Financial news

Sandstorm Gold: An Uncertain Future (NYSEMKT:SAND)

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Via SeekingAlpha.com

Image: The Cerro Moro mine in Argentina from Mining.com

Quick Presentation

The Vancouver-based Sandstorm Gold (SAND) is called a “gold streamer,” and it generates revenues through two types of business: royalties and streams.

It is a reliable business model with great potential and slightly reduced risk potential compared to a gold miner, which is continuously struggling with the difficult task of operating the mine and extracting precious metals.

However, it would be a mistake to consider Sandstorm Gold as much more protected from a Black Swan event than the gold mining sector in general. What we are experiencing now through this flue-like disease, that has spread worldwide, is a complete slowdown of the world economy, including the mining sector.

In this particular case, if the gold miners are suffering by being forced to curtail production then the whole business model chain will suffer without a doubt.

Hence, the investment thesis is always the same. While it is essential to keep a long-term position in SAND, it is also crucial to trade short term perhaps over 50% of your total position.

The company is similar to Franco-Nevada (FNV), Wheaton Precious Metals (WPM), Royal Gold (RGLD), and Osisko Gold Royalties (OR), which I regularly cover on Seeking Alpha.

Sandstorm Gold has acquired a portfolio of over ~190 streams and royalties (~67 in Canada). The company was founded by Nolan Watson and David I. Awram in 2008.

Two production keys that will probably influence the 1Q’20 production results indicated today is:

1 – Production at the Cerro Moro mine in Argentina from Yamana Gold (AUY).

2 – Production of gold/copper at the Chapada mine in Brazil sold by Yamana Gold to Lundin (OTCPK:LUNMF) that I discussed on Seeking Alpha.

Sandstorm Gold announced its First quarter 2020 gold equivalent production

Sandstorm Gold sold approximately 13,400 gold-equivalent ounces during the first quarter ending on March 31, 2020. From this production number, we can conclude pretty accurately some essential financial elements. It was a limited production, in my opinion. As you can see in the chart below, it is the lowest production quarter since 4Q’17.

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The decrease in production could be explained in part by the price of gold when it translates to silver, copper, or diamond. The higher the ratio, the lower gold equivalent ounce the company gets.

Nolan Watson said in the conference call:

In 2020, what we’re currently expecting is similar gold equivalent production levels as 2019 and so, we’re giving the same guidance range for production that we did at the beginning of 2019, which is 60,000 to 70,000 attributable gold equivalent ounces.

Sandstorm Gold indicated 63.829K Au Oz in 2019. However, due to the coronavirus and the disruption that will inevitably happen in 2020, the company stated on March 19 that the previous guidance 2020 is not valid anymore.

PRODUCTION GUIDANCE UPDATE FOR 2020

Due to the unknown long-term effects of the current global health pandemic, Sandstorm has made the decision to withdraw the Company’s 2020 production guidance for the year. Although Sandstorm has not received any direct notification of closures at any partner mine sites, we believe it is reasonable to expect that actions taken to reduce the spread of COVID-19 will affect global mining production levels during 2020.

I am expecting that the company will revise down production to a range between 50K and 55K ounces down from 60K to 70K Ounces.

First-quarter 2020 Revenues and gold price estimated.

The company indicated that:

Preliminary cost of sales, excluding depletion for the three month period was $4.2 million resulting in cash operating margins of approximately $1,280 per attributable gold equivalent ounce.

Then it was easy to calculate the price of gold for SAND received during 1Q’20. It was $1,593 per ounce in 1Q’20, which is a whopping 23.4% higher than in the same quarter a year ago.

Based on 13,400 Au Equivalent Oz, Sandstorm Gold’s indicated revenue for the first quarter of 2020 is $21.3 million.

Sandstorm Gold and the share buyback program

Perhaps trying to soften the effect of the production weakness this quarter, the company gave a complete update of the share buyback program. The company indicated that its normal course issuer bid (“NCIB”) had been renewed after the existing NCIB expires on April 4, 2020.

The current NCIB provides Sandstorm with the option to purchase up to 13.0 million of the Company’s common shares (“Common Shares”) from time to time when Sandstorm’s management believes that the Common Shares are undervalued by the market. Under the renewed NCIB, Sandstorm may purchase up to 17,170,237 of its Common Shares, representing approximately 10% of the Company’s issued and outstanding Common Shares of 174,211,583 as of March 31, 2020,

However, the company diluted weighted average number of common shares is much higher. Based on the table below, which includes stock options, warrants, and restricted shares, I came to about 189 million shares now, not counting options issued in 2020.

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Source: Sandstorm 4Q’19

The company indicated further that:

Since the announcement of the Buyback on November 15, 2018, Sandstorm has bought back approximately 15.5 million Common Shares. The renewed NCIB provides Sandstorm sufficient capacity to purchase the remaining Common Shares from the previously announced Buyback, as well as additional Common Shares at management’s discretion.

I do not get the rationale of this buyback program. The company is using the credit facility to buy back its shares instead of using this precious cash to buy new streams or royalties that could produce direct cash flow. It looks to be a waste of money, which is showing in the balance sheet.

Sandstorm’s net debt was $30.6 million at the end of 4Q’19. As a reminder, in December 2019, the company amended its revolving credit agreement, authorizing the company to borrow up to $225 million with an additional uncommitted accordion of up to $75 million, for a total facility of up to $300 million.

Conclusion And Technical Analysis

Sandstorm Gold is a mixed bag that should be carefully evaluated by investors even at this current level.

Some good potentials with perfect execution on the surface, but when we start to dig down just a little, it doesn’t look so perfect anymore. The gold industry is not without risks, even if gold bullion is shining.

I have explained earlier above that Sandstorm Gold is not immune to the adverse effects of this terrible pandemic outbreak. In some instances, gold streamers are not correlated to the gold price and act more like equity.

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It is what is happening right now with a lot of volatility due to the coronavirus outbreak.

Thus, I recommend trading mostly SAND and use any uptick to take some profit off the table that you will surely need later to accumulate on weakness.

Technical Analysis

SAND experienced a support breakout early March of its descending channel pattern and tumbled to $3.50 and recovered now at $5.50.

The new trading pattern is called a descending wedge pattern with line support between $4.70-$5.00 and line resistance at $5.90-$6.10. I recommend using those lines to apply a short-term trading strategy.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am trading short term SAND but do not hold a long term position at the moment.




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