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Good morning. My name is Matt, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Sandstorm Gold 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 a result, future events could differ materially from those anticipated in such statements. [Operator Instructions] Mr. Watson, you may begin.
Thank you, operator. Good morning, everyone, and thank you for calling in to this third quarter call. This morning, as usual, Erfan, our CFO, is going to walk us through the Q3 results; and Dave Awram will provide a brief update on a few assets. After that, we'll turn it over to the operator for a question-and-answer period. In addition, if anyone has any questions that don't necessarily need to be part of a live Q&A, feel free to ask it through the web portal, and we'll be sure to get back to everyone with a direct response after this call. But before we do all that, I would like to provide a few material updates, including a discussion about our plans for share buybacks between now and the end of 2019. At this time, we'll be again walking through a prepared PowerPoint presentation on the web portal. So if you are able to, please turn your attention there now. The first material update I would like to drive everyone's attention to is that, during the quarter, we received official notice from Yamana that they have achieved commercial production at Cerro Moro. And in accordance with their stream agreement, what that means is that, beginning January 1, 2019, i.e., just over a month from now, Sandstorm will be entitled to purchase 20% of their silver produced to a maximum amount purchase per year of 1.2 million ounces. It's important to note that, under the contract, the delivery mechanism is that we receive the silver ounces in the quarter following the quarter in which they were produced. Therefore, we'll be receiving the silver from Q1 in the second quarter of 2019. Based on Yamana's current guidance, we expect to be purchasing approximately 300,000 ounces of silver every quarter, which should work out to around $12 million per year in cash flow at spot prices. As such, on January 1, the Cerro Moro stream will be the largest stream coming online in the history of Sandstorm. It's also a good example of our commitment to finding streams and royalties on high-quality, low-cost assets with significant exploration upside. With over 2,000 square kilometers under our area of interest and a significant exploration program underway, we anticipate that this asset will continue to reward Sandstorm shareholders for many years to come. It's also important to note that, at approximately the same time, we expect to begin receiving royalty checks from Equinox based on production from their Aurizona project. Equinox has recently announced that they are 80% complete construction and plan producing gold beginning in Q1 2019, i.e., next quarter, and that they've already have 270,000 tonnes of ore stockpiled. You can see in this picture that the mill is nearing completion, and that it's a fairly impressive mill. Sandstorm currently holds a sliding scale royalty into the 3% NSR at today's gold prices. And if gold goes above $1,500 per ounce, it will increase to a 4% NSR. If gold increases to $2,000 an ounce, which I do believe will happen in the not-too-distant future, the NSR increases to 5%. Therefore, at today's prices, we expect to receive $5 million per year from this project so it will become a material contributor to our cash flow going forward. If gold were to increase to $2,000 per ounce, our cash flow would correspondingly increase to $14 million per year because of the ratcheting effect on the NSR. So we see lots of potential upside on this NSR. In addition, this is another asset with significant amount of exploration upside, which Dave will be talking about in a few minutes. As investors can see, we have a couple of exciting catalysts that are happening next quarter, and we anticipate that not only should we recognize a record production in 2018, but we also anticipate record production in 2019. And despite that, due to the low gold price and general lack of investors in the gold industry, our share price is trading at a 52-week low and materially below what we believe the fundamental value is. Therefore, I would like to take a few minutes to talk about our plans for share buybacks. In 2017, so last year, we had a normal course issuer bid, or NCIB, under which we were repurchasing our own shares. In total, we invested USD 17.7 million, repurchasing 4.1 million of our shares. So far, in 2018, we've invested $11 million repurchasing a further 2.5 million shares. And under our current NCIB, we have the ability to repurchase another 6.7 million shares by April 2019. As many of our investors know, we've been torn between the issue of when to declare a dividend, weighing that against the potential share repurchases. Because of the current significantly depressed share price environment and the low price of gold, we have decided to use our 2019 free cash flow entirely for share buybacks, and we will make a decision about potential dividend timing towards the end of 2019 once the new board-approved share buyback program has been completed. With respect to the details of this new buyback plan, overall, our board has approved, subject to TSX approval, the repurchase of 10% of our current outstanding share base, which would result in the repurchase of 18.3 million shares. This repurchase program will begin immediately and will continue through the end of next year, and it's our intention to repurchase the entire 18.3 million shares. It's worth noting that this approval is not only an approval to purchase up to 18.3 million shares, rather it is full board approval to actually repurchase the entire 18.3 million shares over the next year, and it is our intent and our board's expectation that it will be completed in full. Administratively, our plan is to complete this repurchase under 2 separate normal course issuer bids, the first being the current NCIB, which is in place now and still has 6.7 million shares available for repurchase under it. Once we have completed the repurchase of the first 6.7 million shares, which we expect to be done in the first half of 2019, we will then apply to the TSX for a new NCIB to repurchase the remaining 11.6 million shares. We believe that this entire program will cost in the range of USD 70 million to USD 85 million and can be fully funded from cash on hand combined with 2019 cash flow from operations, and we don't plan on taking any debt for the share repurchases. Furthermore, although we are currently debt free, we are working on an upsized, lower-cost revolving debt facility so that if we find royalties with significant exploration upside on assets that are currently producing or will be producing within a year or so, we can also complete those acquisitions and continue to grow the company while we shrink our share float. If we can successfully do that over the short term, we think our share price could have tremendous torque to the upside once the gold market begins to turn around. So that's the business update, and with that, I'll turn things over to Erfan to discuss the third quarter results. Erfan?
