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Sandstorm Gold (NYSEMKT:SAND)
Q3 2020 Earnings Call
Oct 30, 2020, 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, my name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Sandstorm Gold 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 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. If you'd like to ask a question during this time simply press then the number one on your telephone keypad. If you would like to withdraw your question press the pound key.

Thank you. Mr. Watson, you may begin your conference.

Nolan Watson -- President

Thank you. Good morning everyone and thank you for calling into this third quarter earnings call for 2020. This morning Erfan, our CFO, is going to walk us through the Q3 results, and Dave Awram will provide a brief update on our asset base and then as usual we'll turn it over to the operator for a question-and-answer period. If anyone has questions that don't need to be part of the.

Live Q&A, you can ask those sort of web portal and we'll make sure we get back to each question and will get a direct response from us after this call. Before handing it over to Erfan, I want to provide a brief update on how our Q3 sales were affected by COVID and what we're expecting based on what we're seeing for Q4. I'd also like to take the time to provide a couple of updates, including about our expiring warrants, part modern timing and our deal pipeline including the olefins in the room, which is the lead to deal information for a transaction that is not actually occurred. At this time, we'll begin going through a prepared PowerPoint presentation on the web portal.

So if you're able to please turn your attention there now. So starting with an update about our Q3 results were affected by COVID. During Q2 nearly half of our producing assets were affected, including but not limited to Santa Elena for to del Norte, etcetera, and they're all shutdown for most of the quarter. During last quarter's earnings call I outlined how these mine shutdowns were also affect our Q3 numbers despite all of these mines being back up and running during Q3.

The main issue relates to how we recognize revenue for our streams as we do not recognize the sales until we have actually received the goals from our counterparties that have actually sold it in most cases we delivered gold in the month following the actual production. However, in the case of streams like Cerro Moro we are delivered Silver once per quarter only. Meaning that our Q3 ounces from Cerro Moro reflect what was actually produced in Q2 and the Cerro Moro operated at a reduced rate in Q2 that resulted in fewer ounces being received and sold by Sandstorm during the third quarter. The good news is that we expect to be back to record revenue and record cash flow in this fourth quarter with respect to other brief updates.

I'd like to provide. I'll start with the soon to be expiring warrants, there is still a couple of million warrants that are outstanding and will be expiring this coming Tuesday November 3 after which point Sandstorm will no longer have any outstanding warrants and its capital structure and we are very pleased that Sandstorm will be 100% free of any warrant overhang going forward which will be the first time in our 11-year history that will have no outstanding warrants and candidly, I'm very excited about that. It's worth noting that these warrants if not exercise will fully expire next week for those people who have them in their accounts. You will not to be eligible for an extension.

If you will need to exercise of warrants immediately or that value will be last year entirely. Last quarter on our future earnings call, I provided a brief status update on Hod modern and stated that it was likely that the start date would get pushed back into 2023 and certainly thereafter we put out a press release updating our official guidance for 2023 start-up date. The primary reason for these timeline changes are due to various delays that have been occurring because of COVID combined with various longer lead-time items that have been identified during the completion of the feasibility study, which we're hoping will be completed by the end of the first quarter of 2021 or Q2 at the latest. And as I mentioned before, we're pleased with our partner, Lilly made until it is pushing the asset forward as quickly as possible toward production and we look forward to this incredible asset beginning to provide us gold soon.

You can see from this slide that the next six to nine months are very important for this project. We're hoping that in this time period, not only will feasibility study to be complete, but also the EIA will be fully applied for and hopefully granted so will be a big milestone for the project as it fast track toward production. Moving on the status of our deal pipeline last quarter, I mentioned that as base metal prices have rebounded from their prior coated lows. If there were a number of base metal companies that have been looking at selling streams but no longer appear to require financing in this environment and it appears that this continues to be true.

Although we are still working on a number of transactions. It is clear that the larger deals, the motivation to complete stream deals buyer counterparties has decreased on average. As always, our team is working hard behind the scenes to find intelligent and attractive acquisitions and we will continue to endeavor to do so. However, we will not rush ourselves into acquisitions to grow for the sake of growing.

We learned over the years to being methodical and patient is what pays off for our shareholders in the long run. So this available capital slide you can see the substantial resources at the Sandstorm has its disposal to grow the company, only nine months ago Sandstorm had $45 million of debt, owing to banks, and almost no cash. Today sandstorm is debt free and has over $75 million in cash. Nearly $70 million in non-core securities that we can sell and $300 million in available credit.

By early next year, we therefore expect to have access to nearly half the $1 billion with which to grow our company, which is more available capital and Sandstorm has ever had in the history of the company. Also to address the elephant in the room as many of you may be aware a number of weeks ago another company, mistakenly made public information about a conceptual precious metal stream acquisition that involve Sandstorm, causing us to have to put out a press release clarifying that no first transaction had been completed and that no assurance existed at the transaction would be completed ever. The statement continues to be true, we have been asked by a number of investors if we would put our press releases if the deal were to officially die. And the answer is no, we do not put out press releases for deals that we never announce in the first place, and for which we won't be completing, I believe it is reasonable for investors to assume that although the specific transaction might not be completed, but eventually in over time, our management team will find intelligent transactions that makes Sandstorm and even better investment for shareholders.

