Sandstorm Gold Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

There are 7 speakers on the call.

Operator

morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sandstorm Gold Royalties 2024 First Quarter Results Conference Call. All lines have been placed on mute to prevent any background 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 or actual results and future events could differ materially from those anticipated in such statements. After the speakers' remarks, there will be a question and answer session. Thank you. Mr. Watson, you may begin your conference.

Speaker 1

Thank you, Joanna. Good morning, everyone, and thank you for calling into our Q1 earnings call. As usual, in a few minutes, I'll hand things over to Irfan, our CFO, to review our quarterly earnings highlights. And before I do that, I would like to take the time to give an update of our business with a specific emphasis on our capital allocation plans in this current high gold price environment. And in doing so, I want to talk about a few key points.

Speaker 1

Those being number 1, how much cash flow we're making at these high gold prices and how much growth we have built into our portfolio and therefore how much more cash flow we're expected to make in the future. Number 2, how quickly our debt has been coming down and how that continued reduction in debt is accelerating not only because of high gold prices, but because of the non core asset sales processes that we've completed. Number 3, the status of the non core asset sales processes. I want to talk about where we are, what we've achieved and what shareholders can expect going forward. Number 4, I want to remind people of the growth that we have coming online now and over the next few years.

Speaker 1

Then finally, I want to talk about capital allocation priorities and specifically share buybacks versus additional growth. So starting with number 1 and how much cash flow we're making. You can see from this slide that at today's gold prices we're expecting our portfolio to generate close to $165,000,000 of cash flow and as other assets come online like Greenstone, Flat Reef, Robertson, Otmadin and Mara, we expect that cash flow to grow to over $250,000,000 per year within 5 years' time. It's my belief that these new gold prices are generally speaking here to stay. And although there will certainly be more short term volatility in the gold price that the fundamental forces that have been driving gold higher are generational themes of geopolitical tensions, wars, inflation, currency debasement, U.

Speaker 1

S. Dollar, de dollarization of global trade, etcetera. And these themes over the long term will continue to push gold higher. And if I'm right, this means the sandstorm making much more money than anticipated and our shares are worth much more than they're trading at. That brings me to my second point.

Speaker 1

For a long time now many of you know I've been wanting to buy back our shares in the market. As some of you may have noticed we recently filed a CDI report showing that we've recently bought back a few shares in the market. Our debt is now coming down so fast, we feel our balance sheet is now strong enough that we should be buying back some of our own shares. We've just announced the renewal of our normal course issuer bid and our debt as we sit here today is already down to $408,000,000 and we've just announced that we've signed an agreement to sell a few non core non precious metals royalties to a company called Evolv for $21,000,000 in cash And we expect this transaction to close in Q2. So these proceeds combined with our anticipated cash flow for the remainder of Q2 mean that we expect to have our debt down to approximately $375,000,000 by the end of this quarter.

Speaker 1

When you compare that $375,000,000 to substantial cash flow from our portfolio, I can now confidently say that we have low leverage and that leverage is dropping rapidly as our debt evaporates. Because of this, we are now confident enough to resume repurchasing our own shares in the market. Having said that, our plan is still to use the bulk of our cash flow to continue paying down debt and recharging our balance sheet, so that we can set the stage for our next leg of growth. I'm a big believer that gold prices are going to stay high and go higher and therefore we want to find more gold streams and royalties to purchase. I do think it's important to note however that we think our shares are worth so much more than what they're trading for.

Speaker 1

Therefore we're not at all considering any growth that would require equity or convertible debentures or any other forms of dilution. Our goal is to buy back shares and shrink our share float, so that any growth we have will be paid for from operating cash flow or from a revolver. We are also now proud that our balance sheet is once again strong and we plan on keeping it that way. In the past, we have grown Sandstorm sometimes in jarring ways for shareholders and we believe that those days are behind us that our shareholders can expect smoother sailing going forward and growth that is more methodical and measured and that does not require equity. I have to say as a large Sandstorm shareholder myself, I'm excited for this next leg of growth and I believe it will be done in a way that's rewarding to shareholders.

