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Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Sandstorm Gold Royalties' First Quarter Results Conference Call. [Operator Instructions] 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.
Thank you, operator. Good morning, everyone, and thank you for calling into the first quarter earnings call for 2020. This morning, Erfan, our CFO, is going to walk us through the Q1 results, and David Awram will provide an update on the status of our material assets in the context of the COVID-19 world. And then as usual, we're going to turn it over to the operator for a question-and-answer period. And if anyone has any questions that do not necessarily need to be part of the live Q&A, you can ask those questions through the web portal. We'll ensure that each question we get there will get a direct response from us after this call. Before handing it over to Erfan, I want to provide an update on our business and answer some of the common questions that our investors have been asking recently. At this time, we're going to be going through a prepared PowerPoint presentation on the web portal. So if you're able to, please turn your attention there now. Prior to summarize the investor questions, I would say that they fall into 4 broad categories. The first being, how is COVID-19 affecting our business? The second being, how do we think about capital allocation right now? The third being, how do we view the current macroeconomic environment and where do we see gold going? And finally, what does our deal pipeline look like? I'll try to succinctly answer these questions. And starting with the first one about how COVID-19 is affecting our business. I'm pleased to say that all of Sandstorm's employees are safe and healthy and have been successfully working entirely remotely over the past couple of months. I feel blessed to be working with so many high-performing people who are able to work hard from home. With respect to our asset base, most of the mines underlying our streams and royalties are still operating. So Sandstorm is still generating substantial free cash flow. And with gold prices being so strong, I expect, once all the assets are back up and running, we will realize significant revenue and cash flow records, which I'm personally excited for. In a few minutes, Dave will provide a more complete update on the status of the various mines. I will say that COVID-19 has made me more happy than ever that our business model is a streaming and royalty business model because with other mining companies, that shutdown mines, may be losing money, we still have material cash flows and expect to be having record cash flow soon. On the second question about capital allocation. As soon as COVID-19 hit, the market started to tank, and many of you will recall that Sandstorm share price was also temporarily negatively affected. At that time, we began using our normal course issuer bid to buy back the maximum number of shares per day that were allowed. And in total, we repurchased 4.6 million shares at an average price of $5.12, which we believe is an exceptional allocation of capital, and now we're already up over 60% on the share purchases. Now that our share price has quickly recovered, we are refocusing our capital allocation to acquisitions, which I'll talk more about in a minute. I think as part of this discussion, it's also worth noting that yesterday, we announced that we are putting in place an ATM financing program. And I would like to make it abundantly clear that currently we have absolutely no plans on issuing shares, which is why we've been working hard to shrink our share float. The only reason we're putting ATM financing program in place was in case we were trying to complete a large acquisition, and we required the capital to ensure that we were not over levered. So I want to reiterate, this does not mean that we have changed our thinking at all, and we will not be using the ATM program unless it is needed in conjunction with an acquisition. This is a really important point for investors to understand. I have already seen newsletter writers and comments from shareholders saying, "why are you diluting yourself now?", so I want to say this a third time and say it loud and clear so that absolutely no one could possibly misunderstand, we do not plan on using this ATM unless it is in conjunction with a very large transaction. The probability that we are about to just go randomly and issue new shares simply because our share price is going up is 0. That is a 0% change. The third category of questions, which relate to the macroeconomic backdrop and expectations for gold price is a topic that I could talk about for hours. I'm incredibly passionate about it, but I'll try to be concise. Basically, I'm very bullish on gold for the next few years. I've been saying for quite some time that the world has way too much debt relative to GDP and that it would necessitate