Sandstorm Gold (SAND) Q2 2021 Earnings Call Transcript

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Sandstorm Gold (NYSE:SAND)
Q2 2021 Earnings Call
Aug 06, 2021, 11:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Grant, and I will be the conference operator today. At this time, I would like to welcome everyone to Sandstorm Gold Royalties conference call. [Operator instructions] Please be aware that some of the commentary may contain forward-looking statements.

There can be no assurance that forward-looking statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. [Operator instructions] Thank you. Mr. Watson, you may now begin your conference.

Nolan Watson — President and Chief Executive Officer

Well, thank you, Grant. And good morning, everyone, and thank you for calling into the second-quarter earnings call for 2021. As normal, this morning, I’ll provide a brief update on the company, and then Erfan, our CFO, is going to walk us through the second-quarter results, and then Dave Awram will provide a more in-depth look at some of the assets underlying the acquisitions that we made during the quarter. After that, we’ll turn it over to the operator for a question-and-answer period.

And if anyone has a question that does not need to be part of the live Q&A, you can ask those questions through the web portal, and we’ll be sure — make sure that everyone gets a direct response from us after this call. At this time, we’ll be going through a prepared PowerPoint presentation on the web portal. So if you are able to, please turn your attention there now. Overall, Sandstorm had another strong quarter in terms of production and cash flow, and Erfan is going to walk us through those details momentarily.

As most of you are aware, each quarter, I’d like to take the most common questions that we’re getting from investors during the quarter and provide answers for them publicly on these quarterly conference calls. And during Q2, the vast majority of the questions related to the acquisitions that we completed, as well as the timing expectations for both the Hod Maden and EIA being granted, as well as timing expectations for the Hod Maden feasibility study being released. And as part of this, investors have been asking questions about our most recent understanding of timing for Hod Maden construction and first production. So I will address these questions now, and then I’ll hand things over to Erfan.

Starting first with the acquisitions that we made during Q2. During the quarter, Sandstorm made more acquisitions than any other quarter over the last four years. And so, far in 2021, it’s already been the third highest year in sandstorm’s history in terms of value of acquisitions made. During the quarter, Sandstorm first purchased, for $7 million, a royalty portfolio of 21 royalties on development, advanced exploration and exploration-stage projects in the U.S., the vast majority of the value of which related to precious metal projects.

Then Sandstorm purchased a $30 million gold stream on the operating Vatukoula gold mine in Fiji, which has produced 7 million ounces of gold over the past 80 years. And then, finally, we invested USD 108 million purchasing a royalty in a number of Vale’s producing and exploration assets in Brazil that include revenue from iron ore, copper, and gold. I’ve been purposefully telegraphing for a couple of quarters now that we believe that we are close to making a number of acquisitions, and we’re pleased that we were able to close a number of deals this quarter. And later in this call, Dave Awram will talk in more detail about the specific assets underlying those deals.

Having closed these acquisitions, we’re now in the process of restocking our deal pipeline, and we already have some quite interesting things that we’re working on for potential future acquisitions. Candidly, it feels fantastic to have been able to make $150 million worth of acquisitions and still be sitting here with no debt and cash on hand so that we can continue making acquisitions. As our investors know, we’re conscious of dilution. And as a result, we have begun discussions with our banks about upsizing revolving debt facilities, and we’ll continue working on that.

So it’s available for potential future deals. Now, on to Hod Maden. It’s clear to me that a number of our investors are wondering what’s going on behind the scenes with respect to the timing of both the EIA and the feasibility study, and I’d like to take the opportunity to talk through where the process is at in more detail, and I believe that doing so will actually give investors a lot of comfort. Starting with the EIA.

The EIA was submitted originally to the government quite some time ago. As is normal in Turkey, the government departments involved in the permitting process are provided time to review the EIA and make comment and ask questions. This period of initial comments and questions was completed several months ago, after which, Lydia has worked with the various departments to answer those questions and address any comments. And I’ve now been told that all comments have been cleared and all questions have been answered.

