Part 1 ~What You Don't Know About The Sandstorms
Sandstorm Gold ( SAND ) and Sandstorm M&E ( STTYF.PK ) are currently priced to perfection as both will enter large growth spurts over the next 1 to 4 years. I'm sure many reading this think "the gold bull market is over" or some other ridiculous thinking such as "gold's bubble has burst." Instead of focusing on why the bull market is well intact or showing all the ways in which gold was never in a bubble, I will focus on both the Sandstorm companies. The focus of this article is Sandstorm Gold and it discusses what has been overlooked in Analysts production forecasts. For an in depth article on Sandstorm in general, read this prior article .
Most would say that Sandstorm Gold is a roughly 35,000 oz. producer, growing to 70,000 in several years. My contention, however, is that it is a 35,000 oz. producer, growing to 100,000 ounces within 4 years. The disparity between the two estimates is simple: Sandstorm tries to be as conservative as possible. This ignores the St. Elena expansion (to be completed in Q1 2014), Aurizona Phase II expansion, Deflector expansion, heavily discounts Serra Pelada as average grades will be seen once the resource estimate is published and the addition of Premier Royalties.
The following is a chart of what Sandstorms Growth profile looks like;
Oyu Tolgoi, Cuiu Cuiu, Summit and Prairie Creek (Not Included)
Aurizona - The Phase II expansion will likely begin in late 2014 - early 2015 and will be completed in mid to late 2016. As most readers know, the phase I expansion will be complete in Q4 of this year, increasing annual production to an average of 125k-140k p.a. Although Sandstorm will have to pay 17% of the capital expenditures of the phase II expansion, it will be well worth it as it will further increase production to anywhere from 240k oz.'s to 300k ounces p.a.
St. Elena - St. Elena has undertaken a five phase expansion plan, which will greatly increase annual attributable ounces starting in mid-2014 to 2015. The new processing plant will do two things; allow for increased production and increased recovery rates. The recovery rate increases will spur 2014 attributable production growth as recovery rates for gold are expected to increase approx. 40% +/-. Metals production is projected to double in those phases which boost gold paid to Sandstorm, however, silver will increase more than gold, thus the 33k ounces subject to the streaming agreement will increase to 42,000 or so in 2014 and to 50k in 2015. Sandstorm will also have to pay for 20% of the capital expenditures, which is projected to be around 10m but subject to change.
Deflector - Given the recent correction in the gold price, management has said the contract will be renegotiated. This will either be an increase of the streaming interest or a reduction in the $29m yet to be remitted. I would also guess the buy-back clause will be eliminated. But just assuming everything remains the same on this deal, Mutiny has already done an expansion study which they plan to implement soon after Deflector is up and running for a while at the 55k ounces p.a. run rate. The expansion would bring Au production to 85k ounces p.a.
Sandstorms attributable production will be roughly 14k oz.'s of platinum for its 35% stream and 3,000 oz.'s gold for its 1.5% stream.
Serra Pelada - This stream is going to surprise investors. Once host to the largest Latin American gold rush in history, Colossus is bringing it back into production starting in Q3 and ramping up to capacity in early 2014 for gold and end of 2014 for PGMs as the PGM flotation circuit will be up and running. For the above chart I used the lower end of Analysts projections, which is a fair to use, at least before the initial 12-month resource estimate is released in Q3-Q4, showing the average grades of Au, Pt and Pl. Sandstorm will purchase 1.5% of all the gold production at $400/oz and 35% of all the Platinum production at $200/oz. This is 200k oz.'s of Au p.a. and 40k oz.'s Pt p.a.
Sandstorm's attributable production will be roughly 14k ounces of platinum for its 35% stream and 3,000 ounces gold for its 1.5% stream.
What's next?
Given Sandstorm's ample capacity to acquire additional streams, it is likely Sandstorm will acquire its largest stream to date (Serra Pelada currently the highest at $60m) or acquires two medium sized streams. The reason I say this is because of gold's correction and given the fact the current spot price of gold is near the average all in costs of production (Extraction, Processing, G&A, Labor, interest expense, taxes and sustaining capital).
Should Sandstorm acquire a large stream in which they make even milestone payments, the size of the deal can be $42m larger as it will have that amount coming in April 2014 from warrants being exercised as long as its common stock remains above $3/share. Therefore capacity at the end of this month should be $105m (cash on hand) - 29m (payable to Mutiny unless it scraps the stream altogether) + 100m (long term debt facility) + 42m (warrant money inflow April 2014) or $176m.
Best way to play Sandstorm? In my opinion the Oct-2015 warrants ($5 strike) are the best way to play it.