the printing of money to devalue currencies and inflate GDP to make the existing debt levels more manageable to pay off. Well, COVID-19 has definitely caused those world debt problems to hit home and now record amounts of quantitative easing and currency devaluation are taking place. You can see from this chart, the expansion of the Fed's balance sheet. And if you look back at the expansion of the Fed's balance sheet in 2008 from the Great Recession, under what the Fed called QE1, during QE1, the Fed increased its balance sheet, i.e., effectively printed new money to the tune of $1 trillion, which was unprecedented at that time. Then a few years later, it completed QE2, which is another $1.5 trillion, and QE2 took approximately 1 year to complete. Well, now in 2020, the Fed has launched QE infinity and have created new money equaling QE1 and QE2 combined, and they have pushed all of that money into the economy in its entirety, all in 7 weeks. This is completely and entirely unprecedented in the history of the world. And normally quantitative easing like that helps increase GDP and reduce debt to GDP levels, but this time is truly different. Governments around the world are borrowing more money at record rates to keep their economies alive. Companies are borrowing record amounts to keep themselves alive and individuals are borrowing record amounts just to pay the bills. You can see on this next Slide 6, the debt to GDP is not going down. Rather, it's at record highs and it's still climbing fast. In the U.S., total debt to GDP levels are expected to hit 300% later this year, which is entirely unsustainable. I'm sitting here in Canada, which is even worse with total debt to GDP levels expected to approach 350%, which is effectively functional insolvency. The amount of money printing and currency devaluation that will be required to pull us out of this mess will be substantial.And I believe the real assets like gold will be propelled to record highs and stay there for quite a while, especially because the thing that normally kills the Bull Market and gold is rising interest rates. But when debt to GDP levels are over 300% in the country, you can't raise interest rates without destroying the economy. Gold is in a massive Bull Market, and Sandstorm shareholders are positioned very well to profit from it. It is because of this belief that we have been so keen to buy back our own shares at low prices, and it is because of this belief that we are keen to make material acquisitions in 2020, which brings me to the fourth and final topic of questions, which is what does Sandstorm's deal pipeline look like?I can confidently say that industry-wide, more streams are currently in the works compared to any time in the last 5 years. There are billions of dollars' worth of stream processes that are currently being run, virtually all of them because base metal companies need capital and they have precious metal byproduct streams that they can sell.I believe this is just the beginning of base metal companies coming to market to get capital, and I believe this trend will continue for a while. Although there are no guarantees, Sandstorm is actively pursuing a number of different transactions, any one of which would be a record in size for our company. And we will continue to be active behind the scenes, attempting to make a smart acquisitions for our shareholders.Overall, now is a great time to be in the gold business and especially the streaming and royalty gold business, and I expect it will be good times for several years ahead. With that, I'll hand it over to Erfan.
Thank you, Nolan, and hello, everyone. I'm glad you joined us today. I'd like to start by looking at a summary of Sandstorm's quarterly results. As you know, we made the decision to withdraw our 2020 guidance back in March as we began to see the increasing impact of the COVID-19 pandemic on many mine operators around the world.Despite this, Sandstorm had a solid quarter of production, having sold 13,393 gold equivalent ounces. This represents a 17% decrease from the previous quarter and approximately a 5% decrease from the first quarter 2019.We do expect some delays in deliveries and royalty payments to continue throughout the year as the full effect of the pandemic remains to be seen. However, we know that Sandstorm business model is designed to weather extraordinary situations like this, and we view these delays as just that, delays, not losses. The next slide is a summary of the first quarter results compared to the same period in 2019. Despite the small decrease in production, Sandstorm realized $21.3 million in total revenue.This was primarily driven by the increase in the gold price. As Nolan has already discussed, the uncertainty of the global financial outlook has continued to push the price of gold higher as investors seek traditional safe havens. Sandstorm's average realized gold price during the first quarter was $1,593 per ounce, which is 23% higher