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Good morning. My name is Lindsey, 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]Thank you. Mr. Watson, you may begin your conference.
Thank you, Lindsey. And good morning, everyone, and thank you for calling into this Q4 and annual earnings call for 2020.Today, I'll provide a brief update on the company for investors and then Erfan, our CFO, is going to walk us through the Q4 and annual results, and then Dave Awram will provide a brief update on a couple of our assets. And after that, we'll turn it over to the operator for a question-and-answer period. And if anyone has any questions that do not need to be part of the live Q&A, you can ask those questions through the web portal. And we'll ensure that each question we get there will get a direct response from us after this call.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. As everyone is well aware, COVID brought many challenges to 2020, including mine shutdowns as well as operational curtailments, which led us to withdraw our guidance for the 2020 year. And yet, I am pleased that we're reporting both record Q4 and record annual revenue as well as record Q4 and record annual operating cash flow. It's our expectation that 2021 will not have the same shutdown challenges as 2020 and, as a result, I'm pleased that we are now issuing production guidance for 2021.You can see here on Slide 4 that we're expecting Sandstorm's attributable gold production to increase from 2020, and we're providing an initial guidance range for 2021, between 52,000 to 62,000 gold equivalent ounces. Assuming the midpoint of this range and an expected gold price of around $1,800 an ounce, this would translate into record revenue of approximately USD 100 million and operating cash flow after tax and after G&A of approximately USD 75 million, which would also be a record for the company. Therefore, overall, we not only had record cash flow in 2020, we're expecting to set a new cash flow record in 2021 if gold prices continue to stay strong.It is my opinion that there are really 3 primary reasons that make Sandstorm an exciting investment going forward. The first is that our existing portfolio of royalties and streams is performing well and is generating record cash flow. The second is that our primary growth asset, Hod Maden, has exciting catalysts happening in 2021, which I'll talk a little bit more about later. And the third is that we have more capital to allocate than we have ever had before.Specifically, you can see on this next slide that between Sandstorm's cash on hand, our expected operating cash flow this year and our undrawn revolving line of credit, we have $0.5 billion that we can allocate to either making acquisitions or returning capital to shareholders through either share buybacks or dividends. This is an important catalyst for Sandstorm, and it's one of the things that sets us above and apart from our royalty competitors.You can see on this next slide the amount of relative capital that we have to allocate. Specifically, the slide is measuring the amount of capital we can allocate this year as a percentage of our market cap, with the conclusion that we can allocate approximately 30% of our market cap, which is more than triple some of our other competitors. The big question, which many of our shareholders are rightly asking, is how will we allocate this capital, with the 3 alternatives effectively being: number one, acquisitions; number two, share buybacks; and as I said, number three, dividends. Although we will absolutely -- we do not have a crystal ball, I would expect that we will allocate capital to all 3 of those alternatives.Sandstorm is a growth company, and we want to continue to grow our portfolio, and we will do exactly that. We are being patient and ensuring we make intelligent acquisitions, but we are working very hard behind the scenes. Despite making few acquisitions in 2020, we actually worked on twice as many deals in 2020 as compared to 2019. And so far in 2021, our deal team is even busier than we were last year.Fortunately, for Sandstorm shareholders, I believe that we have enough available capital to also return capital to shareholders while we grow the business. It is our management's belief that any decrease in our share price from these current levels warrants us buying back our own shares and then canceling those shares. This would continue to reduce the total number of shares outstanding and will increase the value per share and the cash flow per share to our remaining shareholders. Therefore, if there's any further decrease in our share price, we will be stepping into the market to repurchase shares.You can see from this slide that every year for the past 3 years, we have put our money where our mouth is, and we have repurchased shares, starting with 2.2 million shares in 2018, and then 8.7 million shares in 2019, and then another 4.6 million shares in 2020, all at a weighted average price of $5.13 per share. Based on this past practice, shareholders should not be surprised to see us do it again in 2021.I do believe that even if we make acquisitions and/or repurchase shares, that Sandstorm's stable long-term cash flow would also justify us declaring a small dividend, either towards the end of this year or next. Our current thinking is that the initial dividend would be quite small but that it would continue to increase over time. So I would say to our investors, stay tuned for the timing of this decision.Looking forward to 2021, we're encouraged that it's expected to be a catalyst-rich year with a number of potential positive events, which would benefit shareholders. For example, in 2021, we expect our primary growth asset, Hod Maden, to be granted an EIA from the Turkish government, which is a key permitting milestone. We also expect to be releasing the results of the Hod Maden feasibility study next quarter and then later in the year, to officially award the EPCM contract for the mine's construction.In addition, we anticipate completing new deals in '21 -- 2021 to grow our portfolio while both buying back shares and potentially declaring our first dividend. And we expect all of these catalysts while benefiting from the continued exploration success by our partners as they continue to find new gold ounces that will benefit our shareholders at no cost to us.Overall, despite COVID, 2020 was a good year for Sandstorm, and based on the catalysts I see before us, I'm expecting that 2021 will be an even better year. As I have mentioned in the past, I'm very bullish on precious metals over the next 10-plus years. Sandstorm is well positioned, based on our existing portfolio of assets, to profit from this, but we're working hard to get even more precious metals exposure, and I believe that we are well positioned to accomplish that.With that, I'll now hand it over to Erfan to go through the financial results.
