Sandstorm CEO discusses impact of rising gold prices

VANCOUVER — For streaming financiers like Sandstorm Gold (TSX: SSL; NYSE-MKT: SAND), this year’s rising precious metal prices are a double-edged sword. The company’s existing streams, royalties and equity holdings have become more valuable, but closing deals has become more competitive, as reborn equity markets offer mining companies alternative capital.

On Aug. 3, Sandstorm reported its second-quarter results, which are headlined by operating cash flow of nearly US$9 million and net income of US$5.2 million. The company reported gold-equivalent sales of 12,500 oz., at average cash costs of US$261 per attributable oz. gold.

“Our growth over the next three years does not require new mines.”
Nolan Watson
President and CEO, Sandstorm Gold

Sandstorm is now debt free and has US$110 million in available capital to pursue opportunities.

“It’s clear that rising gold prices have increased the equity capital available to mining companies,” Sandstorm president and CEO Nolan Watson said during a conference call. He says this is “a good thing for us,” since it also leads to higher cash flows and higher exploration spending.

“The number of companies in desperate need of fixing their balance sheets has decreased,” he added. “There are still people looking at streaming deals to remedy debt problems, however, and we also see opportunities in terms of project financing to build mines. That’s a scenario that we may not have seen 12 months ago.”

In early July, Sandstorm closed a US$57.5-million, bought-deal financing wherein it issued 12.9 million shares at U$4.45 each. Watson said the equity was raised to fund a potential deal that the company would not have had enough capital to complete. He said negotiations are ongoing, but that the opportunity is “not exclusive to Sandstorm.”

And there is plenty of competition in the streaming and royalty space, given the wealth of capital among the major players.

For example, Silver Wheaton (TSX: SLW; NYSE: SLW) recently offered Brazil’s Vale (NYSE: VALE) US$800 million to buy another 25% gold stream from the miner’s Salobo copper-gold mine in Brazil. Meanwhile, Osisko Gold Royalties (TSX: OR; NYSE: OR) is on the hunt for deals with $424 million in cash, and Franco-Nevada (TSX: FNV; NYSE: FNV) finished the second quarter with US$226 million in cash, and no debt.

“Our growth over the next three years does not require new mines,” Watson pointed out. “We want to ensure the majority of our net asset value continues to be in this low-risk profile. We do believe in this market, however. We can add one or two development-stage assets to the pipeline.

Yamana Gold’s Chapada gold-copper mine in Brazil, where Sandstorm Gold holds a copper stream agreement. Credit: Sandstorm Gold.

“Precious metal companies have much greater access to equity capital in this environment,” he continued. “We still see some deal flow on the base metal side, where prices have not recovered to the same degree. The equity available to those companies has not rebounded much, so they still look to monetize precious metal by-product credits. We’re looking at a couple of these potential deals.”

Sandstorm said its attributable gold-equivalent production should total between 43,000 oz. and 50,000 oz. this year, and it expects annual production will hit 65,000 oz. by 2020.

The company’s shares  have traded in a 52-week range of $2.82 to $7.92, and closed at $7.71 at press time. Sandstorm has 150 million shares outstanding for a $1-billion market capitalization.

Scotiabank said in an Aug. 4 trading note that Sandstorm could face less competition from the larger streaming firms due to its “smaller-scale approach.”

BMO Capital Markets analyst Andrew Kaip said that Sandstorm “has improved liquidity and enhanced transactional capacity following quarter-end.”

Watson added that “gold appears to finally be making a robust move higher … it trades like a currency, and so the value is set by supply-demand fundamentals that are dictated by a narrative about what is happening in the world. We are hearing more and more that there is risk everywhere people look.”