when compared to the same period a year ago.Perhaps more importantly, our cash cost per attributable health remained modest at $314, resulting in cash operating margins of $1,279 per ounce for the quarter.At the bottom of the slide, you will note that Sandstorm had a net loss of $10.3 million in the first quarter. This was primarily due to certain items that were recognized during the quarter, including a noncash impairment charge on the Diavik diamond mine royalty. With the adverse diamond market conditions, which has been somewhat exacerbated by the COVID-19 pandemic, we took an impairment on this asset.It is also worth noting the insolvency of Diavik minority owner, Dominion Diamond was announced in April. However, Rio Tinto, the operator, majority owner of Diavik, continues to operate the mine and Sandstorm's royalty remains registered on title.Other factors impacting net income include a $5.9 million loss recognized on the revaluation of the company's investments, particularly a change in fair value of the Americas Gold and Silver convertible debenture. On the next slide, we have our production broken out by producing assets. The Yamana silver stream, which includes the Cerro Moro silver mine, continues to be our production leader. You may recall that deliveries from Cerro Moro came online in the second quarter last year and has been one of Sandstorm's top producing assets each subsequent quarter.Once again, Sandstorm received a maximum quarterly amount on the stream agreement of 300,000 silver ounces in the first quarter of this year.Santa Elena was the second largest contributor at 2,161 gold equivalent ounces, a 34% increase in the number of ounces sold when compared to the first quarter of 2019.It is worth noting that as of April 3, the operator First Majestic silver has temporarily suspended operations in Santa Elena in accordance with guidelines for Mexico's Ministry of Health to mitigate the spread of COVID-19. And so we expect the delay in ounces that will impact the second quarter production figures. Other notable changes in the production lineup includes a decrease in ounces sold from Bachelor Lake stream which concluded its 6-ounce delivery in the fourth quarter of 2019 as per the stream agreement. Sandstorm's interest has since converted to a 3.9 NSR royalty on the property, consistent with the agreement. There was also a reduction in ounces delivered from the Karma mine when compared to the first quarter of 2019, which was due to a timing delay of the March delivery.Finally, I think it's worth mentioning the production from Aurizona. This is the third quarter Sandstorm has received royalties from the Aurizona mine after it reached commercial production last year. Aurizona is a good example of the optionality built into Sandstorm's portfolio. Our royalty is a sliding scale between 3% and 5%, depending on the gold price.In the first quarter of 2020, gold prices averaged above $1,500 per ounce, which resulted in a 4% royalty payment from Aurizona. This will increase to 5% when gold prices average above $2,000 per ounce, which we may not have to wait long for given the global financial outlook.The next slide summarizes the first quarter sales and royalty revenue by region. Streams and royalties on Canadian mines contributed 16% of sales and revenues in the first quarter. This, 62% fewer gold equivalent ounces to Sandstorm when compared to the first quarter of 2019. The change is primarily due to decrease in production from Diavik and the Bachelor Lake mines. The decrease was partially offset by an increase in gold equivalent ounces sold from the Black Fox mine in Ontario. Operations within the rest of North America contributed another 19% this quarter, which is 66% increase in sales and revenue compared to the first quarter in 2019, largely driven by an increase in ounces sold from both the Santa Elena and San Andreas mines. Aurizona, Cerro Moro and Fruta del Norte helped to drive 140% increase in ounces sold from operations in South America compared to the previous year. Operations in South America represented half of Sandstorm sales and revenues for the first quarter. Meanwhile, the delayed delivery from the Karma mine resulted in the 47% decrease in ounces sold from other countries when compared to the same period in 2019.Sandstorm continues to hold a geographically diverse portfolio with the majority of sales and royalty revenue coming from the Americas. Overall, I'm encouraged to see the strength of Sandstorm's financial position. Subsequent to quarter end, the company completed their early warrant exercise program that was announced earlier this year with proceeds of over $50 million. This has put Sandstorm in a debt-free, cash-positive position. I believe this will help serve Sandstorm shareholders well as we enter a market that's full of opportunities for new acquisitions and transactions. Now I'd like to turn it over to Dave for comments on some of Sandstorm's assets. Dave?