Thank you, Nolan, and good day to all of you that have joined us on the conference line and webcast. We appreciate your continued interest in Sandstorm. I'm going to take a few minutes to walk through some of the third quarter financial numbers, and I'll draw some comparisons to the third quarter of 2017 as well as the first few quarters of 2018 to give you a sense for how our royalty portfolio has been performing. Well, after 3 quarters, I would say that Sandstorm's portfolio of royalties is performing as we expected. There's always some variability in the quarterly production that comes from our various royalty assets, but we're diversified enough that, when some operations have below average quarters, there are generally a few mines that outperform to make up for it. We expect there to be ups and downs with the mining operations related to our royalty portfolio. But as Nolan discussed already, we're fortunate that we have a number of royalties on projects that are in development, and we're excited that Cerro Moro, Aurizona and some other assets will start to contribute royalty production and cash flow during 2019, furthering that diversification effect that I was talking about. I would like to direct you back to the conference call presentation Slide 9. You can see in the column shaded in white that our business generated about $17.3 million in revenue for more than 14,300 attributable gold equivalent ounces sold during the period. We sold those ounces at an average realized gold price of close to $1,200 per ounce, which is starting to get down to the gold type levels that we haven't seen since back in the first quarter of 2016. Other than the decrease in the average realized gold price and the slight impact that it had on our revenue, you'll notice, if you compare the 2018 and 2019 results, that the Q3 numbers are quite similar to the third quarter of 2017. I'll point out that the slight increase in cash flow from operations, when you make changes for changes in working capital, increased to $11.4 million, and that was partly related to a reduction in administrative costs due to cost-reduction strategies. The decline in net income compared to Q3 2017 is mostly due to items that were recognized during 2017 but did not reoccur in 2018, the Bachelor Lake gold stream amendment being the primary item, as it resulted in a $3.4 million gain on the income statement in Q3 of last year. Speaking of Bachelor, it was great to see the transaction Bonterra come to a close in September. I talked about this on the last quarterly conference call, so I won't get into too many details, but Bonterra recently closed a $21.8 million private placement, and they have some big plans for the Gladiator, Moroy, Bachelor and Barry projects. Sandstorm has a royalty interest on each of these assets, so we'll be watching closely to see how things progress. Okay. On to Slide 10, which provides the revenue and attributable gold equivalent ounce numbers for the last 4 quarters. Firstly, our royalty production figures have been quite consistent in the 2018 quarters, which harkens back to the point about the diversification benefits that I already mentioned. Second, we're certainly on track to meet our expectations for this year. We anticipated some modest growth compared to 2017, and that's what's played out. As a reminder, Sandstorm's royalty portfolio generated approximately 54,600 ounces in 2017 year. And for 2018, we've narrowed our guidance to 56,000 to 60,000 gold equivalent ounces sold for 2018. The growth starts to pick up next year, and we're forecasting 63,000 to 73,000 gold equivalent ounces in 2019, and then our attributable production ramps up considerably with the addition of Hot Maden and some other projects by 2022/2023. Our forecast for 2023 is 140,000 attributable gold equivalent ounces at this point. Moving on to Slide 11. We've shown our top 10 contributors during the period. When comparing the mine-by-mine breakdown to the same period in 2017, there were increases from the Karma gold mine in Burkina Faso due to timing of sales and shipment as well as the additions from the Houndé mine in Burkina, which was not part of our royalty portfolio last year. Notable decreases came from Santa Elena due to timing of shipment sales and from Black Fox related to reduction in gold production at the mine. McEwen Mining has recently indicated that it expects to meet its full year production guidance at Black Fox. As far as how all this breaks down by jurisdiction, we provided a pie chart on Slide 12 to illustrate that. About 56% of the sales and royalty revenues came from North America with 39% of that being Canada. And then there was an even split between South America and other countries for the balance, each contributing 22% to the total. One interesting point from an accounting perspective, you'll see on our balance sheet, that the Hot Maden interest fluctuates each quarter based on the Turkish lira to U.S. dollar exchange rate. Some quarters, the accounting number may go up. Some quarters, it may go down. This is simply a result of the Hot Maden subsidiary having a Turkish lira functional currency while Sandstorm presentations currency is the U.S. dollar. The fluctuation doesn't represent a change in economics at the mine. That is