Sandstorm Gold's (SAND) CEO Nolan Watson on Q4 2016 Results - Earnings Call Transcript

| About: Sandstorm Gold (SAND)

Sandstorm Gold Ltd. (NYSEMKT:SAND)

Q4 2016 Earnings Conference Call

February 22, 2017 11:30 AM ET

Executives

Denver Harris - Investor Relations

Nolan Watson - President and Chief Executive Officer

Erfan Kazemi - Chief Financial Officer

David Awram - Senior Executive Vice President

Analysts

Robert Carlson - Janney

Operator

Good morning, ladies and gentlemen. My name is Joana, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Sandstorm Gold Fourth Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session [Operator Instruction]

Mr. Harris, you may begin your conference.

Denver Harris

Good morning, everyone, and thank you for joining today’s conference call. Speaking today will be Sandstorm’s President and CEO, Nolan Watson; our CFO, Erfan Kazemi; and Senior Executive Vice President, David Awram.

Please be aware that some of the commentary today 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. We have a few slides to accompany our executives’ remarks today. Slides are available on our website or through the webcast link.

Over to you, Nolan.

Nolan Watson

Thank you, Denver, and good morning, everyone, and thank you for taking the time for joining us this morning. We’re again pleased that we had another solid quarter, which included record production and operating cash flow of just over US$10 million as well as operating cash flow for the year of approximately US$39 million. As a result, at year-end, we had cash on hand of $21 million. And it's worth noting that despite having made a few royalty acquisitions subsequent to year-end, due to the strong continued cash flow, as of today, we have over $30 million of cash on hand.

In a couple minutes I'll be handing the call over to Erfan Kazemi, our CFO, to walk through the quarterly results and then to David Awram to provide a couple of other updates. We have prepared an online PowerPoint presentation, so if you have the ability to log into the webcast at this time, you'll be able to see these slides that we'll be discussing.

And as you know, on our quarterly call, I’d like to take the opportunity to summarize some of our more common questions we get from investors and share the answers with all investors before handing the call over to Erfan to go through the specifics of the financial results.

Over the past quarter the most common questions that investors have been asking are: Number one, what do we think will happen to Primero and therefore Black box. Number two, we've been getting questions relating to share price value drivers, investors want to know what are the things that will cause the value of our stock to go up and naturally for a growth company such a Sandstorm as part of that they want to know whether we can continue to buy streams and royalties to continue increasing the underlying value of our shares. And thirdly and finally, investors have questions relating to Luna and their recently announced merger and what those implications are for Sandstorm.

So, starting with the quickest and easiest question relating to Primero, candidly, as we have already made a good profit from the stream and since our internal models prior to the recent reserve decrease show that the Black Box mine only represented 3% of our corporate NAV, we're not at all concerned about the situation because of its general lack of materiality to us. This morning they announced a reserve decrease of approximately 50,000 ounces after adjusting for depletion, which when multiplied by Sandstorm 8% is about 4,000 ounces and therefore should only impact our view of NAV by less than 1% and our shares swing more than that on an hourly basis. So this is a non-event for us.

In addition, it's worth noting that the proven zone, which appears to be economic, has not yet been put into the reserves and I expect that it will be in the future. And not to mention the fact that the asset has significant exploration potential, which is simply not being realized because of the capital constraint to Primero. It's also worth noting that adjusted for depletion the M&I actually went up in the suggested resource statement.

Overall this is a good example of how being diversified and having 142 streams and royalties provides a level of safety and diversification that cannot be found by investing in a mining company. For example, we also have a royalty on a portion of Integra’s Triangles Zone and today they just announced they hit 72 grams over 15 meters in that zone.

Moving on to the next question about value drivers, as most of our investors know our approach to adding value changes depending on which part of the gold cycle we are in. At the moment, it appears that we are in an improved environment and although there does appear to be some temporary headwinds to continued rises in the gold price including potential interest rate rises, there's no question in our mind that the macro backdrop for gold is strong. And although we are clearly no longer at a bottom, we believe that now is still a good time to be buying things.

