Sandstorm Gold Ltd
TSX:SSL
Earnings Call Analysis
Q3-2023 Analysis
Sandstorm Gold Ltd
Sandstorm Gold Ltd. has demonstrated a commitment to financial prudence, carving out a path to substantially reduce its debt from $637 million in mid-2022 to below $350 million by end of next year. This stride encompasses the complete repayment of inherited stream obligations from the Nomad acquisition and a focused effort to lower bank debt, already reduced to $443 million as of the call. The strategy is buoyed by noncore asset sales, which have already begun with a couple of transactions bringing $10 million plus equity interests, and are expected to continue, guided by the aim to amass $40 million to $100 million solely in cash proceeds for further debt reduction.
The company is on a promising trajectory with $220 million in interest-bearing loans to others, capturing market-high interest rates. This additional income is anticipated to counterbalance interest expenses within 2-3 years, potentially leading to a net-zero interest expense and unlocking pure free cash flow from the firm's portfolio. This optimistic outlook is hinged on the belief that current high interest rates will eventually subside, further easing the company's financial burden and augmenting its cash flows.
Sandstorm Gold Ltd. anticipates a transitional year in 2023, offsetting the conclusion of nonrecurring sources of gold equivalent ounces with the mid-year commencement of new long-term contributors like Greenstone and Platreef. Moving forward, they project a continual increase in production and cash flow, potentially consecutively for years. Particularly, the planned engagement with Glencore's Mara project could significantly boost annual production by an average of over 21,000 ounces, enhancing the company's profile and cash flow remarkably.
Under current gold prices, the stream and royalty company projects an annual cash flow well over $200 million. This considerable amount stands in contrast to Sandstorm's market capitalization of $1.4 billion. With evident faith in the potential upswing in gold prices, there is strong belief held by the executive leadership, exemplified by substantial personal investments in the company by the President and CEO, that the future yields will be even more lucrative.
In the wake of economic pressures such as high interest rates and the attractiveness of bonds, Sandstorm sustains growth, reaching for production and balance sheet targets that stoke the confidence of its leadership. The next year is painted with the anticipation of reduced debt, softer interest rates, and a blossoming production profile, steps that position the company in a favorable light despite macroeconomic headwinds.
Sandstorm continued its streak of strong financial performance, reporting over $41 million in revenue this quarter with the sale of more than 21,000 gold equivalent ounces. The company is on track to meet its annual production guidance, and the financial results reflect healthy operational strength - with cash operating margins at nearly 90%, driven by an average realized price per gold equivalent ounce sold of $1,919 and an impressively low average cash cost of only $220 per ounce.
Further illustrating their financial strategy, Sandstorm plans to monetize various financial investments and loans as part of a broader initiative to maintain a robust balance sheet. This includes considering divestures of noncore, noncash flowing assets while keeping an acute focus on the geopolitical and macroeconomic factors that influence the stream and royalty market. Importantly, no major restructuring is on the horizon for the key assets that underpin the future of the company, such as Greenstone and Robertson, which indicates confidence in their current agreements and partners.
The executive team concluded the call projecting a strong forward-looking stance. Despite dealing with multiple noncore asset sales that are occupying significant bandwidth, the leadership's confident tenor underscores a belief in the company's bright future, heavily predicated on executing their outlined strategic plan which they expect to yield substantial results within the coming year.
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Good morning. My name is Alan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sandstorm Gold Royalties 2023 Third 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 be proved to be accurate as actual results and future events could differ materially from those anticipated in such statements. [Operator Instructions] Mr. Watson, you may begin your conference.