Great. Thanks, Erfan. For the corporate development update this quarter, I'll first speak on how the COVID-19 health crisis has affected significant material assets in our portfolio. I'll also provide a bit of an update on some specific assets in the portfolio. And of course, please feel free to ask us in the Q&A session of any questions you might have in the projects or mines. On Slide 13, we'll show how each of our producing assets have been affected by various shutdowns and slowdowns at the mine level. As you can see, most of the assets in our portfolio have had little or no impact to production from the reaction to the global pandemic. Of course, universally, all the operators have had to adapt to the new working conditions, and they've been up to the task. One of the aspects that never fails to impress me with the industry is how resourceful and adaptive the mining partners are to making changes they need in order to remain operating in a safe and successful manner.Also on this slide, you'll see a section of resuming the operations. Mexico, Québec and Ecuador were notable jurisdictions where mining operations were deemed non-essential and shut down. Of those, only Québec has seen the projects get up and going again. Bracemac-McLeod and Triangle Zone were shut down, but are now operating again. Some of the Ontario assets shut down on a voluntary basis but as we have seen, most of those mining projects have restarted in some form.Moving to Slide 14. You see a categorization of our more material producing assets. So far, Aurizona and Chapada have not had any slowdowns of operation. But we are looking closely at how the COVID-19 situation changes in Brazil. Houndé and Karma have not had slowdown issues either.Cerro Moro is one of our more important assets. And while it did reduce operations temporarily, it's now back up to full productions.Really, the significant assets that are still shut down are Santa Elena and Fruta del Norte. Santa Elena, like most Mexican assets, is currently expected to continue to operate again at the end of this month. However, we'll need to get guidance from First Majestic as to whether that will happen at the time.In Ecuador, Fruta del Norte has been put into a temporary shutdown with less guidance for startup indicated. Fruta was just beginning to ramp up. So it's too bad that the project had to take a break for mining. However, it looks like they're working well with authorities and helping address the health crisis in the local area and are in a good position to get back to business when they get the all clear. Once we find out about either of these 2 projects, we'll let everybody know. Overall, our portfolio looks fairly secure with regards to potential future lockdowns if they are to occur. Considering this current lockdown took most of our partners, mostly by surprise, we expect most operators to be much better prepared if the health crisis extends into further lockdowns.So for the first update, I'll briefly speak about Hod Maden, our biggest growth project. This project continues to proceed down the path of feasibility and permitting. The studies continue but some of the fieldwork critical to completing the feasibility study has shut down due to the health crisis. There's no time line yet as to when that work resumes, so the best estimate for completion of the feasibility study is in Q4 of this year.However, our partner on the project continues to proceed with the study's permitting and land acquisition strategy, which are critical paths. Some early works beginning in 2020, are not out of the question yet. And we are hopeful that Hod Maden gets up and running for the beginning of 2023, despite the delays related to COVID-19.Relief Canyon, like many Nevada mines, has been able to adapt well and quickly through the pandemic. They poured gold in February this year and they continue to stack the heap leach pads and ramp up production.As many heap leach operations experience, a few problems and delays have occurred due to startup and pad staging.I spent time every week speaking with management about improvements, and I'm comfortable that the project is on its way to commercial production and full ramp up. Despite a little delay in seeing the gold come out, we have received the first payments on the fixed amounts just 2 days ago. Well done to Americas Gold and Silver, getting the project up and going in these challenging times. Now before I get to the Q&A, I also wanted to mention that Equinox Gold released a PEA on the Aurizona underground expansion. The study revealed good economics on that underground portion, illustrating greater than 8-year mine life with more than 80,000 ounces per year, taking the total production at Aurizona to over 200,000 ounces per year at its peak.We're certainly glad that the capable management at Equinox is finally getting this deposit operating properly, so it can reach its full potential that we saw since first being involved in this project 11 years ago. So with that, I'm going to pass over the call back to Chris, the operator for the Q&A. Thank you.
[Operator Instructions]Our first question is from Mark Johnson with Optimum Investment Advisors.
Congrats on a good quarter despite everything. Just a question for you guys. Regarding the ramp-up and closed out of mines, can you just describe the disruption, the cost, just kind of give a better flavor for how seamless the ramp-up could be, or how difficult it might be? The cost incurred, the financial status of the partners that you're working with, are they able to finance the shortfalls, things like that?
