Sandstorm Gold Ltd.
Q1 2018 Earnings Call Transcript

Published: 2 Aug 2018

[Operator:]

Good morning. My name is Leonie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sandstorm Gold Limited Second Quarter Results 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 will be a question-and-answer session. [Operator Instructions]. Thank you. Mr. Watson, you may begin your conference.

[Nolan Watson:]

Thank you, operator, and good morning everyone, and thank you for calling into our second quarter call. This morning I am going to be providing a brief update on the business and answer typical investor questions as normal. And then Erfan will discuss the financial results, and after that David Awram will walk through a few asset updates. After that, we will turn it over to the operator for questions and for a general question-and-answer period as normal. So with respect to questions from the web portal in order to make things go more smoothly and quickly but also to get to every investor, answers to their questions, we're going to directly reply in email or if you leave your number with a follow-up call to any questions that come in from the online portal. So, feel free to type as many questions into that portal. And if you have questions that you want us to follow-up on, we'll do that directly with you next week. So as everyone can see from these second quarter results, our portfolio is continuing to perform very well. During the second quarter, we recognized operating cash flow excluding changes in working capital of $12.3 million and with Cerro Moro and Aurizona kicking in early next year. It won't be long until we are setting new quarterly cash flow records. Very briefly, I would like to address a few of the more common questions that we've been getting from investors lately. And I then want to actually walk through some of the recent small royalty purchases that we've made. So, I'll try to answer these questions quickly in order to keep things moving. So we've got four questions here. The first is how are things going on the Hod Maden project? The second is, does Sandstorm have the same tax risk as other streaming companies that are being reassessed by the CRA. The third question is what does the deal pipeline look like? And the fourth question is, what are these royalties that we recently purchased? So to start with the first question about Hod Maden, things are going very well at site. As you know we recently put out a PFS, which illustrates a project with all in sustaining costs and a co-product basis of less than $400 per ounce. The permitting process has now officially begun. The project is in full trade off study mode before the feasibility begins early next year. Our technical team actually just got back from the project. They did a site visit last week and are very encouraged by the progress their partner Lidya Madencilik is making. So overall, things are going very well there. There have been absolutely zero negative surprises for us, either technically or socially or even politically as our partner has a very healthy relationship with the government. With respect to the question two regarding taxes, the answer is Sandstorm does not have the same type of tax risk that some of our competitors. The main issue some of the streaming and royalty companies are having is that a material portion of their income is earned in offshore tax havens. They're not paying tax on that income. And it's important to note that 100% of Sandstorm streams and royalties are structured so that we will be paying tax either in Canada or in the local mining country. We don't have that same risk that the CRA comes and asks us to attribute offshore income into Canada. And although this means we pay more tax, I believe that makes Sandstorm a safer investment that the stream and royalty companies. With respect to question three regarding the deal pipeline, the pipeline is great. Right now the markets are so bad for raising equity that there is a very long list of companies that would like capital from Sandstorm. And we are working on behind the scenes is a number of deals, but we are ensuring that we do our due diligence. We are being picky to ensure that we invest in the quality of projects and doing so takes time, but it's safe to say the deal pipeline is incredibly robust right now. A small glimpse of what I am talking about can be seen from the royalties that we recently purchased over the last couple of months. And so that was sort of the fourth question. And if you turn your attention to the webcast, we'll walk through a few of those slides. I am pleased that because of these acquisitions, our total growth account went up, but because we are also buying back shares in the market, our share count went down. So, I think it's a good quarter if you can purchase royalties and buyback shares during the same quarter. I think one of the things that we believe that set Sandstorm apart is that for every dollar invested in Sandstorm, you get more exploration outside than any other stream or royalty company out there. And that's why we continue to buy exciting royalties on large land packages. And so, turning our attention to this webcast now. You can see that we have purchased a total of eight royalties recently. Each one is listed here on the slide that you can see that they are in various countries throughout Africa. One of the things that I think it's worth noting is the size of the land packages. We've got a column there with number of square kilometers of each of these land packages and put into perspective. The average size of the average mining interest per claimed area that comes across our desk is probably around 40 square kilometers. And you can see from these land packages, these are huge land packages. There is only one land package in there that's about average, every other one is hundreds of square kilometers. And I'll walk through a few of the