Q3 2023 Sandstorm Gold Ltd Earnings Call
Good morning, My name is Allen that will be your conference operator today.
At this time I would like to welcome everyone to the Sandstorm gold royalties 2023 third quarter results conference call.
All lines have been placed on mute to prevent any background noise. Please be aware that some of the commentary may contain forward looking statements.
There can be no assurance that forward looking statements will be prove to be accurate as actual results and future events could differ materially from those anticipated in such statements.
After the Speakers' remarks, there will be a question and answer session.
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Thank you Alan.
Good morning, everyone and thank you for calling into our Q3 earnings call.
As usual in a few minutes I'll be handing things over to Frank <unk>, Our CFO to review our quarterly earnings highlights.
Before I do that I would like to take the time to give high level update of the business focusing specifically on four things.
One the progress, we're making in bringing down our debt levels and the things we're doing to continue that trend.
<unk> production expectations over the next year three.
Three our production growth expectations and long term production profile and for based on that long term production profile, how much cash flow, we expect to generate.
So starting off with the progress, we're making with bringing down our debt.
You can see on the left of this chart that $637 million was the amount of money in total and we owed in the middle of 2022, including bank debt as well as money, we owed on streams that no matter had purchased but not yet paid for which we inherited when we acquired nomad.
As you know we have now paid all of those stream payments and there are no more remaining payments owed on any streams and we've been using our free cash flow to pay down our bank debt.
On our Q3 balance sheet and we just released that we own $456 million. However, as you can see on this slide as of today. Our bank debt has been further paid down by another $13 million already since quarter end to $443 million as of today and this only.
<unk> three 5 billion from the recent non core asset sales in order to getting another $6 5 million from that shortly which will apply to our bank debt.
It's our goal to get baked at below $350 million by the end of next year with a combination of cash flow from operations as well as continued cash from noncore asset sales.
We're going to be working on noncore asset sales throughout the remainder of next year as you can already see we've kicked that process off for the sale of a couple of non core non cash flowing royalties for which we're receiving $10 million in cash as well as some share consideration.
Particular deal had been in the works for nearly a year and all future noncore asset sales will prioritize cash.
Currently were working with the bank adviser to help us market. These various non core assets and we're expecting that it will be in a series of smaller transactions to different parties, rather than one large transaction to a single party because theyre trying to find the most logical home for each of the assets that we're marketing.
To be clear the range that we give a $40 million to a $100 million of noncore asset sales is in reference to the cash we would receive in such transactions alone. We're not counting any share consideration, we may or may not receive because we want the target of $40 million to $100 million to be useful in estimating our debt reduction capabilities.
Again with the goal of getting our debt below $350 million by the end of next year.
I believe it's also worth noting that sandstorm has $220 million of loans to other mining companies.
Is generating interest income.
$220 million figure is a mark to market fair value based on current high interest levels, which in layman's terms means we're receiving today is high levels of interest on that $220 million figure.
I bring this up because as we pay our debt down our interest expense will come down.
And as the interest rates eventually come down our interest expense will come down even further and at the same time, because we are generating interest income on these loans that we've made at some point in the future. Our interest expense will have come down so much in our interest income will entirely offset the interest expense and we believe that that could happen within the next two to three years at which point.
100% of our cash flow generated by our stream and royalty portfolio will be free cash flow or stated another way our net interest expense will be zero.
Overall with strong cash flow that we've had in our plan for non core asset sales over the next year, we are very comfortable with where our balance sheet is and happy with where it's headed.
The second thing I wanted to talk about was our quarterly production expectations over the next year to help our investors estimate of future production.
In 2023, we have three sources of gold equivalent ounces that will be nonrecurring items going forward.
And in 2024, we have two very important significant new sources of gold equivalent ounces that will be starting and will continue for decades to come.
In 2023, the nonrecurring sources of gold equivalent ounces were one a one time royalty payment on the Mt. Hamilton royalty that we received in Q1.
Two stepped down in fixed ounces from Mercedes and three we sold a portion of the <unk> royalty during 2023.
And since I mentioned, Mercedes which is run by Bear Creek.
Like to give my condolences to the Bear Creek team.
They are very recent former CEO, Tony Hawk shop passed away a few days ago after a tough battle with cancer.
I've known him for many years and he has a good ran with lots of integrity and he is going to be missed.
Overall, its our expectation that Q4 production should look relatively similar to Q3.
Looking forward to next year, what we're expecting is a year of transition where the majority of our portfolio stays the same.