Once each of these departments signs off, the EIA then goes out to a public comment period where anyone can comment on the proposed EIA, and I’ve also been told that not only has each of the government department signed off, but also that this public comment period is now complete with literally zero comments coming from the public. Zero. So the next and final step is the final government sign-off, which we have been told will hopefully be granted by the end of next month. Overall, although there have been some delays largely due to COVID lockdowns in Turkey, the process is now in the very final stages and appears to be going well.

Moving on to the timing of the Hod Maden feasibility study. I’m happy to report the feasibility study is nearly complete, and the actual final report is in the final stages as we speak, and we’re hoping to have it both announced and filed around the time of the granting of the EIA. One of the things that’s become clear is that due to the slight delays in the EIA, as well as a couple of the longer lead items that were identified in the feasibility study possibly taking a few months longer than originally anticipated, we’re updating our guidance for the start of production from Hod Maden into mid-2024. And accordingly, we’ve updated our guidance for the company in terms of our companywide gold production to 125,000 ounces in 2025.

We’ve always believed the Hod Maden was a permittable project that will be exceptionally profitable. And we’re hoping that by the end of September, we’ll have both the EIA and the feasibility study that illustrates both points. One last thing that I would like to address before handing it over to Erfan is the possibility of Sandstorm paying a dividend in the future. As our shareholders know all too well, I’ve been telegraphing that I believe it makes sense for the company to eventually become a dividend-paying company, and that this is something that obviously needs to be approved by the board of directors.

Sandstorm is a very well-diversified royalty company with strong, diversified cash flows coming from a variety of assets around the world, which has been further bolstered by the acquisitions that we’ve made during the quarter. Yesterday, as part of our Q2 board meetings, we discussed at length the possibility of Sandstorm becoming a dividend paying company. And for the first time, I have permission from the board to publicly state that they also agree that Sandstorm should become a dividend-paying company and that the declaration of such a dividend policy is imminent, and we expect to have the full details of our policy publicly
announced by the end of this year. Year after year, Sandstorm has continued to prove that it’s a growth-focused company, and I believe we proved that yet again this quarter.

We’re excited with the royalty portfolio that we built, and we’ll endeavor to continue along the same path to the benefit of our shareholders. And with that, I’ll hand it over to Erfan to discuss in detail the quarterly results.

Erfan Kazemi — Chief Financial Officer

Thanks, Nolan. Hello, everyone. Thank you for joining us today. This was an exciting quarter for Sandstorm in terms of new acquisitions and financial results.

This first slide provides a snapshot of the company’s financial results over the last four quarters. We’ve included a third bar in this chart, which, in addition to sales and royalty revenue, includes income from other interest. The income from other interest is a gain related to the recently acquired Vale royalties. As some of you may know, the payment for the Vale royalties from the first half of 2021 will be payable to Sandstorm on September 30, reflecting a net sales royalty for the period January 1, 2021 to June 30, 2021.

As the majority of these sales occurred prior to Sandstrom’s acquisition of Vale royalties, Sandstorm has recognized these accrued amounts as the pre-acquisition receivable. I think it’s important to clarify that in subsequent quarters and going forward, the income received from the Vale royalties will be classified as revenue and operating cash flow, similar to how our other royalty interests are treated and how you would normally expect. With that in mind, total sales royalty revenue came at 26.4 million for the second quarter and 32.3 million, including income from other interests. This represents an increase of 41% and 73%, respectively, when compared to the same period in 2020.

Sandstorm set a new record of approximately 18,000 attributable gold equivalent ounces during the quarter. When compared to last year’s second quarter when we were at the height of the operational shutdown due to COVID-19, this represents a 65% increase in gold equivalent ounces quarter over quarter. The average realized gold prices remained relatively constant over the first half of 2021, which has helped support these strong attributable ounce numbers. As a management team, we continue to be bullish on the long-term price of gold and certain other metal prices given the current global economic outlook, and so I anticipate Sandstorm’s financial results to benefit from strong precious metal prices for the foreseeable future.