Speaker 1

That brings me to my 3rd point. Just briefly, I'd like to provide a bit of color on the non core asset sales process. As you know, we have guided the market that we would complete asset sales for a minimum of $40,000,000 in cash proceeds. We had already completed $20,000,000 of that and with this latest sale to evolve with $21,000,000 in cash, we've now completed our minimum objective of $40,000,000 This latest and last sale of assets was the culmination of many months process run by RBC involving many different royalty companies. Many of the offers we received during the bidding process were for non conforming and people bidding on assets that weren't for sale.

Speaker 1

And although it was flattering to see how much people wanted to pay for some of our core royalties in the end, we wanted to keep all of our core royalties and we only wanted to part with a copper MPI and a handful of others non precious metal royalties that don't move the deal for Sandstorm shareholders. For what it's worth, it's my view that we started this non core asset sale process at lower commodity prices and when we had higher debt levels. We were trying to be conservative with our balance sheet, but it's clear to me now we're making so much money, we aren't being served well by over conservatism and we do not need to sell any streams or royalties going forward. Anticipate that these are the last royalties that we'll consider selling and that our portfolio is locked down and the only things we're considering doing is adding to it for new gold streams and new royalties that will make our company stronger going forward. Having said that, we will continue over time to sell our non core debt and equity investments that we have in other mining companies and use those proceeds to accelerate our debt repayment, so that we can recharge our balance sheet and get ready for our next leg of growth in gold.

Speaker 1

Brings me to my 4th point, which is speaking about growth, I want to remind shareholders the 5 great gold streams and royalties that we have coming online over the next several years, being the Greenstone mine, which should be pouring gold next month, the Platte Reef mine that our technical team has got back from, they should be pouring gold next year, the Barrick's Robertson mine, SSR's Hudmodan mine, Glencore's Mara mine. Sandstorm shareholders have a lot of built in growth to look forward to. And at these gold prices, we plan on making lots of money for shareholders. It really is a good time to be a Sandstorm shareholder. We have a strong asset base and a number of key catalysts coming up, including evaporating bank debt, share buybacks, Greenstone and Platte Reef coming online, Hod Moden getting into construction our corporate development team is once again out there trying to plant the seeds for our next leg of growth.

Speaker 1

The future is bright at Sandstorm. With that, I'll hand it over to Irfan to review the quarterly details.

Speaker 2

Thank you, Nolan. With the rapid rise in commodity prices and with gold and silver hitting all time highs, the Q1 of 2024 has brought a renewed sense of optimism and excitement to the mining industry. We're seeing many positive developments from our royalty portfolio as operators and exploration companies accelerate investment in their projects. In terms of Sandstorm's Q1 financial results, we are off to a solid start to the year With just over 20,300 attributable gold equivalent ounces sold, the company is right on track to achieve its production guidance for 2020 4, which is between 7,500,90,000 gold equivalent ounces. The average realized gold price for the quarter was $2,062 per trivial ounce.

Speaker 2

It's worth noting that the company received some of its more material stream deliveries at the beginning of the quarter. In Q1, gold and silver prices made more material moves upward towards the end of the quarter. Sales from our streaming contracts totaled $27,200,000 and royalty revenue was $15,600,000 for total quarterly revenue of $42,800,000 Cash operating margins remained strong coming in at $17.82 per attributable ounce for the 3 month period. That is an 8% increase in cash operating margins compared to the same quarter in 2023. Resulting cash flows from operating activities excluding changes in non cash working capital were $32,600,000 for the Q1.

Speaker 2

Net of a $10,000,000 one time contractual payment related to the company's Mount Hamilton royalty that was recognized in the Q1 of 2023, cash flows were relatively consistent year over year. The company had a net loss of $3,900,000 for the 3 month period ended March 31 compared to net income of $15,600,000 for the comparable period in 2023. The change was primarily driven by a decrease of $10,000,000 in contractual income related to the Mount Hamilton royalty that I mentioned, as well as a fair value changes in the revaluation of the company's investment into ventures. As Nolan just discussed, higher commodity prices are having a positive impact on the company's cash flows, which helps expedite our deleveraging efforts. During the Q1, we were able to make net payments of $20,000,000 on the company's revolving credit facility and we ended the quarter with bank debt totaling $415,000,000 Subsequent to quarter end, we have continued debt repayment.