It will have less production from things like Mercedes, but by the middle of the year, we will have positive catalysts from such things as greenstone stream coming online as well as higher extremes.
Okay.
Both mines are nearing completion of construction it will become significant contributors to sandstorms production and free cash flow will become an important part of sandstorms future.
All mine ramp ups take a while so we're expecting payments from those streams to start slow, but then really pick up and keep growing both our production profile and our cash flow.
Which brings me to the next thing I wanted to talk about this morning, which are production growth expectations and longer term production profile.
This is a new chart that we're showing for the first time in this forum and for me, it's a very exciting chart.
It was inspired by an analyst and we sat down with from one of the banks at the Denver Gold Forum is.
Set to assess sandstorm was the only royalty company that used to show year by year production expectations and I was hoping the other royalty companies would follow your guidance, but instead he stopped it I wish you would bring it back so based on that feedback, we're bringing it back and we've decided to go even further and show our expectations for the next 15 years.
You can see here that after next year and assuming no new acquisitions other than perhaps our Morro stream exercise, we're expecting increases in production and cash flow every year year after year for many years.
Speaking of the Mira project. Some of you may have noticed that Glencore recently announced that they are paying $475 million to buy the remaining 56% stake of the <unk> project for Pan American.
Glencore and intelligent company and they wouldn't be doing that if they didn't plan on billing in a timely manner. That's.
It's my expectation that this will start much sooner than people currently think.
Sandstorm has an option to buy a 20% Gulfstream on tomorrow mined for $225 million, which we would only pay once they are building it.
Based on the last technical report that was done in the project. The average annual production for the first 10 years of a 28 year mine life would be 107000 ounces of gold per year, which would translate to over 21000 ounces per year on average for sandstorm is 20%.
At todays gold price that would be an incremental $30 million per year in cash flow.
On this chart the boxes represent this average annual production for illustrative purposes.
But what is Glencore updates there Mark Technical report next year, we'll update this slide for the numbers from that report.
This brings me to my fourth and final point, which is how much cash flow, we can generate at those production levels at <unk>.
Today's gold price that would translate into well over $200 million U S per year in annual cash flow for a very long time.
A huge amount of cash flow for a company that only has a market cap of $4 4 billion and I'm very bullish on the price of gold and if I write those cash flows will be even higher than that.
From a high level perspective, when you look at the macro factors affecting our business today with high interest rates started increasing our interest expense, but also increasing the attractiveness of investing in things like long term bonds versus stocks like sandstorm. It can be frustrating at the moment. However.
However, what I think what Samsung is and especially what is going to look like one year from now I can genuinely excited.
I know, it's tough to look at stock price today. It would be excited however, one year from now we should have debt below $350 million.
I believe we will have declining interest rates, and therefore, increasing cash flow as well as possibly increasing gold prices and then we will have a production profile that would be increasing year after year for years to come.
This picture that makes the confidence and sandstorm is this picture, there's less need to borrow millions of dollars personally over the past couple of years by sandstorm shares.
And as I have some stock options expiring in the next month at this conference. It will have me borrow hundreds of thousands of dollars more to get even longer sandstorm shares.
For me I've already versus how much money buying sandstorm shares that are running at a bar or a room and I won't be able to exercise all of them or if our share price has gone up a lot to sell something to exercise those options to pay that.
Exercise price, but not only will not be taking any money off the table I will be borrowing more money personally to hold the shares and hold more of them than otherwise.
I believe in this company I am excited about this portfolio of assets I have faith in our long term growth profile and I'm looking forward to that future and profiting from it together.
And with that I'll hand, it over to referred to discuss the quarterly results.
Thanks Nolan.
In terms of financial results. It was another strong quarter for sandstorm the company recognized revenues of over $41 million and sold over 21000 attributable gold equivalent ounces.
Year to date Sandstorm has sold nearly 74000 gold equivalent ounces.
Which positions it comes through the company comfortably within reach of achieving our 2023 production guidance of between 90 and 100000 ounces.
Such I expect this to be another record breaking year for Samsung in terms of revenue and production.
Moving on to the results, we had $41 3 million in revenue for the quarter, which is an increase of $2 4 million from the same period in 2022 comprised of.
$22 5 million in sales from the company's streams and $18 8 million in royalty revenue.
Fight, many macroeconomic headwinds and general market volatility the prices goal is continue to perform relatively well.
As a result, the company's average realized price per gold equivalent ounce sold this quarter.
Was $19019 the average.