more intriguing ones. And one of the deals that we did was with a company called Aton. And you can see from this slide, so this land package has got the black outline. It's hundreds of square kilometers. Every single one of those gold or yellow dots is another area where there is a target for potential gold mine. So it's hugely perspective, but I am going to draw your attention to Rodruin, which is in the middle at the bottom of that land package. And you can see on the next slide. This is assuming into Rodruin and in some of the surface sampling that's been done. All those red inverted triangles are surface samples that range from one to five grams gold just sitting on top. All the purple inverted triangles are samples that are greater than five grams. So, I think you get the sense that this land package is highly prospective. There is gold sitting right in surface. There are just mobilizing drills right now, in fact I saw them put out a press release saying that that drills are getting ready to start drilling at this project. So we are excited to be able to have this added to our portfolio. Another one of the deals we did was with a company called Nexus Gold and it's got some assets in Burkina Faso. You can see this we've bought three royalties from them. Boubolou is an interesting one. It's one of the ones that they're going to be drilling here over the next few months. They just raised a bunch of capital. You can see some of the drilling results. They got last drilling season, they hit 23 meters of one gram right at surface. They had another one meter of 15 grams and drill hole number 7. They hit another one meter of 23 grams in drill hole 8, so maybe it's early stage project, but it's very interesting from our perspective. One of the things that we like about this project and some of it excellent that I'll talk about is, all of these targets are right at surface. So the drilling is very inexpensive and for very few dollars you can get a lot of meters put in and makes a lot easier to find a significant gold resources. Another one of the transactions we did was with a company called Progress Minerals. They are a private company that's about to go public here in the next 12 months. And they have some very interesting land packages, Bobosso is in Cote d'Ivoire. And they are going to be drilling that. Progress just raised and they are doing in two tranche, but a total of $10 million which is incredible for a private company doing exploration in this market. It's very hard to raise equity right now. But you can see some of the historical drill results they had. Last drill season they hit 15 meters of 1.9 grams and that's again the stuff comes right up to surface, this mineralization. They hit 14 meters of 2.4 grams. They hit 57 meters of 1.6 grams. So these are not royalties that we are purchasing on moves faster. These are royalties that are hitting ore grade mineralization over and over and over again and land packages are hundreds of square kilometers. Another one of the land packages that Progress has that we have a royalty on now through our transaction is on an asset called Bira, which is again hundreds of square kilometers. It has gold and arsenic anomalies all over the place. There is an 11 kilometer trend in part of the property another 13 kilometer trend in another part of the property and it's not just anomalous soil samples, they have hit it with our RC drilling and have already hit 20 meters of 1.3 grams, 14 meters to 2.4 grams, 24 meters of 1gram. And this project is going to get tens of thousands of meters of drilling here over the next year and year and a half. And moving on to just one more from Progress, you can get the sense that Progress has a lot of very interesting projects inside that company. Tambiri, this is another one that they're likely going to be drilling here in the next number of months. They had three meters of 13.9 grams, five meters of 17 grams, six meters of 16 grams, three meters of 28 grams. These are all historical drill holes. They are going to go back in and start drilling on this property. So hopefully you get the sense that we are buying very interesting things. And I think that now, if I take a step back and actually analyze these transactions, what we effectively did was purchased some equity in each of these companies. When you add up the total amount of that we pay for all the royalties plus all of the equity, it adds up to approximately $4 million. And one of the things that I think is particularly interesting is that despite the fact that the markets have dropped precipitously over the last couple of months. The equity that we bought in these companies today is worth more than $4 million, which means we've effectively gotten eight of these royalties on massive land packages for effectively free. And if something that I think is an important part of our business strategy, I know that moving forward we have a number of substantial deals in our pipeline that we hope to close before year end that will be near term cash flowing things. And you know we are very focused on increasing our cash flow and doing larger deals, and doing those deals on assets that also have expiration outside. But we are also very excited about the totality of the royalty portfolio that we are assembling because when investors invest in Sandstorm, what they are effectively getting is a piece of all 189 royalties all wrapped up into one investment. And we've got a lot of very exciting small things within that portfolio of 189 royalties. So, our management teams are very excited about the business. The deal pipeline is doing well. Our significant assets are moving forward. We think we are only a few months away from record quarters and we're a few quarters away from record quarters. And so we are very pleased with that. So, now I am going to hand it over to Erfan and he is going to discuss the financial results. Erfan?

