Sandstorm Gold - Q2 2024
August 2, 2024
Transcript
Operator (participant)
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 2024 second quarter results conference call. All lines have been placed on mute to prevent any background noise. Be aware that some of the commentary 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. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star two. Thank you. Mr. Watson, you may begin your conference.
Nolan Watson (CEO)
Thank you, Joanna. Good morning, everyone, and thank you for calling into our Q2 earnings call. As usual, in a few minutes, I'll hand things over to Erfan, our CFO, to review our quarterly financial earnings and highlights. Before I do that, I would like to give a brief update on our business and specifically hone in on four key points. Those being, number one, an explanation of our Q2 production, which was below budget. Two, a status of where our debt is and is expected to be by the end of the year. Three, an update on our share buyback plans. And four, and finally, I'd like to talk about our next steps of growth as a company. With respect to number one in our Q2 production, I would describe it as an uncharacteristically weak and hopefully unlikely to reoccur quarter.
During the second quarter, there were a number of temporary effects that caused the quarter to be below our expectations, including Aurizona having problems with its Piaba pit, Cerro Moro and Chapada, moderately underperforming, and Greenstone taking longer to begin delivering first gold to Sandstorm than originally budgeted. But I would like to reassure everyone that each of these items are all temporary and are not only are we expecting these mines to rebound, the Greenstone mine is now up and running and delivering gold to Sandstorm under our stream.
We did not receive any material amounts from Greenstone in Q2. However, even here in July and now into August, we're seeing the ounces starting to come from that gold stream. So Q3 should be our first quarter with some Greenstone production, and as they continue to commission and ramp up their mine, our gold sales will ramp up correspondingly.
One of the other reasons for the dip in gold equivalent production in Q2 relates to the recent significant increase in the price of gold relative to silver and copper. Specifically, our annual gold equivalent ounce production estimates were based on $1,800 per ounce gold, which was close to the gold price at the time that we set our budgeted numbers. Now that the gold price has increased significantly above $2,400 an ounce, it means that our silver revenue and copper revenue turns into fewer gold equivalent ounces at this high gold price. In fact, our Q2 gold equivalent ounces are lower by more than 2,000 ounces just from this pricing effect of converting copper and silver into gold equivalent ounces. I, for one, though, I'm not going to complain about high gold prices.
As gold prices are now around $2,500 almost, we're still expecting, even with these high gold prices, our 2024 gold equivalent ounces to be between 75,000 to 85,000 ounces per year, with these figures expected to increase eventually to 155,000 ounces per year once both Hod Maden and MARA have been built. This is nearly 100% increase in gold equivalent production over the next five years. Point number two, at the status of our debt, we continue to use the majority of our cash flow to pay down our debt, and as I sit here this morning, our debt balance is down to $383 million. Therefore, our goal of getting debt down to $350 million by the end of the year is well on track.
And that leads me to point number three, which is because of high gold prices, we've been able to not only bring our debt down as anticipated, we have also been able to simultaneously buy back some of our own shares. We have a small share buyback plan in place, which is approximately 10,000 shares per trading day, as long as we're not in blackout. For example, today we are in blackout because of the earnings release, so we can't buy shares today, but on Monday, we'll be back in the market buying small amounts of shares. This plan may change from time to time, as we are currently focusing the majority of our cash flow on paying down debt, and will continue to do so with the goal of getting our balance sheet ready for our next leg of growth. Which brings me to my final point, four.
We are in a fortunate position to already own growth assets in Greenstone, Platreef, Robertson, and Hod Maden, and we have the right to purchase the MARA stream, which we anticipate doing. These assets should nearly double our production from where we are today, so the future is bright at Sandstorm. If you take a look at this slide, which is our current best estimate of our top seven assets by value, you can see that four of these seven assets were not even in production yet during this Q2 results that we're talking about this morning. Hod Maden, Platreef, Greenstone and MARA will all be very important contributors to Sandstorm's future, and we're looking forward to that very bright future. Another way of looking at it is that in Q2 of this year, only 55% of Sandstorm's NAV was in production.