As a result, during this part of the cycle, we're still keen to acquire more streams and royalties. And although it is more challenging to make acquisitions in this part of the cycle due to the availability of equity capital to mining companies along with increased appetite for lending from banks and private equity groups, we still believe we will be able to make some smart acquisitions at Sandstorm to grow the depth and breadth of our portfolio. Specifically, we've already acquired 10 small royalties so far in 2017 and we're currently working on a few other acquisitions.

Having said all of that, this part of the cycle is my absolute favorite part of any cycle because not only are we able to pick our spot to diffuse more acquisitions, this is the part of the cycle where our partners can simultaneously raise more money to invest in the assets where we already have royalties. If you look at the slide of the presentation, you can see that in 2016, Sandstorm sold about 50,000 ounces of gold and because of that we realized cash flow of nearly US$40 million and despite that production, we ended up with more ounces on the books at the end of the year excluding any acquisitions that we made.

Specifically, there were an additional 84,000 ounces attributable to Sandstorm that were discovered during the year of which 63,000 ounces were from operating mines. What this means is that during 2016, we received nearly $40 million of cash flow and had even more ounces at the end of the year than we had at the beginning of the year without having to make any investments.

It’s again worth noting that at the beginning of 2016, there were almost no drill programs that were planned because it wasn't until after Brexit that the gold price went up and our partner started raising money, so most of those ounces were found in the last half of 2016. When we move forward to 2017 and when we sit here at the beginning of the year, we can already identify 33 specifically planned and funded drill programs on our asset bases. And we know that more drill programs will be created and funded throughout the year than what is on this list. Therefore, we expect this effect to continue into 2017.

And it's important to remember that unlike a mining company, we don't have to pay for any of these costs, it's free upside. This is the most important and enjoyable part of a cycle for us because we can not only make selective acquisitions to add value to shareholders, but simultaneously with no cost to Sandstorm, the value of our asset base is increasing as our partners raise money to invest in these assets.

Lastly, I would like to briefly address questions related to the proposed merger between Luna Gold and JDL. As many of you will recall, the Luna stream is one that we have already made more money on than we put into, so it has been a profitable investment for us. And despite them having ceased production, we continue to have a meaningful interest in Luna. As a reminder, when we restructured the stream over a year ago, we received a 3% to 5% NSR on the project as well as a 2% NSR on their 190,000 hectare greenfield operation, which AngloGold Ashanti has recently entered into a JV option on and is currently exploring.

In addition, Sandstorm has a meaningful equity stake as well as both a $20 million term debt facility and a $30 million convertible debt facility. As part of its planned merger, Sandstorm has agreed to convert the $20 million term facility to equity, while the $30 million convertible facility will remain outstanding. At the same time, the combined company is completing a financing, which has recently been upsized to CAD$75 million, which shows incredibly strong demand and market support for this newly invigorated story.

The combined entity is going to be named Trek Mining and due to the cash that is already on JDL's balance sheet, the combined entity will have over CAD$90 million on hand after they pay off their debt to Pacific Road. This cash is expected to be enough for the equity portion of the project funding to put the asset back into production with even more throughput in gold production capacity than before. And you can see on the slide that we have that the combined entity will have a number of benefits including a strong and experienced management team, a good capitalization, lots of exploration upside, et cetera.

Most analysts and investors had written a majority of these investments off for Sandstorm and we are encouraged that not only will we have a material royalty for which we could cash flow approximately $6 million per year on an asset that appears to be imminently going back into production, but because of the restructuring we undertook a year ago, we will now have equity and debt investments that will be worth over US$60 million.

Overall, we are encouraged and excited at Sandstorm not only for the increased value that we are seeing because of Trek Mining, but also because we're seeing investments made by our partners across our portfolio, which is driving value for our investors at no cost. Meanwhile, our cash balance continues to grow and is allowing us to make further acquisitions to create further value for Sandstorm shareholders.

And with that, I will hand it over to Erfan to discuss the financial results. Erfan?

Erfan Kazemi

Thank you, Nolan, and hello everyone. I have a few slides prepared to walk you through a brief summary of the Q4 annual financial. From a high-level perspective, Q4 was a good quarter for Sandstorm. You can see on Slide 8 that the company’s attributable production continue to grow in 2016 with 49,731 gold equivalent ounces reported in line with our annual guidance and a record for the company.

