Is Sandstorm Gold Too Bullish On Hot Maden?
Summary
- Sandstorm's latest deal with Hot Maden has closed.
- The company now owns a 30% interest in the ultra high-grade asset, and still plans on converting it into a gold stream.
- The company is forecasting some pretty strong returns from the asset, including 100% production growth in 5 years.
- I'm a little more confident of this transaction after spending more time processing it, although the risk is still there. I give more thoughts below.
This article was first available to subscribers of the Gold Bull Portfolio, a premium service offered by Gold Mining Bull.
It's official: Sandstorm Gold's (NYSE:SAND) deal to acquire Mariana Resources (OTC:MRLDF) has closed.
For some background, Sandstorm paid $175 million to acquire Mariana, mainly to buy its 30% interest in the Hot Maden project, located in Turkey. Sandstorm issued 32,832,813 new shares plus $48 million in cash to close the deal; Sandstorm paid a substantial 84% premium to Mariana's previous closing price.
As I pointed out in a previous article, I felt the deal was a little confusing since Sandstorm already owned a 2% royalty on Hot Maden and had never acquired one of its royalty or streaming partners outright before. The company has gotten a little creative, as Sandstorm now owns 30% of Hot Maden with the rest owned by partner Lidya (a Turkish company), but it plans on converting its interest into a gold stream. After all, Sandstorm is a streaming and royalty company, not a gold miner.
Sandstorm also gains several other exploration assets, including the 100% owned Las Calandrais gold-silver project in Argentina (500K+ gold ounces), and the earlier-stage, 80% owned Bondoukou gold project in Cote D'Ivoire. The exploration assets will be spun off into a new company, which Sandstorm will own, and Sandstorm will gain royalties on each asset.
However, Hot Maden is really the prize in this deal. A Preliminary Economic Assessment released on the 3.43 million ounce indicated resource projects an after-tax NPV and IRR of $1.37 billion and 153% respectively (100% basis) with estimated all-in-sustaining costs of less than $400 per gold equivalent ounce. That puts Sandstorm's share worth $411 million, significantly higher than the price paid in the deal.
I've had a lot more time to process the deal since that last article, and I am a little bit more confident in this acquisition for Sandstorm, although I think the company has some pretty bullish expectations on the asset. One reason I'm a little more confident is the fact that Sandstorm confirmed it is in discussions with Lidya in a possible equity to gold stream conversion deal (see its video posted on this page), and the discussions actually began before the deal happened.
Note: Sandstorm was not able to talk much about the deal previously due to British Takeover rules (questions weren't even allowed on the previous conference call), but now that the deal has closed, there's more information available.
(Credit: Sandstorm Gold Presentation)
This deal diluted previous shareholders by 19%, but the growth potential is 100% as Sandstorm is projecting 135,000 gold equivalent ounces by 2022 (although I think this language is a bit deceiving, because Sandstorm also spent $48 million of its cash to close the deal).
Sandstorm is bullish on Hot Maden, plain and simple. It's an anchor asset for the company. But is the company too confident?
Along with the production growth, the company expects an increase of annual operating cash flow to more than $100 million, using $1,250 gold prices, a significant jump from the $50 million or so in cash flow expected for 2017, as you'll see below in the company's presentation.
That's after-tax, free cash flow, which is quite an impressive sum given Sandstorm's current $577 million market cap. Sandstorm operates a low-cost business model and has minimum administrative expenses, so most of this cash flow will go in its pockets.
(Credit: Sandstorm presentation)
Of course, this also means that Hot Maden is going to account for about half of Sandstorm's production and cash flow by then, making this its most important asset by far (although it's possible another large deal will be completed before then).
This was one of my main criticisms of the deal initially. I still feel this way - while the deal could carry some really strong returns, if the deal doesn't work out for whatever reason (and there are numerous reasons a gold project may not pan out), it will really hurt the company and erode investor confidence. If the deal works out for Sandstorm, the company could easily make 3X or 4X on its original investment.
As a previous Mariana shareholder, I held on to my shares, which will now be converted into Sandstorm shares. Along with my previous position in Sandstorm, the position will be a significant one in my gold portfolio.
My current strategy: I may look to trim my Sandstorm position in the future, but I will wait for news of a potential gold stream deal before making any decisions. Having an established, local partner in Lidya increases the likelihood of a positive outcome for Sandstorm.
While the 30% equity position is nice for Sandstorm, a gold stream is definitely preferred; after all, Sandstorm is a gold streamer, not a miner, and the company is on the hook for 30% of the capital expenditures at Hot Maden. In conclusion, this deal ramps up the potential rewards for shareholders, but also increases the risk of holding shares, in my honest opinion.
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Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
This article was written by
With over a decade of experience in the investment industry, I am a highly skilled private investor with a proven track record of success in the commodities and hard assets sector. My areas of expertise include investing in gold and silver miners, royalty and streaming companies, pure exploration companies, as well as oil and gas producers and MLPs. My comprehensive understanding of these markets and my ability to identify and capitalize on profitable opportunities have enabled me to consistently deliver strong returns for my subscribers.
Analyst’s Disclosure: I am/we are long SAND. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (43)
The risks are getting bigger and bigger IMHO.
Whats the rationale in these kind of companies not to use debt as the main source to finance M&A?
http://bit.ly/2v5rLLG
I gues all the news about Turkey isn't a big issue in the US.
I live in Europe. And I can tell you. That Turkey did completely change in the last year. It's a dictator that is running the show now. It's a dangerous place now. I would not invest in Turkey.
I had SAND on my watchlist. In my opinion they made a very big mistake.
Re.:http://bit.ly/2v5O1F1Ron Ho
NON EXECUTIVE DIRECTOR
(Age 38) CPA, CA, CFARon Ho has been with Sandstorm Gold for the past 7 years, focused on structuring mine financing transactions and corporate development. Prior to Sandstorm, he served as the Chief Financial Officer for SNS Silver Corporation, where he contributed to equity capital raises and project evaluation and development and was an Equity Analyst at Raymond James Ltd. where he was responsible for sector institutional research. Mr. Ho began his career at Deloitte & Touche, focusing on public company financial reporting in both the U.S. and Canada. Mr. Ho is a Chartered Accountant, holds the designation of Chartered Financial Analyst charter holder and received a Bachelor of Commerce from the University of British Columbia.Best
ViperED's chart is accurate. Please see the April 25th close for SAND. You might also notice that the Mariana stock rose simultaneous with the drop in SAND and I believe the combined market caps of the two was neutral during the period as gold/silver was also dropping. In other words, the market did not revalue Mariana during this transaction. Also during this period GDXJ sold off a lot of SAND shares in a re-balance with had a negative impact on SAND and other stocks held within GDXJ. You may also want to note the price of GDXJ, April 12-May 4. The April 12 close was $38.04 and the May 4 close was down to $29.65 indicating falling prices for SAND and this juniors fund during this time period.For those that have misunderstood this transaction and did not listen to the limited information from SAND that they released during this transaction, and have explained a little further since this transaction closed, here is a FAQ video that explains SAND's position as a royalty/streaming company. http://bit.ly/2v8kRF8
In particular, listen to the questions/answers at 1:30 & 2:18 of the video. You may want to actually watch the whole video as it may address other false rumors that you may be using to make your investment decisions on SAND.SAND and/or the streaming/royalty business isn't for everyone. It is however better to evaluate this with facts instead of emotion and distortions of what is being said and done or not done by SAND management.