90, <unk> hundred $19, the average cash cost per attributable ounce with only $220, resulting in cash operating margins of approximately 1700 per ounce. This equates to nearly 90% cash margins on the average attributable ounce sold which is an incredible Testament to this.
Operating profile of the portfolio.
The strong cash margins contributed to nearly $34 million in cash flows from operating activities. When you exclude changes in noncash working capital an increase of $2 6 million from the same period in 2022.
Net income for the three months ended September 2023 was 14000 compared to $31 7 million for the third quarter in 2022.
This change in net income was driven by combination of factors, including a $24 9 million gain that was recognized in the third quarter of 2022 from the sale of the company top modern interests.
A decrease in gains recognized on the revaluation of the company's investments.
A decrease in deferred income tax recovery driven by the sale of some interest in 2022.
And an increase in finance expense related interest paid on the company's credit facility.
This change in net income.
Was.
Partially offset by $2 4 million increase in revenue compared to the same period in 2022.
In September we announced the renewal of the company's revolving credit facility, which allows sandstorm to borrow up to $625 million U S. And we have extended the term of that facility for additional two years maturing in 2027.
The company ended the third quarter with $456 million drawn on its revolving credit facility, which was used to partially finance the acquisitions made in 2022.
As Nolan mentioned as of.
Today's date the balance on the credit facility was down to $443 million.
The next slide provides a breakdown of gold equivalent production sold by asset.
The Cerro Moro silver stream, leading the way with over 3100 gold attributable ounces.
The Mercedes mine in Mexico was the second largest contributor for the quarter.
The contract that was acquired in the Nomad transaction in 2022 that entitle the company to receive monthly fixed deliveries of gold for Mercedes concluded in the third quarter as expected.
The restructured Goldman Silver stream that was announced in September is expected to commence in January 2024.
And to me in a mine in Peru contributed seven 754 gold equivalent ounces to sandstorm during the quarter. This.
This is the first full quarter since the closing the <unk> transaction with horizon copper whereby the company sold its 166% NPI, So horizon retain a silver stream in a residual MPI.
The production numbers from and 2 million in the third quarter include the gold equivalent ounces attributable to the silver stream and the residual royalty.
Additional cash flows primarily principal repayments of the debenture associated with anthem unit transaction are accounted for in the company's cash flow statement under investing activities.
Finally, this last slide shows the company's attributable gold production by region and metal for the third quarter, 40% of attributable production came from operations in North America, 23% from Canadian mines.
Nearly 50% was from the South American operations with the remaining 11% from the regions around the world.
Precious metals continues to be our focus with 65% of production coming from Golden Silver operations for the quarter.
24% of attributable ounces from copper mines, largely driven by <unk> and in some manner.
As we close them in the last bit of 2023, I'm encouraged to look back over the last 12 months and see significant growth and transformation plan store.
The portfolio is stronger than ever and are generating meaningful diversified cash flows.
We have two significant mine is expected to come online in 2024 with greenstone implant reef and we have a path to reduce the remaining debt balance considerably over the next 12 months to 18 months further fortifying the balance sheet I.
Im looking forward to Samsung continues to SaaS portfolio continues to mature over the next few years and generate value for shareholders.
I'll leave it there and pass it over days for a few specific asset updates. Thanks, Stefan sorry for coughing in the background.
Okay.
With that update today I'd like to address two major development projects in our portfolio shares.
Exciting exploration highlights from fruit.
Starting with modern SSR takes charge of this project and updates of feasibility studies. They have been releasing results from an infill drilling program.
So I always exhilarating to see these results as a typical excitement in the project.
First Street holds for this program continue this tradition of $2 38, UNICEF two six meters grading 18, five grams per tonne gold and 3% to 4% copper all 79 yield at a remarkable 90 meters grading 65 grams per tonne gold at one 5%, 6% copper.
Sure.
240 returned 61 meters grading 18, eight grams per tonne gold and $2 two 6% copper.
These intercepts surpassed the already high grade resource to reserve further underscoring the exceptional quality of new or this mine will produce it's worth reiterating that these results speak to the world class nature of this deposit.
Moving on to prove that they'll nortek.
The 2023 conversion program has delivered impressive results to date 11233 meters of underground drilling across 79 drill holes have been completed in various sectors.
And deposit, including depth and including the depth and the southern sector. Notable highlights from this conversion program include 48 meters grading 692 grams.
Grams per tonne gold 37, nine meters grading 649 grams per tonne of coal for $2 two meters grading 21 grams per tonne gold.
These outstanding highlights.
These outstanding results highlight our partnership with another world class deposits.