We can dive a little deeper into the quarter-over-quarter comparison on the next slide. Revenue was comprised of 17.5 million in sales and 9 million in royalty revenue. If you direct your attention to the third line from the bottom, average cash cost per attributable ounce was $227. As a result, Sandstorm realized cash operating margins of $1,569 per ounce during the second quarter, which is an 8% increase when compared to the same period in 2020.

Cash flow from operating activities, excluding changes in noncash working capital, totaled 17.6 million, a 31% increase from the same period in 2020. Net income was $8.6 million, up from $7.1 million in Q2 last year. The increase was attributable to an increase in revenue, as well as a $5.9 million gain on the revaluation of the company’s financial instrument related to the Vale royalties, which was both entered into and disposed of during the second quarter. The gain was partially offset by an increase in the cost of sales, an increase in tax expense and a decrease in gains recognized on the revaluation of other investments.

Moving on to the next slide. We see a breakdown of attributable gold equivalent ounces by asset. Cerro Moro under the Yamana silver stream agreement continues to lead the portfolio in attributable production. This stream agreement benefited from a 58% increase in the average realized selling price of silver compared to the same quarter of 2020.

As well, there was a 10% increase in the number of silver ounces sold when compared to the same quarter last year. As we’ve discussed, the majority of the 3,400 gold equivalent ounces attributable to Vale royalties package are represented by the gain on the revaluation of Vale royalties financial instrument. With respect to the second quarter, Vale royalty receivable royalty payments are paid by Vale on a semiannual basis, reflecting production in the preceding half calendar year period. As mentioned previously, Sandstorm will accrue the royalty revenue on a quarterly basis going forward.

During our last conference call, I discussed that the first quarter of 2021 marked the end of the five-year fixed-ounce delivery period from the Karma mine. As of April 1, Sandstrom’s gold stream entitlement is now 1.625% of gold produced at the Karma mine for an ongoing per-ounce payment equals 20% of the spot price. These terms will continue for the life of the mine. The ounces sold from the Karma in the second quarter are representative of these updated terms.

Looking at these top producers, I’m encouraged by the diverse portfolio that Sandstorm has built with strong counterparties and a range of stable jurisdictions. Subject to closing conditions in the second half of the year, we’ll see production from the Vatukoula gold stream added to this list, further diversifying our cash flow. The final slide provides a breakdown of attributable gold equivalent ounces by region and metal type. Approximately 60% of ounces came from operations in South America, largely attributable to Cerro Moro and the new Vale royalties.

With only three months of Vale royalties revenue being recognized in Q3 2021, I expect the weighting of production in South America and base metals we will reduce in the third quarter. Sandstorm remains a precious metals-focused royalty company. And this year, we anticipate approximately three-quarters of revenue from gold and silver, increasing to more than 80% by 2024. With the addition of the Vale and Vatukoula transaction, Sandstorm has increased its production guidance and is now forecasting between 62,000 and 69,000 attributable gold equivalent ounces in 2021.

And as Nolan mentioned, we expect production to be over 125,000 ounces in 2025. I’ll leave it there and pass the mic over to Dave.

Dave Awram — Senior Executive Vice President

Great. Thanks, Erfan. So as Nolan said, this asset update is going to focus on the two new acquisitions in Q2, Vatukoula and the Vale royalties. Vatukoula assets, or the Emperor Mine, which it has been known as for a longer period of time, is in the Northwest region of Fiji’s main island of Viti Levu.

The mine has been operated for almost 85 years and has produced more than 7 million ounces of gold, with 25 of those years producing more than 100,000 ounces of gold per annum. We had — Sandstorm had an eye on the project for almost 10 years when the opportunity to create a gold stream was presented to us late last year. Sandstorm will receive fixed deliveries of gold of almost 26,000 ounces over a six-year period and then a 2.9% or 2.55% of the production over the life of mine, dependent on whether or not the mine produces over 100,000 ounces per year. What really makes us so excited about Vatukoula is the exploration potential.

As you can see on slide 12, the stream itself has a five-kilometer area of interest around the existing mining license illustrated in black. Beyond that, we have additional royalty on the exploration ground with an interest — area of interest as well, which is in gold on that same map. The deposit itself is a caldera hosted epithermal deposit with mineralization only a few million years old. Historical mining of the 7 million ounces has come from only what would amount to a slice of less than a quarter of that caldera.

