Sandstorm Gold Ltd.
Q4 2020 Earnings Call Transcript

Published: 12 Feb 2021

[Operator:]

Good morning. My name is Lindsey and I will be your conference operator today. At this time, I would like to welcome everyone to the Sandstorm Gold Conference Call. All lines have been placed on mute to prevent any background noise. Please be aware that some of the commentary 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. After the speakers' remarks, there'll be a question-and-answer session.

[Nolan Watson:]

Thank you, Lindsey. Good morning, everyone, and thank you for calling into this Q4 and Annul Earnings Call for 2020. Today, I will provide a brief update on the company for investors and then Erfan, our CFO, is going to walk us through the Q4 annul results, and then Dave Awram will provide a brief update on a couple of our assets. And after that, we will turn it over to the operator for a question-and-answer period. And if anyone has any questions that don't need to be part of the live Q&A, you can ask those through the web portal. And we'll ensure that each question we get there, you will get a direct response from us after this call. At this time, we are going to be going through a prepared PowerPoint presentation all in the web portal, so if you're able to please turn your attention there now. As everyone is well aware, COVID brought many challenges to 2020, including mine shutdowns, as well as operational curtailments, which led us to withdraw our guidance for the 2020 year. And yet, I am pleased that we're reporting both record Q4 and record annual revenue, as well as record Q4 and record annual operating cash flow. It's our expectation that 2021 will not have the same shutdown challenges of 2020. And as a result, I'm pleased that we are now issuing production guidance for 2021. You can see here on slide four, we're expecting Sandstorm's attributable gold production to increase from 2020, and we're providing an initial guidance range for 2021 between 52,000 to 62,000 gold equivalent ounces. Assuming the midpoint to this range and unexpected gold price of around $1,800 an ounce, this would translate into record revenue of approximately US$100 million, net operating cash flow after tax and after D&A of approximately US$75 million, which would also be a record for the company. Therefore, overall, we not only had record cash flow in 2020, we're expecting to set a new cash flow record in 2021, if gold prices continue to stay strong. It is my opinion that there are really three primary reasons that makes Sandstorm #an exciting investment going forward. The first is that our existing portfolio of royalties and streams is performing well and is generating record cash flow. The second is that our primary growth asset Hod Maden is exciting catalyst happening in 2021, which I'll talk a little bit more about later. And the third is that we have more capital to allocate than we've ever had before. Specifically, you can see on this next slide that between Sandstorm's cash on hand, our expected operating cash flow this year and our undrawn revolving line of credit, we have $0.5 billion that we can allocate to either making acquisitions or returning capital to shareholders through either share buybacks or dividends. This is an important catalyst for Sandstorm. And it's one of the things that sets us above and apart from our relative competitors.

[Erfan Kazemi:]

Thank you, Nolan. Hello, everyone. Thank you for joining us today. I'd like to take some time to walk through the financial results for both the fourth quarter and year-end and highlight a few noteworthy items. To begin, I think it's important to recognize the 2020 was the year unlike anything we've seen before. Despite an unforeseen decreased and expected production from a few Sandstorm's platform of royalties as a result of the pandemic, Sandstorm had another record breaking year in terms of both revenue and cash flow from operations. This chart here shows the trend of gold production over the last decade and resulting revenue for Sandstorm. While the number of gold equivalent ounces sold in 2020 was close to Sandstorm 2017 fiscal year, the run-up in the price of gold assisted Sandstorm's financial results. We're optimistic moving into 2021, as we have no reason to expect further delays to production as a result of the pandemic. And so, we expect Sandstorm to be back on track with setting record production levels over the years. This time in a much stronger gold market.

[David Awram:]

Great. Thanks, Erfan. So, if you were familiar with our investor presentation, then you would have seen something similar to what we have on slide 18. Since we started Sandstorm we've been tracking the amount of meters drilled on the assets that we have streams and royalties on. Our team has compiled the data for 2020. And you can see that the previous four-year trend continues with over 0.5 million meters drilled.

[Operator:]

Our first question comes from Heiko Ihle with H.C. Wainwright. Your line is now open.

[Heiko Ihle:]

Hey, guys. Thanks for taking my questions and congratulations on another pretty successful year and even growing pretty trying times there. You mentioned that you'd be willing to step into the market and repurchase shares. Just in general, your prepared remarks seems to be extremely focused on your balance sheets and use of cash, much more so than I've seen before. I'm just thinking out loud here. Are you essentially stating that royalties, right now, are at prices where large scale acquisitions are not as sensible as they maybe used to be, and then you're looking for alternate uses of funds.

[Nolan Watson:]

Yeah. Thanks for the question. We're saying nothing of the search. I think, the comments that I went through emphasize that we are a growth company. We are focused on a growth company. As many people know we got within inches of completing some deals last year, that just for very efficient didn't realize. And that's just sometimes happens in nature of our growth business where you're swinging big and trying to grow. And our pipeline right now is deeper in terms of large potential transactions than it's been and as long as I can remember. And I do think we're going to grow in 2021 with acquisitions.