Yes. From a high-level perspective, so obviously, Sandstorm doesn't have to incur any of those costs. And in terms of our partners, the -- all of the partners where -- there's really only 2 main material partners that have mine's still shut down, and that's Lundin Gold on Fruta del Norte, which is in a good financial position, and First Majestic on Santa Elena, and they're in a decent financial position to be able to start those back up. So they will have some restart up costs and some working capital that will have to go into the assets, but they do have that access to that capital.And because the mines are being kept on an active care and maintenance where they're just ready to flip the switch back on, I believe they will ramp up very quickly. What I would say is it's important to note, though, that there's a delay from the time that they ramp back up to the time that we get paid, we usually get paid the month after they sell their gold. So there'll be kind of a month where they're ramping up, and it will be the following months that we get those ounces. There will be a bit of a lag on Sandstorm's earnings.
Okay. Nolan, can you just talk a little bit more on the timing of the ATM? What drove you to do it now? Obviously, there's a lot of activity out there. Just a little bit more color on why you did it now? Is there anything in particular that, from a timing perspective, maybe you want to do it?
Yes. It's something that we've been talking about for the last couple of years, and we've been working on it. We were going to do it kind of late last year, early this year, but realized we needed to get a new base-shelf prospectus up before we could make the ATM program and amendment to that.And so we just -- we got the paperwork done, we got the syndicate lined up, and it just happened to be now. There's nothing special about this timing. It could have been last year. We could have waited until next year. There's nothing special about the timing.
The next question is from John Tumazos with John Tumazos Very Independent Research.
Thank you for your service as a company and the presentation. First question is sort of an accounting technical, mechanical question. Your mineral interest, Hod Maden interest and investment accounts during the quarter on the balance sheet fell by about $45 million. Were the 2 items taken through the income statement were $14.8 million, plus another $8 million plus of depletion was $23 million?Could you walk us through the roughly $22 million decline on the balance sheet that didn't go through the income statement? About $10 million of it was the Hod Maden interest, maybe that was due to the Turkish lira collapsing. And there were other drops in mineral interests and investments that didn't go through the income statement.
Yes, John, happy to take you, high level through it, and feel free to give me a call on specific details. But as you pointed out, the -- a large driver of the decrease in the balance sheet was related to the Hod Maden interest and that's purely accounting. So what happens is that interest is held in an entity in Turkey. And so its functional currency by accounting standard is the Turkish lira. And so each reporting period because we're a U.S. functional currency company gets valued up and down depending on how the Turkish lira appreciates or depreciates against the U.S. dollar. So in some other quarters, it appreciated, this quarter, depreciated.And so that difference and it's about $16 million, doesn't go through the income statement. It goes through other comprehensive income. And so that's a statement after your income statement. So you'll see that flow through there. So that will account for the largest difference that you're seeing reflect on the balance sheet and on the income statement.
I can ask a second question. Concerning the amount of time it takes to build Hod Maden once the permits are granted and feasibility is done and funding is arranged. Is it roughly 24 months? What are the big building box, for example, are the initial zones outcropping open pit with no stripping? When would the underground zones start? Just walk us through the nuts and bolts, so we know how close we're cutting it to get the early 2023 output.
Yes. So Hod Maden, as we all know, is underground. Going to be an underground-only mine at this point. To be honest, it's a fairly simple mine to build getting through the feasibility and permitting, like I stated, around -- we expect both of those items, right now, around Q4 of this year to reach.Some of, I think -- and when you actually get into the full build of the mill and the development of the underground, that all really kind of takes a little bit over a year to complete or at least to be some kind of functional level.The real items that they're looking to get done early is perhaps get an exploration portal started on the project. That's one of the things that will help keep the project on track, I think, and then also, they'll need to do some infrastructure builds in and around where the mill will be. Those are fundamental parts and critical points for really kind of getting this forward.To be honest, I think our partner is feeling that getting through permitting, the land acquisition is some of the critical path items. So that's where a lot of their focus has been at right now is making sure that gets to do it. Once the infrastructure is mostly in place and the actual construction of the mill, and you get into the development, underground development work, that's a relatively quick process because it's not a big mine in the end. And there's nothing overly complicated about what's really getting built into there. But we'll have a much better idea once those infrastructure items are in place, and we get a good idea as to when the initial exploration portal gets put in place for the project. That will give us a much more certain time frame as to when we expect the production to begin.
