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Good morning. My name is Melissa, and I will be your conference operator today. At this time I would 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 actual results and future events could differ materially from those anticipated in such statements. [Operator Instructions] Mr. Watson, you may begin.
Thank you, Melissa. Good morning, everyone, and thank you for calling in to Sandstorm's 2018 year-end call. This morning, as usual, Erfan is going to walk us through the Q4 and annual results; and Dave Awram will provide a brief update on a few assets and then we'll turn it over to the operator for question-and-answer period. And if anyone has a question that doesn't necessarily need to be part of the live Q&A, please feel free to ask it through the web portal, and we'll ensure that each and every question we get there will get a direct response after this call. But before we do that, I'd like to provide a brief business update, including an update about our share buyback plan. At this time, we'll begin walking through the prepared PowerPoint presentation on the web portal. So if you're able to do so, please turn your attention there now.From a high-level perspective, it's easy to give a corporate update on the business because things are quite simple these days, and Sandstorm portfolio Streams and Royalties is performing well. 2018 was a year of records. We sold 57,600 ounces of gold, our ninth year of consecutive sales record. We had USD 73 million in annual revenue, which is also a record. And we also had a record in the amount of exploration done on our royalty properties with 715,000 meters drilled. As important as all these metrics are, we're anticipating that 2019 will also be a year of records with Cerro Moro, the silver stream, starting next quarter and the Aurizona royalty from Equinox starting in the next couple of months. In addition, we've been working hard to complete new acquisitions with no dilution and are pleased to recently announce our acquisition of the 0.9% NSR on Lundin Gold's Fruta del Norte mine for $33 million. This mine is a world-class mine that's currently under construction and is already approximately 50% built. And keeping with our publicly stated strategy of focusing on assets that are within 12 to 24 months of production, we expect to receive cash flow from this in the near term and Lundin Gold has publicly stated that they anticipate first gold pour by the end of this year. We're also pleased that this royalty is on a mine that has significant amount of exploration upside, and the royalty covers over 640 square kilometers of ground. We'll continue to endeavor to find acquisitions that we can make that will provide near-term cash flow with exploration upside and no dilution to Sandstorm shareholders.Speaking of dilution or I guess the opposite of dilution, which is share buybacks. Perhaps, the number one source of questions from our investors over the past several months relates to the normal course issuer bid and we're planning to continue buying back shares. Shareholders are asking questions such as how many shares have we bought back. They're asking questions like, how we've been buying back shares in the last month during the share price went up, i.e. is our share price going up because we're pushing the share price upward because of market conditions. And they're asking questions like, now that our share price has increased, do we still plan on repurchasing the 18.3 million shares. I'll try to answer all of these questions now. So in total, since we announced last fall our intention to repurchase 18.3 million shares, we have successfully repurchased 4.65 million shares, leaving 13.65 million shares remaining to be purchased by us. It is important to note that due to a trading blackout that we've been in for nearly a month because of our annual financial statements, we have not purchased any shares in several weeks.Therefore, this run-up in our share price has had nothing to do with the share buyback because we have not been purchasing any shares in the last month. The increase in price has, therefore, been entirely market driven. This blackout will be lifted starting tomorrow, and we will be able to begin repurchasing shares.When we originally announced our plan to repurchase 18.3 million shares, our share price was materially lower than where it is today. And there are two important things that we noted at that time that I believe are worth reiterating here. The first is that we committed to our shareholders that we will not repurchase shares if the price is above what we believe our net asset value per share to be. The second thing we noted was that we wanted to repurchase our shares with cash flow from operations only, and we did not want to add to our debt for share repurchases. With respect to the first issue of ensuring we only repurchased shares below NAV, we do not publicly state what we believe our NAV is because of securities laws and because we're continually recalculating and reestimating that figure. But it is an important number for us because we have many opportunities to buy new royalties at or below their NAV. So it only makes sense for us to purchase our shares if we can do it below NAV. Otherwise, it would make more sense to either purchase new royalties or pay dividend or both. Today, we believe our share price is still below its inherent NAV per share. Therefore, it's still our intent to continue to purchase shares on the open market at today's prices.With respect to the second issue of ensuring we only use cash flow from operations to repurchase shares, we have a bit of, what I like to call, a champagne problem, which is that our share practice has gone up so much that our cash flow from operations that we expect from 2019 is no longer enough cash flow to repurchase the remaining 13.65 million shares this year. And therefore, we will require some of the cash flow from the beginning of 2020 in order to complete the repurchase of the full 18.3 million shares.I want to be clear, we still want to repurchase the full 18.3 million shares, and it is our plan to continue to purchase shares in the open market. The only caveat is that at today's higher share price that will simply take a bit more time. This topic is one that is very important to me as I know it is important to our other shareholders and therefore, I'll commit to being continuously open and detailed with respect to our share repurchase progress and our plans going forward.For those of you who have been Sandstorm shareholder since the beginning, you may note that this is our 10th annual conference call. It's amazing for me to see that over the last decade we've taken a company that has no employees, no cash, no assets and turn it into a world-class royalty company with 187 royalties and $1.3 billion market cap, and we've increased our share price nearly 300% over that period, which is a period in which over 90% of precious metals companies saw their share prices decline.In addition, we've now moved the company to a phase of its life when we're able to continue to grow the company without dilution. So with the quality asset base that we've built, along with a quality of team we've assembled, I'm excited to see what we can do in the next 10 years. So with that, I'm going to hand it over to Erfan to discuss the quarterly and annual results. Erfan?