[Heiko Ihle:]

I'll not mention anything about the deal that you just talked about. But building on the last question, more importantly, your answer, how shocked should we be to see you do a transformational acquisition to say high eight figures, low nine figures. I mean, you could easily do a hundred plus million dollar deal by the end of the year. And building on that, what are the prices that you're seeing for these types of royalties when compared with 12 and 24 months ago? Thank you very much.

[Nolan Watson:]

Yeah. I would say shareholders should not be surprised if we do that. In fact, I think, they should hopefully expect that. In terms of pricing and what we're seeing really depends on the nature of the transaction. We're still -- we're working on some transactions right now that are -- we think there'll be -- if we could complete them over 10% IRRs, but they're more in the -- well below a $100 million size transaction. And it's when you get up into that $200 million, $300 million, $300 million or $500 million per transaction, that the IRRs do come down a little bit, but the asset quality and expiration potential of the assets goes up a lot too. So there's a bit of give and take there. And we -- we're not sure which transactions we're going to land yet, but based on what we're seeing in our pipeline, we can.

[Heiko Ihle:]

Excellent. Thank you very much. I'll get back in queue.

[Nolan Watson:]

Thank you.

[Operator:]

Our next question comes from Matt Farwell ROTH Capital. Your line is now open.

[Matthew Farwell:]

Hi. Good morning. Thanks for taking my question. I was wondering if you could comment on some of the news that we're reading about. If you go North in Mongolia, I'm sure there's not a whole lot you can say, but it does -- is there any risk on timing of that project, based on what you've read and knowledge has it as, given your proximity to the project? And also, is there any risk that the royalty terms could change?

[Nolan Watson:]

So, I start with the second part of that first, there's no risk that I'm aware of that could cause a royalty terms change. We've got a stream on the Heruga and Hugo North Extension on Entrée joint venture grounds. And those terms are kind of set the stone and nobody really has the ability to unilaterally change them on us, and we're not inclined to change them either. So, those should stay the same. With respect to the timing of the asset moving forward, I think that there's always risk. When an asset is not yet fully complete construction, there's risk to timelines. Having said that, this asset is so critical and central to the proper functioning and funding of the Mongolian government that ceasing its forward momentum would bankrupt the whole country. So, the government likes to make lots of noise, but that's all it can ever be. Otherwise, there'll be cutting off their own heads. So, I'm not too worried about long-term delays. Yeah, short-term noise.

[Matthew Farwell:]

Interesting. And then just to follow-up on the M&A environment. In terms of the types of projects you're looking at, are you finding, given pricing that you may have to focus more on development or exploration properties? Or do you still think that you can acquire properties with immediate cash flow?

[Nolan Watson:]

Yeah. So, both. We are focusing on everything from things that are in production to development, to exploration. What we are finding in terms of how we want to allocate capital, it's a priority right now to things that are in operations. I would say the majority of the things that we think we have a reasonable chance of completing are things that are producing now, but we're not stopping looking at exploration. It's just not the priority right now.

[Matthew Farwell:]

And when you mentioned the large ticket price for some of those ideas or transactions, and then when you look at your liquidity -- a lot of your liquidity or capital, as you say, is in the form of credit, is it your intention to use credit for some of those larger transactions? Or would you -- what would you rely on a share issuance?

[Nolan Watson:]

Our plan would be to use credit first.

[Matthew Farwell:]

Got it. Great. Thanks for taking my question.

[Operator:]

Our next question comes from John Tumazos with Independent Research. Your line is now open.

[John Tumazos:]

Thank you. On your website you listed 24 producing royalties you have, and then, development and advanced exploration about three dozen projects. Yesterday, Kinross classified global market has reserved 6.4 million ounces targeting 2024 output. What are the two or three warmest of those three dozen or so projects that you think will have a specific date and timeline in the next five years?

[Nolan Watson:]

Typically the timeline in the next five years, all their projects that are not included in our stuff .

[David Awram:]

Yeah. So, the global market certainly is one of those. It's great to see that upgrade happen. Kinross really pushing that project forward. So that -- that's going to be a, I think, quite a big contributor once it does come online and it's not -- currently isn't in any of the discussion or guidance or cash flow profiles that we may have illustrated in the past. But there's also really kind of a few of these smaller ones. There's a lot of Canadian -- little Canadian assets, that are in there. They're not huge contributors to it as well, too. But there either some kind of bulk sampling type of format, or also in -- but also in -- looking, going through feasibility in development and construction phases. Of course, another large one that we do expect to see more information on later on this year is Aqua Rica, which, of course, is our joint venture between Glencore, Yamana and Newmont. As they outline more details and updated feasibility study on really what that would look like. And of course, that's a huge contributor to us, and that potentially happens sometime by 2024, 2025 timeline as well too. So, that's kind of some of the bigger ones, that would have, I think, significant impact to them that are starting to firm up more serious dates in front of them in terms of when we might actually start seeing production from them.

[John Tumazos:]

Thank you. If I could ask another following up on your earlier question. Your equity stake is 22% in Entrée resources. Is that too much? How do you expect to get out? Or is your game plan to swap that for a stream or royalty -- bigger stream of royalty, or do you see the entire company sold out or to sell it back into the stock market for a little profit? And I have moments when I root for Rio Tinto to dynamite the project. So they earn more on their copper assets in Utah and Chile. I hope before I die one company dynamites the project when they're getting screwed over in some screwy country. I'm just wondering what your game plan to get out of that one is?

