- Vancouver-based Sandstorm Gold released its preliminary first-quarter production results on April 4, 2022.
- On May 2, 2022, Sandstorm Gold announced that it acquired Nomad Royalty and nine royalties, and one stream from BaseCore Metals LP.
- I recommend buying SAND at or below $6.75 with a possible low below $6.
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On May 2, 2022, Sandstorm Gold announced that it acquired Nomad Royalty and nine royalties, and one stream from BaseCore Metals LP.
You can access the company presentation by clicking here.
1 - 1Q22 Production and Revenues
1.1 - Gold equivalent production in 1Q22
Sandstorm gold said that the cash operating margins were approximately $1,600 per attributable gold equivalent ounce. Thus, the profit margin for 1Q22 was about $288 per ounce.
Note: To get the price of gold realized, I have divided the revenues for 1Q22 by the gold equivalent production.
1.2 - Revenues for the 1Q22
Sandstorm Gold said that the revenues for 1Q22 were $35.3 million, up 13.5% from last year's quarter and up 18.4% sequentially. As shown in the chart above, it is a record.
2 - Acquisition of Nomad Royalty and another nine royalties plus one stream from BaseCore Metals LP
Sandstorm indicated that the transactions added an estimated $1.1 billion to its portfolio. The transaction is expected to close in H2 2022.
2.1 - Acquisition of Nomad Royalty
Sandstorm and Nomad Royalty Company Ltd. (NSR) have entered into a definitive agreement whereby Sandstorm will acquire all of the issued and outstanding common shares of Nomad pursuant to a plan of arrangement under the Canada Business Corporations Act. The implied equity value of the Nomad Acquisition is approximately $590 million.
As can often be the case, in this type of merger-acquisitions, the ones who suffer the most are the acquirer's shareholders. It is evident in the chart above, and I wonder what possible advantage we can find in this merger?
Bigger is not necessarily better, and I am afraid this transaction did not pass the smell test looking at the market reaction. The transaction is estimated at $590 million.
Nomad owns a portfolio of 20 royalty and stream assets, of which seven are producing mines. In 2021, the portfolio generated $27 million in revenue and approximately 16K GEOs.
Nomad’s 2021 production consists of 85% gold and silver assets, which match Sandstorm’s precious metals-focused acquisition strategy.
Note: Nomad shareholders will receive upfront consideration of 1.21 Sandstorm Shares for each Nomad Share held, which implies a consideration of C$11.57 per Nomad Share based on the closing price of Sandstorm Shares on the Toronto Stock Exchange (the “TSX”) on April 29, 2022.
2.2 - Acquisition of nine royalties and one stream from BaseCore Metals LP.
Sandstorm has agreed to acquire nine royalties and one stream from BaseCore Metals LP for total consideration of $525 million, payable as to $425 million in cash and $100 million in common shares of the Company ,and together with the Nomad Acquisition.
Concurrent with the BaseCore Transaction, Sandstorm has partnered with Royalty North Partners Ltd. to sell a portion of a copper royalty acquired in the BaseCore Transaction and retain a silver stream on the asset.
It is a significant royalty and stream addition with a price tag of $525 million.
The most irritating from my perspective is that the company is paying part of the deal with ordinary shares of the company. It is about 14 to 15 million shares to be added to the shares outstanding. After the deals are completed, the share outstanding is expected to climb to 284 million shares.
The company initiated a buyback program in 2018 and bought more than 16.8 million shares at the end of 2021.
What was the purpose of such expense? All the benefits expected just vanished in one single massive transaction.
2.3 - 2022 Guidance enhanced
The transactions increase Sandstorm's 2022 production guidance by approximately 22% from 65K–70K gold equivalent ounces GEO to 80K–85K GEO and increase long-term production guidance by 55% from 100K GEO to 155K GEO in 2025. It is too early to evaluate the real benefits and venture an estimated stock price from those new ranges.
3 - Stock Performance
Sandstorm Gold continues to be one of the worst performers in this segment and is down 9% on a one-year basis. The market punished the stock today.
4 - Investment Thesis
As I have said in my preceding article, SAND is an excellent trading tool. Still, I am not confident enough to consider the stock a proper long-term investment like Franco-Nevada (FNV), Royal Gold (RGLD), or Wheaton Precious Metals (WPM).
I was hoping for some respite after the Hod Maden near-miss experience, but SAND did it again. The company suffers from the syndrome called "folie des grandeurs," where they continuously try to bite off more than they can chew. It is noticeable in the presentation.
CEO Nolan Watson said in the press release:
Today’s announcement propels the Company forward in both size and scale while solidifying Sandstorm’s position amongst its peers as the highest-growth streaming and royalty company. We believe that precious metals and copper are poised to materially outperform the market in the coming years, and we are excited to provide investors with exposure to long-life, high quality, and low-cost assets focused on gold, silver and copper.
I am sorry to say, but investing in a company that does not seem to put its shareholders' interest first is incredibly challenging. The company waited years before finally starting paying a dividend, and those recurring deals tell me that I am not an essential part of the company.
Thus, one great strategy that I often recommend in this sector in my marketplace, "The Gold and Oil Corner," especially for SAND, is trading a minimum of 60% LIFO of your whole SAND position and keeping a core long-term position for a much higher stock price.
It is the best strategy (the backbone of my marketplace) that will shield you from "surprises" like the one today. However, only US investors can trade LIFO. Please read the note at the end of the article.
Technical Analysis and commentary
Note: The chart is adjusted for dividends.
SAND forms an ascending channel pattern with resistance at $9 and support at $6.75.
This week's trading strategy is to sell LIFO at a resistance range of $8.80 to $9.15, about 40% of your position. However, with the recent significant drop, I recommend trading in a lower range between $8 and $6.75. (see chart)
I consider $8 a mid-resistance, and I suggest selling a part of your trading position at this level. Selling about 20% at or above $8 and another selling move at or above $9 could be reasonable.
The gold price is weakening as we approach the Fed decision to hike interest, and I believe SAND might drop at or below $6.
In short, I recommend buying slowly SAND below $7 with a potential new low around $6-$5.75.
Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS), though it is permitted in the United States to generally accepted accounting principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stock, one for the long term and one for short-term trading.
Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.
Author's note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks.
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This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of SAND either through stock ownership, options, or other derivatives. 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.
I trade short-term SAND mostly.
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