Sandstorm buys Diavik diamond mine royalty

Gold-focused royalty and streaming company Sandstorm Gold (TSX: SSL; NYSE: SAND) has branched out into diamonds.

Sandstorm picked up a 1% gross proceeds royalty from Iamgold (TSX: IMG; NYSE: IAG) on a property, which includes the Diavik diamond mine in the Lac de Gras region of the Northwest Territories. It paid Iamgold US$52.5 million in cash and 3 million warrants, valued internally at US$4.3 million. The warrants have a five-year term and are exercisable following first production from Diavik’s A21 pipe at a strike price of US$4.50.

Canada’s largest diamond mine has been in operation since January 2003, producing more than 90 million carats from three kimberlite pipes: A154 South, A154 North and A418. Rio Tinto (LSE: RIO), the mine’s 60%-owner and operator, has recently approved development of a fourth pipe, A21, slated to come online in 2018. That should help extend the mine’s life to 2023. Dominion Diamond (TSX: DDC; NYSE: DDC) owns the remaining 40%.

“The quality of the asset and the operator as well as the stability of the cash flow that will be coming to Sandstorm made the deal appealing from a diversification perspective,” Sandstorm’s CEO Nolan Watson said in an emailed response.

The Diavik royalty should add around US$7 million to US$8 million a year in additional cash flows. “While largely neutral to NAV (net asset value), it is roughly 20% accretive to forward cash flow,” CIBC analyst Cosmos Chiu writes.

Based on current diamond prices, the company assumes it will take about 6 to 7 years before it sees a profit on its cash investment in the Diavik royalty. That said, Watson notes the base case return on the deal is around 7%, “with potential for exploration upside.”

Raymond James analyst Phil Russo, who views the acquisition as favourable to both firms, notes the royalty sale will further strengthen Iamgold’s balance sheet as the company looks to improve its now 100% gold-focused portfolio. Russo estimates Iamgold’s overall liquidity at $870 million.

On the back of the Diavik royalty acquisition, Sandstorm has bulked up its 2015 production guidance to between 40,000 and 50,000 attributable gold-equivalent oz., from 36,000 to 44,000 oz. previously. The top-end of the new 2015 production guidance reflects a 12% year-over-year growth from the 44,821 gold-equivalent oz. sold in 2014, Chiu notes.

Sandstorm also forecasts 2018 attributable gold-equivalent production of 50,000 oz., up from 45,000 oz. That excludes ounces from Luna Gold’s (TSX: LGC) currently suspended Aurizona gold mine in Brazil, where cash-strapped Luna intends to restructure Sandstorm’s 17% gold stream.

Following the royalty acquisition, Sandstorm has nearly US$40 million in cash and a US$100 million revolving credit facility to feed its acquisitive appetite.

On a recent conference call, Watson said the company has about 21 potential deals in its pipeline, with 19 of them being at in the precious metals space. “So by the makeup of our pipeline you can tell that we continue to be hyper focused on gold,” he said.

Asked how many other deals Sandstorm expects to complete this year, Watson says it is “very difficult” to predict, adding the firm continues to actively pursue accretive opportunities.

Sharing his view on gold, Watson notes certain macroeconomic factors might continue to weaken the gold price and strengthen the U.S. dollar for the next year or two. However, he believes the price of gold will appreciate in the long term and intends to expand Sandstorm and better position the company, so it could benefit from the expected improvement in prices.

“We believe at this period, it’s the right time for us to be purchasing further streams and royalties,” he said on the call.

Once the Gold Royalties (TSXV: GRO) acquisition closes, which was announced in February, Sandstorm would have a total of 70 streams and royalties.

Sandstorm shares ended March 24, a day after the Diavik royalty acquisition, at $4.20 in Toronto.

CIBC’s Chiu has bumped up his 12-to-18 month target price to $4, from $3.50, and has an “underperform” rating on Sandstorm. Raymond James’ Russo has lowered his target to $5.50 from $6, noting it is unlikely Luna will be able to secure capital to resume production at the Aurizona mine. He rates Sandstorm as “market perform.”