[Nolan Watson:]

Yeah. It’s a great question. I think that, that right now, the way we're looking at it is that there are -- their shares are fundamentally and deeply undervalued. And I would say that they probably think the shares are probably closer to worth $2 or $3 compared to the $0.50 they're trading at. So, we're happy to -- the shares maybe pick some more up in the market, which we do from time to time. And then in terms of exit strategy, the way you win others, there's a lots of different ways to win when you buy something that deeply undervalued. You can either sell to potential strategic acquirer. You can wait till the project is more advanced and the market is paying more reasonable price and you can liquidate it into the markets, or you can just continue to hold. I think that a lot of people don't realize for a company like Entrée is that once their round is being mined on, they should cash flow close to a $100 million a year, every year. And Sandstorm owns 22% of that company. And if we just forced a dividend that's $22 million a year to our shareholders. It's a mine that should last several generations and went to $22 million in your forever. It's a lot more than the $15 million we paid for the shares.

[John Tumazos:]

If I could impose with one last one.

[Nolan Watson:]

Yeah.

[John Tumazos:]

The slide with 30% of your market cap is capital available for acquisitions, might frighten some investors. We don't know what we're buying. If the corporate asset mix is going to change, it's like a special purpose acquisition corp. Some of your recent investments are Mongolia, Burkina Faso, Turkey. Is it too much to constrain your next investments to the Americas or first world, given that you have a number of recent investments that are in other places. I was trying to get a fund manager into your stock a couple of days ago. And the guy was upset that at the time, he put almost half your assets into Mariana's for Hod Maden.

[Nolan Watson:]

So, I think the answer to your question is it depends on the specific transaction. You're looking at places like Burkina Faso, that's less than 4% of our NAV. When people make statements like we put half of our value into Hod Maden, it's just sort of an ignorant statement because yes, it will be half of our production, but we are a $1.2 billion market cap company that bought that investment for $180 million. So we -- for 15% of our market cap, we bought 50% of our production. If we can do deals like that, that are that accretive to shareholders over and over and over again, we'll do it. And so, it just depends on what deals are in front of us. I think that we've shown over time that we're willing to be patient and methodical and thoughtful about how we grow the company and what we buy to make sure it is intelligent and accretive to shareholders. And we'll continue to do that. And if the next best deal happens to be in Canada, we'll do that deal in Canada. We're going to go with a smart deal there.

[John Tumazos:]

So, as I look at your slide -- with your output slide 15 by mine or revenue by mine, it's the seventh largest mine, Relief Canyon, that's in North America and the eighth Black Fox and the 10th, 11th, and 12th are smaller mines. It might be closer to their end of life. So, it's just -- your first six mines are four in Latin America and two in West Africa, but it wouldn't hurt to have something big in the asset mix in U.S. again.

[Nolan Watson:]

Yeah. I definitely do not disagree with that.

[John Tumazos:]

Thank you. I'm a shareholder. Good luck. Sorry to pest you.

[Nolan Watson:]

Okay. Thanks, John.

[Operator:]

Our next question comes from Josh Wilson with RBC Capital Markets. Your line is now open.

[Josh Wilson:]

Thanks. I'm just wondering for Santa Elena, when the Emer Teneo deposit fermented, is there any sort of visibility on how that's going to affect the stream payouts and what that looks like a longer term?

[Nolan Watson:]

Yeah. So, with the Santa Elena transaction that we originally put together, we did put a displacement agreement in terms of displacement of ore going to the mill. So, we have to have those discussions with them. Obviously, as we get into 2021, there'll be more emphasis -- really kind of finally started to see some type of ore, at least development ore coming from Emer Teneo looking to get processed at that Santa Elena mill. So that will become a point of discussion. I think this year with First Majestic as to how that displacement clause works in that original transaction that we did with them.

[Josh Wilson:]

Okay. And then as it relates to so, we're looking for an update on EIA status, as well as the feasibility study? The feasibility study links to the, I guess, delivery first or the EIA, or there's two independent items.

[Nolan Watson:]

So, those two are independent items. Feasibility study is in its very, very advanced stages. The initial applicants for the EIA have already been submitted. And then the final EIA is expected to be submitted here in Q2 or slightly before that. So, I went -- we're hoping that in Q2, both of those catalysts will happen.

[David Awram:]

It's been a process of really Lydia prioritizing the EIA from their perspective as operators of the project -- really get into the EIA process, getting it the final approval and it has been a priority for them or as opposed to completing the feasibility study.

[Josh Wilson:]

Great. Those are all my questions. Thank you.

[Operator:]

There are no further questions in queue at this time. I'll turn the call back over to Mr. Watson for any closing comments.

[Nolan Watson:]

Well, thank you, Lindsay, and thank you everyone for phoning into today's call. And as always we're around. And if you have any further questions, feel free to contact us here at the office. We'll be happy to get back to you. Thank you.

[Operator:]

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