Thank you, Nolan. Hello, everyone. Thank you for joining us today. I'd like to take some time to walk through the financial results for both the fourth quarter and year-end and highlight a few noteworthy items.To begin, I think it's important to recognize that 2020 was a year unlike anything we've seen before. Despite an unforeseen decrease in expected production from a few of Sandstorm's cash flowing royalties as a result of the pandemic, Sandstorm had another record-breaking year in terms of both revenue and cash flow from operations. This chart here shows the trend of gold production over the last decade and resulting revenue for Sandstorm. While the number of gold equivalent ounces sold in 2020 was closer to Sandstorm's 2017 fiscal year, the run-up in the price of gold assisted Sandstorm's financial results. We're optimistic moving into 2021 as we have no reason to expect further delays to production as a result of the pandemic. And so we expect Sandstorm to be back on track for setting record production levels over the years, this time, in a much stronger gold market.Here, we can see the average realized gold price per attributable ounce overlaid on this chart. In 2020, Sandstorm sold each attributable gold ounce at an average price of $1,783, with an average cash cost of $269 per ounce. This resulted in a record cash operating margin of approximately $1,500 per attributable ounce. This set a new record for cash flows from operating activities of approximately $66 million in 2020.Looking at the summary of Sandstorm's year-end financial results. As mentioned, Sandstorm had total revenues of $93 million, up 4% from 2019. This came from 52,176 gold attributable ounces sold during the year compared to 63,829 in 2019. As I've just mentioned, $65.6 million in cash flow from operating activities was a record for Sandstorm, which resulted in net income of $13.8 million for the year.This next slide is a summary of the fourth quarter financial results. Quarterly revenue was also a record at $29.7 million, up 24% from the fourth quarter in 2019. The number of attributable gold equivalent ounces sold in the fourth quarter, while not a record, was back in line with expectations, thanks to mining operations in our portfolio producing at full capacity again following the COVID-related temporary shutdowns experienced in the spring and summer months. Cash flows from operating activities for the fourth quarter was also a record at $19.8 million, up 26% from the fourth quarter of 2019, and net income was $10.5 million.Looking at where revenue came from for the year, this slide shows Sandstorm's sales and royalty revenues broken up by region and by metal type. Sandstorm continues to receive the majority of its revenues from the Americas, with over 1/3 of revenue coming from North America. In terms of metal type, Sandstorm remains a precious metals-focused royalty company, with a vast majority of revenue coming from gold- and silver-producing assets.Digging a bit deeper, this next slide breaks down Sandstorm's annual production by asset. The Yamana silver stream was a top-performing asset, bringing in nearly 11,000 attributable gold equivalent ounces. 2020 marked the first full year that Sandstorm has received production from the silver stream. Under the stream agreement, Sandstorm is entitled to 20% of the silver produced at Yamana's Cerro Moro mine for ongoing cash payments equal to 30% of the spot price, up to an annual maximum of 1.2 million silver ounces per year. Cerro Moro did experience a COVID-related temporary shutdown in the summer, which was reflected in the silver deliveries for both the second and third quarter.The Aurizona mine was another producing asset from which Sandstorm received its first full year of production in 2020. Equinox Gold commenced commercial production at the Aurizona mine in July 2019.Sandstorm, as everyone will recall, has a 3% to 5% sliding scale NSR royalty in Aurizona dependent on the gold price. With a stronger gold market this year, Sandstorm royalty has been 4%. If gold prices rise above $2,000 per ounce, the royalty will increase to 5%.Two assets to note on this slide are Relief Canyon and Fruta del Norte, Sandstorm's 2 most recently acquired producing royalties. Sandstorm began receiving fixed deliveries from the Relief Canyon mine in May and sold a total of 3,819 gold ounces during 2020. Fruta del Norte reached commercial production in February of 2020. The mine experienced a COVID-related temporary shutdown at the end of the first quarter that lasted into July.In the second half of 2020, Fruta del Norte produced 191,000 ounces