By the end of next year, that number should be up to 72% as Greenstone ramps up and Platreef comes online. Then by 2029, we expect 88% of our NAV to be in production. Our portfolio is maturing quickly. As a reminder of the cash flow generating capacity of that portfolio, you can see that once those ramp-ups do happen by 2029, we expect our portfolio to be able to generate after-tax cash flows of close to $250 million per year. Now, we're continuing to pay down our revolving debt facility, and as we do that, we're opening up room on it for potential future acquisitions that would grow our production even further. We're starting to once again look at such potential transactions.
What I want to emphasize, however, is that we are not contemplating any transactions that would cause us to have to raise equity. We want to decrease our share count, not increase it, and also we're not contemplating any transactions that would cause us to have to draw down too much on our revolver to the point where we would no longer be comfortable buying back our own shares. Overall, I want to be clear that with our significant free cash flow, we are still predominantly focused on debt reduction with the purpose of recharging our balance sheet, so we can eventually begin our next leg of acquisition growth and grow from a position of financial strength while avoiding dilution. We are very fortunate to be in this position to be able to do this, while having a nearly 100% increase in production coming from our existing portfolio.
It's a good place to be. With that, I'll hand it over to Erfan.
Erfan Kazemi (CFO)
Thanks, Nolan. Looking at the financial results for the three-month period ended June thirtieth, gold equivalent production totaled just over 17,400 GEOs. Nolan mentioned there were a few factors that resulted in slightly softer production numbers when compared to the previous quarters. Some of these I'll discuss in a little minute, but the company remains on track to achieve attributable production between 75,000 and 85,000 gold equivalent ounces in 2024. Stronger gold prices boosted revenues during the second quarter, with the company recognized over $41 million. Elevated commodity prices have been a welcome tailwind against the mining industry in the first half of this year.
During the second quarter, Sandstorm realized average gold prices of $2,313 per ounce from the company's gold streams, and achieved a new record for cash operating margins of over $2,040 per attributable ounce. As Nolan discussed, shareholders have a lot to look forward to over the next few years as the company's portfolio continues to mature. Over the near term, we anticipate stronger production as the Greenstone mine continues to ramp up following its first gold pour in May. The Greenstone gold stream was purchased as part of the company's acquisition, Nomad Royalties, in 2022, and one of the most material development assets from that acquisition to come online. Once fully ramped up, Greenstone expected to contribute between 8,000 and 10,000 gold ounces annually to Sandstorm.
Quarterly revenue was comprised of $25.8 million in sales from streaming contracts and $15.5 million in royalty revenue. With strong operating margins, the company had $32.6 million in cash flow from operating activities, excluding changes in non-cash working capital. These exceptional cash flows continue to support our effort in deleveraging the company's balance sheet. Debt repayment has been our primary focus over the last 24 months following various asset acquisitions in 2022. During the second quarter, the company made net debt repayments of $27 million on its revolving credit facility. And as Nolan mentioned, we have $383 million on debt outstanding as of now, and an undrawn and available balance of $242 million. Net income for the quarter was $10.5 million, compared to $2.7 million for the comparable period in 2023.
The increase was partially driven by a fair value revaluation gain of approximately $7 million as a result of the settlement of the company's debenture due from Versamet Royalties, which was formerly known as Sandbox Royalties. The debenture was settled by way of conversion to common shares of Versamet, resulting in the gain. In June, Versamet announced a transaction with B2Gold, which subsequently values Versamet at nearly $300 million. The settlement of Sandstorm's debenture highlights the next step in daylighting value for Sandstorm shareholders, which was the underlying investment thesis back in 2022. As previously disclosed, Sandstorm renewed its normal course issuer bid in May and was actively buying back shares throughout the second quarter. For the three months ended June 30, the company bought back and canceled nearly 460,000 common shares for a total consideration of $2.5 million.
