Sandstorm Gold Ltd (SAND)

[OldtimeramI]

Sandstorm CEO sets the record straight on Mariana deal

http://www.northernminer.com/news/sandstorm-ceo-sets-record-straight-mariana-deal/1003788112/

VANCOUVER — Sandstorm Gold (TSX: SSL; NYSE-MKT: SAND) made headlines in late April when it bid around US$175 million in cash and shares for explorer Mariana Resources and its 30% stake in the advanced-stage Hot Maden gold-copper project in northeastern Turkey.

The move appeared to hint at a change in business strategy, with BMO analyst Andrew Kaip noting at the time that investors were grappling with “how a streaming-royalty company can acquire an exploration company with development and operating risk.”

Following closure on July 3, Sandstorm president and CEO Nolan Watson sat down with The Northern Miner to discuss how the deal aligns with the company’s overarching goals.

“There’s been this misconception that the acquisition somehow indicates a shift in our business,” Watson says. “But Mariana called the deal structure a ‘joint venture’ for essentially lack of a better term. It’s really a net profits interest (NPI) in the way it mechanically works, except [they] had to make payments from now through to production to maintain that interest. What they did was enter into a ‘shareholders agreement’ that is effectively a royalty.”

Mariana inked the deal with 70% owner-operator Lidya Madencilik, which is part of a multi-billion dollar Turkish conglomerate called Çalik Holding. The terms dictate that the project operator will make a payment, on an annual basis, equal to the value of 30% of the gold and copper sold, less the cost of operations.

Watson estimates Sandstorm will be on the hook for around US$7 million at Hot Maden through 2019.

The joint-venture partners released a preliminary economic assessment (PEA) on Hot Maden in March. The study outlines a US$169-million development that would boost Sandstorm’s attributable gold equivalent production to more than 135,000 oz. by 2022, while increasing annual operating cash flow to more than US$100 million.

The company reported record gold equivalent sales of roughly 15,600 oz. gold equivalent in the first quarter.

Hot Maden’s global economics include a US$1.37 billion after-tax net present value, at an 8% discount rate, and a 153% internal rate of return. The PEA is underpinned by 7.1 million indicated tonnes grading 12.2 grams gold per tonne and 2.3% copper.

Capital expenditures could overrun by 50%, and it really doesn’t matter because it goes from an eleven-month payback period to sixteen or seventeen months. The risk you’d usually see associated with a mining project just isn’t there,” Watson continues.

“This is an asset that’s really unlike anything that’s been the subject of a stream and/or royalty agreement. When we buy a royalty in the normal course of operations, very rarely do we pay for it all upfront. So, in that sense, this is functionally very much in our sweet spot in terms of the business model,” he elaborates.

Watson adds that the social political risk in Turkey is “largely headline media noise” that ignores the fact the country’s stock market continues to hit all-time highs. He also points out that having Lidya Madencilik navigate the permit and construction process will further mitigate operational risk.

Sandstorm has been building its stake in Mariana over the years via a few separate deals.

The company accumulated a 7.6% equity stake largely through previous private placements and had also targeted a 2% net smelter returns (NSR) royalty on Hot Maden in a US$21.8-million cash-and-shares deal with Teck Resources (TSX: TCK.B; NYSE: TCK) in early 2016.

The deal also sees Sandstorm acquire nearly 2,800 sq. km in prospective greenstone exploration ground in Côte d’Ivoire, West Africa, which it intends to spin-out into a separate public company that is expected to be run by former Mariana president and CEO Glen Parsons. That process is expected to be complete by September. Furthermore, the company will also spin-out tertiary exploration assets in Turkey and Argentina into a separate vehicle.

“No one tried to outbid us for Hot Maden because we were the largest shareholder and got there before anyone else was aware of the asset,” Watson explains.

“It’s becoming necessary to get more creative in the stream-and-royalty business, and we’ve been quicker to adapt than some of our larger competitors. We’re finding good deals buying small royalties for small dollars on exciting exploration plays, and we’re one of the only companies doing that right now,” he adds.

During the first quarter, Sandstorm acquired 22 royalties for US$1.9 million. The portfolio includes development-stage, advanced exploration-stage and exploration-stage projects located in Canada, Mexico and Peru.

Sandstorm has traded within a 52-week window of $4.29 and $8.73, and closed at $5.21 per share at the time of writing. The company maintains 184 million shares outstanding for a $962 million press-time market capitalization, and reported a cash balance of roughly US$32 million at the end of the first quarter.

“We have to be much more creative in how we put financing packages together, and how we actually acquire streams. It’s getting more expensive to put together larger deals because those are few and far between,” Watson concludes. “We understand the need for creativity to maintain our rates of return, and thus far our biggest competitors are not evolving, and they’re seeing declining rates of return for shareholders.”