Precious metals and diamonds accounted for 82% of the gold equivalent ounces during the year, and another 18% came primarily from base metal projects. Our average realized selling price per ounce of gold was $1,254 and as you can see from the chart on the right hand side of the slide, the average price that we sold our ounces was similar to 2014 and slightly higher than 2015.

Annual revenue ended up at $62.4 million during the year and came to $16.5 million during Q4. That equates to an 18% increase over the 2015 full year revenue figure and a 67% increase when compared to Q4 of 2015. The growth in revenue was a result of a combination of factor, but was largely due to rising gold price and an increase in Sandstorm’s attributable gold equivalent ounces.

New contributors in 2016 were the Karma gold stream, Chapada copper stream, and Yamana silver stream, along with a few cash flow in royalties that were picked up as part of the Teck and Norilsk royalty packages that we acquired earlier in the year. Just briefly on a couple of those assets, firstly, the Karma mine, which announced commercial production in the fourth quarter of 2016, so we expect to receive our full 5,000 ounces under the gold stream in 2017. We like the exploration potential at Karma and the operator, Endeavour Mining, is planning to release the results from a 60,000 meter drill program that has been completed at Kao North and Endeavour is also in the process of completing a 30,000 meter program on near-mill targets like Rambo West. We look forward to seeing exploration results as they're released.

I will also chat briefly about the Yamana silver stream, which during 2016 delivered silver ounces from the Minera Florida and Chapada operation. And we will continue to receive ounces from these properties during 2017 and 2018 years, after which we expect to purchase silver from Yamana Cerro Moro project on Argentina.

Yamana stated that they are on track to see first production from Cerro Moro in early 2018 and the ramp up of site construction engineering is reportedly at its schedule. The updated mine plan at Cerro Moro shows an estimated 2019 silver production of approximately 9.9 million ounces. As a reminder, Yamana’s provided a backstop of the years 2019 and 2020 via the El Peñón mine in the event Cerro Moro is not up and running by then.

Moving on you'll notice on Slide 9, we've highlighted all of the producing streams and royalties in white and then the blue circles represent all of Sandstorm’s additional assets that are in development stage or exploration stage projects around the world. As Nolan was referring to, there's a lot of optionality in our portfolio that now totals 142 assets. When we break down the producing assets by jurisdiction, 45% of the gold equivalent ounces came from mines in Canada, 29% from the rest of North America, specifically the U.S., Mexico and Honduras, and the remaining 26% was from South America, Africa and Australia.

The asset diversification has certainly come a long way from the days of Sandstorm being the junior streaming company, but we're not content to stay where we are and the team is working hard to add to our producing and development stage assets and we intend to keep increasing optionality by adding high quality exploration assets to the mix as well. My last point on the production numbers is forward-looking. The company's forecasting 45,000 to 55,000 attributable gold equivalent ounces during 2017 and we are estimating that it will grow to over 65,000 per annum by 2020.

On the next slide, you'll see a comparison of some of the key 2016 financial results to the 2015 numbers. A line item that I would like to discuss is a net income figure, which was materially higher in 2016. One of the drivers of the increase was a gain on the revaluation of the company’s investments and a big reason to that gain was a change in fair value of the convertible debenture in warrant position that Sandstorm holds in Luna Gold.

Overall, we ended up recognizing a fair value increase of $39 million within the company's portfolio of investments. Due to accounting, half of this is recognized in net income and the other half is in other comprehensive income. And during 2017, we expect to monetize a portion of the more than $80 million that we hold in investments and loan receivables.

On to cash flow. Sandstorm’s cash flow from operating activities was approximately $10.1 million in Q4, which you can see illustrated in the right-hand chart on slide 12. That represents an increase of more than 100% compared to Q4 2015. The main reason for the change is due to the new streams and royalties in 2016 that I mentioned earlier.

Operating cash flow for the full year was $39 million, 26% higher than in 2015. That operating cash flow is free cash flow to Sandstorm and we are able to use that cash to repay debt, acquire new loyalties and buyback shares during the period.

