CEO Says His Canadian Streaming Company Misunderstood by Markets

2017-07-06 15:59:10

By Danielle Bochove, Bloomberg News

The head of Sandstorm Gold Ltd. is feeling misunderstood.

Shares in the Vancouver-based royalty and streaming company haven’t done much since it announced a deal in April to acquire Australia’s Mariana Resources Ltd. The complexity of the arrangement — in which Sandstorm will obtain a 30 percent interest in the Hot Maden gold-copper project in Turkey — has been an issue for investors, Chief Executive Officer Nolan Watson said.

“Sometimes undervalued means not well understood,” he said in a telephone interview Wednesday.

While some investors believe Sandstorm is acquiring a 30 percent joint-venture stake in Hot Madden, the acquisition is actually closer to a royalty agreement with upfront capex payments, he said. And since Sandstorm will spin off all other exploration assets received through the cash-and-stock transaction, understanding the asset is key to properly valuing the deal, he said.

The transaction closed this week, freeing up Watson to discuss details that had been restricted under U.K. takeover law. The company plans to convert its stake in Hot Madden to a more straightforward mine streaming arrangement in the next six to 12 months, both to create clarity for investors and to secure possible tax benefits, he said.

Streaming and royalty deals have become increasingly popular sources of funding for miners in recent years. In exchange for upfront payments, the streamer receives the right to buy a portion of the mined metal at a discount over a future period of time.

Analyst reaction to the Mariana deal has been mixed. In a June 21 note, CIBC’s Cosmos Chiu wrote that incremental cash flow from the deal probably wouldn’t have an impact until at least 2021. Scotia Capital’s Trevor Turnbull was more optimistic, writing that it would be 13 percent accretive to net asset valuation “on a conservative base case scenario.” Scotia rates the stock sector outperform, while CIBC has a neutral recommendation.

The shares sold off in the days after the deal announcement and have lagged peers Franco-Nevada Corp., Osisko Gold Royalties Ltd. and Wheaton Precious Metals Corp. in the equity market this year.

“Sandstorm really traded off partly because they weren’t able to discuss things,” Scotia’s Turnbull said by telephone Wednesday. The company is holding an investor conference Thursday and more color around the Mariana acquisition and its exploration potential could help it catch up to its peers, he said.

Production Doubling

Hot Madden is expected to begin producing in 2021, adding an additional 70,000 ounces to what would have been 65,000 ounces of gold equivalent production for Sandstorm by 2019, barring additional acquisitions, Nolan said in Wednesday’s interview.

“It’s basically a doubling of our production and we only had to dilute shareholders 19 percent to do it,” he said, adding that the estimated 11-year mine life probably will be longer.

The company plans to buy back 5 percent of shares over the next four to six months, reducing that dilution to 14 percent, he noted. “It’s a very, very accretive series of steps for shareholders.”

If the stock price stays low, Sandstorm will continue to buy back shares and if it rises, it will issue a dividend, Watson said. He declined to say at what level that switch would be made.

Streaming Climate

With a market value of about $580 million, the company is still too small for most large generalist investors, who tend to not look at companies with a value of less than $1 billion and only get “serious” about those over $2 billion, Watson said. He expects Sandstorm will hit that $1 billion threshold in the next few years organically.

“We’ve been disproportionately hit by the GDXJ re-balancing and the arbitration funds coming in on the back of this deal,” he said. “And then gold falling.”

Traditionally used by early-stage exploration companies, streamers gained acceptance among large miners during the commodities downturn as metals prices plummeted. Glencore Plc, Teck Resources Ltd. and Barrick Gold Corp. were among majors that sold streams on top-tier assets to raise cash. However, as gold prices stabilized, those large deals have all but disappeared and there is some suggestion the market for smaller streams is also languishing.

Asked about the climate for streamers, Watson agreed that large deals are few and far between. When they do appear, competition is fierce and the final price tag high, he said, citing last month’s deal by Osisko for a large package of royalty and streaming assets as a case in point.

“We’ve been looking for many, many years for a transaction that’s this material and this accretive and this is the first one we’ve come across,” Watson said, noting the company will likely return to smaller acquisitions typical of what it’s done in the past two years.

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