of gold. And in December, the operator, Lundin Gold, announced a plan to expand mine and mill throughput by 20%, expected to complete it by the end of 2021. With this in mind and no further operational suspensions expected, we're optimistic about the value that this asset will bring to Sandstorm going forward.Finally, I want to briefly speak to Sandstorm's cash position and some notable events that took place in 2020. As Nolan has already mentioned, Sandstorm is in one of the best financial positions it has been ever. In 2020, Sandstorm received gross proceeds of over $70 million from the last of the company's outstanding warrants. The proceeds from the early warrant exercise program in April were used to pay off the remaining balance on our credit facility. The final set of warrants expired in early November, making Sandstorm both debt free and warrant free, a first in the history of the company.We were also able to take advantage of higher gold and asset prices, liquidating approximately $56 million in noncore equity and debt investments in 2020. As of the end of 2020, Sandstorm had approximately $16 million in noncore equity and debt investments that we can continue to monetize for future acquisitions and corporate development efforts.As Nolan stated, Sandstorm is forecasting attributable gold equivalent production to be between 52,000 and 62,000 ounces in 2021, with a long-term forecast of approximately 125,000 attributable gold equivalent ounces in 2024.And with that, I'll turn it over to Dave for further updates on our assets. Dave?
Great. Thanks, Erfan. So if you are familiar with our investor presentation, then you would have seen something similar to what we have on Slide 18. Since the start of Sandstorm, we've been tracking the amount of meters drilled on the assets that we have streams and royalties on. Our team has compiled the data for 2020, and you can see that the previous 4-year trend continues with over 0.5 million meters drilled. Despite the year being seriously disrupted by COVID-19, we still saw this increase of drilling in 2020 over 2019. And like previous years, we see that almost 2/3 of that drilling was completed on producing assets. You can see that reflected in the increased resources in Houndé, Aurizona, Chapada and others.For the last 5 years now, we have seen almost 3 million meters of drilling on our partner projects. Now I'm not exactly sure what the dollar number that this represents in terms of investment, but it's likely not far from $0.5 billion of exploration work that Sandstorm did not have to contribute to but will receive the upside on. This helps to illustrate the focus that we have on purchasing assets that have the best chance of receiving exploration success. Since the beginning of Sandstorm, both Nolan and I have stressed the importance of exploration as the best value driver in streaming and royalty deals. When your portfolio has excellent exposure to exploration success, you are driving shareholder value forward.On to Fruta del Norte, which is a great example of this. Like our investment in Houndé before it, as soon as Fruta got into production, Lundin Gold has focused on growing the project in multiple ways. Despite going into initial production in 2020 during COVID and being shut down for most of the first half of the year, we already have an expansion plan for the project in place, and there has been reserve increase that Erfan talked about just a few moments ago.Lundin Gold is working towards an expansion of 20% for both mining and milling to be completed this year. After producing 191,000 ounces in the second half of 2020 and beating their guidance on tonnage throughput, head grade and recovery, Lundin is expecting to see between 380,000 and 420,000 ounces of production in 2021 and an average of 340,000 ounces over a 14-year mine life. That's without converting any of their 1 million -- 11 million tonnes of inferred resource that they're working to complete 10 million -- sorry, 10,000 meters of infill drilling in 2021.On top of the expansion program and infill drilling at Fruta, there is additional exploration drilling at other regional targets. These are targets that have not been investigated for almost 15 years. The 2 first targets to get work on are Barbasco and Puente-Princesa, both located on the Suarez pull-apart basin. So they were looking for similar mineralization targets to what Fruta is. Their initial budget is $11 million for 9,000 meters of drilling, and I can't wait to see what results they come up with on the project. Lundin has done a great job in getting this project up and going, and