Sandstorm Gold's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Sandstorm Gold (SAND)
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Sandstorm Gold Ltd. (NYSEMKT:SAND) Q4 2013 Earnings Conference Call March 11, 2014 11:30 AM ET

Executives

Denver Harris - IR

Nolan Watson - Chairman, President and CEO

Erfan Kazemi - CFO

David Awram - Senior EVP

Analysts

Shane Nagel - National Bank Financial

Jeff Jackson - CIBC World Markets

Alex Terentiew - Raymond James

Marc Johnson - M Partners

Operator

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sandstorm Gold Fourth Quarter and Annual Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to Mr. Denver Harris. Please go ahead.

Denver Harris

Thanks Michelle. Good morning everyone and thank you for joining today's conference call. With me I have Sandstorm's President and CEO, Nolan Watson; CFO, Erfan Kazemi; and Senior Executive Vice President, David Awram.

Before we begin, please be advised that some of the commentary on today's call may contain forward-looking statements. There can 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.

I will now turn the call over to Nolan.

Nolan Watson

Thank you, Denver, and good morning everyone. In a few minutes, I am going to turn the call over to discuss our financial results and then to Dave Awram, to give an update regarding the various assets underlying our streams. But before I do that, I would like to take the time to provide a high level update of the business, and to address a few of the more common questions that we have been hearing over the past few months.

As everyone is aware, 2013 was a challenging year, with decreasing gold prices, evaporation of available financing for companies building gold mines, record insolvencies in the industry, and with some of that hitting close to home with one of our partners, Colossus Minerals, having to complete a court supervised insolvency. And although, 2013 was a challenging year, it was also an important pivotal year for Sandstorm.

While attention during the year gravitated towards the write-offs of premier royalties in Colossus, there have been nine additional important things that occurred over the past year, and briefly, those things are; one SilverCrest's building and underground mine and a mill, which we have now auctioned into and its nearing the beginning of commissioning. Number two, Metanor has entered into commercial production, has become a material contributor to Sandstorm's production, and the Bachelor Lake Mine has had tremendous exploration success.

Number three, Premier's portfolio of royalties have become a consistent solid source of cash flow for Sandstorm. Four, we have decreased our ongoing G&A costs by 40%, which you'd be able to see in our Q1 numbers, when they come out in a couple of months. Number five, Luna has made substantial advancement towards completion of their ramp-up and they are now producing at a 90,000 ounce per year run rate, ramping up to 135,000 ounces per year. Number six, Brigus Gold, which had significant debt levels, has been purchased by Primero Mining, and the debt has been paid off, and in addition, Primero has indicated to the market that they will be ramping up production from Black Fox by 30% compared to our previously budgeted figures.

Number seven, Rambler's Ming Mine has quietly but consistently replaced its reserves, despite another full year of mining. Number eight, both Luna and SilverCrest have each raised $20 million of equity capital in the past month, further increasing the strength of their balance sheets; and number nine and perhaps most importantly, now all of our remaining material streams are on mines that are in full commercial production, with an average all-in sustaining cost of production below $1,000 per ounce, which is not only lower than the industry average all-in sustaining costs, it's also lower than the all-in sustaining costs of the partners of most other streaming and royalty companies.

So from a high level perspective, although 2013 was a challenging year, it was perhaps the most transformative year that Sandstorm has seen, and we stand here today with $100 million of cash in the bank, no debt, record cash flow from operations, with a diversified portfolio of cash flowing assets, with low all-in sustaining cost of production. Based on this position, with cash on hand and cash flow and available credit for future deals, the majority of the questions that we are getting from shareholders these days relate to how we plan on growing, what types of acquisition will do, what our pipeline looks like.

We are also getting questions on how we have changed our process, to ensure we don't have another Colossus. But for every time we get one of those questions, we are also being asked, why aren't we doing more deals? How many more deals can we do this year? And so I'd like to take just a few minutes now, to specifically address all of those types of questions.

