Sandstorm Gold Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 6 speakers on the call.

Operator

Afternoon. My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sandstorm Gold Royalties 2023 Second Quarter Results Conference Call. To the ground noise. Please be aware that some of the commentary may contain forward looking statements.

Operator

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 After the speakers' remarks, there will be a question and answer session. To Vince.

Speaker 1

Thank you, Jenny, and good morning, everyone, and thanks for calling into this Q2 earnings call. Shortly. I'll hand it over to Irfan to discuss the Q2 results. But before I do that, I'd like to provide a corporate update and specifically briefly talk about to 5 things being 1, Sandstorm's updated production guidance methodology 2, the sale by Glencore and Yamana or to Pan American of the Sandstorm Shares 3, share buybacks 4, production growth and 5, debt repayment. To So starting with our updated production guidance methodology, over the last couple of months, I've had some conversations with larger investors and it's clear to me that our to update our production guidance methodology is not yet fully understood, especially as it relates to how we have historically made our guidance and how our royalty to Sandstorm and our peer companies have a challenge that when we are guiding future production, We have a large portfolio of royalties on development stage mines and we have to make an educated guess as to which mines will be in production in the future.

Speaker 1

When you're projecting 4 years out, that can be hard to do if you have dozens of mines that have a chance of going into production, but on the balance of probabilities, many of them won't for various reasons often relating to financing or permits. Historically, Sandstorm and its mid cap peers as well as smaller royalty companies have showed forward guidance that to the future guidance in this case is more of a statement of if everything goes perfect and these mines and companies get their permits and the money they need, then this is what our production would be when in reality everything isn't going to go perfect. This year we made a decision to go to more of a meaningful measure of forward guidance and only include mines that are permitted or effectively permitted in the hands of companies that will definitely build or are actually building the mines and who have almost certain access to the capital to build those mines. For example, if it's a permitted mine, but sitting in a company with only $100,000,000 market cap and the CapEx for the mine is $300,000,000 we will not include that production in our guidance. Fortunately for Sandstorm, we can show over 30% growth in production to 125,000 ounces per year by 2027 from assets we already have purchased and our mines that are already in construction are going into construction imminently.

Speaker 1

With the 4 primary mines being Greenstone, currently being built by Equinox Flat Reef, which is currently being built by Ivanhoe Hod Moden, which is going into construction next year by SSR in the Robertson Mine, which is part of the Cortez trend and is being built by Barrick. These are all impressive mines and important part of Sandstorm's future. The point I'm trying to make though is that we may have other things and in some cases likely will have new mines come online that will happen that will cause the production to be even higher than our guidance and we have a list of those things in our corporate presentation and our production chart slides. Those are all upside to our guidance. One such potential upside that I think is worth mentioning is that we have an option to purchase a gold stream of 20% of the gold produced at the Mara project for $225,000,000 As some of you may have seen this week Glencore just announced that it's purchasing the remaining 56% interest in Marah for $500,000,000 Many people have assumed that this asset won't go into production anytime soon.

Speaker 1

It's not in our guidance. However, Glencore is a very intelligent mining company and their purchase of this interest suggest to me that to the next question. This project will be moving forward more quickly than people anticipate and would further increase Sandstorm's production guidance beyond our current guidance numbers. Moving on to the second topic, as many of you are aware, in the last quarter, we had to absorb $100,000,000 of share sales. Within a 1 month period both Pan American who received Sandstorm shares when they acquired Yamana and Glencore who received Sandstorm shares in the Basecor transaction both to actively sold our Sandstorm shares.

Speaker 1

We do have some insight into the buyers of those shares who for the most part were long term large institutional investors. And so those shares have found their way into stronger hands. A few of the buyers of those shares were more short term oriented funds and when gold prices started dropping they decided to sell them, Which leads me to my 3rd point of discussion being share buybacks. Fortunately for us, we had our share repurchase program in place and we were able to buy some shares at low prices and we canceled those shares and have tightened up our share structure a bit. Over the last quarter, we purchased around 2,600,000 shares.

