Sandstorm CEO sets the record straight on Mariana deal

VANCOUVER — Sandstorm Gold (TSX: SSL; NYSE-MKT: SAND) made headlines in April when it bid US$175 million in cash and shares for explorer Mariana Resources and its 30% stake in the advanced-stage Hot Maden gold-copper project in northeastern Turkey.

The move appeared to hint at a change in business strategy, with BMO analyst Andrew Kaip noting that investors were grappling with “how a streaming royalty company can acquire an exploration company with development and operating risk.”

The Hot Maden joint-venture project in Turkey. Credit: Mariana Resources.

After closure on July 3, Sandstorm president and CEO Nolan Watson sat down with The Northern Miner to discuss how the deal aligns with the company’s goals.

“There’s been this misconception that the acquisition somehow indicates a shift in our business,” Watson says. “But Mariana called the deal structure a joint venture, for lack of a better term … it works [like a net profits interest], except for payments made from now through production to keep interest. What they did was enter into a shareholders agreement that is effectively a royalty.”

Mariana signed the deal with 70% owner-operator Lidya Madencilik, which is part of a multibillion-dollar Turkish conglomerate called Calik Holding. The terms dictate that the project operator will make a payment, on an annual basis, equal to 30% of the gold and copper sold, less the cost of operations.

Watson estimates Sandstorm will be on the hook for US$7 million at Hot Maden through 2019.

The joint-venture partners released a preliminary economic assessment (PEA) on Hot Maden in March. The study outlines a US$169-million development that would boost Sandstorm’s attributable gold equivalent production to more than 135,000 oz. by 2022, while increasing annual operating cash flow to more than US$100 million.

The company reported record gold equivalent sales of 15,600 equivalent oz. gold in the first quarter.

Hot Maden’s global economics include a US$1.37-billion, after-tax net present value at an 8% discount rate, and a 153% internal rate of return. The PEA is underpinned by 7.1 million indicated tonnes grading 12.2 grams gold per tonne and 2.3% copper.

Sandstorm president and CEO Nolan Watson. Credit: Sandstorm Gold.

“Capital expenses could overrun by 50%, and it doesn’t matter because it goes from an 11-month payback to 16 or 17 months. The risk you’d usually see associated with a mining project isn’t there,” Watson says.

“This is an asset that’s unlike anything that’s been the subject of a stream and/or royalty agreement. When we buy a royalty in the normal course of operations, rarely do we pay for it all upfront. So this is very much in our sweet spot, in terms of the business model,” he says.

Watson adds that the sociopolitical risk in Turkey is “largely headline media noise” that ignores that the country’s stock market is hitting all-time highs. He points out that having Lidya Madencilik navigate the permit and construction process will mitigate operational risk.

Sandstorm has been building its stake in Mariana for a few years.

The company accumulated a 7.6% equity stake, largely through previous private placements, and had targeted a 2% net smelter return royalty on Hot Maden in a US$21.8-million, cash-and-share deal with Teck Resources (TSX: TECK.B; NYSE: TECK) in early 2016.

The deal also sees Sandstorm acquire 2,800 sq. km in prospective greenstone exploration ground in Côte d’Ivoire, West Africa, which it intends to spin out into a public company run by former Mariana president and CEO Glen Parsons. This could be complete by September. The company will also spin-out tertiary exploration assets in Turkey and Argentina into a separate vehicle.

“No one tried to outbid us for Hot Maden because we were the largest shareholder and got there before anyone else was aware of the asset,” Watson says.

Sandstorm Gold’s 30%-held Hot Maden gold-copper project in northeastern Turkey’s Artvin province. Credit: Mariana Resources.

“It’s becoming necessary to get more creative in the stream and royalty business, and we’ve been quicker to adapt than some of our larger competitors. We’re finding good deals buying small royalties for small dollars on exciting exploration plays, and we’re one of the only companies doing that right now,” he says.

During the first quarter, Sandstorm acquired 22 royalties for US$1.9 million. The portfolio includes development-stage, advanced exploration projects in Canada, Mexico and Peru.

Sandstorm shares have traded in a 52-week range of $4.29 to $8.73 per share, and closed at $5.21 at press time.

The company has 184 million shares outstanding for a $962-million market capitalization, and reported a US$32-million cash balance at the end of the first quarter.

“We have to be much more creative in how we put financing packages together, and how we acquire streams. It’s getting more expensive to put together larger deals because those are few and far between,” Watson says. “We understand the need for creativity to keep our rates of return, and so far our biggest competitors are not evolving, and they’re seeing declining rates of return for shareholders.”