However, we do know that mineralization has occurred in many other parts of the seven-kilometer diameter caldera. There was a very large gold-bearing system with sever
al phases of gold mineralization in this area. In our site visit this spring, we saw a new type of mineralization recently discovered within the existing mine workings that is reminiscent of a more typical hydrothermal brecciated epithermal deposits, perhaps even a feeder zone. This mineralization has allowed the operators, Zhon-grun, to develop higher tonnage and more easily minable stopes that had historically been found.

When looking at a more regional basis, this mineralization style may be more extensive and allow for more — allow for a new type of target to pursue propertywide. Part of the funds we provided in this stream will be used to investigate this opportunity. And it’s also not just Zhon-grun who has identified this either. As of last week, it was announced that Zijin Mining will purchase a 70% interest and will commit to spending $20 million on the exploration licenses on which we have royalties.

Again, that’s the area of gold on slide 12. Of course, having such interest in one of the world’s largest gold mining companies will have a huge impact on future discoveries. Moving on to slide 13 for a quick description of the Vale royalties. From a technical perspective, we really like these assets because of the diversity of assets and the quality of the product, particularly from the northern system assets.

With an approximate 65% iron grade, Serra Sul, Serra Norte and Serra Leste are such high-quality assets. We can expect these mines to produce in almost any price environment. Combined with Vale being the largest iron ore producer in the world, lowest quartile iron ore production in the world, and a world-class infrastructure for transported shipping, gives us reassurance that these assets will be able to produce to the end of their reserve lives. And the reserve life certainly could extend substantially for this royalty, because in addition to covering these two very large areas of current mine, there is a total of over 15,000 kilometers square of ground covered.

In addition to the iron ore is, of course, exposure to copper and gold. Currently, Sossego is our copper and gold exposure in the northern system, but future copper and gold projects developed by Vale would fall under this royalty as well. This royalty will likely be filled with positive surprises over the years. Iron ore is not our technical expertise, but it is hard to argue with having a diversified royalty on these assets is a poor strategy, especially when you have such quality upside potential operated by one of the largest mining companies in the world on their home ground.

And with that, I’m going to pass the call over to Grant, the operator, for some Q&A. Of course, please feel free to ask questions about any of our royalties and streams.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from Heiko from H.C. Wainwright. Please go ahead.

Heiko Ihle — H.C. Wainwright & Co., LLC — Analyst

Hey, everybody. Thanks for taking my question. And I hope everybody is staying safe and feeling well.

Nolan Watson — President and Chief Executive Officer

Thank you.

Heiko Ihle — H.C. Wainwright & Co., LLC — Analyst

The delay at Hod Maden, walk us through what else could either accelerate or possibly slow down the process from this point on. And also, if this question doesn’t make perfect sense, I’m sorry, because I’m not sure how exactly to ask it. But at what point are your prices for construction more influx? In other words, is there a point where pricing agreements run out, or like inflationary things start kicking in? Anything like that?

Nolan Watson — President and Chief Executive Officer

Yeah. I mean, I would say, to answer the first part of the question in terms of things that could accelerate or slow things down, we don’t think that the construction is overly complex at the asset, and we think it’s a fairly straightforward mine to build. It doesn’t take that long. There aren’t very many long lead time items, but one of those long lead time items is the road that needs to go to the highway.

And my understanding of where that’s at is that they’ve sent that road contract out to tender. They’ve got the bids back, I believe. They’re in the processes of finalizing where they’re going to choose to do that in the road. Hopefully, we’ll get under construction by the end of this year.

And if it does get under construction by the end of this year, then the mine will stay on track. Outside of that, it would just be your normal things like permitting. I don’t think we see any other potential delays in construction of the mine. In terms of costs, this is a really interesting time to be building mines, inflation going higher around the world than it has been historically.