Speaker 1

In addition, during the quarter, we had a very odd trading day on June 12th, when we were notified by Ice Data Industries, the index manager for the Nice Yarka Gold Index, that we are unexpectedly removing Sandstorm from the index. We spent the entire day reaching out to them and explaining They clearly made a calculation there literally a mistake. And at the end of the day, they announced they're reversing their decision and we were appropriately put back into the index. However, during the trading day, we traded nearly 19,000,000 shares and at some points we're down over 10%. Again, fortunately for us, we had our share buyback program in place and we were able to buy the maximum allowable to a number of daily shares at a very cheap price on that day.

Speaker 1

It wasn't a fun day, but it worked out well in the end. On a side note, we do have some insight into the fund that stepped in big and bought shares on that day and they're great long term funds. So So at the end of the day, we ended up with a stronger, better shareholder base and fewer shares outstanding. The 4th topic I want to talk about because I always get this question from investors is about growth. The point I want to make will be brief because it's simple and it leads into my last to the topic of discussion.

Speaker 1

We have already bought our growth. Last year, we acquired $1,000,000,000 worth of new streams and royalties, much of which is for mines that are in construction now. Those purchases are our future growth and we have the Mars Stream option and a number of other potential development assets in the portfolio. If we make no new acquisitions, we have a lot of solid to high confidence growth built in. In order to get that growth, we had to take on debt last year, which leads me to my last point, debt reduction.

Speaker 1

At the peak of last year, if you took our debt, plus payments we had yet to make on streams that have been purchased by NoMad, but not yet paid for such as Greenstone and Platte Reef, our debt or amounts owed was close to $625,000,000 We have been diligently bringing that down and we stand here today with net debt below $460,000,000 So it's come down massively. You can see here on this chart, It shows that if we don't make any further acquisitions and depending on the gold price, the debt will get to 0 sometime in 2027. Now we have a revolving facility of 625 that we can draw on for future acquisitions, but with interest rates where they are today, the most likely outcome is it will keep paying debt down to save on interest. I think it's also worth noting that sometimes in the past we have purchased a gold stream, we have lent to the mining company money or in the case of the sale of the Antamina MPI to Horizon, one of the things we took back was a loan that has a cash sweep on the MPI cash flows. And therefore Sandstorm has a portfolio of loans to other mining companies from which we receive interest income on.

Speaker 1

In total, the mark to market value of those loans that we have made is $234,000,000 So if you take Sandstorm's net to bank debt of around $457,000,000 which has an interest expense to us and you net that debt against the loans we have made to other companies which yields income to us. The net interest isn't that bad. Having said that, our business is doing well. Our cash flows are strong and we'll be applying those cash flows against our debt as our first capital allocation priority. It's very exciting to be in this position today with a strong portfolio, to 4 amazing mines being constructed and with debt falling rapidly.

Speaker 1

Quarter by quarter, Sandstorm is becoming a bigger, stronger and more stable company. With that, I'll hand it over to Irfan for the detailed results.

Speaker 2

Thanks, Nolan. It was another strong quarter in terms of financial results for the company. To set another record in quarterly revenues at $49,800,000 with attributable gold equivalent production of over 24,000 to nearly 53,000 ounces in the first half of twenty twenty three. Sandstorm is on track to comfortably achieve its production guidance of between 90000 and 100000 attributable ounces this year. Our gold and silver prices during the Q2 helped boost revenues and the company realized an average gold price of $19.72 per attributable ounce.

Speaker 2

This resulted in cash operating margins of $17.44 per attributable ounce sold. Comparing the 3 months ended June 30, 2023 to the comparable period in 2022, gold revenues and to the company's earnings release. The increase in production and revenues was primarily driven by the assets added to Sandstorm's portfolio in the second half of twenty twenty two via the NoMad and Basecor transactions, as well as an increase in the average realized price of gold. The average cash cost per attributable ounce in the Q2 of 2020 to the Q1 of 2019 was $2.28 a 16% decrease compared to the same period in 2022. Contributing to the strong cash operating margins that I mentioned earlier.