[Erfan Kazemi:]

Thank you very much, Nolan. And thanks again to everyone that has joined the call today. We appreciate you taking the time. I am going to take a few minutes to discuss some of the meaningful financial numbers from the second quarter. I'll talk about how they compared to Q2 2017, as well as how we are trending in terms of our outlook for the year. Well, the revenue that was generated from Sandstorm's royalty assets during the quarter totaled $18.9 million. This was the second highest total in company history. On Slide 12, you'll notice the chart comparing some of the key figures from Q2 2018 to Q2 017. Showing that our attributable gold equivalent ounces sold are up by more than 10% when compared to the same quarter last year. Solid production numbers combined with an average gold price of more than $1,300 per ounce realized during the period and it's no surprise that revenue came in strong. The average cost per attributable ounce to Sandstorm was $296, resulting in cash operating margins of more than $1,000 per ounce. After deducting quarterly cash expenses for admin, project devaluation like, we ended up with $12.3 million in cash flow from operating activities. This $12.3 million figure exclude changes in non-cash working capital and is more than $2 million greater than what we've posted in Q2 of 2017. This cash flow figure represents the cash that we've been able to direct towards growing the Company and building shareholder value. In the last row of the chart, on Slide 12, you can see that we've reported about $0.7 million in after tax net income during the period, an improvement over the second quarter of 2017, primarily due to a non-recurring impairment charge that occurred last year. Moving on to Slide 13, we've provided the attributable production announced and sold for the revenue of the last four quarters. To give you a sense of how things are trending and to show how the first half of 2018 compares to the back half of 2017. Things are certainly trending in the right direction, as you can see from the trajectory of this chart which shows that overall revenue is up 15% and attributable production up 11% compared to the last six months of 2017. We've broken out the top royalty contributors by mine on the next slide, Slide 14. As you can see the Santa Elena mine in Mexico took the top spot delivering approximately 3,000 attributable ounces to Sandstorm during the quarter, a 46% increase compared to Q2 2017. The Chapada mine in Brazil was number two and also contributed additional gold equivalent ounces when compared to last year, up about 14%. I won't go through the entire list, but for those of you who aren't aware, almost all of the operations listed here are run by multi-billion dollar mining companies including likes of Glencore, Rio Tinto, Yamana Gold and Endeavour Mining. We're very happy with our counterparty strength that underlies our royalty revenue and cash flow. There are few royalty assets that delivered less ounces to Sandstorm than in 2017, which partially offset our growth. One of those assets was the Bachelor Lake mine in Quebec which due to timing of shipments ended up delivering 50% less gold when compared to the figures from Q2 2017. Under the current gold stream contract, Sandstorm is due 1,500 ounces gold from Bachelor Lake per quarter, so we expect additional ounces in Q3 to make up the difference. And in fact, with that they received those ounces as I speak. Bachelor Lake is owned by junior mining company called Metanor Resources and in late July Metanor announced its definitive agreement with Bonterra Resources to combine their companies. Metanor's Barry property is adjacent to Bonterra's large land position in Urban-Barry camp in Quebec, just south of the [indiscernible] windfall deposit, which is likely familiar to some of you on the call. The Urban-Barry camp has seen some extra ordinary amount of exploration over the last 12 to 18 months and the merger Metanor and Bonterra puts the combined company in a great position with one of the best land positions in exciting district. Sandstorm has a royalty on Bonterra's Gladiator deposit as well, so we're keen to watch the combined company progress and expect with time it will hopefully grow into a multi-asset producer. My last slide provides a regional breakdown of our royalty revenues. The pie chart illustrates the 52% of Sandstorm's Q2 revenue came from North American including 28% from Canada, another 24% came from South American and the balance from Africa and Australia. So, in the bigger picture, when I put the Q2 results in the context of our outlook and forecast, I'm glad to say that we're on track to meet our 2018 guidance and have narrowed the range of our forecasted attributable ounces sold to 54,000 gold equivalent ounces sold on the low end and we left the high end of our guidance to 60,000 gold equivalent ounces for the year. We've also recently given guidance for 2019 and expect to be in the range of 63,000 to 73,000 gold equivalent ounces growing to 140,000 in 2023. That's all from me this time. And now over to you Dave for a few asset updates?