our 0.9% NSR covers the entire area, including all of their current exploration targets.On Slide 20, we show one of our most successful assets in the portfolio in Aurizona. Being our first investment when we started Sandstorm alongside Santa Elena, this project keeps on giving to us. With guidance of 120,000 to 130,000 ounces in 2021, our sliding scale royalty on this asset should provide us around $9 million in revenue this year. I'll remind you that our original investment in Aurizona in 2009, the project was expected to produce less than 90,000 ounces per year for about 8 years. Now in 2021, there are still over 6 years of life remaining, and exploration keeps going strong.Recently, they released some exploration results that are more regional-based and also targeting their underground potential. For near-surface targets, they have begun drilling to the East in Genipapo and Micote. These are 2 areas that I stood on over 10 years ago with their chief geologists, who thought they may be the highest-grade targets on the property. Drilling to date shows consistent ore grade intercepts from section to section and also some really remarkable holes, like 17 grams over 5 meters and 84 grams over 21 meters. At Piaba, the targeting is mostly directed to a potential underground mine, which 47 [ and ] the 49 holes that they have assays on hit significant gold grades.On the long section on Slide 21, you can see large consistent trends beginning to emerge in the deeper drilling under the current pit shell. The mineralization is consistent enough, and the grades are high enough to start looking seriously at an underground option, which is exactly what Equinox is doing as it proceeds to a pre-feasibility study in 2021 and is planning over 49,000 meters of drilling for this year.To illustrate the potential upside to Sandstorm, assuming a $2,000 gold price, every 1 million ounces that Aurizona adds into its mine plan means over $100 million in cash flow to Sandstorm. That's what good exploration success does for shareholders. So with that, I'll pass it over to Lindsey, the operator, for Q&A.
[Operator Instructions] Our first question comes from Heiko Ihle of H.C. Wainwright.
Congratulations on another pretty successful year and growing pretty fine times there. You mentioned that you'd be wanting to step into the market and repurchase shares. And just in general, your prepared remarks seem to be extremely focused on your balance sheet and uses of cash, much more than I've seen before. I'm just thinking aloud here, are you essentially stating that royalties right now are at prices where large-scale acquisitions are not as sensible as they maybe used to be, and you're looking for alternate uses of funds?
Yes. Thanks for the question. We're saying nothing of this sort. I think the comments that I went through emphasize that we are a growth company. We are focused on a growth company. As many people know, we got within inches of completing some deals last year that just, for various reasons, didn't materialize. And that just sometimes happens in the nature of a growth business where you're swinging big and trying to grow. And our pipeline right now is deeper in terms of large potential transactions than it's been in as long as I can remember. And I do think we're going to grow in 2021 with acquisitions.
I will not mention anything about the deal that you just talked about. But building on the last question, more importantly, your answer, how shocked should we be to see you could do a transformational acquisition, say, high 8 figures, low 9 figures? I mean you could easily do $100-plus million deal by the end of the year. And building on that, what are the prices that you're seeing for these types of royalties when compared with 12 and 24 months ago?
Yes. I would say shareholders should not be surprised if we do that. In fact, I think they should hopefully expect that. In terms of pricing and what we're seeing, it really depends on the nature of the transaction. We're still -- we're working on some transactions right now that are -- we think there'll be, if we could complete them over 10% IRRs, that they are more in the -- well below $100 million size transaction. Because it's when you get up into the $200 million, $300 million, $400 million, $500 million per transaction that the IRRs do come down a little bit, but the asset quality and exploration potential of the assets goes up a lot, too. So there's a bit of a give and take there. And we're not sure which transactions we're going to land yet, but based on what we're seeing in our pipeline, we think [indiscernible] will.