Subsequent to quarter end, the company has purchased approximately 90,000 additional shares, while not in blackout. We expect this level of buyback activity to continue for the remainder of the year, as Nolan mentioned, and we're pleased to once again be able to return capital to shareholders via share buybacks in addition to our quarterly cash dividend. Gold equivalent ounces for Q2 reflected lower production at some of the underlying assets in the portfolio when compared to the second quarter in 2023. Attributable production at Cerro Moro reflected decrease in head grades and the corresponding decrease in silver sales. This was partially offset by an increase in the average realized selling price of silver, which is approximately $28 compared to $25 per ounce in the second quarter of 2023.
The realized selling price of silver is reflective of the silver market in early April, as Sandstorm typically receives its material silver deliveries, including deliveries from Cerro Moro, early in the quarter. In April, Equinox reported displacement of material in the Piaba pit at the Aurizona mine, resulting in restricted access to the pit. As a result, Equinox paused mining at Piaba to establish a remediation plan. Milling and gold production continued from ore stockpile through April, while mining activity commenced at the Aurizona Tatajuba pit, which is also within Sandstorm's royalty claim. Equinox anticipated a ramp-up of mining activities at Tatajuba to produce ore for plant feed in June, going forward. Partially offsetting these decreases in sales and royalty revenue, was a 56% increase in the number of copper pounds sold from the Chapada Copper Mine.
The average realized selling price of copper also increased to $4.22 per pound, compared to $4 per pound in the same period in 2023. Finally, taking a quicker look or a quick look at a breakdown of our attributable gold equivalent ounce sold during the second quarter. Over 80% of our ounces sold came from operations in the Americas, 17% of which came from operations in Canada. We expected this to increase over the coming months and years as the Greenstone ramps up to commercial production. Sandstorm continues to be a precious metal-focused company, with nearly 70% of attributable production coming from precious metal and only increasing more with time. While our material copper assets, Chapada, Antamina, and Caserones, continue to provide excellent exposure to our preferred base metal.
With that, I'll pass it over to Dave for a few updates. Dave?
David Awram (Senior Executive VP and Co-Founder)
Great. Thanks, Erfan. Good morning, everyone. Today, I'll speak to Troilus' new feasibility study, Endeavour's expanded drill program at Houndé, and also an interesting chart regarding the big increase in attributable reserves and resources Sandstorm has realized in the last couple of years. But first, a quick discussion on drilling at Hugo North Extension. So Entrée Resources recently released drilling results from both surface and underground locations at Hugo North Extension on the Oyu Tolgoi joint venture ground. Although the drilling took place in 2022 and 2023, Entrée received results only a few weeks ago, but they're definitely worth the wait. Highlights from surface drilling include one hole with 398 meters of about 2% copper equivalent, and another with 400 meters of about 1.4% copper equivalent.
Highlights from underground drilling include 2 holes that graded about 3.7% copper equivalent, 1 being 2,424 meters and a separate 1 being 114 meters. There was also a number of very wide intercepts underground, with 2 notably wide ones, 1 over 574 meters, grading almost 1.9% copper equivalent, and 1 almost 365 meters of 2.5% copper equivalent. Of course, each of these had higher grade intervals within, but when you look at all the holes and where they sit relative to the current reserve and resource, it paints a great picture of how special this deposit is and how Rio Tinto, the operator, is finally looking to expand the ore body.
A primary direction is to the north, a long trend, which is, of course, the ground on which our streams apply. In addition to the eye-watering drill results, Entrée also offered an update on the underground development. Shafts three and four have reached their final depths. These shafts are key for support of panels one and two of the block cave and will allow for a greater level of development. Entrée is also guiding that development work on the JV ground begins in Q4 2024, which is exciting to see the very first underground work beginning in the area covered by the stream. After a long wait, Sandstorm has started to see the light at the end of the tunnel, and I expect to see more regular updates on work and ultimately production from that Oyu Tolgoi joint venture ground.