Thank you, Alan. Good morning, everyone, and thank you for calling in to our Q3 earnings call. As usual, in a few minutes, I'll be handing things over to Erfan Kazemi, our CFO, to review our quarterly earnings highlights. And before I do that, I would like to take the time to give a high-level update of the business, focusing specifically on 4 things: one, the progress we're making in bringing down our debt levels and the things we are doing to continue that trend; two, production expectations over the next year; three, our production growth expectations and long-term production profile; and four, based on that long-term production profile, how much cash flow we expect to generate. So starting off with the progress we're making with bringing down our debt. You can see on the left of this chart that $637 million was the amount of money in total that we owed in the middle of 2022, including bank debt as well as money, we owed on streams that Nomad had purchased but not yet paid for, which we inherited when we acquired Nomad. As you know, we have now paid all of those stream payments and there are no more remaining payments owed on any streams, and we've been using our free cash flow to pay down our bank debt. Bank debt on our Q3 balance sheet that we just released said we owed $456 million. However, as you can see on this slide, as of today, the bank debt has been further paid down by another $13 million already since quarter end to $443 million as of today. And this only includes $3.5 million from the recent noncore asset sales, and we'll be getting another $6.5 million from that shortly, which will apply to our bank debt. It's our goal to get bank debt below $350 million by the end of next year, the combination of cash flow from operations as well as continued cash from noncore asset sales. We're going to be working on noncore asset sales throughout the remainder of next year. And as you can already see, we have kicked that process off for the sale of a couple of noncore, noncash-flowing royalties for which we're receiving $10 million in cash as well as some share consideration. This particular deal had been in the works for nearly a year, and all future noncore asset sales will prioritize cash. Currently, we're working with a bank adviser to help us market these various noncore assets. And we're expecting that it will be in a series of smaller transactions to different parties rather than one large transaction to a single party because they're trying to find the most logical home for each of the assets that we're marketing. To be clear, the range that we give of $40 million to $100 million of noncore asset sales is in reference to the cash we would receive in such transactions alone. We're not counting any fair consideration we may or may not receive because we want the target of $40 million to $100 million to be useful in estimating our debt-reduction capabilities, again, with the goal of getting our debt below $350 million by the end of next year. I believe it's also worth noting that Sandstorm has $220 million of loans to other mining companies that is generating interest income. The $220 million figure is a mark-to-market fair value based on current high interest levels, which in layman's terms means we are receiving today's high levels of interest on that $220 million figure. I bring this up because as we pay our debt down, our interest expense will come down. And as the interest rates eventually come down, our interest expense will come down even further. And at the same time, because we're generating interest in commodities loans that we've made, at some point in the future, our interest expense will have come down so much that our interest income will entirely offset the interest expense. And we believe that, that could happen in the next 2 to 3 years, at which point, 100% of our cash flow generated by our stream and royalty portfolio will be free cash flow or stated another way, our net interest expense will be 0. Overall, with strong cash flow that we've had and our plan for noncore asset sales over the next year, we are very comfortable with where our balance sheet is and happy with where it's headed. The second thing I wanted to talk about was our quarterly production expectations over the next year to help our investors estimate future production. In 2023, we had 3 sources of gold equivalent ounces that will be nonrecurring items going forward. And in 2024, we have 2 very important significant new sources of gold equivalent analysis that will be starting and will continue for decades to come. In 2023, the nonrecurring sources of gold equivalent ounces were: one, a onetime royalty payment on the Mt. Hamilton royalty that we received in Q1; two, a step-down in fixed ounces for Mercedes; and three, we sold a portion of the Antamina royalty during 2023. And since I mentioned Mercedes, which is run by Bear Creek, I'd like to give my condolences to the Bear Creek team as their very recent former CEO, Tony Hawkshaw, passed away a few days ago after a tough battle with cancer. I've known him for many years, and he's a good man with lots of integrity and he's going to be missed. Overall, it's our expectation that Q4 production should look