So early in 2013, we began reengineering our deal screening and due diligence process, to be more focused on the top down approach. We found at Sandstorm, that where we have had significant success, it has been by us identifying projects, that we think have lower risk and then have significant exploration upside, and then us going out and proactively selling the benefits to those change to mining companies. And where we have had less success, is where we have been re-active to deals that have been brought to us.

So during the year, we refined our process of filtering deals, such that we say no to as many incoming mediocre deals as quickly as possible, thus gaining us time to proactively create lists of our top targets around the globe, and that has resulted and that's creating what we are calling our dirty dozen lists, and we do it for each continent, but each list has over 20 names, so I am not quite sure why we use the word dozen.

But although, we have been making these list of names, we have been taking those with any other deals that do come in the door, and we have been putting them through our now formalized multi-phase investment committee system, and we have talked some of our larger institutional investors through this system, and the consistent comments that we have received is that investors are glad that we have used past expansions to improve our process. But, they have expressed concern, and they want to ensure that we don't become so conservative and risk averse, that no deals can get through our due diligence process in sufficient time, such that any company would want to do a deal with us.

So to be candid, we are trying to walk the fine line right now, between doing deals on low risk high upside projects, and being so conservative that we don't get any deals done. Unfortunately, Sandstorm's in a position, that we are doing one significant deal per year, and perhaps a couple of smaller deals, can make a material difference to our growth and our value per share. We don't need to do four or five deals per year, we would rather just do one or two good deals per year, and so that's our current focus.

I think its also worth noting, briefly, one of the things that investors have been focusing on is, the warrants that are coming due in April, and we have talked about those on past investor calls. Originally, there were 13 million shares to be issued upon exercise of the warrants that expire on April 23, so in just over a month, and I think it was last Investor Call, that number had dropped to 10 million to 11 million shares to be issued on exercise of those warrants, and to provide a little bit of an update, the market is doing a surprisingly and very good job clearing those warrants, and I think we stand today with only 6.3 million shares remaining to be issued on exercise of those warrants. And so our volume has picked up, and the market doesn't appear to be having any challenges to improve those warrants. So I think that's a -- a very good thing is that, warrant wall is now dissipating and going away.

Over the past number of months, we have also been getting a lot of questions from investors, as to how we are feeling about the gold markets; and as you may recall over the past several quarters, I have been indicating my short term bearishness and my long term bullishness, based on where I see the gold price in the broader markets today, I would now declare myself short term neutral, maybe even short term bullish, but definitely long term bullish. And I think that this sentiment is also starting to be reflected in the broader markets, as we are seeing increased financings in the precious metal space, which also provide us comfort, that if we allocate capital in the current markets, that our partner companies can raise some equity if they really need to. Therefore, as we stand here today, we are keenly looking for growth, but we want to do it in a measured manner. Our goal at Sandstorm is to become a risk mitigated cash flow machine, and we plan on relentlessly pursuing that goal.

So with that, I will now hand it over to Erfan.

Erfan Kazemi

Thanks Nolan. As mentioned previously, Sandstorm posted quarterly and annual records in terms of gold sales and revenue during the fourth quarter and full year of 2013. Our attributable ounces came in at over 36,000, hitting the high end of our guidance, and our revenue was just under $60 million for the year.

Going forward, our guidance will account for the entire Sandstorm portfolio of streams and royalties. As you will recall, Premier Royalty had not been included on guidance in the past. So when you look at our entire portfolio, we expect 40,000 to 50,000 gold equivalent ounces in 2014, increasing to 60,000 ounces by 2016. We are looking at more than 50% potential growth in the coming year. While that's encouraging, we don't intend to sit back.

Of the $60 million in revenue that was generated last year, 80% came from four gold streams; and although those mines performed really well, its important that we continue to diversify our production and cash flow base. We have been diligent, in ensuring that we are in a strong financial position, to add more streams and royalties, and with $100 million in cash, $100 million in available credit, millions of dollars of free cash flow coming in every month, as well as cash coming in from warrant exercises, we will have approximately $350 million to deploy in the next 18 to 24 months. That's over half of our current market cap.

