Sandstorm axes its diversified metals and energy arm

VANCOUVER — Sandstorm Gold (TSX: SSL, NYSE-MKT: SAND) president and CEO Nolan Watson says the calls from shareholders requesting he “clean up” sister company Sandstorm Metals & Energy (TSXV: SND, US-OTC: STTYF) have been getting louder.

Watson and his team had envisioned dual streaming companies that could offer financing alternatives on commodities ranging from precious metals to natural gas, but in the end it was only the gold component that gained traction.

And so Sandstorm Gold is offering up a deal that caters to investors’ requests to exit the base metals and energy businesses, and focus on gold streams. Though the deal is labelled an acquisition, it appears Sandstorm Gold will sell as many of Sandstorm Energy’s assets as possible to boost its cash per share.

“Over the past several years I been hearing input from [our] shareholders who have repeatedly expressed concern over the amount of attention management has been spent on Sandstorm Metals,” Watson said during a conference call. “Many investors have expressed a desire for management to spend 100% of its time on gold. We’ve not only heard these concerns, but we understand them. We think that they are reasonable, and this transaction is a result of us responding and reacting to that feedback.”

With the deal Sandstorm Gold would issue 0.178 of a share for each share of Sandstorm Metals, along with 35¢ in cash. The offer values Sandstorm Metals at $49 million, which represents a 43% premium based on  the companies’ closing prices on April 21. This means Sandstorm Gold would pay US$12 million in cash to divest itself out of the base-metal and energy markets.

Watson added a couple of details regarding the cash consideration: Sandstorm Metals is slated to have US$5.5 million in cash-on-hand at the time of the acquisition; and Sandstorm Gold is working on “the sale of a number of non-core assets” it believes will result in another US$6 million in cash over the next several months.

“There are a number of other non-core assets we’ll be seeking to monetize over the longer term, which include our Thunderbird Energy (TSXV: TBD) natural gas asset, some of the other thermal coal assets and potentially the Colossus Minerals (TSXV: CSI, US-OTC: COLUF) investment,” Watson adds, estimating the company could generate US$8 million through the sales.

And it isn’t too hard to identify the issues at Sandstorm Metals. The company recorded a US$35-million net loss in 2013, which followed a US$38-million net loss in 2012. Over the past year Sandstorm Metals has suffered through impairment charges, as a number of its streams and royalties have been delayed or undergone ownership restructuring. The company reported nearly US$70 million in non-cash impairments over the past two years.

Watson says the transaction “represents not only reasonable [acquisition] value, but tremendous strategic value.” He cites feedback from an investor who said that “this transaction feels like big brother helping little brother,’” but responds that “this is not the case. The process was driven to clear a path so we can realize full value without distraction. I personally believe that it is a no-brainer.”

Sandstorm Gold is optimistic about the few assets that will remain in its portfolio. The Sandstorm Metals acquisition would provide US$4 million in annual royalty revenue from operating mines.

Watson highlighted two promising exploration and development opportunities, including a 1.2% net smelter return royalty on Canadian Zinc’s (TSX: CZN) Prairie Creek zinc­–silver–lead project in the Northwest Territories, and a copper-streaming agreement on Entrée Gold’s (TSX: ETG, NYSE-MKT: EGI) Hugo North Extension and Hega deposits near Turquoise Hill Resources’ (TSX: TRQ, NYSE: TRQ) Oyu Tolgoi copper–gold mine in Mongolia.

“I’ve already been asked a number of times: ‘Does this mean that Sandstorm Gold will be doing a bunch of base-metal deals going forward?’ I want to be clear that we’re a gold company,” Watson continued.

“We had dreams of walking into a room and offering both a gold and base-metal financing component, but as Sandstorm Metals became unable to pay its part of the deals, it became awkward to be in a negotiating room sort of ignoring the sister company. Now we can go to companies with multiple commodities and focus only on a precious-metals stream,” he concluded.

Sandstorm Gold has traded within a 52-week window of $4.17 and $8.78, and closed at $5.78 per share at press time. The company would dilute by 5.2% after acquiring Sandstorm Energy, and had 104 million shares outstanding at press time for a $603-million market capitalization.

Sandstorm Energy has traded within a 52-week range of 95¢ to $3.65, and jumped 36% after news of the deal, en route to a $1.35-per-share close at press time. The company has 35 million shares outstanding for a $47-million market capitalization.