relatively similar to Q3. Looking forward to next year. What we're expecting is a year of transition, where the majority of our portfolio stays the same. So we'll have less production from things like Mercedes, but by the middle of the year, we'll have positive catalysts from such things as Greenstone stream coming online as well as the Platreef stream. Both mines are nearing completion of construction and will become significant contributors to Sandstorm's production and free cash flow and will become an important part of Sandstorm's future. All mine ramp-ups take a while. So we're expecting payments from those streams to start slow but then really pick up and keep growing both our production profile and our cash flow, which brings me to the next thing I want to talk about this morning, which is our production growth expectations and longer-term production profile. This is a new chart that we're showing for the first time in this forum. And for me, it's a very exciting chart. It was inspired by an analyst that we sat down with from one of the banks at the Dever Gold Forum who said that to us, "Sandstorm was the only royalty company that used to show year-by-year production expectations. And I was hoping the other royalty companies would follow your guidance, but instead, you stopped it. I wish you would bring it back." So based on that feedback, we're bringing it back, and we've decided to go even further and show our expectations for the next 15 years. You can see here that after next year and assuming no new acquisitions other than perhaps our Mara stream exercise. We're expecting increases in production and cash flow every year, year after year for many years. Speaking of the Mara project, some of you may have noticed that Glencore recently announced that they're paying $475 million to buy the remaining 56% stake of the Mara project from Pan American. Glencore is an intelligent company, and they wouldn't be doing that if they didn't plan on building it in a timely manner. It's my expectation that this will start much sooner than people currently think. Sandstorm has an option to buy a 20% gold stream on the Mara mine for $225 million, which we would only pay once they are building it. Based on the last technical report that was done in the project, the average annual production for the first 10 years of the 28-year mine life would be 107,000 ounces of gold per year, which would translate to over 21,000 ounces per year on average for Sandstorm's 20%. At today's gold price, that would be an incremental $30 million per year in cash flow. On this chart, the boxes represent this average annual production for illustrative purposes. But once Glencore update their Mara technical report next year, we will update this slide for the numbers from that report. This brings me to my fourth and final point, which is how much cash flow we can generate at those production levels. At today's gold price, that would translate into well over USD 200 million per year in annual cash flow for a very long time. That's a huge amount of cash flow for a company that only has a market cap of $1.4 billion. And I'm very bullish on the price of gold. And if I'm right, those cash flows will be even higher than that. From a high-level perspective, when you look at the macro factors affecting our business today, with high interest rates not only increasing our interest expense but also increasing the attractiveness of investing in things like long-term bonds versus stocks like Sandstorm, it can be frustrating in the moment. However, when I think what Sandstorm and especially what it's going to look like 1 year from now, I get genuinely excited. I know it's tough to look at the stock price today and be excited. However, 1 year from now, we should have debt below $350 million. I believe we will have declining interest rates, and therefore, increasing cash flow as well as possibly increasing gold prices, and we'll have a production profile that will be increasing year after year for years to come. It's this picture that makes me confident in Sandstorm. It's this picture has led me to borrow millions of dollars personally over the past couple of years to buy Sandstorm shares. And as I have some stock options expiring in the next month, it's this confidence that will have me borrow hundreds of thousands of dollars more to get even longer Sandstorm shares. Unfortunately, for me, I've already borrowed so much money buying Sandstorm shares that I'm running out of borrowing room and I won't be able to exercise all of them or if our share price has to go up, we'll have to sell some to exercise those options to pay the exercise price. But not only will I not be taking any money off the table, I will be borrowing more money personally to hold these shares and hold more of them than otherwise trade. I believe in this company. I'm excited about this portfolio of assets. I have faith in our long-term growth profile, and I'm looking forward to that future and profiting from it together. And with that, I'll hand it over to Erfan to discuss the quarterly results.