Our operating results will continue to propel the business forward. We posted strong operating cash flow of over $32 million for the year, even though, we saw our average selling price per ounce in gold, reduced by 15% compared to 2012. And I think, the quality of our corporate development team, and the technical expertise that we added over the last year, will help insure that we make some really smart deals.

While we have had some missteps, we structured our transaction, such that we can offset our tax losses against the income from our existing stream. And while we have taken a significant impairment on Serra Pelada, the way we structure the transactions and down size protection that we put in place, allows us to be patient, and work to recoup value.

Now I will turn things over to Dave.

David Awram

Great. Thanks Erfan. So just to update on our assets; last year, our key producing partners demonstrated how they could operate and ramp up their production in a low gold price environment. It was a critical year, as operations at Bachelor Lake and Ming had just begun, but had not yet ramped up, and transformative upgrades to production at Aurizona and Santa Helena were just underway.

Now, that we have seen a full year of results from most of these companies, it's clear that [indiscernible] has done a good job in producing gold, with low all-in sustaining costs. In addition, like Nolan said earlier, many of the companies have reduced their financing risk, by completing equity financings, and in the case of Brigus, by being taken over by Primero.

So a brief update on each of our main assets; for Aurizona, as of Q3 all-in sustained costs were $958, as Luna ramps up production through the phase one expansion. We potentially see that number get even lower. Increases from the expansion are already being reflected, as Aurizona is operating at close to 90,000 ounces per annum run rate.

Luna also just completed a $20 million Bought Deal financing, putting them in good position to complete additional drilling on Aurizona main, and complete the Phase 1 expansion of the mine later this year. We expect Luna to provide further disclosures on these issues in the coming quarter.

For Santa Elena, silver equivalent production cash costs are expected to range between $8.50 to $9.25 per ounce, or approximately $520 to $560 per gold equivalent ounce in 2014, making it still amongst the lowest in the industry. The underground and milling operations are still on-track to begin towards the end of Q2, and into Q3, and updates on detailed [indiscernible] lines are expected in the coming months.

Like Luna, SilverCrest had announced a $20 million Bought Deal financing in February, which will help ensure that all of the [indiscernible] requirements for the expansion in the mill are met. SilverCrest has been infill drilling some of the higher material in the ore body, and has announced some excellent success with consistent grades [indiscernible] they are planning to mine.

On Black Fox; Black Fox had a very good year, overall, with consistent grades and tonnages throughout. Up to Q3, they had reported all-in sustaining costs of $992 per ounce, demonstrating the strength of this asset. They also reported some excellent exploration results from some zones down-dip from current mineralization, with results over 80 meters, of 18 grams per ton gold, and another intercept to 26 meters of 39 grams per ton gold. So further results are expected later this year, and of course, the most significant event for Brigus, was their acquisition by Primero. The acquisition does not affect Sandstorm's [indiscernible] contract, but what it does do, is it puts in place, a larger, less levered operator, who is better able to deal with the capital projects of the future. We are excited to be working with Primero now, and see what they do, with what we believe to be a very exciting project in Black Fox.

So, Bachelor Lake; Metanor has done a very good job of ramping up Bachelor Lake over the latter part of 2013, and even into the beginning of 2014. Monthly production has steadily increased, and we have been very encouraged by the consistency in the head grade reporting to the mill, which has been over six grams per ton. Metanor has done an excellent job in controlling dilution and development costs, and most recently reported cash costs of just over $815 per ounce in December.

We expect these costs to improve over the beginning of this year, as they continue to ramp up production at the asset. It has also been encouraging to see consistent drilling success to the west and at depth, where multiple zones or grade material has been intercepted. With further drilling, these zones have the potential to be converted into resources and reserves.