So moving on to the recently announced feasibility study on the Troilus deposit in Northern Quebec, which we own a 1% NSR on. The study revealed 6.7 million ounces of gold equivalent to be mined over 22 years from this past producer. Troilus is looking to produce and sell a concentrate that has an average annual production of 303,000 gold equivalent ounces over those 22 years, with a peak of production of over 536,000 gold equivalent ounces. The overall NPV 5, using April 2024 average prices for gold, copper and silver, is over $1.5 billion. So the economics are great for this project. Troilus is shaping up to be another big Canadian gold project, and we can't wait to see it move forward.
Next steps on the project is finalization of the environmental and social impact assessment and continued exploration of the property. But moving on to Houndé, I certainly want to speak to the success of exploration that Endeavour Mining is having on the project. Now, our royalty does not cover all the areas that they've been exploring, but so far it seems that they has been an important focus on the ground that our royalty does cover. Endeavour had originally budgeted $7 million for exploration at Houndé in 2024. However, with the success at Vindaloo, they have increased that to $10 million for the year. Seems that the Vindaloo Deeps target is looking very promising for potential underground operation, but they also stress exploration success and resource delineation at Kari Main, Kari East, and Vindaloo North, which are all encompassed by our royalty.
Houndé continues to impress on the exploration side, and it feels like almost every target they have is open in one way or another. I certainly expect to see the resources continue to grow on this generational asset. For my last item, I wanted to take a look at a bigger picture of our acquisitions for the last couple of years. On slide 16, we're trying to illustrate how Sandstorm has transformed its diverse portfolio through its acquisitions of BaseCore, and Nomad. The first important point is that post the acquisitions of these companies-
We now have an average mine life of 25 years for our top ten assets in the portfolio. And as the years pass, those mine lives are increasing with exploration success rather than just depleting. Second, with the reserves and resources that these two major transactions and the success of subsequent exploration at the underlying assets, we've seen attributable reserve royalty gold equivalent ounces almost double. And resources, both measured and indicated, and inferred categories, have almost doubled as well. We like to use this indicator as a way of demonstrating how important and effective those acquisitions were to accretive growth of Sandstorm. So, with that, I'll hand over the call to Joanna, the operator, for our Q&A session. Please, feel free to ask questions about any of our royalties and streams. Thank you.
Operator (participant)
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you would like to withdraw your question, please press star followed by two, and if you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Heiko Ihle at H.C. Wainwright. Please go ahead.
Heiko Ihle (Analyst)
Hey there. Thank you all for taking my questions on a very interesting stock market.
Nolan Watson (CEO)
Thank you.
Heiko Ihle (Analyst)
Can you hear me?
Nolan Watson (CEO)
Yep, yep.
Heiko Ihle (Analyst)
Okay. Your, your stated goal is to get the debt down to $350 million by the end of the year. I mean, gold's effectively at an all-time high, especially if you look at some non-USD currencies. You mentioned your share buyback plan at $550, that seems quite appealing. But with the debt and given current gold prices and the commensurate cash flow, is there maybe a stretch goal that you think is achievable, given the cash flow that you're getting with the current commodity prices? Do you think we could get this to, call it, $330, $335 by the end of the year?
Nolan Watson (CEO)
Yeah, I'm not gonna throw dartboards with, you know, changing commodity prices and stuff like that, but, you know, the goal of getting it to below $350 by the end of the year. Originally, the goal was to get it to $350 and then start buying back our own shares. Because the gold price has gone up so much and our cash flow has been higher than was anticipated, we're buying back shares even before we get there, and we're still gonna get it to below $350 by the end of the year. And if we continue to get these strong commodity prices, hopefully we get it below there and continue to buy back shares and just recharge that balance sheet.
