Sandstorm Gold Ltd. (NYSE:SAND) Q2 2022 Earnings Conference Call August 12, 2022 11:30 AM ET
Company Participants
Nolan Watson – CEO
Erfan Kazemi – CFO
David Awram – Senior EVP
Conference Call Participants
Marcus Giannini – H.C. Wainwright
Trevor Turnbull – Scotiabank
Derick Ma – TD Securities
Operator
Good 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 2022 Second Quarter Results Conference Call [Operator Instructions]. Please be aware that some of the commentary made 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 begin your conference.
Nolan Watson
Thank you, Joanna. Good morning, everyone, and thank you for calling in to this Q2 earnings call. At Sandstorm, we’ve had a very, very busy summer so far. And so as part of this Q2 earnings call, I’d like to provide everyone with a brief corporate update before handing it over to Erfan, our CFO, to go over the specific Q2 results and then to Dave to provide asset specific updates on a view of our stream. There are four specific areas that I’d like to provide an update on this morning. And those are: number one, the BaseCore Royalty Package acquisition; number two, the Nomad Royalty acquisition; number three, the surfacing of value through the sale of underappreciated the valuable assets to Sandbox; and number four, the sale of the Hod Maden interest and the taking back of a gold stream from Horizon Copper. So I’ll start with the first one being the acquisition of BaseCorp. Sandstorm successfully closed the $525 million acquisition for the BaseCore Royalty portfolio on July 12th. That deal is now officially closed. As part of that transaction, we successfully upsized our revolving credit facility to $500 million and partially drew down on it to close the acquisition. Once Horizon Copper is up and running, which I’ll talk more about shortly, the next step will be to vend in the Antamina royalty into Horizon and take back at silver stream, a smaller portion of the copper royalty unit debenture. And I figure that this transaction, the second step will close sometime this fall.
Next, moving on to the Nomad Royalty Company acquisition. This week, both Nomad and Sandstorm shareholders voted overwhelmingly to approve the acquisition, and we now have all the government approvals that are required for the transaction, and we expect it to close on Monday, August 15th, so this coming Monday. I have to say having over 99% of voting shareholders support the acquisition of both Sandstorm and for Nomad shows what a logical combination this is, and we believe that the new Sandstorm will become an even more attractive investment vehicle for large institutional investors looking for high quality, high upside, lower risk exposure to gold.
Moving on to the next update. We have successfully surfaced a significant amount of shareholder value by selling underappreciated and undervalued royalties to Sandbox. That transaction officially closed on June 29th. You may have noticed, a substantial amount of net income in this quarter’s financials due largely to a gain on the sale of royalties, and it is this surfacing of value transaction with Sandbox that was the source of most of that gain, because we sold the royalties for more than what we paid for. In the final update, which is an important one related to sale of our 30% Hod Maden interest to Horizon, and the taking back of a gold stream and a debenture. This transaction required the approval of the TSXE, and I’m pleased to say that we now have that approval in hand, and we’re expecting this transaction to close near the end of August. But we had a lot of moving parts this summer. And going into summer, our goal was that while everyone else was on vacation, we would get all of these transactions completed. But when everyone else came back for their desk in December, the new and improved Sandstorm would be ready to go with a clean and clear story. And honestly, I’m so so proud of the work that our team has done over the summer. And I’d like to take this opportunity to thank them because they have been working so hard to get all of these deals done. And I know that both I and shareholders appreciate the hours that they’ve been putting in to get all this done.
So speaking of the new Sandstorm, I just have two quick slides to remind investors what we look like emerging from the summer, not being we are a pure play streaming and royalty company. By 2025, we’ll have nearly 90% of our revenue coming from precious metals. Our streams and royalties are in some of the highest quality assets in the industry, with over 60% of our streams and royalties on mines that can produce in the lowest cost quartile. Out of the majors and mid tier royalty companies, we are the most diversified precious metal company in the world with respect to royalties, more than 38% of our value coming from our top five assets, whereas every other major and material royalty company has over 60% of their value coming from only five assets, which we think about as not very diversified at all. And we have the highest growth amongst our peers with a dramatic increase in production and cash flow coming over the next few years. And you can see that increase in cash flow here. With the cash flow generated by our portfolio, we’re expecting that to increase to approximately $170 million to $180 million per year by 2025. We are very excited for what lies in store for us going forward.