What's particularly reassuring is the consistency of the results across all published or it's not just these highlights.
Each solve the pilot solidifies your body's quality. These results will be incorporated into the upcoming reserve and resource.
Update expected in Q1 2024.
Just about a kilometer to the south we have seen more results from new deposits.
So we're shaping up to be another discovery on the property with promising intercepts on strike from the main ore body it for them.
This one is leading to 850 meters on strike and another 500 meters.
But remains open in all directions key highlights include 744 grams per tonne over eight eight meters 587 grams per tonne over 11 nine meters.
Two rigs are currently active that balance the sewer and we anticipate more results this year.
The conversion drilling and exploration Chilean across property lending goal is set to complete 50000 meters of drilling in 2023.
Marking the largest drill program since 2007.
This project is shaping up to demonstrate the potential for months multi generational lifestyle.
The third World class deposit are focused on his plan routes operated by five in homeowners. This remarkable deposit on north limit. The bushveld complex is rapidly advancing towards production next year Ivanhoe has recently announced that phase one construction activities of 62% complete.
With production expected in Q3, 2024, notably more than 2000 meters lateral development on three different levels have been completed to date on the ninth 50 level.
Underground crushing and loading has been completed.
The first phase remains for shaft two has commenced.
With completion anticipated in Q2 2024.
This shift is currently required for phase III mining expected in 2027, however, former batch vent shaft shaft three is currently being leaned out.
One one meters with completion expected in Q4 2023 shifts.
<unk> will be equipped with polished derisk phase, one haulage and expedite phase two mining. So there may be a scenario, where we see a ramp up of production between the currently planned stages, one and two.
At plant.
It's incredibly exciting to be associated with such dynamic and successful mine builders and we eagerly anticipate new ideas and approaches to expedite the assets through its mining phases.
With that review of the three world class assets in our portfolio pass over the call to Allen our operator for the Q&A session. Please feel free to ask questions about any of our royalties and streams.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
Again, if you have a question. Please press star one on your Touchtone phone.
You will hear a three pronged acknowledging your request and your questions will be pulled in the order that you received.
If you would like to withdraw from the question queue. Please press star two.
Theorizing your speaker phone please lift the handset before pressing any keeps one moment. Please for your first question.
Your first question comes from Josh Wolfson of RBC capital markets. Your line is already open.
Thank you very much.
In terms of the royalty transaction that was announced.
Possible for the team to split out our IDEXX.
Identify what the Blackwater value, what's within the $25 million and then b with the split even further would've been between <unk>.
Cash and equity.
Yes, so I'll start.
With the split between cash and equity so as $10 million of cash $50 million of equity that was it.
The action that we started working on.
A year ago.
<unk>.
Just again to clarify the 40 to a $100 million of noncore asset sales that we're talking about is just kind of cash portions of things only and I don't think youll see that.
Transactions like that one going forward in the noncore asset sale process to answer your question the split out.
We're just going to leave that separate because it's under a row for right now for.
Blackwater and so that's we're waiting to receive some of the cash to determine whether they exercise added up there'll be more clarity on that.
Okay.
I guess, that's sort of part of the question here is.
How would that roll for.
Value equity in sandbox and the current situation assuming there is any equity.
For the Blackwater asset specifically, so we're going to get we're going to get an incremental six and a half million dollars.
Our cash.
Irrespective of whether that's exercised or not we won't get any more shares.
Okay.
And then back to sandbox and its been a while since we've received an update there minor.
My understanding is there are still parts of that that are waiting for closing so.
I'm wondering is there any kind of update the company can provide on some of these timelines.
And what is sandbox is cash position to fund part of this deal.
And then lastly, what's the pro forma equity percentage stake Okay storm, it's going to have at sandbox. After this is done.
Yes, so our piece was much smaller piece of the transaction with sandbox recently announced so I'll start with answering the part of what we own we own about 34% of that company John Armstrong.
Who is the CEO of that.
Did a really good job, putting together a $100 million financing package because the bigger piece of it was <unk> $75 billion.
A stream on greenstone and.
All of those pieces of the puzzle will have effectively been locked down and closed now so we're just waiting for <unk> to be triggered.
And a few other things, but it's a done deal.
Six months to pull $100 million financing package together for him but.
It's a tough market to do it so I'm pretty impressed equal that together.
Okay, and then sorry, so with 34% with the equity Stakes Sandstorm had before this deal assuming everything closes with the 25 million transaction.
What would be the new equity stake.
So 30, 34%.