Speaker 2

As a result, the company had record cash flows from operating activities to $42,100,000 or $38,000,000 in operating cash flows excluding changes in non cash working capital. These cash flows and the strong margins that underlay them really highlight the benefit of the royalty model business. Over the last 12 months, we've added considerable scale to Sandstorm's cash flowing royalty portfolio, while also increasing our operating margins. Even in a high inflationary environment, Sandstorm continues to turn out exceptional operating results. Net income for the 3 month period was $2,700,000 compared to $39,700,000 in the comparable period of 2022.

Speaker 2

This change was driven by approximately $35,000,000 in gains recognized in the Q2 of 2022 related to the sale of a portfolio of royalties to SandBox royalties and the sale of the company's equity interest in Entre Resources to Horizon Copper. On the next slide to the breakdown of attributable gold equivalent production sold from the company's top assets. At the top of the list, we have the Mercedes mine in Mexico at almost 41 unrated Tribula Altas sold. Sandstorm acquired a gold stream on Mercedes in April 2022, which pays fixed deliveries until nearly 30 to the Nomad acquisition last year, the company also acquired a Silverstream on the asset along with fixed additional deliveries. To Ceramuro continues to be a strong contributor to Sandstorm production profile with over 3,300 attributable gold equivalent ounces sold during the quarter.

Speaker 2

To July August mark 1 year since the completion of the base core NoMad acquisitions respectively. As I look at the contributing assets on this list and compare it to this time last year, it's great to see so many significant cash flowing streams and royalties from those acquisitions. To Antamina, Casa Ronis, Bonnacro, Blybore are just some of the assets that are contributing meaningful cash flow to Sandstorm this year with many more in development. Speaking of Antamina, in June, Sandstrom completed the final component of its transaction with Horizon Copper, whereby Sandstorm sold a portion of its net profits interest on the Antamina copper mine. In consideration for the NPI, Sandstorm received a 1.66 to the 3rd quarter of the silver produced at Antamina as well as a $20,000,000 cash payment plus a combination of debt and equity and retain a portion of the NPI as a residual royalty.

Speaker 2

The cash received from this transaction contributed strong quarterly cash flows that I mentioned earlier that helped further pay down the company's debt balance, while also investing in share buybacks as Nolan discussed. Operations in the Americas contribute significantly in terms of the majority of gold equivalent production to Sandstorm at to 86% in the Q2. Compared to same period in 2022, attributable production from mines in North and South America is up 37% and 18%, respectively. This is largely due to the regional exposure from mines acquired in 2022. To Dantrone remains a precious metal focused company.

Speaker 2

During the Q2, approximately 75% of attributable production came from precious metals. And of the 25% production that came from base metals, about 20% was in copper. And with that, I'll turn it over to Dave for updates on some of our development assets.

Speaker 3

Great. Thanks, Erfan. For the asset update today. I'd like to speak about 2 of the biggest development projects in the portfolio and a few smaller updates. Starting with Platte Reef and the fantastic progress towards Phase 1 production, which is still expected for Q3 2024.

Speaker 3

Concentrator is well on schedule with much of the concrete work completed. 70% of all the orders for the Phase 1 mill have been placed with greater than 10% of the steel work erected to date. Underground work has been focused on lateral development to the high grade flat reef ore body on 3 different levels. More than 2,000 meters of development has been completed to date with the cumulative advance rate expected to increase in September from 200 to 300 meters per day and again up to 500 meters per day by January 2024. The 10 meter diameter shaft to for Phase 2 minuteing continues to be advanced and is expected to operate at 8,000,000 tons per annum to the next question.

Speaker 3

Once completed, the head frame will be approximately 100 meters tall. To this will be among the largest hoisting shafts in the world. As part of the optimization work, Ivanhoe is looking to convert a previously installed bench shaft into shaft 3 to accelerate underground mining activities associated with Phase 2. To the existing shaft is currently being reamed to a 5.1 meter in diameter and is planned to have this project completed to Q4 2023 and it will be planned to be equipped with a winder and the appropriate headgear on it. To the Phase 1 and Phase 2 move towards completion, management at Ivanhoe is speaking more and more about a potential Phase 3, which would take the mine up to 12,000,000 tonnes per annum.