Speaker 2

And as of yesterday, Sandstrom's net debt was approximately $405,000,000 With the closing of the non core sales transaction announced yesterday that Noel mentioned, we expect our bank debt to be well below $400,000,000 in the coming months. Looking at a breakdown of our assets and where production came from during the quarter, the Bonacrom mine in Cote D'ivoire was a top producer. This was largely due to the timing of sales whereby approximately 800 gold ounces were delivered towards the end of the Q4 and subsequently sold in Q1 2024. The company streams on the Chapada mine and the Cerro Moro mine continue to be in Sandstrom's list of top producing assets. In February, Lundin Mining announced a 25% increase in mineral resources at Chapada Swaba deposit.

Speaker 2

I want to highlight that attributable production from the Antamina copper mine approved was lower in the Q1 compared to the previous quarters. The decrease is related to the nature of the NPI that Sandstorm holds, whereby there was a reduction in the royalty payment due to a one time adjustment to the asset retirement obligation at the Antonina mine to reflect updates relating to the recently approved mine plan and other working capital adjustments. Despite this one time adjustment affecting Sandstorm's quarterly revenues attributable to Antamina, the underlying benefit to Sandstorm is the extension of operations at Antamina and the proposed processing capacity expansion at the mine, which should further increase the already long dated nature of this incredible asset. Sandstorm is well positioned to take advantage of an environment of rising gold, silver and copper prices. In the Q1, nearly 75% of the gold equivalent ounces sold were attributable to gold and silver mines, while 15% of attributable gold equivalent ounces came from copper mines.

Speaker 2

As Nolan discussed, cash flows are expected to be strong this year and we're excited to see some of our key development assets come online over the coming months years. I'll leave it there and turn the mic over to Dave for some portfolio highlights. Dave?

Speaker 3

Great. Thanks, Stefan, and good morning, everyone. Today, I thought I would remind everyone our timelines for Greenstone and Platte Reef, but I also want to speak to the market share that Sandstorm has of the spending going on in the junior mining exploration sector. So starting with Greenstone, which is now fully consolidated under Equinox Gold. On track for a 1st gold pour this month, following the introduction of ore into the grinding circuit on April 6.

Speaker 3

They have over 1,500,000 tons of ore stockpiled and over 70,000 tons of ore crushed. With preparations for early commissioning feed underway, the project targets throughput of 20,000 tons per day with commercial production expected Q3 of 2024 90% of that nameplate capacity by the end of the year. Greenstone is on the final stretch becoming the 4th largest gold mine in Canada. Moving on to Platte Reef, the technical team and I just completed a visit to Platte Reef in South Africa 2 weeks ago, and we're really pleased to see the project there develop. It's a very impressive site and the scale of everything leaves you awestruck.

Speaker 3

Ivanhoe Mines is doing an excellent job pushing this project to production, which is now hoping to become the largest South African PGM producer by a significant margin. Despite the enormous scale of what is being built on-site, the project will start rather modestly with 800,000 tons per annum at Phase 1 expected for Q3 2025. Considering the scale of shaft 2 and the ingenuity of how shaft 3 is being converted, you can see how the expansion of 4,000,000 tons per year per annum at Phase 2 and a further expansion to 10,000,000 tons per annum for Phase 3 can happen. As expected, Ivanhoe has an impressive build team on-site with many of the people involved in the construction on the amazing Kamoa, Kakula project in DRC currently involved in the optimization and construction of Platte Reef. We're excited to see the mill starting to take shape and this first phase should be ready in time for the production in Q3 2025.

