And the analysts say...
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Sandstorm Gold Ltd. ( SSL-T, SAND-A) is "spicing up" its portfolio with the acquisition of an existing 2-per-cent net smelter returns royalty on the producing Houndé gold mine in Burkina Faso, said Canaccord Genuity analyst Tony Lesiak.
On Tuesday, Sandstorm announced the acquisition from Acacia Mining PLC for $45-million (U.S.) in cash. It covers the Kari North and Kari South tenements, representing approximately 500 square kilometres of the Houndé property package, which is currently operated by Endeavour Mining Corp. ( EDV-T).
"We view the acquisition as accretive to SSL on an NPV5% basis," said Mr. Lesiak. "At spot gold prices we calculate the value of the royalty is between $39-million (reserves only) and $62-million (assumes EDV's targeted M+I resource additions of 2.5 million ounces or more 1). Based on CG's current base case of a 1.2 million ounces resource addition and spot gold, we value the royalty at $55-million.
Maintaining a "buy" rating for Sandstorm shares, Mr. Lesiak raised his target to $10.25 from $10. The average is $8.21.
"SSL is currently trading at a heavily discounted 0.92 times NAV while the precious metal royalty sector is at 1.4 times NAV," he said. "We estimate the transaction will increase 2018 cash flow by 11 per cent, assuming the spot gold price, and should help SSL close the relative valuation gap with its peers. The Hounde royalty represents 6 per cent of total SSL operating NAV (fourth largest) with Hot Maden now at 29 per cent followed by Chapada and the Yamana silver stream at 9 per cent each. We calculate an IRR of 11 per cent on our CG base case (1.2 million ounces) on the forward curve, which is well above typical IRR's for royalty transactions."
Elsewhere, CIBC World Markets analyst Cosmos Chiu raised his target to $6.25 from $5.75 with a "neutral" rating (unchanged).
"As Endeavour Mining's flagship asset, Hounde appears to have good exploration upside, which could eventually benefit Sandstorm Gold," said Mr. Chiu.
Raymond James analyst Brian MacArthur maintained an "outperform" rating and $6 (U.S.) target for the U.S. listing of the stock.
Mr. MacArthur said: "This deal increases Sandstorm's growth in its royalty portfolio and provides immediate cash flow with upside potential from exploration. We also note the PFS [pre-feasibility study] for Hot Maden, anticipated in 1Q18, could be a key catalyst for the company."
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