Investors who like the streaming model and have yet to invest in Sandstorm Gold's (SAND) sister, Sandstorm Metals & Energy (STTYF.PK), should do so. Reason being is that the time is getting closer until this company undergoes a market revaluation. Why a market revaluation? Well up until now, it has no stream of size on-line that has ramped up. However, now that its largest stream, Bracemac-Mcleod reached commercial production and ramping up, Sandstorm M&E will see some cash flow generation and material cash flow generation in early 2014 and beyond.
Bracemac-Mcleod will be the primary growth driver in 2013 and 2014, despite Gordon Creek having a projected 50 wells in operation by year end, an increase from the 8 wells currently in production. However, in the future, should natural gas prices appreciate considerably, Gordon Creek will become a cash flow machine. Also, augmenting this growth is its 35% streaming interest in the incredibly high grade Au-Pt-Pl mine, Serra Pelada. While initial palladium deliveries will likely be in 2013, it will grow in 2014 and in the 2H 2014, will increase considerably as the PGM flotation circuit is up and running. The following is a chart of its three main assets and its streaming interest.
(click to enlarge)
The above chart excludes the 2.5% stream on copper on the Hugo North and Heruga deposits in the Oyu Tolgoi mining complex. While this is just an NSR royalty on part of the mining complex, the complex is of sizeable proportions. By 2020, it is projected Oyu Tolgoi will account for 1/3 of the Mongolian economy. Each pound of copper will be sold to Sandstorm at $0.50c/lb., rising to $1.10 after 9.1b lbs. have been produced on those two deposits combined.
The 1.2% NSR on the Prairie Creek mine is also excluded. This royalty has tremendous upside as it is on all base metals produced from the mine. The resource grades are incredibly high at 9.4% Zn and 9.5% Pb. Furthermore Sandstorm was granted a right of first refusal. Most don't know this but zinc's future looks extremely bright as starting in 2015 there will be a supply deficit which will grow until at least 2019. This is a result of some very large primary zinc mines becoming depleted with no large zinc discoveries made for quite some time. See charts below;
(click to enlarge) (click to enlarge)
Last time this happened in 2002-2006, the price movement looked as follows;
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There are also some things investors may not be aware of for Bracemac-Mcleod.
In mid-2012, Xstrata, the operator of the Bracemac-Mcleod mine announced it would increase the original design capacity by additional 30% and because Sandstorm's management likes to stay on the conservative side, they didn't include that in the production forecasts. So instead of the mine averaging 21m lbs. p.a. it will instead average over 27m lbs p.a., which of course benefits Sandstorm Metals and Energy.
Like I said in the first part of this series (here), official production estimated for Serra Pelada will only be known once the 12-month reserve estimate is published. But using the lower end of analysts forecasts for palladium production, yields 70k oz.'s p.a. Also, as I mentioned above the PGM production will really pick up in the 2H 2014 due to the PGM flotation circuit.
The following is a valuation with sensitivity analysis on the company;
(click to enlarge) Sandstorm Metals and Energy is back on the hunt, looking to strike new deals for value adding streams. It is looking at Zinc, Potash, Iron-ore, oil, natural gas and everything else to a lesser degree. Following the reverse split, they now only have 33m share outstanding, which is great because even if it issues equity one or two times, the shares outstanding would still be at a reasonable level.
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