all I have for the quarterly review. But before I turn the call over to Dave, I'd like to speak briefly about Sandstorm's taxes. Over the last few years, some other companies have come under scrutiny for their offer of tax structure. And as a result, Sandstorm fielded several questions from investors about the way that we set up our stream and royalty investments. Our response has been that the majority of the company's streams and royalties have been entered into directly by Canadian-based entities and subsidiaries and, therefore, subject to Canadian tax. We did have a Barbados entity in the early days, but as you already know, all those profits have been attributed to Canada, and the profits from those streams continue to be subject to Canadian tax. So why am I talking about this? The Canada revenue agency, the CRA, is currently finalizing an audit of Sandstorm Gold Ltd. as the parent company's 2010 to June 2015 tax return and has issued a proposal letter dated October 2018. Based on the letter received, we don't anticipate any adverse implications for our company's financial statements as a result of the audit and the CRA's proposed adjustments. Okay. That's it for me. Dave, the floor is yours.
Great. Thanks, Erfan. So before I lean into few key updates on assets, just a quick word on our corporate development. I'm very proud of the team's intense work for digging up some great opportunities over the last quarter. Nolan and I have given the corp dev team a change in mandate on what to look for, and the team has spread a growth trap line and found some quality projects. Although Nolan spent a lot of time talking about the share buyback, we're still working hard to acquire cash flow from deals that are both large and small, but certainly hope that we can crystallize some of these opportunities before the end of the year or early next year. Okay. On to the asset update. I'll start with Black Fox on Slide 14. It's now in the capable hands of McEwen Mining, and they begun to reveal data from some of the aggressive work that they have completed in both development and exploration. If you spent time at their Investor Day in September 6 or view the media that they produced for it on their website, you can see how the project is front and center for them in the overall strategy of growth at McEwan. Rob McEwen has even gone so far as to state how Black Fox reminds him of Red Lake in the early stages of Goldcorp. Thus far, in 2018, McEwen has spent over $17 million in exploration at the Black Fox complex with the goal of spending $19 million over the entire year. That's paid off in an updated resource on Froome, discovery of new higher-grade Froome footwall zone in a more active scenario, a development towards both areas in mineralization that began in September. Management has recently discussed the concept of being able to access and mine these new areas in as early as 18 months. In addition to Froome and also Tamarack, a new view of the geology has generated a number of high-quality targets on the Black Fox property, and these targets have been chased down and represent further upside. However, the Deep Central zone continues to be the best high-grade target within the complex, as you can see in these drill results. At McEwen gets deeper and follows deposit down-dip, some of the best grades to-date are appearing. It's great to see this project finally get the capital it deserves. As it develops, we'll be sure to keep you all posted. Now on to Slide 15 and Cerro Moro. Cerro Moro is another project that is busy demonstrating its exploration potential. Nolan's already spoken about how it has reached commercial production threshold to trigger our stream in 2019, but I think the more exciting aspect is the exploration potential that has been emerging over the last couple of years. As we have said before, Cerro Moro is partway through a stated 4-year $40 million exploration project. Focus has been on converting inferred into M&I on the Veronica vein, Escondida Far West, Martina and [ Mimi ] extension. To-date, Yamana has exceeded internal expectations on conversion and expects to increase resources at year-end. Further exploration drilling from new targets identified through geochemistry and geophysics is also occurring in Q4. When we purchased this stream in 2015, these were scenarios that we expected to come to fruition. Cerro Moro is an excellent exploration target and has a huge land package from where we expect further discoveries to be made. So on to Slide 16 and Aurizona. Of course, a big part of our growth next year and production next year is reopening the Aurizona mine by Equinox Gold as Ross Beaty's new gold mid-tier vehicle, which is slated for Q1 of next year. However, I'm personally excited to finally see the West extension of Piaba structure, Tatajuba, to be finally drilled. Ever since the start of Sandstorm on our first transaction on Aurizona, I've been waiting to see drill results from this prospective ground. However, the transition of the permitting has largely prevented this. Finally, though, the management of Equinox has succeeded in getting drills onto the site and may have not disappointed. On the slide, you can see some of the highlights to the right, showing 13.7 grams over 35 meters and 2.71 