are not quite there yet.

Operator

Your next question comes from the line of [Charles Heady]. Your line is now open.

Unidentified Analyst

My question is in regard to Mr. Watson and Mr. Awram's liquidation of relatively large block of shares. I was wondering if you -- I don’t know if this question has already been asked because I called in a bit later, but could you elaborate on that please. Thank you?

Nolan Watson

I can elaborate my personal situation. So I exercised some stock options over the last couple of months with the view of using a reasonable portion of that cash to buy shares in Sandstorm Metals & Energy. You get a lot of investor calls and questions during meetings from Sandstorm Metals & Energy shareholders wondering why I have a huge percentage of my net worth tied up in Sandstorm Gold shares and very little in Sandstorm Metals & Energy.

And so I have given public guidance to them and to our other investors that over the next several years as stock options or the money I will be using some of that capital to buy position in Sandstorm Metals & Energy. So my incentives can be aligned with the shareholders in that company as well. So that was the motivation for that. Currently I am in (inaudible) Sandstorm Metals & Energy which is why you haven’t seen the share purchases occur yet.

David Awram

It’s a similar story for me. When Nolan and I started up this company, we put substantial amounts of our -- in fact almost our entire net worth investment in this company and when we started up Sandstorm Metals & Energy we wanted to make sure that we had access into that model, instead but because we did it, the plan of arrangement spinout, we only received the same pro rata amount prior to the initial finance we did on that. So it's really a way of really going in and accessing some more of the Sandstorm Metals & Energy asset, to stay invested in both of the companies.

Unidentified Analyst

Okay, that's a good answer. My last question. Dividends again I don't know if it's already been asked, but obviously you can't give me an exact date or time, but more so you know a goal when you guys say get $60 million to $70 million cash flow, if you guys have an idea, so where you would initiate a dividend you know market cap goal (inaudible).

Nolan Watson

Yeah, absolutely. The goal and this has been our goal from the very beginning is to pay a dividend when we feel we are at the point where the amount of cash flow coming in relative to the accretive acquisitions that we wanted to make provides us with surplus capital such that it should be returned to shareholders and I realistically think we are probably still a couple of years off given the fact that the capital markets are falling apart, for a lack of a better term here.

And there are so many opportunities in front of us that we will be able to use all of our cash flow for the next couple of years and potentially even more than that, growing our portfolio of gold streams. Eventually, we are going to get to the point where you are right, we will be cash burn $60 million a year, it will be debt free and the company hopefully will be cash flowing a lot more than that as we go to the company here and at that point we are going to start returning money to shareholders in the form of dividends.

Operator

And your final question comes from the line of [Tony San]. Your line is now open.

Unidentified Analyst

I understand that you are looking at the SilverCrest expansion and do you have a preliminary, do you have a preliminary estimate as to the upfront cost to Sandstorm in terms of capital expenditures and what's your the time frame for expected return is?

Nolan Watson

No we haven't gone in that yet, that's really going to come up with the PFS that SilverCrest is working on right now. They did complete a PEA on that, I think it was early this year or late last year, doing some of the additional numbers behind that but they have been doing a lot of work on the project, they do have a drive and a portal access and the drive that goes down over 400 meters and getting close to 500 meters and they have done a lot of work.

So that's just a part of the process so we don't really know what that number would be now, but over Q3 and Q4 when they provide that reports we should have a clear idea of concept of what our portion of the CapEx would be if they go into that underground, decide to go forward on that underground operation.

Denver Harris

Okay. Thank you all very much for attending the call. We are again very pleased to have another great quarter from our production partners and be able to share that all with you. If you have any other further questions you can always call our Investor Relations line. But otherwise thank you all very much for attending the call and have a good rest of the day.

Operator

Ladies and gentlemen thank you for your participation. This concludes today’s conference call. Your may now disconnect.

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