Speaker 3

Shaft 3 is almost finished reaming and is expected to be ready for hoisting in Q4 2025, making with a capacity of 4,000,000 tons per annum, bringing the entire hoisting capacity to 5,000,000 tons per annum by the end of next year. An updated and optimized feasibility study is expected on Phase 2 expansion by the end of this year. Last item I wish to speak to about today is regarding the optionality of the royalties that we own. Beyond the 40 cash flowing assets in the portfolio, it's important to remind shareholders there are close to 200 additional projects worldwide that we hold royalties on. Of course, Sandstorm has been accumulating royalties and packages for 15 years now, and it's incredible to see how far our reach into the junior mining exploration market extends.

Speaker 3

Tracking financings for the last 3 years and one quarter, we see that in precious metal and base metal junior explorers, dollars 14,800,000,000 has been raised by companies in North America and Australia. When you look at how much was raised by our own junior mining partners, whom we hold royalties with, there's a remarkable $1,800,000,000 raise. This means that Sandstorm Gold is seeing the benefit of greater than 12% of all junior mining exploration financings completed in North America and Australia. If we are seeing a renaissance of new equity into that sector, we hope this amount will increase over the rest of this year and continue to see projects in our portfolio move from exploration to development to production, like we have seen from partners like Erdene in their Beinhunde mine or Las Isnas by Cerato Gold. It's great to have a huge portfolio in an exciting time like this, where capital is starting to flow into the exploration space.

Speaker 3

So with that, I'll hand the call back over to Joanna, the operator for our Q and A session. Please feel free to ask questions about any of our projects and royalties

Operator

First question comes from Heiko Ihle at H. C. Wainwright. Please go ahead.

Speaker 4

Hey there. Thanks for taking my questions. I assume you can hear me okay?

Speaker 1

Yes. Hi, Heiko.

Speaker 4

Perfect. How are you? Hey, on your pipeline of non core asset sales, what are you seeing with sales pricing right now given the spot prices versus where we would have been when you started this non core asset sales mission? And building on that question, earlier on this call, you discussed people bidding on assets you don't want to sell. Looking at your pipeline, and there's no need to provide a name, I'm just curious.

Speaker 4

Looking at the assets that are for sale, how soon to production are the nearest term ones that you are willing to sell for the right price, please?

Speaker 1

Yes. So I guess just as a reminder that after this sale process to evolve of $21,000,000 that will conclude our asset sale process. There's nothing else that we're considering going forward. If I reflect on the process, the phases of bidding and when the prices of bidding were due were before this run up in commodity prices. And so we didn't really get a lot of information about what people would be paying going forward for assets.

Speaker 1

I expect that, for example, when we're competing to buy streams of royalties going forward, there will be a bit more competitive tension because commodity prices are higher. But in terms of asset sales right now, we're done selling anything in our portfolio. Our portfolio is locked down. We only want to buy things going forward and grow in gold. And we're going to be focused on doing that.

Speaker 1

And the only non core asset sales that we'll sell going forward will be the assets of debt and equity investments that we hold in other mining companies that are core and we're going to continue to try to sell that to accelerate our debt repayment.

Speaker 4

Fair enough. Your average cash costs went up $50 year over year and I believe it was $69 quarter over quarter. This isn't really surprising given where commodity price are right now, but it's certainly a fairly large percentage when looking at it on a percentage basis. Your longer term estimates, 125,000 attributable GEOs in 5 years. Assuming and you were hinting at this earlier on this call that gold prices are probably here to stay.

Speaker 4

Assuming spot price stay where they are and with new assets entering production, do you have an internal model of where you see the cash cost figure through the next several years, ideally even year over year while you work towards the 125,000 GEOs?

Speaker 1

Yes. So our guidance now, if you include Mara, is up to kind of 155,000 ounces. We do have that modeled out. What I would say is that the average cost per ounce for us is dependent on a couple of things. One is obviously gold price because often in our streams we're paying 20% of the gold price for example.