Great. Thanks, Nolan. Hello to all of you shareholders and to prospective investors who are listening in today. We appreciate you taking the time to join us, and I'm pleased to speak to you about another record-breaking year that we had in 2018. I have a few slides to go along with my portion of the conference call. And to begin, I thought it'd be interesting to display a chart of Sandstorm's gold equivalent ounces going back to 2010.For those of you without access to the slides, this bar chart that I'm referring to shows a very nice growth trend since we initially began receiving gold ounces from our royalty and stream that we acquired back in 2009. Since that time, we've had steady, consistent, incremental year-over-year growth in attributable ounces sold from our royalties and stream. We expect this trend to continue in the years ahead before we are treated to some explosive growth that will come from a production start at Hod Maden and some other assets that are currently in the development stage. I am also proud to say that we've met our stated guidance this year, and actually we had each and every year since early days of the company. For those of you who may not be familiar with our guidance practices, what we like to do is start the year with a relatively wide guidance span and then as we complete each quarter we tend to narrow the guidance range. For 2019 in particular, we're forecasting 63,000 to 73,000 gold equivalent ounces sold, which represents about 10% to 25% growth from what we brought in during 2018. That's not too shabby. But that explosive growth that I was referring to, well, by 2023 we're projecting over 140,000 gold equivalent ounces attributable to Sandstorm. This impressive growth profile is based on royalty asset that we have already bought and paid for and assume that we acquire no new royalties between now and then. Now I'll spend some time digging into the highlights from the fourth quarter and the full year results in 2018. Staying on the topic of the gold equivalent ounce deliveries and sold during 2018, we've broken out the top 10 contributors by mine on the next slide. A number of the mines that we completed deals on years ago should have been off this list by now, but have had excellent exploration success and are producing far beyond the mine life that was originally anticipated. Kudos to our technical team and their ability to evaluate upside potential. You'll notice on the chart that the Santa Elena mine in Mexico came out on top followed by Chapada mine in Brazil, the Karma mine Burkina Faso and the Diavik mine in Canada. These mines are all run by major and mid-tier mining companies including the likes of Rio Tinto, Endeavour Mining, Yamana Gold and First Majestic Silver. It was really the increases from these top 4 contributors as well as the addition of Houndé at the beginning of 2018 that led to a record year. We did have some declines from a basket of royalties when compared to 2017, but overall this chart demonstrates how nicely diversified our portfolio has become and the diversification benefits have more than offset the underperforming assets during 2018.It's also worth noting that the majority of our attributable ounces are coming from stable jurisdiction. For example, from the top 10 contributors listed here, 55% of the ounces sold came from North America, with the majority being here in Canada; 23% of the ounces were delivered from mines in South America; and about 22% came from Africa. So how did that translate into revenue? Well, on Slide 9 you can see that we posted a record of $73.2 million in revenue, about 7% higher than in 2017. This chart also nicely illustrates that steady, incremental growth that I was talking about earlier. We strung the average realized gold price per ounce over these bar charts, and you can see that there's not been a great deal of variance in average gold price during the last 4 years. The average realized price was slightly higher than last year at $1,269 and our average cash cost per ounce during 2018 was $278. So our average operating margin per ounce during the year ended up being about $990. All right, moving on to a few comments about our reported cash flow and net income. We posted $48.1 million in operating cash flow, excluding changes in working capital over the 12 months of 2018 compared to $44 million in 2017. That cash flow enabled us to add to our royalty portfolio and buy back millions of shares during the year. Our net income was lower than 2017 at $5.9 million. And the difference was due to a number of nonrecurring gains that were reported in 2017. The difference in net income was also a function of smaller gains recognized on the revaluation of our equity and debt investment as well as decreases in things like deferred income tax expense and depletion expense and the like. I'd like to touch on the quarterly results from 2018 briefly as well. Let's start by using the chart on Slide 11. The attributable gold equivalent ounces sold quarter-over-quarter were really quite consistent, as you can see on the chart. The difference between the highest total in Q1 and the lowest in Q4 was only 3%. Revenue moved around slightly, mainly based on the commodity price. It has been nice to see that the price of gold off to a good start in 2019, which I think is part of the reason why Sandstorm's share price has been performing well. But ultimately, the bigger reason why our share price has been trending upwards is that the investment community is starting to recognize the value of our royalty portfolio. I'm quite happy that we were able to buy back as many shares as we did at such low prices during the year. Based on the inherent value that we believed in our royalty portfolio, it's not