Slides 13 provide a breakdown of the $39 million in cash flow by assets. We're certainly more diversified than we've ever been and with the number of development stage assets that are currently being developed, we expect to add to this diversification and significantly increase our cash flow over the next few years.

Lastly, I thought I’d speak to our available cash and debt capacity. Since the beginning of 2017, we've added a few million dollars of cash to our cash balance, Orezone bought back the Bomboré royalty adding another 3.6 million, and once the Luna Gold and JDL financing merger is complete, we hope to receive potentially some additional cash to partially settle some of the amounts owing under Luna loan. As a result of what I’ve just mentioned, Sandstorm could have over 40 million in cash in Q2 2017 and combined with our undrawn $110 million revolving credit facility, we would have over $150 million in available capital to make acquisition.

That's all for me. I will now pass the call over to Dave to update us on a few of the assets.

David Awram

Great. Thanks, Erfan. Nolan already got a chance to speak about the busy season of exploration our assets have ahead of them, which is pretty exciting for us. We will try to find some good ways to illustrate that impact to our shareholders over the next little while and of course we will be updating the market to any of the exceptional discoveries that are made on those assets. In the meantime, I have a couple of updates.

On Slide 15, we will start with Mariana Resources, the minority partner of the Hot Maden asset. They recently released a PEA-level study on Hot Maden that illustrates very robust asset. We agree that the asset is very strong and are eagerly anticipating the upcoming prefeasibility study to be created by the operator Lidya Madencilik anticipate it to be completed towards the end of 2017. As stayed in PEA, we anticipate that this asset is capable of producing close to 3,000 tons per day from underground-only operations.

Lidya Madencilik is very keen on streamlining the permitting process on this asset and head right into construction and as a result are proceeding on a path of least resistance. The planned course of processing will be production from a gravity and flotation concentrates of very rich mineralization, which should be relatively straight.

The production is anticipated to focus on the main gold and copper resources in the center of this photo with secondary production coming from the new zone of mineralization to the south. However, as you can see in this photo, the alteration trend extends much further to north and south of the two discovered zones of which there is yet to be any drilling or serious exploration work.

In addition to our 2% NSR, we also purchased almost $9 million units in financing of Mariana, which is currently up over 300%. This is an exploration project that has already contributed to Sandstorm’s bottom line and we anticipate will do so for years to come. We'll keep the market updated as to how the studies on this asset develop.

Flipping to Slide 16, you will see a cross section of the Bayan Khundii project owned and operated by Canadian company Erdene Resource. Erdene has been operating in Mongolia for over 15 years and we feel this project ranks as one of the best discoveries to-date in the prolific Tian Shan gold belt. This low sulphidation epithermal project is comprised of a series of quartz, and quartz hematite being hosted in volcanics with broad zones of ore-grade mineralization.

What is notable about this discovery are the high grades and the consistency of mineralization from section to section. This was a discovery made in 2015 and we were able to get involved very early with a royalty in the asset and an equity investment in the company. Drilling to-date has been very positive and frankly has yet to disappoint. Of the 90 holes in the main zone drilled in assay to date, 23% of those holes have one or more intercepts of 1 ounce or greater gold grades and 30% of all the holes have ended in mineralization.

If you take a look at this cross section, you can see the typical characteristics of consistent mineralization across a wide width and a drill depth that only goes down to average depth of about 90 meters. Metallurgical results so far have been favorable with both high-grade and low-grade composites testing, having recovery rates of 90% or greater using gravity and cyanide leaching techniques.

The trend has already been traced over 1.7 kilometers in length with lots of open areas in all directions and more ore-grade intercepts have been made on a long straight to 3.5 kilometers away. So, needless to say, there’s a lot more work that needs to be done on this discovery. Our equity position alone is worth almost four times of what we paid for it and Erdene is about to close on another CAD$12 million, so there are plenty funds to advance the project, to meeting resource and to further work on that.

Lastly, on Slide 17, I'll speak about the recently announced developments at the Chapada mine in Brazil operated by Yamana Gold. True to what we were anticipating when we completed this transaction almost 18 months ago, Chapada is transforming into more of a district place and just a standalone mine. Over the last year, Yamana spent lot of exploration dollars examining both near-pit and more distant targets. Of note are the near-surface Sucupira and Baru targets.