And with that, I’m going to hand it over to Erfan to go over the specific results.
Erfan Kazemi
Thanks, Nolan, and thank you to everyone who has joined us this morning. The second quarter of 2022 was another one for the record book. For those of you joining us on the webcast today, you’ll see on this first slide, the growth trend over the last four quarters in terms of revenue and production. Sandstorm continues to grow our attributable production quarter after quarter. And with the addition of the BaseCore Nomad assets, the company is on task for another record breaking year in terms of financial results. Let’s look at the quarterly results in a bit more detail. Sandstorm’s revenue for the second quarter was approximately $36 million, an increase of 36% compared to the second quarter of 2021. The increase was driven by several factors, including a 7% increase in the attributable gold equivalent ounces sold, totaling over 19,000 ounces as well as a 4% increase in the average utilized selling price of gold. Revenue was comprised of $23.8 million in sales from our stream assets and $12.2 million in royalty revenue. When comparing the same period in 2021, the company has several new cash flowing assets in our portfolio this year, namely the Mercedes mine, which began stream deliveries in April 2022, and the Vatukoula gold stream, which began making deliveries in December 2021. The Vale Royalties that were purchased in June of last year also contributed to higher revenue this quarter.
Our corporate development team has been very busy over the last 12 months, and it’s nice to see the recent acquisitions providing meaningful contribution to Sandstorm. Despite a softening gold market in the latter half of the second quarter, Sandstorm’s average realized gold price was $1,866 per ounce for the three months ended June 30th. The average cash cost per attributable ounce has remained below $300 for the last several quarters, which is indicative of the high quality and low cost assets that are underlying our stream and royalty portfolio. Cash flows from operating activities, excluding changes in noncash working capital, totaled $21.9 million in the second quarter, resulting in cash operating margins of $1,593 per attributable ounce. Net income for the quarter was nearly $40 million. Net income was higher compared to the same period in 2021, driven by higher revenue as well as a $22.9 million gain, mostly driven by the disposal of royalty assets that were sold to Sandbox Royalties in June 2022.
For consideration for the portfolio of nine royalty, Sandstorm received 34 million shares of Sandbox, a $15 million cash payment and the $31.4 million convertible promissory note. Nolan mentioned, with accretion of Sandbox Royalties, Sandstorm expects to surface value certain assets that were not receiving the warranted value in our existing portfolio. Additionally, Sandstorm recognized a $12.5 million gain resulting from the sale of the company’s equity interest in on-trade resources to Horizon copper, which completed in May. During the second quarter, Sandstorm sold 19,276 attributable gold equivalent ounces. This slide lists the top assets by production. Under the Yamana silver stream, the Cerro Moro mine was a top contributor for the quarter, followed by the Chapada copper mine. The Chapada copper stream benefited from an increase in the average realized on price of copper in the second quarter of 2022 compared to the second quarter of 2021, as well as a 64% increase in the number of copper pounds sold.
As previously mentioned, we’ve added a few new assets to this list over the past year, which has contributed to the increase in attributable gold production, namely the addition of the Mercedes and Vatukoula gold streams along with the Vale Royalties. Production attributable to the Diavik Royalty also contributed to the increase compared to the same period in 2021, which was driven by an increase in [diamond] prices, as well as some nuances with the timing of sales. Taking a look at the regional breakdown on the next slide. Nearly 90% of production in the second quarter was attributable to operations in the Americas. Cerro Moro, Chapada, Fruta del Norte and Vale were the primary drivers of production in South America. While Relief Canyon, Santa Elena, Diavik, Mercedes and Black Fox were the larger contributors of production in North America. Geographical diversification has always been an important consideration with building a growing Sandstorm portfolio. We’ve seen incredible royalty assets around the world. And with the assets from the BaseCore Nomad transactions, we’ve added a number of high quality assets located in several stable mining jurisdictions.
And with that, I’ll turn it over to Dave for an asset update. Dave?