One of the things that we, I think, benefit from in-country is that, even though there’s substantial inflation, there’s also a devaluation of the local lira, and that helps keep inflation under control. They are still subject to increasing input costs associated with steel and other commodities that are your input costs. But having said all that, some of those increases were taken into account in the feasibility study that we’re going to be putting forward. And if we were to look at some of those costs, say, a month ago, I would say some of the raw input costs a month ago were looking more expensive than what was priced in the feasibility study.

But a lot of those raw input costs are already starting to peel back and come down now. We’re starting to see cement come off in some places and steel come off in some places and some energy costs come off in some places. Certainly, lumber prices around the world, they’re down over the last month. So we’re starting to see some of those extreme increases in raw input costs dissipate, and so I think there’s a reasonable amount of conservatism built into the feasibility study.

So when we release that, I think it should be a fairly healthy, reasonable, conservative document.

Heiko Ihle — H.C. Wainwright & Co., LLC — Analyst

Fair enough. No, they’re very detailed and very good answer. You have a chart on the bottom of Page 22 of your MD&A that breaks down your geos by region. South America is 61%.

North America is 31%. It led me to a question that keeps coming up in investor calls where people are thinking out loud in regards to COVID. I know I’m the guy that brings it up. Have you seen an overall larger impact from COVID in Q3 thus far for the South American assets? Have results in any area lagged expectations over the past, call it one, two, three months in any area more than the others?

Nolan Watson — President and Chief Executive Officer

Yes. It’s a good question. Thanks for asking it. And certainly, we are monitoring operations and see how they’re impacted.

But candidly, the impacts that we find are related to timing of shipments and sales. So we do have some operations where there’s a quarter lag. And depending on whether or not they meet their shipment that quarter, we get that delivery. And if we don’t, then there’s a true-up with respect to our contracts that trues up in the subsequent year.

But an actual impact, so far, we haven’t noticed in any of our results in a material way.

Heiko Ihle — H.C. Wainwright & Co., LLC — Analyst

Got it. Wonderful. I’ll get back in queue. Thank you very much.

Nolan Watson — President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Matt Farwell from ROTH Capital. Please go ahead.

Matt Farwell — ROTH Capital Partners — Analyst

My question. I was just curious about the Vale royalty. If you could provide some background about h
ow this came about and what Vale’s incentive was to sell these off.

Nolan Watson — President and Chief Executive Officer

Yes. So the original Vale royalties, for a long period of time, it actually came many years ago when the government privatized Vale, and they issued some of these royalties. And they did another issuance more recently, predominantly to Brazilian funds and hedge funds and a few things, and we were able to approach some of those entities and purchase them off of them, and we’re pleased with the amounts that we purchased. But it’s a royalty that we think makes a lot of sense, and it’s been around for a long period of time.

Matt Farwell — ROTH Capital Partners — Analyst

Great. Thats all I have. Thanks .

Operator

Your next question comes from John Tumazos from John Tumazos from John Tumazos Very Independent Research.

John Tumazos — John Tumazos Very Independent Research — Analyst

Thank you very much. Could you refresh us as to what percent of your stock is owned in gold specialist funds and the extent to which having a certain fraction of your revenue or assets in gold and silver continues to be a goal? My impression is that the gold stocks are getting to single digit cash flow multiples. It might even be out of favor. And the iron ore business is pretty good, and I wouldn’t have any problem if you did another transaction the size of what you just did in iron ore and the ratios toward base metals got a little bigger.

Cash flow is cash flow.

Nolan Watson — President and Chief Executive Officer

Yeah. I appreciate that. So we historically have had the rule where we want to make sure that at least 80% or more of our revenue long term is coming from precious metals being gold and silver. And with this Vale acquisition, I think our long-term numbers show 85% precious metals is well within that.

So I think we have more room to take on some additional precious metals. Having said that, we are a precious metal company, and we’re focused on acquiring more precious metals. And the bulk of the deal opportunities that we are looking at right now are precious metals, but we’re not afraid when it makes sense, like you said, to make acquisitions where they just — it’s a good rate of return on a mining asset that’s got a long life for exploration upside. So we’ll continue to operate that way, and I would agree with your comments.