a complicated cash flow allocation decision to make.I'll now point you to Slide 12 where we have a summary of our fourth quarter financial results for both 2018 and 2017. I'll highlight that the cash flow from operations, excluding changes in working capital and net income figures were higher in 2018 at $10.9 million and $2.7 million, respectively. There was nothing particularly noteworthy about the increase in cash flow, which was driven by additional royalty revenue that came from the Houndé royalty. But as far as net income is concerned, the main difference between the 2018 and 2017 years was an impairment charge that occurred in 2017 that did not reoccur in 2018. To end my remarks, I thought I would pull the available capital slide from our investor presentation. I like this slide because it gives you a sense of how much firepower we have in terms of incoming cash flow and credit capacity. Last section on the bottom of the chart represents our accumulating cash flow from operation. And the gray section is our $225 million credit facility. At present, we have less than $40 million in net debt after closing the Fruta del Norte transaction. But that won't hamper our corporate activity a bit, and we expect to continue making acquisitions and buying back shares this year. It's also worth noting that our debt and equity investments are currently valued at about $65 million. And like we've done before over the last few years, we look forward to monetizing some of these assets in order to fund our corporate development efforts. All right, that's it for me. It was a good quarter, a record year and we're excited for what's about to come as we continue to execute on our growth plans. Dave, I'll pass it over to you.
Great. Thanks, Erfan. So for this quarter's asset update, I thought I would touch both on our newest acquisition, Fruta del Norte, but also Aurizona. But first, I'll speak to a slide in our present -- investor presentation deck that helps illustrate the exploration upside that we try to capture in every deal here at Sandstorm. As Nolan and I have described in investor meetings, we firmly believe that the upside value in every good streaming and royalty deal is the exploration potential. The one thing that I've learned in this industry that you can't get exploration upside if you don't get any drills turning. Slide 15 of our presentation attempts to graphically demonstrate how the drills have been turning for Sandstorm's portfolio over the last 8 or 9 years. Each of these columns show the amount of drilling incurred on our properties for each of those years. As you can see, in the last 4 years we have gone from less than 21,000 meters of drilling to over 200,000 meters of drilling in 2014; over 500,000 meters of drilling in 2016 and 2017; and now over 700,000 meters of drilling in 2018. That is what we're looking for in a deal. And we get rewarded for chasing after transactions that are getting the exploration drilling they deserve. And these are not just exploration projects either. Houndé, Cerro Moro, Chapada and Aurizona are amongst all the top drill projects in our portfolio.Many of these mines are taking drilling in 2017 and 2018 and translating that into reserves to be mined in just the next few years at already producing mines. For us, that is the best value that we can provide to our shareholders. And we're very proud that our portfolio has demonstrated this very valuable characteristic in space. Now onto Aurizona. Of course, a big part of our growth and production next year is the reopening of Aurizona by Equinox Gold. Last quarter, I did a quick update on the great drill results Equinox had on the projects. But this quarter, we'll focus a bit more on the progress towards production at the mine. Right now, Equinox is working on commissioning in Q1 with the goal of achieving commercial production at or just after the end of that same quarter. They expect to expand tailings facilities this year and also complete a preliminary assessment on a potential underground mine in the future. A new resource is expected based on the large amount of successful drilling in 2017 and 2018. And, of course, more exploration at prolific Tatajuba target and others on the property. Now coming back again to the first part of my discussion today focused on exploration upside. I'll speak to our latest acquisition in Fruta del Norte. We feel Fruta is in a similar position to where Houndé was a little bit over a year ago. It's about to go into production, but has yet -- has a large land package that has yet to see much drilling outside of the original deposit. There's been very little drilling since Kinross owned the asset and little since Lundin has begun its construction. However, like Houndé, Fruta del Norte has many prospective areas that will get the attention they deserve in the coming years as the mine gets up and running. Luckily for us, the getting up and running part is coming along great. Just yesterday, Lundin released further information on how construction is going. Overall, engineering is 85% complete, with 70% of project CapEx committed. Underground development is ahead of targets, with both declines reaching the orebody and development of the primary levels has begun. Earthworks had 3 quarters complete, and the process plant is getting started with most of the foundation poured and some of the structures have been assembled. The power line is started with 27% of the infrastructure completed at the end of 2018. Lundin remains on track for production on -- for first gold pour in Q4 2019. We have great confidence in Ron Hochstein and his team will be able to achieve their goal in 2019. And so with that, I'll pass over to the operator, Melissa, to begin the Q&A session.