grams of over 56 meters. And just like in the Piaba area, you're seeing consistent mineralization from section to section over more than 500 meters of strength length. This represents material very near the mill in the extension of Piaba that may be the same or greater grade going forward. More drilling is to come, and truly, this will add to the excitement around this project as we enter its production. Now we don't have a slide on it, but today, Endeavour Mining released a heavily anticipated resource on the Kari Pump discovery on the Houndé property. Remember that Endeavour did no exploration on this project from the acquisition in 2014 until 2017. But since then, they have been on an aggressive drill program on the asset, focusing much of the effort on this large gold and soil anomaly at Kari and Kari Pump. 70,000 meters of drilling has been completed since May 2018 along Kari Pump, and now, they have a new resource of almost 1 million ounces, mostly as indicated. We're still trying to get a handle on the location of the ounces relative to the boundary of the royalty, but we're confident that the majority of this new resource lies within the boundary. Almost more importantly, much of the drilling at Kari West and Kari Center and much of the gold and soil anomaly are also on the royalty ground, so we do expect significant amounts of both of these resources anticipated in 2019 to occur on royalty ground. It's not about increasing the royalty that we've owned for less than a year. And with that, I'll pass it over to Matt, the operator, and we can begin the Q&A session.
[Operator Instructions] Our first question is from John Tumazos, a private investor.
Should we interpret from the larger buyback that you're not going to be buying as many new assets in 2019 or 2020?
So one of the things that we decided to do a number of months ago, and I mentioned this in a couple of presentations that I've given in the past, is our boards made the decision that 90% of the capital we allocate is going to be either share buybacks and/or buying streams and royalties on assets that are either already producing or will be within, say, 12 to 24 months. And so about 6 months ago, we started working hard to reengineer our pipeline of potential deals for things that are currently cash flowing. When we started that process, we were not that optimistic because we know it's very hard to find things that are -- assets that are producing or currently under construction and to buy royalties on those. We've actually been pleasantly surprised in the last couple of months. And we do have a number of deals -- I'll say 5 deals that are at various stages of due diligence right now that meet that criteria. Because of that, we're working on upsizing a revolving debt facility, which we hope, over the next month or 2, we should have details out on. And if we do want to make these acquisitions, then we'll do that on that debt facility. So it's too early to tell definitively and answer that question. I think, based on the pipeline that we see in front of us, that acquisitions next year probably will exceed what they have in the last 12 months.
If we were to group the royalty streaming companies into 2 political parties, aggressive and conservative, if you will, Royal Gold hasn't done a significant deal in 2.5 years. They appear to be conservative or just repaying debt. Your other larger peers have been more aggressive. Franco in oil and gas. Wheaton and Cobalt PGMs as well as other traditional assets, Osisko, PAAZ, lots of things. Do you think you're more aggressive or conservative or somewhere in the middle?
I'd say we do a purposeful job of being in the middle. We try to be thoughtful -- thoughtfully aggressive. How about that?
Well, honestly, when Kirkland gets the #4 Shaft going to the south or southeast of the existing one, and they're actually going to dismantle the #3 Shaft and just use it for ventilation and egress, do you guess that 1 quarter, 1.5, 3 quarters or can you guess how much of the new throughput will be from the HM claims?
It's Dave here. It's a little bit difficult to say at this point, but we're looking to try and get some guidance from Kirkland Lake themselves on this. But that has been a significant amount of the drilling and development has gone into that HM claim, particularly on that series of levels where it has gotten to work on. So it's difficult to say, but I certainly do expect that we're going to be getting over $1 million per year from that royalty. It's a little bit difficult at this point how long that will last for. But that's not bad considering we paid I think less than $300,000 entirely for that...
All praises. I just -- I'm hoping for 1/2 of the output as opposed to a taste.
Yes. We'll see. I mean, clearly, it's been a big focus for them at Macassa, but we'll see. If we can get some guidance, we'll share that with our investors.
[Operator Instructions] If there are no further questions, I'd like to turn the floor back to management for closing comments.
All right. Well, thanks, everyone, for calling into today's call. We have seen a number of questions coming through the portal, and we'll get back to people directly on those, and we hope everyone has a good day. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.