With respect to — sorry, what was the last part of your question?

John Tumazos — John Tumazos Very Independent Research — Analyst

Do you want to keep that 80% goal long-term?

Nolan Watson — President and Chief Executive Officer

Yes. Yes. So that —

John Tumazos — John Tumazos Very Independent Research — Analyst

If I could squeeze you a little bit, Nolan, change the name of the company to Sandstorm Cash Flow.

Nolan Watson — President and Chief Executive Officer

Yes. We do want to keep that 80% long-term. But we’re — what I would like to think intelligent businesspeople, that we’re going to — if a really, really smart deal is sitting in front of us, I think we’ll likely take it. But we are a precious metal company, first and foremost, and we’ll continue to be a precious metal company.

And in terms of who owns us in gold specialty funds, what I would say in terms of actively managed institutional investors that are gold-focused specialty funds, it is a very, very low percentage of Sandstorm’s shareholder base. We do have passively managed ETFs. So we’re in the GDXJ. We’ve been in a number of other gold-related ETFs, specifically in the U.S.

What I would say is we have a lot of retail following in the gold space. So we do have a lot of, I think, U.S.-based retail investors that are focused on gold. And as we should, we’re a well-diversified gold royalty company, and so we’ll continue to be a well-diversified gold royalty company.

John Tumazos — John Tumazos Very Independent Research — Analyst

Thank you.

Operator

Your next question comes from Brian MacArthur from Raymond James. Please go ahead.

Brian MacArthur — Raymond James — Analyst

Good morning. Just two questions on the Vale situation. There’s a statement in the MD&A talking about another 8.1 million after the balance sheet. Was that in the original deal? Or is that additional one — I mean, I know it was announced after quarter.

Is that in addition to what’s already been announced in your press release? And my second question relates just to how do you — and I get it going forward, it’s going to come in with revenue. But with all the provisional pricing that can go on in iron ore, do you get — when you put your five-point whatever million in for that quarter, is that trued up until June 30? Or will there be another adjustment going forward if they have material that’s being shipped and there’s adjustment? I’m just trying to figure out the volatility we may get around it going forward. Thank you.

Nolan Watson — President and Chief Executive Officer

Yeah. Thanks for that. So the original announcement of the transaction of USD 108 million of this royalty. So we acquired that in conversations with a number of different entities that owned it.

So that was the total that we were able to acquire at that time. Subsequent to the announcement, we found another couple of people to sell us small amounts of the royalty. So we purchased another $8 million subsequent to that. The total is $116 million as it stands today.

So we own a little bit more of it today than we did on announcement date. In terms of the true-ups, there will be some small true-ups going forward, but it’s payable semi-annually. And so, there will be some volatility, but we get paid in September for the first half of this year.

Brian MacArthur — Raymond James — Analyst

And sorry, just — that’s very helpful. And just to be clear, on the 8.1, does that get backdated to January 1? Or because it was post quarter end that you’ll only get one quarter on that, I assume, right? But like forward from the date of acquisition, right?

Nolan Watson — President and Chief Executive Officer

Correct. It’s backdated to January 1. So we’ll get the whole payment for that, we believe.

Brian MacArthur — Raymond James — Analyst

OK. Thanks very much. That’s very helpful.

Nolan Watson — President and Chief Executive Officer

OK, operator. I think that’s it for Q&A right now. But I would recommend that if anyone has any other questions that they want to ask us, we’re here. We’re around.

Feel free to call us or email us, and we’ll make sure everybody gets the answers to the questions that they need. I just want to thank everybody for taking the time to listen to us, and we’ll keep working hard to add value for shareholders. And like I said, feel free to call us if you have questions. Thank you, everyone.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

Nolan Watson — President and Chief Executive Officer

Erfan Kazemi — Chief Financial Officer

Dave Awram — Senior Executive Vice President

Heiko Ihle — H.C. Wainwright & Co., LLC — Analyst

Matt Farwell — ROTH Capital Partners — Analyst

John Tumazos — John Tumazos Very Independent Research — Analyst

Brian MacArthur — Raymond James — Analyst

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