[David Awram:]

Thanks Erfan. So, before I get into specific update on the assets, just want to reiterate what Nolan had said earlier about the pipeline, because it is really probably the most common question that we get, and I'm sure as all of you in the audience know far too well, the poor state of the equity capital markets and the industry today, poor state of capital infusion in general to our industry is very pervasive and so here at Sandstorm, we are seeing an unprecedented amounts of new opportunities. We're seeing our due diligence and tactical due diligence team stretched to the edges of really being able to find and go through these opportunities as well as our corporate development team. Pipeline is strong and we're doing to do everything we can to sort through to find those quality assets. It's tough time for the market, but it's a great time to be sourcing deals. So, first asset I'll talk about is Black Fox which is now in the hands of a well-funded management team. Project has been in putting more capital than ever, to further exploration and that's – and the results to-date have been very worthwhile of cost. The overall budget from McEwen Mining for 2018 exploration is $15 million both in new targets and infill drilling. As we enter the third quarter, there is going to a be a particular focus on converting resources, extending exploration development underground and a focus on the prolific deep central zone which has produced some of the best drilling on the property to-date. On Slide 17, you can see a few of the ounce of multi-ounce results with width 2.5 to 7.5 meters. These are all intercepts at depth in deep central zone. Drilling has demonstrated previously this area of the deposit is tending to have the highest grades over minable width, which is very typical of these organic deposits in Ontario and Quebec. In addition to these hits in deep central zone, the McEwen has been having success following out along the Froome zone. On Slide 18, you can see an image representing the resource at Froome and also the work that's been completed around that. There is evidence for repetition of the mineralization proximal to the resource in a number of different clusters and down depth. I'm not going to take that much more additional resource in this area to make it profitable and it has potential to provide higher tonnage for the mill. It's great to see that this prospective deposit is receiving the good geologic work that it warrants. The next project I'd like to give an update on is the Roc d'Or East Extension on Slide 19 or more commonly known was Triangle Zone, a key part of the Lamaque restart previously owned by Integra Gold but now operated by Eldorado. Eldorado has begun developing into the Triangle Zone where we hold a 2% NSR over about 20% of the resource. We're expecting to begin receiving payments from this royalty this year as the development and soon mining starts on that zone. Over this year, over $120 million has been invested in this project and in 2019 it should hit commercial production. We have not integrated any of the revenue from this royalty into our cash flow projections. So, anything that we receive this year or in the following years will be incremental to the guidance and the production projections that we provide. This is a great example how picking up packages royalties years ago, all of a sudden lead – begin to lead to pay you back. Lastly, flip to Slide 20 and I'll discuss some of the latest results at Erdene's Bayan Khundii project in Mongolia. They continue to get great drill results on the program and they are finally getting close to developing a full global resource and then later a PEA on the project. Already they have come up with preliminary resource in the north to the Altan Nar project. Soon, they will be looking to develop the resource over the greater project including Bayan Khundii, which we believe is going to be pretty significant. But they still continue to hit new results, extend the project and mineralized body continues to improve and expand. So with that, I'm going to pass it over to Leoni, the operator, and I think we will begin our Q&A session.

[Operator:]

[Operator Instructions] Your first question is from Lawrence Daniff, Private Investor. Lawrence, please go ahead.

[Lawrence Daniff:]

The acquisitions of those new royalties, I loved the thinking on that. Quick questions, so I know that no one alluded to a dividend in the near future. What part of the year next year do you think that might happen?

[Nolan Watson:]

I love how you framed that question.

[Lawrence Daniff:]

Well, I didn't say what quarter. I didn't say quarter. I gave you a little room.

