A friend of mine just sent me this write-up from the "Stock Gumshoe" newsletter. I think the numbers are in line but I stand corrected ...
stockgumshoe.com
First, a note on Sandstorm Resources (SSL in Canada, SNDXF on the pink sheets). I noted a few weeks ago that I added to my position in this “gold streamer” (think a junior Silver Wheaton, only for gold), so it has grown to be one of my bigger speculative holdings — and I was thinking about them this week, with gold soaring, so I thought I’d run down my back-of-the-envelope calculation for their cash flow again.
Sandstorm has four gold streaming agreements with mines that are either already producing gold, or will begin to do so in 2011. I ran down all of them in my note about buying shares earlier this year, but let me share the quick current rundown of what we’ve been told to expect from each mine. I’m going to assume a gold price of $1,200 an ounce, and that each mine hits their targets for production in 2011, which is probably a bit optimistic on both parts (I’m also ignoring the ongoing startup production this year, which is fairly minor for all of them so far). To keep it simple, I’m also not paying attention to the depletion rate of each mine — all of them are expected to produce for at least eight years, and all have room to significantly increase the size of reserves and the mine life with additional drilling.
Aurizona (owned by Luna Gold): Sandstorm’s deal gets them 17% of production at a cash cost of $400 an ounce. The mine is expected to produce 60,000 ounces in 2011, 80,000 in 2012, and 100,000 per year after that. At $1,200 an ounce for gold, that means Sandstorm effectively gets $800 per ounce, and their share at 17% of production means that they would earn $8.1 million in 2011, $10.1 million in 2012, and $13.6 million annually thereafter.
Santa Elena (owned by Silvercrest): This mine probably has the shortest expected mine life at eight years (though they could expand to other veins, or an underground mine, which might require additional investment from Sandstorm if they wish to participate). Sandstorm gets 20% of production at a payment of $350/ounce, and Santa Elena is expected to produce 35,000 ounces per year for the life of the mine. that would net Sandstorm $5.9 million/year at a $1,200 gold price.
Summit Mine (owned by Santa Fe): This one’s fairly small, they are producing now and are expected to produce 11,000 ounces per year at full commercial production. Sandstorm gets half of the first 10,000 ounces, then 22% (or 15%, if they exceed some benchmarks) of gold production after that, all of it in exchange for $400/ounce ongoing payments. So if we assume that they get the whole first 10,000 ounces produced in 2011, that’s a 5,000 ounces at a $800 profit (with gold at $1,200), or $4 million in the first year, dipping down to (if we assume the lower payout) $1.3 million per year after that.
The Ming Mine (owned by Rambler): This is the last one to start production, this is an old mine that’s being restarted and expanded — they should be producing some gold next year (there’s still a final permitting step needed for Sandstorm’s final up-front payment of $13 million). Sandstorm gets 25% of the first 175,000 ounces of gold with no per-ounce payment, which should take them into the foreseeable future (this is expected to be a long-lived mine, production initially at 12,000 ounces/year — once they go past 175,000 ounces of production, Sandstorm’s share dips to 12%. So if we assume that they get up to full production speed in 2012, that’s $4.8 million/year (4,000 ounces at $1,200/ounce, no ongoing per-ounce payment).
As I said, this is a faulty calculation and makes some assumptions, but what I end up with is expected revenues of $18 million in 2011, $22.8 million in 2012, and $25.6 million in 2013 from the streaming agreements that Sandstorm currently has in force. They are, of course, also looking to growth with additional agreements with other miners, and those numbers depend on each mine producing, on the price of gold, etc. etc. With a market cap of $193 million at the moment, this means that investors right now (including me) are effectively paying roughly 10X forward sales for Sandstorm. That sounds high, but since they have extremely low costs (other than buying new gold streams, they really just pay for their staff and management team), it should be effectively coming in at a very high operating margin. Royal Gold (RGLD) trades at about 20X trailing sales, and Silver Wheaton (SLW) at about 25X, so this is obviously a much smaller company that you’d want to be far more careful with, but the valuation is certainly not absurd in comparison.
Their cash expenses for the first half of this year that we might expect to be recurring, or growing somewhat, came in at a bit under $600,000, and there’s no real reason why scaling up of production at their royalty streams should increase their administrative and professional expenses. That’s not going to mean that they record the rest as profit, of course, since they also have to take into account depletion of reserves, non-cash expenses like stock-based compensation, and they will likely reinvest essentially all of their free cash flow into new gold streaming investments … but still, this is a model that allows for substantial increases in cash flow without substantial increases in costs.
So those are my updated thoughts on Sandstorm — it’s still very small and very speculative with just four streaming deals under contract, but they have some cash remaining and more cash coming in over the coming year to help invest in new deals if anything looks compelling, and I’ve been comfortable buying at prices right around here. My core assumption is that gold will remain over $1,000 an ounce and that the management team will be effective at compounding their cash flow into new deals to grow substantially over the next decade (unless Royal Gold or Franco Nevada or one of the smaller royalty players tries to buy them out first).
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1. CR Childress September 24th, 2010 1:09 pm :
The problem with Sandstorm is there are 265 million or over a quarter of a BILLION fully diluted shares outstanding. Puke…….. There will be additional stock offerings in the future…. Will the ultimate result be a BILLION SHARES? Too many juniors are in similar capital structure situations like this. |