Thanks, Nolan. In terms of financial results, it was another strong quarter for Sandstorm. The company recognized revenues of over $41 million and sold over 21,000 attributable gold equivalent ounces. Year-to-date, Sandstorm has sold nearly 74,000 gold equivalent ounces, which positions the company comfortably within reach of achieving our 2023 production guidance of between 90,000 and 100,000 ounces. As such, I expect this to be another record-breaking year for Sandstorm in terms of revenue and production. Moving on to the results. We had $41.3 million in revenue for the quarter, which is an increase of $2.4 million from the same period in 2022, comprised of $22.5 million in sales from the company's streams and $18.8 million in royalty revenue. Despite many macroeconomic headwinds and general market volatility, the price of gold has continued to perform relatively well. As a result, the company's average realized price per gold equivalent ounce sold this quarter was $19,019, the average -- $1,919. The average cash cost per attributable ounce was only $220, resulting in cash operating margins of approximately $1,700 per ounce. This equates to nearly 90% percent cash margins on the average attributable ounce sold, which is an incredible testament to the strong operating profile of the portfolio. Strong cash margins contributed to nearly $34 million in cash flows from operating activities when you exclude changes in noncash working capital, an increase of $2.6 million from the same period in 2022. Net income for the 3 months ended September 2023 was $14,000 compared to $31.7 million for the third quarter in 2022. This change in net income was driven by a combination of factors, including a $24.9 million gain that was recognized in the third quarter of 2022 from the sale of the company's Hod Maden interest, a decrease in gains recognized on the revaluation of the company's investments, a decrease in deferred income tax recovery driven by the sale of some interest in 2022, and an increase in finance expense related to interest paid on the company's credit facility. This change in net income was partially offset by a $2.4 million increase in revenue compared to the same period in 2022. In September, we announced the renewal of the company's revolving credit facility, which allows Sandstorm to borrow up to USD 625 million. And we have extended the term of the facility for additional 2 years maturing in 2027. The company ended the third quarter with $456 million drawn on its revolving credit facility, which was used to partially finance the acquisitions made in 2022. As Nolan mentioned, as of today's date, the balance on the credit facility was down to $443 million. The next slide provides a breakdown of gold equivalent production sold by asset with the Cerro Moro silver stream leading the way with over 3,100 gold attributable ounces. The Mercedes mine in Mexico was the second largest contributor for the quarter. The contract that was acquired in the Nomad transaction in 2022 that entitled the company to receive monthly fixed deliveries of gold for Mercedes concluded in the third quarter as expected. The restructured gold and silver stream that was announced in September is expected to commence in January 2024. The Antamina mine in Peru contributed 1,754 gold equivalent ounces to Sandstorm during the quarter. This is the first full quarter since the closing of the Antamina transaction with Horizon Copper, whereby the company sold its 1.66% NPI to Horizon and retained a silver stream and a residual NPI. The production numbers from Antamina in the third quarter include the gold equivalent ounces attributable to the silver stream and the residual royalty. Additional cash flows, primarily principal repayments of the debenture associated with the Antamina transaction, are accounted for in the company's cash flow statement under investing activities. Finally, this last slide shows the company's attributable gold production by region and metal. For the third quarter, 40% of attributable production came from operations in North America, 23% from Canadian mines. Nearly 50% was from the South American operations with the remaining 11% from the regions around the world. Precious metals continues to be our focus with 65% of production coming from gold and silver operations for the quarter. 24% of attributable ounces were from copper mines largely driven by Chapada, Caserones and Antamina. As we close out on the last bit of 2023, I'm encouraged to look back over the last 12 months and see significant growth and transformation in Sandstorm. The portfolio is stronger than ever, and it generated meaningful diversified cash flows. We have 2 significant mines expected to come online in 2024 with Greenstone and Platreef, and we have had to reduce the remaining debt balance considerably over the next 12 to 18 months, further fortifying the balance sheet. I'm certainly looking forward to Sandstorm's continued success as our portfolio continues to mature over the next few years and generate value for shareholders. I'll leave it there and pass it over to Dave for a few specific asset updates.
Thanks, Erfan. Sorry, for coughing in the background on you. For the asset update today, I'd like to address 2 major development projects in our portfolio, share some exciting exploration highlights from Fruta del Norte.
