Sandstorm to acquire Premier Royalty

Nolan Watson — the dynamo who co-founded Sandstorm Gold (TSX: SSL; NYSE: SAND) in the depths of the financial crisis in 2008 after serving as one of the first two employees at Silver Wheaton (TSX: SLW; NYSE-MKT: SAND) and as its chief financial officer, all before he turned 30 — is working his magic again with the announcement that his streaming company would acquire 100% of the outstanding shares of Premier Royalty (TSX: NSR; US-OTC: NSRRF) in an all-share deal worth $28 million.

If the deal goes through, Sandstorm picks up the $33.5 million in cash on Premier’s balance sheet, a diversified portfolio of assets and its deal team based in Toronto.

Sandstorm already owns 46.7 million shares of Premier — or 59.5% of Premier’s outstanding common shares (51.6% on a fully diluted basis) — as well as warrants to acquire another 6.96 million shares of Premier.

Under the offer, shareholders of Premier Royalty would receive 0.145 of a Sandstorm share for each share held. The deal values Premier’s shares at 89¢ — a 16% premium to their 20-day, volume-weighted average trading price of 77¢ on the Toronto Stock Exchange.

The deal must be approved by two-thirds of Premier’s shareholders at a special meeting in September, but Premier’s directors, other than those who have declared an interest in the arrangement and abstained from voting, unanimously support the transaction and will recommend that shareholders vote in favour of the deal.

“It’s a different kind of deal — it’s not a straightforward mergers and acquisitions transaction because they already own 60%,” Abraham Drost, Premier’s president and CEO, tells The Northern Miner. “It really does come down to the cash. In order to have access to that cash, they needed to finish the job.”

Drost also points out that in the current depressed gold market, the shares of Sandstorm and Premier have been “beaten down,” and that as things have shown signs of  turning around, there has been a sense that they would be better off as one company.

As far as valuation is concerned, “fair market values were evaluated, and on the basis of that, the trade was determined to be fair,” he says. “We accept the result. We did negotiate — and received — a slightly higher premium than anticipated, but at the end of the day I’m confident that shareholders will benefit from this as the gold markets in particular turn around, which I anticipate they will.”

Drost also notes that “when you’re talking about that, you’re usually talking about people, because quite frankly, Premier’s general and administrative expenses (G&A) have no fat.”

He says they have “a deal team that is essentially critical mass — a minimum-sized deal team that we need to identify, evaluate and close royalty acquisitions . . . but the relative G&A to cash flow will decrease over time. We’re caught in a difficult market, so we have limited bargaining power.”

Premier has no debt and its royalty portfolio features cash flow from a number of producing gold mines, including a 1.5% net smelter return royalty (NSR) on Newmont Mining’s (TSX: NMC; NYSE: NEM) Emigrant Springs mine on Nevada’s Carlin Trend; a 1% NSR on the Thunder Creek deposit of the Timmins West mine operated by Lake Shore Gold (TSX: LSG; NYSE-MKT: LSG); a 1% NSR on the Mine Waste Solutions’ tailings processing facility near Johannesburg that is operated by AngloGold Ashanti (NYSE: AU); a 1% NSR on Yamana Gold’s (TSX: YRI; NYSE: AUY) Gualcamayo mine in Argentina’s San Juan province; and a 1.5% NSR on Aura Minerals’ (TSX: ORA; US-OTC: ARM-ZF) San Andres mine in Honduras and the Sao Vicente and Sao Francisco mines in Brazil.

For its part, Sandstorm has a portfolio of 10 gold streams and three NSR gold royalties, and since its incorporation has grown into a company with a market capitalization of more than $1 billion. It has also spun out a sister company called Sandstorm Metals and Energy (TSXV: SND; US-OTC: STTYF).

Watson said in an interview with BNN that Sandstorm buys gold at an average of US$400 per oz. — the only gold company with such low all-in sustaining costs. If the deal with Premier is approved, the cash on Sandstorm’s balance sheet could reach $100 million.

Despite difficult market conditions, Premier’s royalty contracts delivered 1,859 oz. gold in the quarter ended June 30, in a 57% increase over the first quarter.

Premier’s royalty revenue amounted to $2.7 million, while adjusted earnings before interest, taxes, depreciation and amortization reached $1.9 million.

The company posted a 9¢-per-share net loss due to an $8.7-million writedown at the Buffelsfontein mine in South Africa. In mid-May, Village Main Reef (US-OTC: VMRFF) said it would start closing down Buffelsfontein. Premier has been earning a 1% NSR on the mine, which represented 13% of the company’s revenue in 2012.

Premier had estimated that the Buffelsfontein NSR proceeds would make up 7% of gold ounces attributable and related revenue for 2013.

Closing Buffels will cut Premier’s attributable ounces this year by 7%, and the company forecasts attributable production of 6,500 to 7,000 oz. gold from its 2013 royalty portfolio.

News of the transaction sent Sandstorm shares up 6¢, or 1%, to $6.21, while Premier ended the day 1¢ higher at 89¢.

Over the last year Sandstorm shares have traded between $5 and $14.99, while Premier’s have moved from 43¢ to $2.45 per share.