Speaker 1

So if the gold price goes up our cost will but that 20%. And one of our big pieces of growth is hotmodan and hotmodan does have a higher cost per ounce. We pay 50% of the gold price there. So you will see by around 2027, 2028 or whatever, Haban gets up and running our cost per ounce on average will go up a little bit because of that. But generally speaking, our cost per ounce is going to be and stay very, very low for a long period of time.

Speaker 1

A lot of the royalties that we have coming online things like Greenstone and Flat Reef, they're very, very low costs per ounce. Our margin is close to in some cases 100%. Robertson, the royalty that's coming online from Barrick, that's a full royalty, so we get 100% of gold price, our cost base is 0. So we're going to still have very, very, very high margins going forward. But I wouldn't be able to pry

Speaker 4

a number out of you?

Speaker 1

Not year. Yes, it will be what it will be and it will bounce around depending on the prices.

Speaker 4

Fair enough. Got it. Thank you. I'll get back in queue.

Operator

Thank you. Next question comes from Derek Ma at TD Securities. Please go ahead.

Speaker 5

Thank you. Good morning and congratulations on the asset sales. Question as you start looking at growth sizing of the if the sizing of the deal is more than your quarterly cash flows, are you willing to tap into debt? And what's that maximum level of debt you're willing to add to your balance sheet at this time?

Speaker 1

Yes. So I guess the way I'd answer that is in terms of the amount of debt that we're willing to take, it really depends on the assets that we're buying. Right now, to answer your question, we're focused really with a barbell approach for growth with kind of 50% of our time focused on sort of the high dollar number transactions that are for assets that are cash flowing now. And so if we did one of those transactions, it would come with its own debt capacity. We've got a revolver that allows us to drop to $625,000,000 We're not looking at any transactions that would require us to upsize that revolver.

Speaker 1

So if we did anything, it would be within that revolver range that we already have and it would the acquisition would come with its own debt capacity. The other 50% of our time that we're spending on is trying to plant the small seeds of growth for that next leg of growth past the things like Hot Modern and Amara. So going out past 2,030, what are the opportunities that we can tie down to really small dollars today, where we're tying those opportunities down. So if someone's finding a copper and gold mine somewhere, we want to be the guys on the ground paying $1,000,000 to buy the royalty and getting a right of first refusal to maybe do an early deposit stream option and get a right of first refusal for the gold streams going forward when those mines eventually get built. And so we're trying to figure out how to increase our growth now in the short term, but also how to increase our growth past 2,030 and beyond with that approach.

Speaker 1

But anything that we're considering that is long dated to cash flow, we're not considering allocating material dollars to that. That will all be hard work, but low dollars.

Speaker 4

Okay. Thank you.

Operator

Next question comes from Tanya Jakusconek at Scotiabank. Please go ahead.

Speaker 6

Hi, good morning everyone. Thank you for taking my questions. I'm just wondering when you mentioned, Nolan, the deals, that barbell approach, obviously, the higher valued ones up front to fill that gap that you have a flat production profile. The deals that you are considering, I'm just wondering on the simplicity of the deals. We are seeing that a lot of the deals that are being done, unless they are pure royalty deals, come with an equity component, come with a lending component.

Speaker 6

So they're more complicated than they have been in the past. Is that what we should be thinking about in terms of the type of deals that you're looking at? And then just wondering, you mentioned size up to $625,000,000 available on the revolver, but where is your sweet spot?

Speaker 1

Yes. That's a great question. I would say that broadly right now we're so happy with our portfolio and what it looks like and continued debt reduction is one important place that we can allocate capital. So the bar is very high for the quality of types of things that we would have to buy to grow. If we're going to allocate capital for growth, it's got to be for a deal that really makes a lot of sense and makes sense for our story better.

Speaker 1

So to answer your question about structure of deals right now, I can confidently say that the only things that we're looking at that are material and large are pretty straight down the fairway precious metal streams and royalties that would not have other portions of the capital structure be a material part of the capital allocated. I think years from now that may change, but that's not on the radar right now.

Speaker 6

Okay. And most of the and maybe this is early for you to say as you start looking and or are approached on some of these deals, would most of them be in this sort of $50,000,000 to $300,000,000 range? Is that what you're seeing? Is that your sweet spot?