So, on to Serra Pelada, I suppose it would be a little strange if we try to finish off the call and we don't really talk about what's happening at this project. We are currently in the middle of participating, in taking the Canadian parent company of Colossus out of CCAA. That process is proceeding well, and in the coming weeks, we expect to have the proposed transaction approved, where between Sandstorm Gold and Sandstorm Metals and Energy will own approximately 45% of the shares outstanding of the parent company. With the bondholders and the previous equity holders, the owner of the other 55%. Both Sandstorm companies will also own a 2% MSR over the entire land packets.

The Brazilian subsidiary that owns the Serra Pelada deposit and the other properties, still has accounts payable of approximately $32 million, which will need to be figured out how to address. Rest assured though, Sandstorm will not be contributing significant amounts of capital to adjust this. Instead, we are working to find other partners to fund the accounts payable, and to contribute the capital to make, what we hope will be the exciting project that we still expect Serra Pelada can be. As we have always stated, Sandstorm does not operate mines, and despite the fact that we still believe that Serra Pelada can be a great producer in the future, we are not willing to put it into operation ourselves. But, we are willing to put in the labor to find a good partner that can.

Okay, so operator, with that, I will pass it over to you, and we can begin the question period. Feel free to ask any kind of further questions on the assets.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Shane Nagel. Your line is open.

Shane Nagel - National Bank Financial

Thanks operator. Hey guys, just a quick question on the holding costs at Serra Pelada. You mentioned, you're going to own, I guess, a combined 45% of the parent company. Not planning on paying any of those accounts payables, but in the meantime, are you looking for someone to pay those costs, or foot the bill of those costs, what are you going to be spending on a monthly, quarterly run rate here?

Nolan Watson

Yeah. So that's something that we are actively discussing right now. The cost for security and maintaining the dewatering of the mine as it currently stands, we'd figure it would run something like $500,000 or $600,000 a month, which should be sort of $6 million a year. If we were to pay our portion of that, that would be just over couple of million dollars a year. Our goal though, is not to have to pay our portion of that. So our goal is to bring in, in the longer term, someone else to do that.

Shane Nagel - National Bank Financial

And in worst case scenario, if you can't find somebody, the preference still is just to hold on to that, or how do you divest completely, if someone doesn't come to the table?

Erfan Kazemi

Well I think, one of the main plans that we are working on right now, is to formulate the bare bones management team and actually go out and raise a bit of money, just sort of delude ourselves out of our current position by raising money to take the asset forward.

Shane Nagel - National Bank Financial

Okay. And with the experience with that, and I guess, at Bracemac, are you guys looking at -- I know you've said expanding the asset base, but in terms of the M&A strategy, does currently producing mines, may be that would require a bit of a premium in terms of an acquisition cost, screen a bit more favorably now?

Nolan Watson

Well they always have, it has always been preferable to do deals on currently operating mines. Its challenging to do that, without overpaying in this market, so its something that we continue to look at, or always [indiscernible] the risk related profile, with everything that comes across our desk.

Shane Nagel - National Bank Financial

Great. That's all from me. Thanks guys.

Operator

Your next question comes from Jeff Jackson. Your line is open.

Jeff Jackson - CIBC World Markets

Thanks for taking my question. Congrats on the quarter. First question just -- I guess, in regards to G&A this quarter, can you just give some idea of -- was there about $1.4 million in severance costs this quarter, and then just looking forward, would this be the last bit, or is it expected to continue?

Nolan Watson

Yeah. That was actually even higher than $1.4 million of severance costs in the quarter, and we made a significant number of changes in the business, and that will be in our view, the last of it. So we have taken all of the steps now to reduce our G&A that we want to-date. We don't plan on having any other severance payments. So Q1 should be a pretty, other than may be some one time legal fees associated with some of the things that we are working, from an actual other G&A perspective, should be a pretty normal going forward quarter.