Speaker 3

We'll stay tuned for updates on that timeline. Moving on to William Tollgoin and the joint venture ground to which we hold a couple of streams. To just over 3 weeks ago, Rio Tinto hosted an investor site visit which focused on the underground progress on the asset since their takeover of Turquoise Hill. The operations continue to improve every year as they work to transition to underground operations for most of the supply of ore for the rest of the life of mine. To SHAP-three and 4 are increasing sinking rates and the concentrator conversion is making progress with completion expected in H1 2025.

Speaker 3

The 7.8 kilometer long conveyor to surface is well on track and expected to be completed in H2, 2024. According to their presentation, the Oyu Tolgoi team has exceeded planned performance in almost all productivity and production metrics, including development meters and hoisted tons. The project is finally hitting its stride as it pushes hard to production from the Black Cave. This all points to positive progress optimizing the plants to mine into Panel 1 of Lift 1, which is where Sandstorm's gold and copper streams apply. With the latest update from you, it looks like access to the ore from that panel may be moved up as much as 1 year or possibly 2.

Speaker 3

Another important note from site visit was the focus on Hugo North Lift 2. As you can see on this slide, the three d view of the reserves and resources at Oyu Tolgoi, there are enormous amounts of resources in the salmon color compared to the relatively small reserves in red. But without conversion to reserves, you can already see in the light gray that Rio has already worked on the development design of LIFT 2. They have said that the new resource model can be expected by mid-twenty 24 and an order of magnitude study to be commenced this year. Rio is keen to continue to fill the mill to Beyond 2,043.

Speaker 3

This update, along with the Mongolian Prime Minister's optimistic comments on his recent trip to Washington, D. C. Regarding the near resolution on the ongoing tax issues in Rio Tinto leads us to believe that Oyu Tolgoi is in very positive position compared to just a few years ago. The progress at Oyu Tolgoi is feeling very tangible now. So before I hand over for the Q and A, I thought it might be worth an added on to really what Nolan said earlier about the to consolidation of the Mara project fully into the Amzik Glencore.

Speaker 3

They've moved really quickly consolidate the to Newmont and now Pan America and we are hoping they're pushing this project to development. And we'll see if Glencore has an update on timing of this project before the end of the year. Also worth mentioning is a congratulations to Lundin Gold to the amazing initial results of the 43,000 meter drill program at Fruta del Norte. Just yesterday, they released assay results from the conversion program that were well above the current grade, but also results from Epti himself and BASISOR that are in line with the grades achieved to Fruta itself. So with that, I'll pass over the call to Jenny, the operator, for Q and A.

Speaker 3

Please feel free to ask questions about any of our streams and royalties.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer You will hear a 3 tone prompt acknowledging your request. Questions will be taken in the order received. Your First question is from Josh Wolfson from RBC Capital Markets. Please ask your question.

Speaker 4

Thank you very much. First question or most of my questions, I should say, have to do with the capital allocation side of things. In addition to the $12,000,000 of Stream Investments, there is also a $12,000,000 investment titled as acquisition of investments and other assets. Are there any disclosures that can be provided what those investments were for the quarter?

Speaker 1

We made a few small investments in various things that are not being disclosed at this point. But I think in terms of capital allocation going forward. It's important to note that I recently did a large round of marketing talking to institutional investors and prior to that round of marketing was sort of thinking to my mind we'd be Allocating future capital probably 70% to debt reduction and 30% to share buybacks and the overwhelming message that came back to me from our large investors is no, just don't worry about share buybacks so much, just pay down debt as fast as you can because interest rates are high. And so capital allocation going forward, I don't think You'll see us doing any of these smaller deals per se and fewer share buybacks and really just whacking down the debt. Okay.

Speaker 4

Yes, I would just sort of this isn't so much a question, more so a to the confirmation, an $8,000,000 debt repayment this quarter is relatively light versus to the debt load and the cash generation and the debt could be repaid by 2027. Our forecasts agree with that, but it would take significantly longer, maybe a decade or more if the current pace of debt repayment was extrapolated. So I look forward to next quarter's update. Thank you.

Speaker 1

Yes. And then just to emphasize, it's all going to debt repayment at the moment, everything.