It's, you know, there is a lot of cash flow coming in, and it's kind of a fun job having to allocate it between a bunch of intelligent ways to do so.
Heiko Ihle (Analyst)
That's fair. I know you stated you don't intend to monetize assets in the press release, but nonetheless, have there been some conversations, at least, even just early stage, with mine operators that want to buy back streams on their own assets, even though they may not have the contractual right to do it, just given that the current gold prices have changed their internal calculations a bit?
Nolan Watson (CEO)
Nope, not at all. It's something that we don't really engage in. If a mining company ever asks to buy back a stream of royalty, we say no very quickly, and I think all the other stream royalty companies do as well, and people know that, they stop asking.
Heiko Ihle (Analyst)
Okay, fair enough. That's what I assumed you would say. Thanks so much. I'll get back to you.
Operator (participant)
Thank you. Next question comes from Kelvin Lee at Scotiabank. Please go ahead.
Kelvin Lee (Analyst)
Hey, good morning, Nolan and Dave. Thank you for taking my question. So following on with debt reduction, so it sounds like you're targeting $350 million by year end, but do you have any longer-term target beyond 2024?
Nolan Watson (CEO)
Yeah, the way we look at it is, once we're below $350, we're just gonna continue to pay off that debt as quickly as possible, because it's a revolving line of credit, and we can redraw on it at any time to make acquisitions. So our goal is to get that number as low as possible before we start swinging big for our next series of transactions, because we wanna grow methodically. We wanna do it from a position of strength. We never want to be viewed as overlevered again, so we're really focusing on just getting that number as low as possible while we continue to look for deals.
Kelvin Lee (Analyst)
Right. That's fair. Thank you. In terms of the M&A strategy, firstly, is your deal size still mostly in the range of $100 million-$300 million?
Nolan Watson (CEO)
Yeah, in terms of things that we think we could do now without overlevering ourselves, it would certainly be things that are $100 million or less. As we continue to pay down our debt, that number, that number grows.
Kelvin Lee (Analyst)
All right. Yeah. I think the core dev team is spending, like, half time on cash flowing assets and the other half on, like, long-term, earlier stage optionality assets. Does that still hold true?
Nolan Watson (CEO)
If right now, we've given our corporate development team the guidance that if we're gonna do a material transaction, it needs to be something that's either cash flowing now or is being built and will be cash flowing within a year or so. We're not looking at deploying material amounts of capital for things that are long dated optionality. What we are looking for simultaneously, though, are really small royalty transactions, trying to find them at the point of discovery, where we can build in rights of first refusal to do the stream financing, if and when they eventually go to build the mine. So those contracts are small dollars, but they do take a lot of time to find those opportunities.
They're hard to find, and so we're looking sort of at both ends of the spectrum that way.
Kelvin Lee (Analyst)
All right, okay. So my last question is about the share buyback. Is it fair to assume, like, you know, you continue to buy back pretty much, you know, 2 million, 2.5 million per quarter in the rest of 2024 and 2025 on the, you know, buyback? And would that be a fair assumption, if the $2 stands, you know, dividend per share until the end, yeah.
Nolan Watson (CEO)
Yeah, our plan right now is, we're sticking with sort of 10,000 shares a day. If we see big swings in our share price, you know, for example, you know, today's a big down day, even though gold is really strong and the fundamentals are strong. You know, we reserve the right to change that and make decisions on the fly that we think are intelligent capital allocation decisions. But right now, the plan is to use the bulk of the capital to pay down debt and a small portion of it for buying back shares.
Kelvin Lee (Analyst)
Hmm. All right. Appreciate the comment. Thank you so much. That's... Those are all my questions. Thank you.
Nolan Watson (CEO)
Thank you.
Operator (participant)
Thank you, ladies and gentlemen. As a reminder, should you have any questions, please press star one. The question comes from Derek Ma at TD Cowen. Please go ahead.
Derick Ma (Analyst)
Thank you. In terms of Aurizona, what is the company's expectation for GEOs in the second half of the year?