David Awram
Great. Thanks, Erfan. With the vote finalized on the acquisition of Nomad behind us and with the imminent finalization of the transaction in the coming days, I’d like to focus on some of the bigger growth assets from the Nomad portfolio. But first, I’ll speak a little bit about the Permian situation at Hod Maden. Great news is that Armin has received all the major permits for the construction of Hod Maden in Turkey. The EIA was approved last year and the final permit from the forest — Ministry of Forest has been received. This means that permits required to begin construction have been received completely, including the infrastructure and tailings pond and the sell core Vale to North. I’m also pleased to report that two of four early works projects are well underway at site. The road and pad preparation for the electrical substation are almost complete, and the road upgrades in Saliçor Valley is well underway. Once installed, the substation will tie into the existing overhead high voltage lines. So once this project is complete, it will make a huge difference to the energy available, not just for the construction at Hod Maden but the surrounding area as well. Other early works projects that are permitted and set to begin are the road upgrade and the access tunnel to the North Valley. We expect that all four early works projects will be underway or completed by the start of Q4 2022. It’s great news to see that this project is finally starting to take shape and move forward towards the construction mode.
Moving on to Greenstone with the latest update from Equinox stating that the project is 35% complete and currently on time in construction efforts. Detailed engineering is effectively complete, highlights of the construction milestones that are procurement, earthworks and structural concrete, are all above or approaching 40% completion. Tailings storage facility is close to 30% complete, and some of the first mining trucks are on site being assembled. As we approach the end of the year, the water treatment plant is expected to be commissioned and the majority of the buildings will be enclosed with some of the preproduction mining activities set to begin. Permian is part of their integrated team on the project. And they are motivated to prove their skills and complete this project to move on time and on budget as they will next be moving on to their own mine construction in Brazil on the Tocantins project. As a reminder, Greenstone is expected to produce more than 5 million ounces over a 14 year mine life with the first gold production expected in the first half of 2024. Equinox sees this asset as a key part of their growth portfolio, and we expect to see lots of news as they put into production one of Canada’s largest gold mines.
Perhaps the most exciting growth project in the Nomad portfolio is the Robertson mine, which is part of Nevada Gold Mines operated by Barrick. This will be the latest mine in the Cortez Complex of project and sits just northeast of the current pipeline operations. As of the last update, the record of decision on this project is expected by Q2 2023 with initial production in Q4 2024. Nevada Gold Mines is in the enviable position of utilizing the existing mining fleet at their Crossroads operation to start this mine and also using the existing pipeline oxide mill to process higher grade material in addition to a lower grade heap leach operation at the mine site. The asset is expected to begin production in Q4 2024, and right now is expecting 260,000 ounces per year for a eight year mine life. However, Nevada Gold Mine continues to point to the additional exploration potential that exists here. And if Robertson continues exploration success typically found in that Cortez region, we’re hopeful that the asset has a life of mine will well beyond 10 years. It’s great to have a royalty with a great growth project and largest gold producing complex in the world. Also, I would be remiss not to mention Platreef operated by Ivanhoe Mines, which is another important asset within the growth portfolio at Nomad. They continue to develop the Flatreef orebody with Phase 1 production expected in Q3 2024, where they expect to be operated in one of the world’s largest and lowest cost primary PGM producers.
So with that, I’ll pass over the call to the operator, Joanna, for Q&A. Please feel free to ask any kind of questions about any of our royalties and streams.
Question-and-Answer Session
Operator
[Operator Instructions] First question comes from Heiko Ihle at H.C. Wainwright.
Marcus Giannini
This is Marcus Giannini calling in for Heiko. With the Nomad and BaseCore transaction now essentially complete, given the recent approval, just thinking out loud here. Have you been getting phone calls from larger scale investors, given the transformational nature of the deal? I guess what I’m asking is, do you feel that there’s now more interest in the firm, which may lead to an increased trading multiple, given its increased size in the near future?
Nolan Watson
We certainly expected that going into it, which is one of the reasons we did these transactions in the first place. Anecdotally, what I’m hearing from sales [desk] right now is that they were telling their clients all summer long, there’s a lot of moving pieces here, it’s going to get messy, wait until it’s all done and then go by Sandstorm. And I think you’re going to see that happening here over the next couple of months.
Marcus Giannini
And then there’s probably no scientific answer to this. But based on the Horizon transaction, if you had to estimate how do you see the breakdown of your attributable assets in terms of precious metals versus base metals in the next five years versus where they are today?
Nolan Watson
We’re closer to 20%, 25% of our cash flow, have been coming from nonprecious metals, although, a lot of that is coming from copper, and we do love copper too. But by 2025, we’ll be 90% precious metals [exposure] when Hod Maden is up and [running].
Operator
Next question comes from Trevor Turnbull at Scotiabank.
