$STTYF - Insiders Are Buying Sandstorm Metals & Energy: Should You? http://seekingalpha.com/article/1727662-insiders-are-buying-sandstorm-metals-energy-should-you?source=email_rt_article_readmore There is perhaps no stock out there that has been as disappointing as Sandstorm Metals and Energy (STTYF.PK). The company was founded in December of 2010 by the same management team that started up Sandstorm Gold (SAND), a gold streaming, mine financing company that has provided investors with a return of 70 percent since inception (and at one point in October of 2012, up over 340 percent). Several key management at Sandstorm came over from Silver Wheaton (SLW), where they came to love the streaming model and helped Silver Wheaton grow into the company it is today. Therefore, a lot is expected from this management team. To sum of Sandstorm Metals business model briefly, the company gives an upfront cash payment to mining companies looking to build a mine. What they get is the right to purchase a fixed amount of a commodity, such as silver or copper, for the life of the mine. This streaming model has been very successful so far for companies such as Sandstorm Gold and Silver Wheaton for a number of reasons; while mining companies face increasing inflation pressures, streaming companies have fixed costs, providing outstanding leverage to an increase in the price of a commodity and cash flow to investors. There are no other costs associated with owning the stream, but the streaming companies still get exploration upside. While Sandstorm Gold has been somewhat of a success so far, the same success has not been seen at Sandstorm Metals, which has seriously underperformed for a number of reasons, mainly because of the failures of their partners. Sandstorm Metals Share Structure Sandstorm Metals has 33.3 million shares outstanding, 1.65 million options outstanding and 215,300 restricted share rights. With a current stock price of $1.50, Sandstorm Metals has a market cap of $47.7 million. Why is Sandstorm Metals Underperforming? The first big hit for the company came on July 8, when the company announced an amendment to their copper stream with Donner Metals. The company waived their previous requirement for Donner to sell copper to Sandstorm Metals during the 2013 calendar year. The company was previously expecting a significant amount of cash flow to come in from this stream, so this was seen as a big disappointment by shareholders. The stock fell from $3 a share to under $1.30 in the span of about a month. (click to enlarge)Credit: StockCharts.com The company was originally expected to start receiving cash flow from the stream during Q2 2013. The agreement was 24.5 percent of the copper production for an ongoing payment of $.80/lb. With the company projecting 21 million lbs. of copper production in the future, a 24.5 percent stream would have amounted to about 5 million ounces of copper to the company or over $15 million a year in revenue. Another blow came in September when Donner announced they would forfeit their interest in Bracemad-McLeod. Donner is a micro-cap company with a tiny market cap and very little cash. Because of the weakness in commodity prices and Donner's problems, this didn't come as a complete shock, but it was still disappointing. The Stream is Settled Donner, Sandstorm Metals & Energy, Sandstorm Gold (which previously held a gold stream on the mine) and Glencore came to the following agreement: Glencore issued a 3% net smelter returns royalty ("NSR") to Sandstorm Metals on 100% of production from Bracemac-McLeod, in consideration for the interest in Bracemac-McLeod acquired by Sandstorm Metals from Donner and for an option to acquire certain Donner shares and warrants, as described below. Sandstorm Metals and Sandstorm Gold have relinquished their copper stream and their gold stream respectively. Sandstorm Metals will issue 1.33 million shares of Sandstorm Metals to Donner and Donner has provided each of Glencore and Sandstorm Metals with an irrevocable and unconditional release and discharge of any claim by Donner against Glencore or Sandstorm Metals and Donner agreed to an orderly execution of the agreement. Donner will receive a 1% NSR from Sandstorm Metals and Sandstorm Gold from any proceeds from the 3% NSR that exceed CDN $49 million. Managements Explanation of the Stream Conversion to a NSR I spoke with Denver Harris, Investor Relations at Sandstorm, to talk about the Donner default and the company's decision to convert the stream into a NSR, instead of taking over the JV. Unfortunately, this new NSR deal results in a smaller amount of cash flow for Sandstorm Metals than the stream would have provided, according to Harris: "The Donner stream would have generated between 8 to 10 million per year at current commodity prices. The 3% NSR will generate approximately $4.5 million in annual cash flow, with