Nolan Watson (CEO)
Yeah, we have some internal numbers that we're not going to give specific guidance on, on that mine. But, my understanding is that Aurizona, they have opened up, and have started mining Tatajuba, and they are turning back on the mill, and so we are expecting, production to get back, maybe not quite up to normal, but closer to normal for the back half of the year.
Derick Ma (Analyst)
So closer to Q1 levels?
Nolan Watson (CEO)
Potentially, but not necessarily, and we'll see how it goes. I mean, we just don't have the data to intelligently say.
Derick Ma (Analyst)
Okay, fair. And then in terms of the Vale royalties, the Southeastern system, when in 2025 should we expect Sandstorm to start receiving royalty payments on that?
Nolan Watson (CEO)
I'll have to, to double-check, but,
David Awram (Senior Executive VP and Co-Founder)
Yeah.
Nolan Watson (CEO)
Yeah.
David Awram (Senior Executive VP and Co-Founder)
The time - the timing happens on those payments, kind of on a rotating basis. So, it should be, I think, in keeping with almost where it's been for the last several years.
Nolan Watson (CEO)
Yeah, we get paid semiannually, so when that kicks in, it'll get caught up in whatever is the next semiannual payment.
Derick Ma (Analyst)
Right. So if it's second half, that could happen in 2026?
Nolan Watson (CEO)
Yeah.
Derick Ma (Analyst)
Got it. Okay, and then finally, on the Viking royalty sales, the remaining portion of the cash proceeds that you expect to receive, what is the correspondence that you're having with Green Technology Metals? Do they have a right to buy back the royalty, or is it something else?
Nolan Watson (CEO)
It's something else, which I'm not going to get into the details of, but that's the, yeah, the last remaining $5 million piece of that transaction. We're trying to close it, and there's a chance that it may not, and I'm not going to get into the details of it.
Derick Ma (Analyst)
Yeah. Okay. All right. Thank you very much.
Operator (participant)
Thank you. And the next question comes from Brian MacArthur at Raymond James. Please go ahead.
Brian MacArthur (Analyst)
Good morning, and thank you for taking my question. One of mine is around Viking too. Where is it on the balance sheet, given this uncertainty? Is it in short-term investments or is it in something else at the moment?
Nolan Watson (CEO)
It's in cash.
Brian MacArthur (Analyst)
So, even the 6, even the $5 million is in cash? So if you don't get it, the cash goes back out? No.
Nolan Watson (CEO)
The original transaction was $20 million, all cash, in 2 payments.
Brian MacArthur (Analyst)
Yeah.
Nolan Watson (CEO)
The first one is $15 million of cash, the second is $5 million of cash.
Brian MacArthur (Analyst)
Right.
Nolan Watson (CEO)
They paid the $15, we've closed that part, and it's the second part that may or may not close. If it doesn't close, there will be no shares. So there's no Viking sitting in our investments anywhere.
Brian MacArthur (Analyst)
Okay, thank you. And just my second one goes back to Versamet, because you mentioned it was $300 million valuation right now, but I find... I'm just trying to match it again to the financials, because your carrying value is $65, and I think you own 28%, which would imply it's worth more than $85. Has there been something that's happened since quarter end that's changed that? Because I thought the other convertible was done in the quarter. I'm just trying to reconcile where the $300 comes from.
Nolan Watson (CEO)
Yeah, that's referencing enterprise value, and the amounts that you see in investment associates are carried at cost, and so they don't get into a revaluation of your initial investment and accounting, kind of, unique components, not mark to market.
Brian MacArthur (Analyst)
Okay, great. Thank you very much. That's very helpful.
Operator (participant)
Thank you. We have no further questions. You may proceed.
Nolan Watson (CEO)
All right, well, thank you everyone for calling in, and as usual, if you have any questions, feel free to phone us here at the office, and have a good day.
Operator (participant)
Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.