Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.
In a recent article we reported on a series of good news concerning Sandstorm Gold (NYSEMKT:SAND) and its little sibling Sandstorm Metals & Energy (OTCPK:STTYF). As if on cue more news was release at the end of last week. In response to the lively discussion following the above mentioned article we decided to sit down and summarize the latest development for interested readers.
Before we continue, here is a summary of the business model of the two companies. Both Sandstorms are streaming companies. They provide up-front capital to mining companies in exchange for a metal streaming agreement. This agreement gives streaming companies such as Sandstorm Gold and also Sandstorm Metals & Energy the right to purchase a percentage of the life of mine production, at a fixed and typically heavily discounted price. The Sandstorms portray themselves as non-operating miners. Alternatively, the Sandstorms can be viewed as highly specialized venture capital providers for mining companies. Both Sandstorm siblings are managed by Nolan Watson, a much respected executive who has also served as a CFO for Silver Wheaton (SLW), the largest streaming company by market capitalization.
Last Friday a news release from Sandstorm Metals & Energy reported on a deal made with Canadian Zinc Corporation (OTCQB:CZICF), which is a junior development company listed on the Toronto Stock Exchange and traded in the USA via the pink sheets. Canadian Zinc Corporation has a market capitalization of $73.7M and a flagship project located in the Northwest Territories, Canada, called the Prairie Creek mine. This project is an existing mine and mill built in the 1980s with the silver in mind that had been found there. When silver prices crashed the mine was closed down within months of completing construction. The present owners have upgraded the mining infrastructure and completed a preliminary feasibility study (PFS) with the intention of producing a zinc sulphide concentrate and lead sulphide and oxide concentrates effectively treating the silver as a by-product to a base metal mine. The PFS indicates very solid economics with a pre-tax NPV of $253M, a pre-tax IRR of 40.4% and a pay-back period of three years.
With 10.8% zinc and 10.2% lead contained in the measured and indicated resources Prairie Creek has some of the highest grades on record anywhere when viewed a base metal mine. The mine life is currently given as 11 years based on reserves with ample indicated resources and further exploration potential to extend this period significantly. Anticipated annual production is 76M lbs of zinc, 90M lbs of lead plus 2.2M ounces of silver. According to the PFS the mine will require a total of $193M in order to reach production over two years. The mine land tenure is enclosed by the Nahanni National Park which makes licensing a key issue. However, the company seems to have cleared most environmental hurdles and is awaiting the Final Decision and Water License from AANDC Minister later this year. The mine is situated in a rather remote place and will need to truck concentrates to a railhead in Fort Nelson which is 488km or just over 300 miles away.
The deal agreed upon with Sandstorm is small compared to other deals: Sandstorm Metals & Energy has bought 1.2% net-smelter royalty (NSR) on the base metals to be produced at Prairie Creek for a consideration of $6.8M; and Sandstorm Gold has bought a 1.2 NSR on the precious metals for a consideration of $3.2M. More importantly, however, the two companies have ensured rights of first refusal on any future royalty or streaming agreement; and Canadian Zinc Corporation can buy back the NSRs if they decide to enter into a commodity stream agreement with Sandstorm Metals that has an upfront deposit of no less than US$90 million. We would suggest that this is the true intention and the present deal lays the ground work for a future streaming agreement.
Many analysts believe that zinc has a great future mid-term as a commodity with several mines earmarked to close down within the next five to ten years. Zinc demand is increasing due to industrialisation, especially in Asian countries with forecasted growth rates for zinc demand as high as 4% between now and well beyond 2020. This deal is not immediately accretive for the Sandstorm companies but it has a lot of potential in the mid-term especially for Sandstorm Metals & Energy. Sandstorm Gold will be adding a little bit of silver to its portfolio with the current arrangement and might significantly increase the silver component if a streaming agreement comes to fruition.
While certainly not a company maker at the present time, this deal might develop into an important stepping stone for Sandstorm Metals & Energy and yet another piece of the puzzle for Sandstorm Gold. At present the investment is small, but it puts the foot in the door for bigger things to come. All in all, more good news for the Sandstorm siblings as far as we are concerned.
Disclosure: I am 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.