Trevor Turnbull
I appreciate the update that David provided with respect to some of the Nomad projects and how that feeds into the company going forward. I was just wondering, though, if you could touch a little bit on some of the producing assets within Nomand? Just wondering maybe specifically how Blyvoor performed in the second quarter, and if there’s any update on Bonikro as well.
David Awram
Blyvoor is really kind of been having continued success over this year, 2022, starting to hit its metrics a little bit more. We still do see it progressing and really kind of getting up to the projected number of phases by early next year to really kind of get it into more of a steady state piece. If we do see an increase in gold price, that’s going to be a huge benefit to really kind of speeding that on as they have more capital to really continue to add to their workforce and increase the number of panels that they’re able to access at any given time. Over at Bonikro, a big part is really completing this — the stripping on the next phase mining from there. That is completing in 2022, which will open up a lot more material. So as we get into 2023, they’ll start accessing that next phase of production from Bonikro, which should provide a number of years of some good cheap tons to be able to start putting through the mill there. So Bonikro really, 2023 is the — we’ll start seeing it, really start ramping up from that next phase of mining. And I think the same thing for Blyvoor as Blyvoor really kind of gets into higher number of overall panels, really with the goal of getting 20 panels operating once. That will get them closer into this beyond 50 to 60 to even potentially as high as 80,000 ounces per year.
Trevor Turnbull
And then just the last question I had, while we’re talking about some of these Nomad assets, Woodlawn in Australia seemed like it was getting closer and closer to being redeveloped with new management or new owners. Can you remind us kind of where that is in the process?
David Awram
I think they’re still really kind of going through. I think they completed now that whole takeover of that asset. So they’ll start seeing the investment going back into Woodlawn, and really that idea that if it get it on timeline, I don’t think we’ve seen the renewed and the new timeline really pop up on Woodlawn . But as we get into the second half of the year, I’m sure they’ll have a more defined timeline when they expect that project to get up and going.
Operator
[Operator Instructions] Next question comes from Derick Ma at TD Securities.
Derick Ma
Just looking ahead, given the inflationary environment faced by mine operators today. Could you provide us with some insights into the effects of any of reduced margins and higher CapEx would have on a proposed synthetic silver stream on Antamina with Horizon? And then I believe the situation might be slightly different with Hod Maden, but if you could touch on that as well, it’d be great.
Nolan Watson
Yes, specifically with respect to the silver stream on Antamina, the silver stream is a very small part of the overall royalty. And so it’s not impacted.
Derick Ma
Would it have impact on the Hod Maden side? I mean, I’m just thinking about Horizon as an entity having cash flows to pay it on the silver streams in that kind of situation.
Nolan Watson
In terms of operating costs, Sandstorm doesn’t bear any of those risks. And there’s a lot of margin and it’s a super low-cost asset. It’s going to be able to produce gold — one of the lowest cost mines in the entire world. And so increase in operating costs would affect Horizon before Sandstorm. But having said that, because it’s producing gold at such a low cost, if inflation is 10% and costs go up 10%, but you’re producing gold for $400 an ounce, $400 becomes $440. Like it’s just — that’s one of the reasons we love the asset in the first place. It just doesn’t affect the cash flow really.
Derick Ma
And then sticking with Hod Maden, and perhaps I missed this. Are there any other hurdles, regulatory or otherwise for the product to go ahead, or is it simply about funding in a full construction decision by Lidya at this point?
Nolan Watson
In terms of government regulation, there’s none permitting. There’s none — they’re in the very final stages of clearing surface rights, and that’s very advanced and expected this year. And that’s the reason Lidya has started those construction items and roads and whatnot. They weren’t willing to do it until they knew it was a certainty that everything was a go and now they’re starting to build.
Derick Ma
And then one last question. I know previously, you said the company is going to take a breather while it closes a series of transactions, and you guys have been very busy. And I’m not suggesting that you guys need more growth at this point in time. But with the acquisitions closing or the transactions closing, is that reduction can be the primary objective for the company over the next six to 12 months, or is the mindset going to shift back to growth relatively quickly?
Nolan Watson
Both, I mean, in absence of good deals, we’re going to just keep paying down debt and reloading the balance sheet for the next round of deals. And otherwise, we’ll walk that line as we see potential deals and figure out how we finance them.
Operator
Thank you. There are no further questions, you may proceed.
Nolan Watson
Well, thank you very much, everybody, for calling in. And hope you have a good day.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.
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