Sandstorm Metals & Energy getting about 80% of that cash flow ($3.6 million)." Sandstorm Gold gets the remaining amount. Sandstorm Metals had the option of assuming the joint venture with Glencore, but decided against it for a number of reasons: "Although the joint venture could have potentially generated more future cash flow than the 3% NSR royalty, there were significantly more risks associated with it. Under the joint venture, Sandstorm would have been exposed to monthly cash calls in excess of 35% of the mine's operating costs and at current commodity prices, the 35% interest would have generated a very small amount of free cash flow." It would have taken approximately $15 million to step into Donner's shoes and we may have had to raise additional funds to meet cash calls in the future. Additionally, there were environmental liabilities associated with the joint venture and some other risks as well." On the bright side, this NSR will generate cash flow immediately for the company without those monthly capital commitments that the stream would have required. Also, there is no dilution required. If the company decided to take over the joint venture interest, it would have resulted in significant dilution to shareholders. Other negative news: - The company took an impairment charge on its natural gas stream with Thunderbird Energy, in the amount of $12.1 million. From the second quarter 2013 report: "Given Thunderbird's negative working capital, Sandstorm has been in discussion with the company to modify the terms of the Energy Stream to better allow Thunderbird to raise additional third party capital. These factors and the lack of progress with respect to Thunderbird's drilling commitments prompted the Company to evaluate its investment in Thunderbird." - Other blunders include the Royal Coal and NovaDX deals. Colossus Minerals and Serra Pelada - Key for the Company? Sandstorm Metals owns a 35 percent palladium stream on the Serra Pelada mine in Brazil, operated by Colossus Minerals (COLUF.PK). The company paid $15 million to acquire the stream via a back-to-back agreement with Sandstorm Gold, which took the gold and platinum. Colossus is expected to announce commercial gold production in the first quarter of 2014 and platinum and palladium production should begin in the third quarter of 2014, when the PGM flotation plant is completed. It is very hard to say how much palladium will be produced at Serra Pelada, because Colossus has completed no resource estimate on the mine (a 1-year resource is due later this year). However, this is a mine with tremendous upside, with Serra Pelada producing some of the highest grade drill results on record. Read my article on Colossus Minerals for more of an idea on the potential of Serra Pelada. If Serra Pelada were to produce 30,000 ounces of palladium in 2015, which I believe should be a reasonable number based on the 1,000 TPD mining rate and grades reported by the company, this would result in 10,500 ounces of palladium to Sandstorm Metals. At $650 palladium, Sandstorm Metals would realize $6.8 million in revenue for 2015 and approximately $5.7 million in cash flow. Combined with $3.6 million in cash flow from Donner, the story gets much more interesting as the company could bring in nearly $10 million in cash flow for the year. This would give the company a 2015 EV/Cash Flow of just 4.5. Colossus Runs Into Problems Sometimes, when it rains, it pours. Another negative news release came out on July 15, this time by Colossus: "Colossus has encountered challenges with dewatering wells and pumps in the Central Mineralized Zone at Serra Pelada which requires additional dewatering capacity and has delayed gold production. Colossus is continuing its decline development to have multiple horizons ready for mining in 2014 and has made progress in the construction of its process plant. The delay in gold production at Serra Pelada is not currently anticipated to affect the development timeline for the platinum/palladium flotation circuit, which is expected to be processing material in late 2014." This news wasn't the worst thing in the world that could have happened to Sandstorm, but it certainly wasn't a positive release and it came at a bad time. However, since that release, Colossus Minerals secured $38 million in an equity raise. On September 23, the company gave a development update on Serra Pelada, stating that they are on track with their dewatering program expansion. The total mine was 92 percent complete as of September 17,compared to 90 percent in August, so it looks like the company is making progress towards getting into production. The water issue appears to have been resolved, but investors should keep an eye on Colossus. This is arguably the most important deal for Sandstorm Metals and the trust of shareholders depends on it, in my opinion. Insider Buying at Sandstorm Metals and