Our next question comes from Matt Farwell with ROTH Capital.
I was wondering if you could comment on some of the news that we're reading about Hugo North in Mongolia. I'm sure there's not a whole lot you can say, but it does -- is there any risk on timing of that project based on what you've read and your knowledge as -- given your proximity to the project? And also, is there any risk that the royalty terms could change?
So I'll start with the second part of that first. There's no risk that I'm aware of that could cause the royalty terms to change. We've got a stream on the Hugo North Extension on Entrée joint venture grounds. And those terms are kind of set in stone, and nobody really has the ability to unilaterally change the [ MOS ], and we're not inclined to change them either. So those should stay the same.With respect to the timing of the asset moving forward, I think that there's always risk when an asset is not yet fully complete construction. There's risk to time lines. Having said that, this asset is so critical and central to the proper functioning and funding of the Mongolian government that ceasing its forward momentum would bankrupt the whole country. So the government likes to make lots of noise, but that's all it can ever be. Otherwise, they'll be cutting off their own heads. So I'm not too worried about long-term delays. It's just short-term noise.
Interesting. And then just a follow up on the M&A environment. In terms of the types of projects you're looking at, are you finding, given pricing, that you may have to focus more on development or exploration of properties? Or do you still think that you can acquire properties with immediate cash flow?
Yes. So both. We are focusing on everything from things that are in production to development to exploration. What we are finding in terms of how we want to allocate capital, it's a priority right now to things that are in operation. I would say the majority of the things that we think we have a reasonable chance of completing are things that are producing now. But we're not stopping looking at exploration. It's just not the priority right now.
And when you mention the large ticket price for some of those ideas or transactions, I mean, when you look at your liquidity, a lot of your liquidity or capital, as you say, is in the form of credit. Is it your intention to use credit for some of those larger transactions? Or would you rely on share issuance?
Our plan would be to use credit first.
Our next question comes from John Tumazos with Independent Research.
On your website, you listed 24 producing royalties you have and then development and advanced exploration, about 3 dozen projects. Yesterday, Kinross classified Lobo-Marte as reserve 6.4 million ounces, targeting 2024 output. What are the 2 or 3 warmest of those 3 dozen or so projects that you think will have a specific date and time line in the next 5 years?
Specific date and time line in the next 5 years, [ well, a lot of our ] projects [ are not included in that respect ]. I'll hand that over to Dave Awram.
Yes. So Lobo-Marte certainly is one of those. It's great to see that upgrade happen. And Kinross is really pushing that project forward. So that's going to be, I think, quite a big contributor once it does come online, and it's not -- it currently isn't in any of the discussion or guidance or cash flow profiles that we may have illustrated in the past.But there's also really kind of a few of the smaller ones. There's a lot of Canadian -- little Canadian assets that are in there. They're not huge contributors to it as well, too. But they're either in some kind of bulk sampling type of format or also in -- but also in looking -- going through feasibility and development and construction phases.Of course, another large one that we do expect to see more information on later on this year is Agua Rica, which, of course, is the joint venture between Glencore, Yamana and Newmont, as they outlined more details and updated feasibility study on really what that would look like. And of course, that's a huge contributor to us. And that potentially happens sometime by 2024, 2025 time line as well, too. So that's kind of some of the bigger ones that would have, I think, significant impact to them that are starting to firm up more serious dates in front of them in terms of when we might actually start seeing production from them.
If I could ask another, following up on an earlier question. Your equity stake is 22% in Entrée Resources. Is that too much? How do you expect to get out? Is your game plan to swap that for a stream or royalty -- bigger stream or royalty? Or did that see the entire company sold out or to sell it back into the stock market for a little profit? And I have moments when I root for Rio Tinto to dynamite the project so they earn more on their copper assets in Utah, in Chile. I hope before I die, one company dynamites the project when they're getting screwed over in some screwy country. I'm just wondering what your game plan to get out of that one is.