Starting with Hod Maden. As SSR takes charge of this project and updates their feasibility study, they have been releasing results from an infill drilling program. It's always exhilarating to see these results as they rekindle excitement in the project. First 3 holes from this program continue this tradition. Hole 238 intercept to 26 meters grading 18.5 grams per tonne gold and 3.24% copper. Hole 239 yielded a remarkable 90 meters grading 16.5 grams per tonne gold and 1.56% copper. HOle 240 returned 61 meters grading 18.8 grams per tonne gold at 2.26% copper. These intercepts surpass the already high-grade resource to reserve further underline the exceptional quality of the ore this mine will produce. It's worth reiterating that these results speak to the world-class nature of this deposit. Moving on to Fruta del Norte. The 2023 conversion program has delivered really impressive results. To date, 11,233 meters of underground drilling across 79 drill holes have been completed in various sectors of the FDN deposit, including depth and -- including a depth and the southern sector. Notable highlights from this conversion program include 48 meters grading 6.92 grams per tonne gold, 37.9 meters grading 6.49 grams per tonne gold, 14.2 meters grading 20.01 grams per tonne gold. These outstanding highlights -- or these outstanding results highlight our partnership with another world-class deposit. What's particularly reassuring is the consistency of the results across all published holes, not just these highlights, which solidifies the ore body's quality. These results will be incorporated into the upcoming reserve and resource update expected in Q1 2024. Just about a kilometer to the south, we are seeing more results from new deposits. Bonza Sur is shaping up to be another discovery on the property with promising intercepts on strike from the main ore body at Fruta. This zone is believed to extend 350 meters on strike and another 500 meters at depth but remains open in all directions. Key highlights include 7.44 grams per tonne over 8.8 meters, 5.87 grams per tonne over 11.9 meters. 2 rigs are currently active at Bonza Sur, and we anticipate more results this year. In the conversion, drilling and exploration joint across the property, Lundin Gold is set to complete 50,000 meters of drilling in 2023, marking the largest drill program since 2007. This project is shaping up to demonstrate the potential for multigenerational lifespan. The third world-class deposit I'll focus on is Platreef operated by Ivanhoe mines. This remarkable deposit on the north wing of the Bushveld Complex is rapidly advancing towards production next year. Ivanhoe has recently announced that Phase 1 construction activities are 63% complete with production expected in Q3 2024. Notably, more than 2,000 meters lateral development on 3 different levels have been completed to date. On the 950 level, underground crushing and loading have been completed. The first phase of reaming for Shaft 2 has commenced with completion anticipated in Q2 2024. This shaft is currently required for Phase 2 mining expected in 2027. However, the former [ Bushveld ] shaft, Shaft 3, is currently being reamed out to 5.1 meters with completion expected in Q4 2023. Shaft 3 will be equipped with haulage to derisk Phase 1 haulage and expedite Phase 2 mining. So there may be a scenario where we see a ramp-up of production between the currently planned Phases 1 and 2 on line at Platreef. Incredibly exciting to be associated with such dynamic and successful mine builders and we eagerly anticipate new ideas and approaches to expedite the assets through its mining phases. With that review of the 3 world-class assets in our portfolio, I'll pass over the call to Alan, our operator, for the Q&A session. Please feel free to ask questions about any of our royalties and streams.
[Operator Instructions] Your first question comes from Josh Wolfson of RBC Capital Markets.
In terms of the royalty transaction that was announced, would it be possible for the team to split out or identify what the Blackwater value was within the $25 million and then maybe with the split even further would have been between cash and equity?
Yes. So the -- I'll start with the split between cash and equity. So it's $10 million of cash, $15 million of equity. That was a transaction that we started working on a year ago. And just again clarify the $40 million to $100 million of noncore asset sales that we're talking about is just accounting cash portions of things only, and I don't think you'll see transactions like that one going forward in the noncore asset sale process. To answer your question, the split out, we're just going to leave that separate because it's under a ROFR right now for Blackwater. And so that's -- we're waiting to receive some of the cash to determine whether they exercise that or not, and there'll be more clarity on that.
Okay. I guess that sort of part of the question here is how would that ROFR value equity in Sandbox in the current situation, assuming there is any equity for the Blackwater asset specifically?
There's none. But we're going to get an incremental $6.5 million of cash. Irrespective of whether that's exercised or not, we won't get any more shares.
Okay. And then back to Sandbox. It's been a while since we've received an update there. My understanding is there's still parts of that, that are waiting for closing. So -- and I'm wondering, is there any kind of update the company can provide on some of these time lines? And what is Sandbox's cash position to fund part of this deal? And then lastly, what's the pro forma equity percentage stake that Sandstorm has got in Sandbox after this is done?
Yes. So our piece was a much smaller piece of the transaction than what Sandbox recently announced. So I'll start with answering the part of what we own. We own about 34% of that company. John Armstrong, who's the CEO of that, did a really good job pulling together a $100 million financing package because the bigger piece of it was a $75 million stream on Greenstone. And all of those pieces of the puzzle have effectively been locked down and closed now. So it's -- we're just waiting for ROFRs to be triggered and a few other things. But it's, I think, about 6 months to pull $100 million financing package together for him. But it's a tough market to do, and so pretty impressive he pulled it together.
Okay. And then so 34% was the equity stake Sandstorm had before this deal. Assuming everything closes with the $25 million transaction, what would be the new equity stake?