Speaker 1

Yes. I would even say higher than $50,000,000 We're kind of looking at the $100,000,000 to $300,000,000 range is our sweet spot right now.

Speaker 6

Okay. And then can I just on your capital allocation, so I'm just wanted to make sure I understand that we've got this debt level that you want to bring down to under $350,000,000 or thereabout, I think was the target? And then should I be thinking that as soon as we get under that, that's when deployment of capital for buyback would make sense and sort of assuming anywhere pick a value but the low NAV would be something that you would look as a benchmark for buying back shares?

Speaker 1

Yes. I think that originally we had picked a $350,000,000 number backroom gold prices were much, much lower And we were worried about sort of a dip in production, but that dip in production is behind us and the gold prices ended up being much, much higher. So now that we've completed or going to be completing the sale of non core assets to evolve and expect to exit Q2 with about $375,000,000 of debt, we now have the confidence in our balance sheet enough to start at very small low levels buying back our shares now. And we will still though use the bulk of our capital to be repaying our debt. So our original goal of pay debt to below $350,000,000 by the end of this year and then start buying back shares.

Speaker 1

We think we'll actually be able to buy shares and still end up with debt well below $350,000,000 by the end of the year. And so we're kind of front loading the share repurchases a little bit.

Speaker 6

Okay. So $375,000,000 by the end of Q2, then we start seeing sort of the share buyback is what I'm reading. And then how do you manage that on your share price, buyback the low NAV, is that what you're looking at? And then sort of as the stock or stocks are volatile in the gold space, kind of trying to buy below NAV, would that be a fair way of thinking about it?

Speaker 1

Yes. Although I would say, I would give the caveat that it's our view of what our shares are worth. And we are currently in the process of re informing what we think that number is. If you would have asked me 6 months ago what we think our NAV per share was, I would have said something like CAD8 per share back then. But now that gold prices have reset themselves higher and I believe that the gold price is going to stay strong, continue to go higher, think that that number is the wrong number.

Speaker 1

It's too low for two reasons. 1, because the gold price is higher, we're going to make more money, but also because at these higher commodity prices, our partners, as Dave alluded to, they're raising more money, they're turning on the drills, their projects, they're finding more exploration upside, they're going to expand their plants. So the numbers that I'm using in my Excel model to determine what our shares are worth, they're the wrong numbers because they're too low. There's going to be more gold ounces found, there's going to be more gold ounces produced before the sandstorm. So the value per share is determined on how many ounces are we going to get with us to gold price.

Speaker 1

And I think the answer is our model should have more ounces than they currently have it and the gold price is going to be higher than what our models were. And so our share prices are worth a lot more than that. So what is that number? I don't know. It's probably somewhere between $9 to $12 a share.

Speaker 1

Are we going to buy our shares in the market all the way up to $12 Probably not. But will we buy them up to $9 Probably, yes.

Speaker 6

Okay. And then how should I think about dividends in this sort of scenario?

Speaker 1

Yes. So right now we're paying $0.02 per share per quarter. And our plan is to continue to do that sort of every December. We reevaluate that policy and decide whether we keep it the same or increase the dividend. And so we'll keep paying our dividend in this December.

Speaker 1

We'll make that decision when that time comes.

Speaker 6

Okay. So you review the dividend once a year in December. Is that correct?

Speaker 1

Yes, correct.

Speaker 6

That's great. Thank you so much for this. Appreciate you taking my questions.

Speaker 1

Thank you.

Operator

Thank you. That concludes today's Q and A session. I will turn the call back over to Mr. Watson for closing comments.

Speaker 1

Well, thank you very much. And thanks everyone for calling in and taking the time. And as usual, feel free to call us at the office if you have any further questions. And I hope everyone has a good day.

Operator

Ladies and gentlemen, this concludes your conference for today. We thank you for participating and we ask that you please disconnect your lines.

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Earnings Conference Call
Sandstorm Gold Q1 2024
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