Yes. It's a great question. I think that right now, the way we're looking at it is that their shares are fundamentally deeply undervalued. And I would say that we probably think the shares are probably closer to worth $2 or $3 compared to the $0.50 they're trading at. So we're happy to own the shares, maybe pick some more up in the market, which we do from time to time.And then in terms of exit strategy, the way you win, there's lots of different ways to win when you buy something that deeply undervalued. You can either sell to a potential strategic acquirer. You can wait until the project is more advanced and the market is paying more reasonable price, and you can liquidate it into the market or you can just continue to hold.I think that what a lot of people don't realize for a company like Entrée is that once their ground is being mined on, they should cash flow close to $100 million a year every year. Sandstorm owns 22% of that company. And if we just force a dividend, that's $22 million a year to our shareholders. It's a mine that should last several generations and what's $22 million a year for everyone. It's a lot more than the $15 million we paid for the shares. So...
If I could impose with one last one. The slide with 30% of your market cap as capital available for acquisitions might frighten some investors. We don't know what we're buying if the corporate asset mix is going to change. It's like a special purpose acquisition corp. Some of your recent investments are Mongolia, Burkina Faso, Turkey. Is it too much to constrain your next investments to the Americas or first world given that you have a number of recent investments that are in other places? I was trying to get a fund manager into your stock a couple of days ago, and the guy was upset that at the time, you put almost half your assets into Mariana's for Hod Maden.
So I think the answer to your question is it depends on the specific transaction. You look at places like Burkina Faso, it is less than 4% of our NAV. When people make statements like we put half of our value into Hod Maden, it's just sort of an ignorant statement because, yes, it will be half of our production, but we are a $1.2 billion market cap company that bought that investment for $180 million. So we -- for 15% of our market cap, we bought 50% of our production. If we can do deals like that, that are that accretive to shareholders over and over and over again, we'll do it. And so it just depends on what deals are in front of us.I think that we've shown over time that we're willing to be patient and methodical and thoughtful about how we grow the company and what we buy to make sure it is intelligent and accretive to shareholders, and we'll continue to do that. And if the next best deal happens to be in Canada, we'll do that deal in Canada. We're just -- we're going to go where the smart deals are.
So as I look at your slide with your output, Slide 15, by mine or revenue by mine, it's the seventh largest mine, Relief Canyon, that's in North America and the eighth, Black Fox and the 10th, 11th and 12th are smaller mines that might be closer to their end of life. So just saying your first 6 mines are 4 in Latin America and 2 in West Africa, but it wouldn't hurt to have something big in the asset mix in the U.S. or Canada.
Yes. I definitely do not disagree with that.
Our next question comes from Josh Wolfson with RBC Capital Markets.
I'm just wondering, for Santa Elena, when the Ermitaño deposit comes in, is there any sort of visibility on how that's going to affect the stream payout and what that looks like longer term?
Yes. So with the Santa Elena transaction that we originally put together, we did put a displacement agreement in terms of displacement of ore going to the mill. So we have to have those discussions with them. Obviously, as we get into 2021, there will be more emphasis and really kind of finally starting to see some type of ore, at least development ore, coming from Ermitaño, looking to get processed at that Santa Elena mill. So that will become a point of discussion, I think, this year with First Majestic as to how that displacement clause works in that original transaction that we did with them.
Okay. And then as it relates to Hod Maden, so we're looking for an update on the EIA status as well as the feasibility study. Is the feasibility study linked to the, I guess, delivery first of the EIA? Or are those 2 independent items?
So those 2 are independent items. The feasibility study is in its very, very advanced stages. The initial application for the EIA has already been submitted, and then the final EIA is expected to be submitted in Q2 or slightly before that. So I would -- we're hoping that in Q2, both of those catalysts will happen.
It's been a process of really Lidya prioritizing the EIA from their perspective. As operators of the project, really getting to that EIA process, getting the final approval on it has been the priority for them as opposed to completing the feasibility study.
There are no further questions in queue at this time. I'll turn the call back over to Mr. Watson for any closing comments.
Well, thank you, Lindsey, and thank you, everyone, for phoning into today's call. And as always, we're around. And if you have any further questions, feel free to contact us here at the office. We'll be happy to get back to you. Thank you.
This concludes today's conference call. You may now disconnect.