Yamana has been working on the Sucupira for a number of years now and has defined an inferred resource of 35 million tons at average grade of 0.756 copper equivalent and is currently defining this as an underground target. Baru is a recent discovery and it appears to represent another one of the flat line tabular bodies and it lies immediately adjacent to Sucupira ore body, which is immediately adjacent to the existing main pit. The difference with Baru is that despite its lower grade so far, it is closer to the surface than Sucupira. This mineralized body is still open to the southwest.

In addition to these mineralized bodies, there's continued drilling on District exploration program with targets of Bom Jesus, Curicaca and others getting significant exploration applied to them. Overall Yamana has drilled over 61,000 meters of drilling at near mine targets and an additional 9,800 meters of drilling in District wide exploration during the year of 2006, all of these areas of exploration fall under our stream agreement.

Moving over to the Chapada mill, further upgrades have been taken to improve recoveries to the copper concentrate. Yamana had previously discussed to retrofit the existing cleaner tanks, which is being completed and has been providing the optimization risk in recoveries as expected. In addition to this, Yamana has decided on [indiscernible] in order to increase retention time for the concentrate, which is an optimization that we had recognized upon our first site visit. These improvements along with others to the crush and grinding section are anticipated to be completed by the fourth quarter of 2017. Chapada is definitively a cornerstone asset for Yamana. And with the exploration success that occurred, we can anticipate – expect additional capital investment in this asset for years to come.

So with that, I'll turn it over to the operator and we will begin the Q&A session of call.

Question-and-Answer Session

Operator

[Operator Instructions] Thank you. Your question comes from Robert Carlson from Janney. Please go ahead, Robert.

Robert Carlson

Hi, guys. First, congratulations on the time and effort you have done putting together this package of streams. While it might not be happening as fast as all of us wanted it to, it’s obviously happening and I think we have some great assets. But my question is could you take the top three streams that will be coming on and identify those and when we think those will come to fruition?

Nolan Watson

Yeah, the – I’d say the most significant ones coming online over the coming years would be the royalty from Aurizona, as that starts to back up the royalty from Hot Maden that we talked about.

Robert Carlson

When will – the first one would come online when?

Nolan Watson

So they're currently guiding end of 2018. We know that there will be a period of ramp up time and realistically we're putting it into our current cash flow models, I think, towards – the material cash flow starts in 2020.

Robert Carlson

And number two?

Nolan Watson

One of the more material royalties that will be coming online will be Hot Maden, which we anticipate coming on 4 years, 5 years from now. But based on the PEA that was just recently released, the cash flow is expected to be $8 million a year at today’s commodity prices. So that will be a very material one for us when that comes on.

And obviously the most material one coming online over the next couple years is Cerro Moro, which Yamana is currently in the middle of constructing. It's supposed to begin operations in 2018 and under our contract during 2018, we still have interim silver deliveries from the other Yamana mines, and so we are not purchasing from Cerro Moro in 2018.

So, as they ramp up toward the end of 2018, we will begin full purchases under Cerro Moro at a barely full run rate beginning in – beginning at 2019. So those are the three main ones that will be coming online and couple of others worth noting would be Coringa, which is currently being developed by Anfield Gold and we expect that to be online over the next couple years.

And then – I know I'm past three now, but there is one that’s still going take another 8 years or 9 years, but it is very material for us on a cash flow basis. So it’s anywhere in our cash flow projections just because of the time line, but it’s the Hugo North Extension and Heruga streams from Oyu Tolgoi, which should cash flow to us anywhere from $7 million to $20 million a year depending on the scenario, so a lot of things coming online. The benefit is we’ve already paid for all of it. There is no capital expenditures we have to make and just sort of sitting and waiting for the cash flow to increase.

Robert Carlson

Thank you.

Operator

Thank you. There are no further questions at this time, you may proceed.

Nolan Watson

Great. Well, I take that as a sign that we answered the questions appropriately as we went through. So thanks everyone for calling in and as always feel free to call us here directly at Sandstorm and happy to answer any questions you might have. Have a great day.

Operator

Ladies and gentlemen, this concludes today's conference call. We thank you for participating and we ask that you please disconnect your lines.

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