So 34%.
Okay. So it stays at 34%. Okay.
Yes.
And then in terms of -- it seems like there's some material progress that was made on those closing time lines. We're getting close to 1.5 years since we've received an update. What is the current guidance for closing on the Sandbox transaction, not for the royalties but for the original deal?
I'm not sure what you mean for the original deal. Everything's closed.
Your next question comes from Heiko Ihle of HCW.
It's Heiko from H.C. Wainright. Nice to see management having faith in the farm and investing more of their own cash. I mean already believe shares are attractive right now, price-wise. You have this mission for noncore asset sales to strengthen your balance sheet. I mean more in the Sandbox transaction, which I think is funny how it just came up for the second time in the Q&A. Where are you seeing the most interest in sales? What metal has the most demand? I mean, is there a big difference on how geopolitical risk factors are seen compared to how it used to be? Obviously, the world has changed in the last 1.5 years. Anything in some proposed yields that surprises you and maybe would surprise us?
In terms of where we're seeing interest in our noncore assets, specifically?
Yes.
Yes. So a good question because it's one of the reasons that I specifically mentioned that we are looking to do a series of smaller transactions rather than one big transaction is because there is interest up and down the portfolio in a bunch of our noncore, noncash-flowing things. But they tend to be from smaller entities that have only certain amounts of access to actual cash. So we're trying to find -- and we're now having conversations with various parties that are in base metals, in battery minerals, in sort of long-dated noncash-flowing things a little bit. We're not really looking to sell much precious metals, if any, unless it's a very elongated thing. And -- but we are finding parties that are interested in each of those, and so we're hunting for the leases.
Fair enough. Building on that last question and capping it all off, I mean, how do you view that pricing is at least -- or rather proposed pricing is given that gold is at $1,964 an ounce? And I wrote that question this morning when it was at $1,962. So it's already looking better than a couple of hours ago.
Yes. We're not finding that the gold price up or down is -- for the stuff that we're looking at, it's more access to capital, interest rates, the bigger macro factors are the things that affect valuation. And so what we've done -- just to give more clarity, we've -- what we've done internally is we've specifically identified the noncore assets that we are running processes on and that are for sale, and that list is worth a lot more than what our target is. And we're going out and feeling for prices and to see where the market is assigning value where we agree on the value or whether because of its bad market conditions and high interest rates, where people are willing to buy that. So we're only going to sell the ones that we think we're getting at least somewhat reasonable value for.
Your next question comes from Derick Ma of TD Securities.
In terms of the other -- sorry, other than noncore, nonproducing royalties, are there other financial investments or loans that could be monetized at this time to reduce debt?
Yes. So I would -- it's a bit of a nuanced answer, but I would include those in noncore and noncash flowing, to a certain extent. So some of the things that are on our list are looking at ways to monetize some of those things specifically, yes.
All right. Okay. And then given -- I know debt reduction is a priority right now, but given the economic concerns in China, weaker base metal prices, higher interest rates, what is the outlook for the stream and royalty business from your perspective in this environment? And do you see existing counterparties seeking additional financing or looking to restructure then their stream agreements with you in this kind of economic environment?
I think fortunately for us, we've taken most of the pain already. Bear Creek is the only thing that we were actively in conversations with the restructuring on. I know Americas Silver has been having some challenges, but those are both sort of short-life things that are a small part of Sandstorm's overall value. And sort of the big, future, chunky parts Sandstorm are things like Greenstone and Robertson and Platreef and Hod Maden and so on and so forth. And those are the future of Sandstorm. And none of those assets are in any challenges there with strong partners. And so we're actually feeling very, very good about the portfolio, the portfolio's growth. And although it's not boring in the sense that we're doing a lot of work to sell noncore assets, it's taking a lot of our time and management's time and our corporate development team's time. We're very confident that if we just sit here and execute that very simple plan, it's going to look really good a year from now.
[Operator Instructions] There are no further questions at this time. I will hand over the call to Mr. Watson. Please proceed.
Great. Thank you, Alan, and thank you, everyone, for calling in to today's call. As normal, we're going to be here around and available to answer any questions as they may come up, and hope you have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.