[Operator Instructions] Our first question comes from the line of Mark Johnson with Optimum Investment.
Can you hear me, okay?
Yes, thank you.
Glad to see the momentum turn around for you. Just a question for you, anecdotally, on the drilling process, completed a book a while back on fracking of oil in the shales, et cetera. Just wondered, really, what's happening technology-wise? Is that a benefit to you guys in some of these projects? Is there greater technology that's been brought into the drilling process? Is that still to come or what's happening in that regard?
Mark, it's Dave here. Yes, in general, the drilling process for us is focused really on the discovery and looking for new projects and really trying to use them evaluated. In general, it doesn't change that much. There's a few little things here and there that help out. But if your rock is fairly competent, if you're getting decent recoveries, you typically really just use your RC, or reverse circulation, drilling or you end up doing your diamond drilling, which gives you a little bit more structural information. So for the most part, it's been pretty successful just using that technology. I think, really, the broader base of really how technology hopefully will increase efficiencies in the industry is really more on that production side. There's been a lot of changes in automation. There's been a lot of changes in a couple of different -- new sorts of mining methods that are being tried out. For the most part though, we here at Sandstorm, when we're looking at our investments and choosing our investments, we're looking for relatively well-established methods. We're looking for fairly conservative types of deals and transactions that are using well-understood methods. So for us it's -- we don't really kind of stretch beyond the boundaries of our comfort zone and what we're familiar with.
Great. A lot of activity too with some of the consolidation in the industry?
Yes, definitely. It's a thing we think will continue going forward.
Our next question comes from the line of Don MacLean with Paradigm Capital Group.
I know we've talked about a number of things before, but one question was on the comment about monetizing certain of the assets to fund the buyback. Can we get a little more specific on that? And then I was also going to ask for an update on Hod Maden?
Yes. So just to correct, I don't think we'll be monetizing any assets to fund the buyback. We're going to focus on the buyback with cash flow from operations, and so we'll use 2019 cash flow. And as I mentioned, that we'll probably use the beginning part of 2020's cash flow to complete the buyback, depending on what our share price does between now and then. And I think Erfan made reference to monetizing some of those assets to help our corporate development efforts, so buying new royalties and new streams.
Nice to see you chasing a rise and peak.
[indiscernible]
Just on the Hod Maden. Maybe, Dave, can you talk a bit about the timing of key milestones ahead? And then, Nolan, maybe you could answer a question that I get asked about every time I talk about Sandstorm, which is, is there progress on the path towards conversion to a royalty?
Sure. For -- really kind of progress on how the asset is developing, I think it's in a good spot right now. Some of the key milestones is really focusing on the EIA process, which is a vital and important part of the permitting process. So that's well underway. They've done enough baseline testing, that's all was completed over a year ago and they submitted that with partly through that process of submitting the EIA and getting it completed. So that's an important part. The team there at Lydia and Artmin has begun the process of really starting that feasibility. There was a couple of key trade-off studies that we're going to have first, but the feasibility should be awarded soon. But a lot of work that would go into the feasibility study, testing and further studies have begun already by that Artmin team. 2019 should be an important year in terms of really seeing some of that first early works, including infrastructure builds and starting to get portal getting into decline. So that's something that the Artmin and Lydia is looking at very closely to trying to complete in 2019. So it's been good progress, we think. We still think that time line is intact as we outlined it -- as we've been outlining for the last couple of years now.
Then that would be -- talking in terms of feasibility completed when?
Yes. So feasibility completed either probably at the beginning of next year because it's just really getting assigned right now and the tender process is being completed. But in the meantime, a lot of the permitting and permitting isn't getting slowed down by that process.