Jeff Jackson - CIBC World Markets

Great. Then I think you said G&A is expected to come down around 40%, so I guess, what would the actual corn I would be looking forward, given the synergies you are expecting from the Premier transaction?

Nolan Watson

Yeah, we will hold off on giving guidance on specific numbers and people will be able to see what Q1 is, when Q1 is over. But to compare it to what we are running at, on a consolidated basis in Q2 and Q3, we have substantial reductions from that.

Jeff Jackson - CIBC World Markets

Great. Okay. Thank you. And on -- I guess I am looking at acquisitions going forward. I think you have highlighted that your current operating assets are pretty good cash costs and all-in sustaining costs. So looking forward then on the next asset is, is there a hurdle rate in terms of all-in sustaining costs that you'd be looking forward?

Nolan Watson

Yeah. Although, whenever we are doing transactions, and maybe Dave can speak to this even more, whenever we are doing transactions, we are always looking for assets that we believe, once finally up and running, we will have a little cost [indiscernible]. But maybe Dave, you can speak to a bit on what we are looking for on the cash cost side?

David Awram

Yeah I mean, there is no specific number. I mean, there is a number of variables that you have to look into for every project. But yeah I mean, there is going to be always, a strong focus on just good overall economics. Certainly, a target of below $1,000, all-in sustaining costs, that's a good place to start. But there is a number of things that play into that, and there is another different aspects. I mean we are always -- we are looking for two things primarily in any project, that we are looking to do a transaction on, its good economics, and then a good reach into the exploration upside. So sometimes there is a little bit of a trade-off for both of those, but how we have really tightened up the corporate development side in our process, is to really dig deep and to find those assets that we truly feel that we can get that good value out of.

Then, also make sure that we can put those good mitigated risks in there. One of the big issues that we faced over the last year in the whole corporate development side, is really just finding adequate capital structures to inject ourselves into.

A project, that we feel is taking on too much debt, well it doesn't matter how good the economic sign, doesn't matter how good the exploration upside is there. If we don't think that their capital structure is sustainable, that wipes it off our list as well too.

Jeff Jackson - CIBC World Markets

That's great. Thank you very much for taking my question.

Operator

(Operator Instructions). Your next question comes from Alex Terentiew. Your line is open.

Alex Terentiew - Raymond James

Hey, good morning guys. I just want to follow-up one more question on Serra Pelada. You guys noted a $52 million write-down, so leaving $8 million on your books there. If you -- I understand you are looking and trying to salvage some value from that. Could we expect another write-down or the remaining $1 million -- the next one or two quarters, and I guess follow-up with that is, are there any existing environmental or closure liabilities that you would have to fund, in the case that you do not find a buyer of this asset?

Nolan Watson

Good question. So the way accounting rules work, is if we expect an $8 million write down, we would have to take that today. So by the virtue of the fact that we haven't, the answer as of today is no, but obviously the future is uncertain. The reason we wrote it down to $8 million, is we are senior secured for $10 million on the 2% MSR that we are taking back, and 20% of that goes to sands terminals and energy, and 80% of that goes to [indiscernible] goals, so that's how we arrived at the math; and what we just said is, there is going to be lots of things that we are going to be working on, behind the scenes going forward and the restructuring of Colossus, and to the extent that we can write the value of those shares down to a small or non-existent number, it becomes non-material and it doesn't have to occupy the disclosure space and the news release space for Sandstorm going forward. So we want to be able to work on those things, behind the scenes, without distracting shareholders from the deals that we are doing and the value that we are trying to build in the companies. That's a little bit of the logic behind that.

In terms of your second question, with respect to any liability or closure issue cost, every single deal we have ever done, has been structured such that we wouldn't be subject to that, and we wouldn't change that, based on even the restructuring and insolvency. So the short answer is no, we won't have any of those costs. Its possible that those costs may exist, and they may have to be borne by Colossus, and they may impair the value of the equity that we hold. But Sandstorm proper, is not in anyway shape or form, on the hook legally for any of those costs.