Will the production be from a ramp and not a shaft?
It will be a ramp. Yes. I mean, the ore body really, at this point, extends only to about 400 meters at Max, 400 meters on the ground.So it should be relatively easy and simple to get a ramp in there. And our Turkish partners are good at that type of infrastructure build. They've had a lot of experience doing it, so we're confident that, that's the right way to proceed.
I can ask a final question. Currently, with travel restrictions, it's very hard to do due diligence on transactions.Presumably, the very big $0.5 billion, $1 billion transactions in Franco-Nevada, Wheaton Precious Metals class, they can find an expert who knows the property already and doesn't need a site visit.But in the $10 million, $20 million, $30 million, $50 million, $100 million class, some of those expenses and logistics are a little harder to get through.Are you finding the market is less efficient and there's more hunting opportunities now because of the challenges that the virus imposes on getting anything done?
Yes. COVID-19 has definitely made the market less efficient. And as you pointed out, partly because of the challenges associated with doing due diligence. If I look at how we do due diligence at Sandstorm, a site visit might be 3 days of the due diligence, but there will be months and months of desktop work sometimes. We can still do all of that desktop work now, that doesn't hold us back.And we have to be creative as to how we actually get that site visit done, whether it be by remote iPads and virtual tours and whatnot, but still talking to the technical people at the mine site.One of the things that we have right now that's an advantage to us. That's made that less of an issue is that the larger streams and royalties that we're looking at the moment are all operating lines.So we don't have to do too much work on whether or not the plant is going to work because it's already working. So that's made it a bit easier.
The next question is from Wally Walker with Hana Road Capital.
In the wake of a very successful stock repurchase and a world starving for income, how are you currently thinking about potential for dividends?
Yes. It's something that we've been thinking about for a long period of time now. If you would have asked me in January, whether we'd be declaring a dividend by the end of the year, I would have bet, yes. I think COVID-19 may have delayed that, but it has not stopped it. So what we said to our investors in the past, we are going to become a dividend paying company, and we're going to do it sooner rather than later. And right now, we're just trying to assess the exact right timing.
The next question is from [ Lauren Stany ], a private investor.
Thanks for all your hard work and diligence. I sent an e-mail a couple of days ago about a new article on the importance of a dollar swap line. I tried to send it to Nolan's e-mail. Are you guys familiar with dollar swap lines?
Yes. Yes, we are. I've been Chief Financial Officer of multibillion-dollar companies before, and I -- Erfan and I together are well acquainted with how to deal with any foreign currency news that we have. So thank you.
Is that the kind of thing where there's an inherent risk in investing in foreign operations and you just can't worry about stuff that may never happen? Is it that kind of thing?
No, we don't have any challenges because we're a U.S. dollar functional currency company because we get paid in U.S. dollars. All gold has transacted around the world, at least by the majority of companies, in U.S. dollars.We're even a U.S. dollar functional currency but are paying taxes in Canada. So we're just -- our whole business is U.S. dollars, except for the people's salaries up here in Canada. So that's pretty clean line. The money comes in U.S. dollars, it goes out in U.S. dollars, stays in U.S. dollars in our bank account.
We have no further questions at this time. I'll turn the call back to the presenters for any closing remarks.
Great. Well, thanks again, everyone, for calling in. And as usual, feel free to call us at the office here if you have any questions. We are all in the office today. So I hope everyone has a great day.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.