[Nolan Watson:]

So, we – it's funny we're actually right now we're coming to you on this call from a Board strategy session offsite and that's on the agenda for tomorrow. So, the Board continues to discuss it and I don't know the answer to that question today, but we're going to continue to refine our thinking and we will provide more guidance by the end of this year as to timing.

[Lawrence Daniff:]

So, is it safe to say sometime next year?

[Nolan Watson:]

I don't control that decision, so I'm going to refrain from saying yes. But…

[Lawrence Daniff:]

Alright, that's a Board decision. That's right, it's a Board decision. Okay. Thank you.

[Operator:]

Your next question is from John Tumazos from John Tumazos Very Independent Research. John, please go ahead.

[John Tumazos:]

With the U.S. dollar being a little firm and gold price softening there, obviously are scenarios in both directions. If gold were to get to 1,100 or retest the 2015 December lows of 1,100 your opportunities to invest would not only of course improve as juniors need, but need more money and have less access to capital markets. What is your program to improve your capital availability as all these wonderful opportunities here?

[Nolan Watson:]

So, it's interesting. We actually did some analysis recently and I think it's a very good question and something that we've spent a lot of time thinking about. One of the exercises that we've recently gone through as we compared ourselves to Franco-Nevada, Royal Gold, Wheaton Precious Metals and we said what percentage of their market cap do each of us have in terms of available liquidity. They take cash available plus any available room on lines of credit and we're actually above average in terms of available liquidity relative to our size. In addition to that, we have two things that are going to be increasing that over time. One is, our lending group has indicated to us that we can increase the size of our revolver if we want to, based on only our existing asset base and not including any acquisitions and acquisitions if there are large ones would obviously come with their own credit capacity. And secondly we have more cash flow coming as a percentage of our market cap in any of our peers, personally because their valuation is lower relative to theirs. And over the next couple of years, we also have some warrants that had been issued years ago and it's interesting that the warrant holders have already shorted most of those shares into the market, so wouldn't actually – when they can exercise, it's not going to be a net new issuance of shares to the market, because it's already been effectively presold through a short sale, but that will bring another $80 million. So, we think we have a lot of capital to grow even if gold prices stay low. I think for me, the question is, if gold prices do test lows, which I don't think they are going to, but if they do, the challenge will be how much capital do we allocate to buying really smart undervalued acquisitions versus buying back our own shares, because in those markets, share prices tend to get undervalued. So, that will be there. It's not a thing that we struggle with.

[John Tumazos:]

So, Nolan, if I could follow-up, how much is the cash in from the warrant exercise?

[Nolan Watson:]

If they are going to exercise, it'd be about $80 million. They all have different exercise prices, the highest series is at 450, so it's basically right close to at the perfect U.S., so it's very close to at the money right now and the rest of them are in the money.

[John Tumazos:]

And how much is unused credit lines?

[Nolan Watson:]

Clearly, $150 million U.S. and I think we could increase that to $200 million if we wanted to.

[John Tumazos:]

That gets us to $280, and the – I guess the cash flow is roughly about $10 million a quarter, maybe a little more. So, it sounds like you have so many good opportunities that maybe you should procrastinate instituting a dividend and these geologist that need their prospecting money, or development money, you are probably more undervalued than Sandstorm, so should we be basically expecting that there is going to be $300 or $400 million invested in in the next year or two and you are going to really grow your asset base?

[Nolan Watson:]

We definitely are really going to grow our asset base. One thing that I've always been hesitant to do because I can't control the markets and they can change fast is to start predicting how much capital we're going to allocate over any individual period of time. But as they've said, the technical team is working overtime right now trying to sift through all the things that are coming in to help us try to find the best things to buy and we will be working hard to do that.

[Operator:]

Thank you. [Operator Instructions]. There are no further questions at this time. Please proceed.

[Nolan Watson:]

Thanks operator and thanks everyone for calling in today and as normal feel free to follow-up with us in the office either by email or phone and we'll answer any other further questions that you have. Everyone have a good day. Thank you.

[Operator:]

Ladies and gentlemen, this concludes your conference tall today. We thank you for participating and as that you please disconnect your lines.