Alex Terentiew - Raymond James

Okay, thanks. Another question, on your guidance for 2014, and up to 2016, what gold price do you assume in those numbers? It's relevant for the conversion of the cash flow from the royalties into gold ounces?

Nolan Watson

Yeah, I believe we had $1,300 for that conversion.

Alex Terentiew - Raymond James

Okay. And just maybe, if you can give us a bit more color on your goal for [ph] 2016, approximately 60,000 ounces, where do you expect to see that growth come from?

Nolan Watson

So the vast majority of that growth, is from the ramp-up of our existing assets that are already in production. So for example, Luna right now, producing at about a 90,000 ounce a year run rate, we see them going to 130,000 ounces a year, in conjunction with their public guidance. So we get 17% of that increase, which is about another 7,000 ounces a year. Bracemac is ramping up, we expect Black Fox to ramp up a little bit, and then we have some additional royalties. Couple of, sort of more minor ones that we estimate will come online over the next couple of years. So there is no one major source that is not already in commercial production, that that increase is coming from.

Alex Terentiew - Raymond James

Okay. Perfect. Thank you.

Operator

Your next question comes from Marc Johnson. Your line is open.

Marc Johnson - M Partners

Good morning. Thanks for taking the call. My question deals with kind of the geopolitical nature of what's happening. Freeport- McMoRan and Newmont are subject to some kind of changing, moving of the field post. In Indonesia, what your take is on the climate that way geopolitically, with tax rates and stuff, and how you are mitigating the risk there, how you evaluate it?

Nolan Watson

Yeah so right now, the vast majority of our cash flow comes from North America, which is a very stable mining jurisdictions. We do have about a third of our cash flow that comes from South America. Much of that is in Brazil, which is, I would say, moderately stable, and then only 2% of our cash flow is coming from the rest of the world. So we tried to, for the most part, have a politically stable portfolio of assets. Now having said all of that, its my experience that some countries have significant deterioration of their geopolitical stability, while other countries are getting stronger, and that ebbs and flows around the world, and it can change very-very quickly, and countries that are deemed to be politically stable to invest in today, may be can unstable five years from now, and vice versa.

And so I believe that, one of the powers of our model is, the diversification approach, and I feel that the more diversified that we get, so long as we try our best to feel like -- take politically stable jurisdictions, the better off our shareholders will be; because if we have no more than X percent of your portfolio and in any one country, it may have problems at any given time, then investors won't have to be overly concerned about it, because on average, the portfolio will stay the same, as things ebb and flow around the world. So I don't think the world is getting worse as a place to do business. I don't think its getting better as a place to do business. I just think it continues to change, and so diversification is the best way to defend against that.

Marc Johnson - M Partners

Okay. Thanks.

Operator

The next question comes from Ron Chung [ph]. Your line is open.

Unidentified Analyst

Thank you very much for taking my call. I see that we have a net loss of $74.6 million for the 12 months of 2013. Using $1,300 an ounce for the gold for this year, would that result in a net profit for the year?

Nolan Watson

Yes absolutely, and that's the intention and our expectation for 2014. That loss related to some goodwill write-offs in the Premier acquisition and then in the Colossus. But the actual operations themselves, even after depreciation, were profitable, and so, unless we are surprised by something in 2014, we don't have any plans for write downs. So we would expect profit this year.

Unidentified Analyst

Good. Thank you very much for answering the question.

Operator

I have no further questions in queue. I will turn the call back over to the presenters, for closing remarks.

Nolan Watson

All right. Well thanks very much operator, and thanks everyone for dialing into today's call; and as usual, if you have any questions, either on the financial side, feel free to phone our head office and ask for Erfan directly, or on the business side, myself and Dave and Denver, we are happy to answer any questions you may have after this call. So thanks again everyone.

Operator

Thank you everyone. This concludes today's conference call. You may now disconnect.

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