And with respect to the legal form of what we own, so as a refresher to everyone, we own 30% profits interest and what I would say is we have a public policy now of not discussing any conversations that we're having about potentially changing that legal form of what we own, so can't comment on that. And what I would say to investors is making investment decision assuming that our 30% profits interest stays at 30% profits interest. And if one day we wake up and surprise you, then that will be a good news thing.
That's fair, Nolan. Maybe one last thing, Dave, because we've seen Alamos struggle trying to get permits sorted out. They don't have a partner. Can you maybe provide a bit of color to, I don't know, but facilities that your partner has in dealing with natural government obstacles and red tapes?
Well -- yes, I mean, the permitting process like in DC or Ontario jurisdictions that we're more familiar with it, there's a lot of different organizations, a lot of different permits actually need to receive. So it takes somebody who's been trained, somebody who really understands the process well and that's what we have in Lydia. They've been Alacer's partner in Turkey for many years now and they've been very successful at getting permits, both on open pit, heap leach type of operations. Of course, on that autoclave that tripler is running. We are really confident and we really believe in the process that Lydia is going through right now to get the permits. We don't see that as really a -- at least right now we don't see it as a problem area or an area that might hold up the project because they have been so successful at receiving permits on projects that frankly are much more complex and much more difficult to deal with than this. There's, I think, 17 permits altogether that need to be received on this. And with the EIA process really well on track, we don't see that that's going to be the holdup that some other companies that don't have a good Turkish partner have encountered in Turkey.
[Operator Instructions] Our next question comes from the line of John Tumazos with John Tumazos Very Independent Research
When do you expect the first gold output to be at Fruta del Norte?
So the first gold pour they've publicly disclosed this by the end of this year, but commercial production happening sometime in mid-2020. Our royalty kicks in as soon as they start pouring gold.
What is the tax jurisdiction for your royalty? Is it Ecuador, Canada or something else? And what tax rate should we anticipate?
So it's a Canadian entity that owns the royalty. And when the royalty payments get made to us from Ecuador, there's about 15% withholding tax. And in Canada, you get a tax credit for that and you get a depreciation tax yield in Canada as well. So we don't anticipate paying any tax other than that withholding tax.
What's the credit do you get back in Canada?
You don't get it back in Canada. You just get it credited towards what other -- what Canadian income tax you otherwise would have paid in Canada, which takes your Canadian tax to 0.
Your last 4 deals or 4 of your last deals have been 2 in Burkina Faso, 1 in Turkey, 1 now in Ecuador, do you anticipate trying to limit some of your next transactions to boring, monotonous countries like Canada or the U.S.?
As we've said all along, our plan is to diversify globally, but we do want to ensure we're not overly concentrated in any one jurisdiction. So Turkey, for example, we've got enough Turkey risk right now, so we're focusing on countries other than Turkey. And we've enough Burkina Faso exposure right now, so we're focusing on countries outside of Burkina Faso. We are working on some transactions right now, and they are of that more plain vanilla type country. Other than -- we're not focusing on anything material and exotic right now.
Our next question comes from the line of Matt Williams, private investor.
Just wanted to call out in regards to the buyback. I've noticed that the -- certainly, over the last few months, the share price has risen quite nicely from the mid-$4s up towards $6 in recent weeks in U.S. dollar terms. All else being equal with kind of gold price in the mid-$1,300, call it, is there a share price at which you would really consider pausing buybacks, recognizing that making a buyback is ultimately a capital allocation choice between reducing share count and investing in kind of new growth assets. Any thoughts on that?
Yes. As I mentioned in my preamble, one of the things that we've committed to our shareholders is not buying shares above what we believe the inherent net asset value price or value per share is. And that number is something we don't publicly disclose. It's changing all the time. We update that number at least on a monthly basis, sometimes on a weekly basis, depending on what's happening here at Sandstorm. And we will not purchase shares above that. And as I mentioned, we believe today's share price is below that inherent value per share. So today's price we'll continue to operate the buyback. But if the share price were to go up very substantially and above what we believe at that moment the net asset value per share is, we would pause the buyback and focus our capital on asset acquisitions or debt reduction or dividends or a combination of those three things instead of share buybacks.
This concludes our question-and-answer session. I'll turn the floor back to Mr. Watson for any final comments.
All right. Thank you, Melissa, and thank you everyone for calling in today's call. And as normal, please feel free to reach out to us here at Sandstorm after this call if you have any further questions. Thank you.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.