Okay. So it stayed 34 okay.
And then in terms of it sounds like there is some material progress that was made on those closing timelines.
We're getting close to a year and a half since we have received an update.
What is the current guidance for closing on on the.
Sandbox transaction not for the royalties, but for the original deal.
I'm not sure if I am not sure what you mean for the original deal.
Things closed.
Everything's close okay.
Okay. Those are all my questions. Thank you.
Yes.
Your next question.
It comes from Heiko Ila.
<unk> H C. W. Youre line is already open.
Hey, Tycho from H C Wainwright.
Nice to see management, having faith in the farm and investing more of their own cash I mean are you believe shares are attractive right now.
This waste.
You have this Michigan for non core asset sales the strength of your balance sheet I mean more on the sandbox transaction, which I think it's funny how it just came out for the second time in the Q&A.
Where are you seeing the most interest in sales what metal has the most demanding these are big difference how geopolitical risk factors, we're seeing compared all it used to be obviously the world has changed in the last year and a half anything in some proposed yields that surprises you or maybe it would surprise us.
In terms of where we're seeing interest in our non core assets specifically.
Yeah. So.
A good question because it's one of the reasons that I, specifically mentioned that we are looking to do a series of smaller transactions rather than one big transaction is because there is interest up and down the portfolio and a bunch of our non core non cash flowing things, but they tend to be from smaller entities that have.
Only certain amounts of access to actual cash so we're trying to find.
And we're now having conversations with various parties that are in base metals and battery minerals.
In.
Sort of longer dated noncash flowing things a little bit we're not really looking to sell much much precious metals. If any of the metrics are very long dated thing.
And but we are finding parties that are interested in each of those and so we are hunting for those leases.
Or unlawful.
Building on that last question and tapping into all off I mean, how do you view that pricing is at least the Laredo proposed pricing is given with goals of $19 64 and that was in a real quick question. This morning was at 1962 so.
It's already looking better another couple of hours ago.
Yes, we're not finding that the gold price up or down.
For the stuff that we're looking at it's more access to capital and interest rates. The bigger macro factors are the things that affect valuation and so what we've done just to give more clarity with what we've done internally is we've specifically identify the noncore assets that we are running processes on and that are for sale.
And that list is worth a lot more than what our target is and we're going out and feeling for prices and to see where where the market is.
Signing value, where we agree on the value or whether because it's bad market conditions and high interest rates, where our people are willing to buy that and so we're only going to sell the ones that.
That we think we're getting at least semi reasonable value for.
That's helpful. Thanks, a lot and I apologize for the background noise.
Your next question comes from Derick Ma.
TD Securities. Your line is already open.
Thank you and good morning.
In terms of the other.
Other than certain other than non core non producing royalties other other financial investments or loans that could be monetize at this time to reduce debt.
Yeah. So.
Okay.
It's a bit of a nuanced answer but I would include those in noncore and noncash linked to a certain extent so.
Some of the things that are on our list are looking at ways to monetize some of those things specifically, yes.
Okay.
And then given I know debt reduction is our priority right now, but given the economic uncertainty in China, we kept base metal prices higher interest rates and what is the outlook.
For the stream of royalty business.
From your perspective in this environment and do you see existing counterparty seeking additional financing or looking to restructure and then their stream agreements with you.
In this kind of.
The economic environment.
Yes.
I think fortunately for us we've taken most of the pain already Bear Creek is the only thing that we're actively in conversations with the restructuring on.
Americas Silver has been having some challenges, but those are both sort of short life things there.
Our a small part of sandstorms overall value and sort of the big future chunky parts.
However, things like greenstone, and Robertson and flat rates.
In hardboard and so on and so forth and those are the future of sandstorm and none of those assets.
Or in any challenges there with strong partners.
And so we're actually feeling very very good about the portfolio of the portfolio's growth and although it's not boring in a sense that we're doing a lot of work to sell non core assets and it's taking a lot of our time and management's time and our corporate development teams time.
Where.
We're very confident that if we just sit here and execute that very simple plan.
It's going to look really good a year from now.
Okay, great. Thank you.
Ladies and.
Gentlemen, as a reminder, if you have a question. Please press star one.
There are no further questions at this time.
Over the call to Mr. Watson. Please proceed.
Okay, great. Thank you Alan and thank you everyone for calling in to today's call as normal we're going to be here around and available to answer any questions as they may come up okay.
Hope you have a good day.
Ladies and gentlemen, this concludes today's conference call.
Thank you for your participation you may now disconnect.