Energy (click to enlarge)Credit: CanadianInsider.com One recent positive sign for the company is that insiders have been purchasing shares. Here is the insider buying activity: - On September 20, David Awram purchased 16,000 shares at a price of $1.50 and 10,500 shares at a price of $1.46. Awram is the Senior Executive Vice President and Director at Sandstorm. - On September 18, Nolan Watson purchased 27,700 shares at $1.40, 6,100 shares at $1.39, 1,100 shares at $1.38 and 100 shares at $1.46. Watson is the President, CEO and Director at Sandstorm. Insider buying certainly isn't the only reason to buy shares in a company, but it doesn't hurt. It's a vote of confidence in the company from management. Current Valuation of Sandstorm Metals So, is Sandstorm Metals & Energy a good deal at current prices based on their two primary deals? - Sandstorm Metals has a current enterprise value of $46.7 million (market cap of $49.5 million minus cash and equivalents of $2.8 million as of last quarter). - If the company were to receive $3.6 million in cash flow from the Donner stream in 2014, this would give them a 2014 EV/cash flow of about 13. - As I stated previously, if all works out with the Donner stream and the Colossus stream, the company could bring in roughly $10 million in cash flow in 2015. Other Deals in the Pipeline I have not mentioned other streams and NSR's that the company owns: The Potential at Prarie Creek: Sandstorm has a 1.2% net smelter returns royalty ("NSR") on base metals produced from the Prairie Creek mine, an advanced staged zinc-lead-silver project that is 100%-owned by Canadian Zinc Corporation (CZICF.PK). Sandstorm made a cash payment of US$6.8 million to acquire the royalty in May 2013.This deal was completed via a back-to-back agreement with Sandstorm Gold. Canadian Zinc has a market cap of $90 million, much higher than previous partners Donner Metals, Royal Coal and others. The company was granted a water license for the mine on September 18, a huge step for the company in bringing the mine online. Canadian Zinc also has the option for 30 months to buy back 100 percent of the NSR under the following terms: "Canadian Zinc enters into a commodity stream agreement with Sandstorm that has an upfront deposit of no less than US$90 million." This deal would be done with Sandstorm Gold, as Sandstorm Gold has a 1.2 NSR on the precious metals produced at the mine. Under this scenario, Sandstorm Gold would likely provide the majority of the capital ($60-$70 million), with Sandstorm Metals taking on the rest. This could easily become a zinc and lead stream for Sandstorm Metals, which would definitely be a positive for the company, in my opinion. Other potential future developments include: Colossus Minerals Buyback: Colossus has a buyback option on the Serra Pelada stream: "Until April 1, 2015, Colossus has the option to repurchase up to 50% of the agreement by making a US$9.75 million payment to Sandstorm, upon receipt of which, the percentage of palladium that Sandstorm is entitled to purchase shall be decreased from 35% to 17.5%." While this lowers cash flow from Serra Pelada, this would give the company cash without dilution. Perhaps this could help them complete the stream with Canadian Zinc? Big Brother to the Rescue? Sandstorm Gold has frequently done deals, taking the precious metals with Sandstorm Metals partnering up to take the base metals. Example: Colossus Minerals, Entree Gold and Canadian Zinc deals. I only expect this to continue and this is another thing to keep in consideration when investing in shares of Sandstorm Metals. Sandstorm Metals: Short-Term Pain but Long-Term Gain? In conclusion, I have not yet given up on Sandstorm Metals and Energy. I don't think the stock will do much for the rest of 2013 or even 2014, but if the Serra Pelada stream comes online with no problem, then the stock could soar and the end of 2014/2015 could be a pretty great time for the company. The price of copper and palladium could also rise during this time, which would really help the company. I also feel that the Prarie Creek mine holds a ton of potential and could be a company-making type of deal and I will be writing a future article on that company as they work on bringing the mine into production. It will be interesting to see what the company does next. They don't have a ton of cash so I am not expecting a deal anytime soon, unless they decide to raise equity and announce a deal at the same time. But it would have to be a great deal with a asset that is either already in production or very near term. Sandstorm Metals has been Sandstorm Gold's ugly sister for a while now, but this could change in the future. I am not ready just yet to purchase shares, as I feel that Sandstorm Gold possesses the better value here, but I am keeping my eye on the company. Please follow me here on Seeking Alpha for future updates.