Operator

Thank you. Your next question is from Heiko Ihle from H. C. Wainwright. Please ask your question.

Speaker 5

Hey guys, this is Marcus Giannini calling in Brantco. Thanks for taking my questions. You sort of touched on the capital allocation to question we had in terms of share repurchases versus dividends. I guess to tweak that question a bit, going forward, debt repayment is a priority and it's what affects will the share repurchase program slowdown and to what effect will the dividend program be changed based on that near term goal?

Speaker 1

Yes. We don't have any plans to change the dividend policy once we said when we put the dividend in place, it's going to maintain and stay in place as is and then we'll evaluate once a year whether or not it makes sense to raise the dividend at the end of the year. I think with debt levels where they are and with interest rates where they are, we'll probably just continue to keep that's steady for the meantime until either interest rates come down or debt comes down or both. And in terms of debt reduction versus share buybacks, We are prioritizing the vast majority of our capital to debt reduction just because interest rates are so high. I mean, we're not worried about our debt levels at all, But interest rates are at generational highs and everyone is saving that money.

Speaker 5

Okay. Yes. That makes sense. And then speaking of using funds, This may be more of a question for Eric. You're at $9,100,000 in cash at the end of June, slightly up compared to the $7,000,000 at the end to 2022.

Speaker 5

This figure still isn't all that high. Obviously, your actual liquidity is much higher given your working capital and revolver. At what point do you get a little concerned with actual cash on the balance sheet or rather is there a minimum cash figure you simply cannot or will not go under?

Speaker 2

Yes, thanks for the question. There's no hard rule. There's no specific reason why you keep a certain level of balance. To just working capital, some of it paying for stream deliveries and timing of deliveries associated with it and has to do with also quarter end where We expect payments of receivables coming, but there's no covenant requirement in terms of minimum cash balances or otherwise. But you'll just see us maintain low levels of cash to just save interest on the debt that we have outstanding.

Speaker 1

That's what it's actually one of the benefits of being a streaming royalty company with the business model and the way the contracts are structured is that when G and A is so immaterial to the company, you You don't really need to keep much cash on hand. And when we get our main cash outflow items are paying for the gold that delivered to us under streams, but the way our contracts are structured is we get the gold and we sell it and we get the revenue before we have to pay for it. So you never have to keep cash on hand to buy the gold and then sell it because you sell the gold and then buy it.

Speaker 5

Okay, perfect. No, that makes sense. Thanks for taking our questions.

Operator

Question. Your next question is from Derek Ma from TD Securities. Please ask your question.

Speaker 4

Hi, thank you for taking my questions. And I apologize if these questions have been answered. I was dropped at the beginning of Q and A. But Could you speak to the rationale on why the company reestablished the ATM program and how it intends to use the ATM going forward?

Speaker 1

Yes. No, that's a great question. I'm glad you brought it up. So years ago, the Board of Directors decided that it was prudent to always have the flexibility to have a share buyback in place simultaneously with an ATM to give maximum flexibility, just in case. We have never ever used our ATM in the several years that we've had in place, including to this day, we've never had our used our ATM.

Speaker 1

It is there in sort of a break glass in case of emergency scenario and we have no plans to use it.

Speaker 4

Okay, great. And then just a couple of points of clarification on the Mars Stream option, if I could. The conversion granted 20% gold stream on the entire project or just a portion of the project?

Speaker 1

The whole

Speaker 4

project. The entire project. And is there an expiration, is there an expiry date on the auction and terms that govern when you can actually exercise that auction?

Speaker 1

There is no calendar based expiration date on the option. The option is given to us at a point in time when they make Their Board decision to construct the mine and have financing, that's when we're we get the phone call to say, do you elect yes or no? If we elect yes, then we're in and then we pay over time as they build the mine. Got it. Thank you very much.

Speaker 1

All right. Well, if there are no more questions, I think we can end the call and I appreciate everybody calling in. And as always, we're around to answer questions that people may have as follow-up questions. So thank you. Have a great day.

Operator

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.

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Earnings Conference Call
Sandstorm Gold Q2 2023
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