And I can assure investors that we work very hard behind the scenes to continually improve this company and move it forward. I personally am very bullish on precious metals over the next 10 plus years Sandstorm is well positioned based on our existing portfolio of assets to profit from this, but we're working hard to get even more precious metals exposure and I believe that our balance sheet is well positioned with no debt and substantial cash to make further acquisitions going forward. With that behind it over to Erfan.

Erfan Kazemi -- Chief Financial Officer

Thank you, Nolan. I would like to take some time now to highlight a few key points from the third quarter financial well, I think a general theme for 2020 has been a $0.30 on third-quarter results show positive trends. Then hopefully indicative of the mining industry returning to sometimes normal. The big news in the mining industry this year has been the continued rise in the price of gold, the chart on the right of this slide shows the Sandstorm the average realized gold price for the third quarter was $190.20 per attributable ounce that's a 12% increase compared to the second quarter of 2020 and nearly 30% increase since the third quarter last year.

In the chart on the left, you can see that the increase in gold price resulted in higher revenue for the third quarter at 23 million despite decreases in gold attributable ounces sold over the last three quarters. This is a good demonstration of the exposure to the gold price that lies within Sandstorm's portfolio of royalty assets. The rising gold price has that other positive effects on the company's financials and I'll highlight a few here on this next slide. Sandstorm sold approximately 12,000 attributable GOLD on ounces in the third quarter, down from 17,000 ounces from the previous quarter.

In the previous year. The decrease was partly due to the lingering effects of the restrictions related to the pandemic which I will discuss in a bit. As I mentioned, at an average realized gold price of $190.28 per two ounce. Total revenue for the third quarter was 23.3 million.

The average cost for Sandstorm's self-attributable ounce remained very low for the quarter, averaging $258 per attributable ounce. This low cash costs combined with the higher gold price resulted in strong cash operating margins of $160.70 per attributable ounce. In fact, this was a new record for the company. Cash flows from operating activities was also strong at $18.1 million, resulting in $6.50 million of net income for the quarter, up slightly from the same period in 2019.

The next slide shows the breakdown of gold attributable ounces sold from Sandstorm producing asset. As we've discussed, overall production continues to be affected by various operational restrictions implemented because of COVID-19. While all the effective operation Sandstorm's portfolio were back online in some capacity by the end of the second quarter, several months continue to ramp up operations throughout the third quarter. Another important factor to note is the delay in the realized productions in several months, and as Nolan just mentioned, Cerro Moro is no exception.

So when you look at silver deliveries from Cerro Moro, identify here under the amount of silver stream, it provides Sandstorm at the beginning of each quarter. This means attributable ounces sold in the current quarter, a representative assets production from the previous quarter. As such, the ounces received from Cerro Moro in the third quarter represents the operational impact that actually occurred in the second quarter. Speaking of Cerro Moro, although the number of silver ounces sold was down for the quarter by 47% compared to the previous year's quarter.

The decrease was partially offset by the rising price of silver. Sandstorm realized an average price of $19.12 per silver ounce up 27% when compared to the third quarter of 2019. The increase in silver price, should correlate nicely with the return of Cerro Moro's full production capacity in the coming quarters. Well, Santa Elena contributed the largest number of ounces of Sandstorm's production in the third quarter, the Santa Elena mine was also impacted by COVID-19 restriction in the second quarter.

This partly resulted in a 40% decrease in attributable ounces sold compared to the same period in 2019. As with other operations impacted by the pandemic, Santa Elena continue to ramp up production throughout the third quarter. Our operator puts majestic announced in October, the mine saw a 100% increase in gold production compared to the previous quarter. I'm optimistic that this trend will continue and there are some of the production return at higher levels in the coming quarters.

Another note and I'd like to highlight on this slide is Relief Canyon, operator American gold and silver announce first gold pour and Relief Canyon back in February. And as for the streaming agreement fixed deliveries to Sandstorm began in May, making this the first full quarter, where we received ounces from stream. I guess in conclusion. I believe this quarter's financial results represent a trend in the right direction.

Even in times of uncertainty, the royalty business model continues to prove its resilience and strength. As Nolan mentioned earlier Sandstorm is in a strong position with plenty of available capital to act quickly on new opportunities. And with rising commodity prices and operations returning to normal capacity, I believe Sandstorm shareholders have reasons to be optimistic for the future. And with that, I'll turn it over to Dave for some specific asset update.

Dave Awram -- Senior Executive Vice President, Co-Founder

Great, thank you Erfan. So a summary for the mining industry we begun to see the effect of more capital coming into this space for development and exploration within our entire industry. The portfolio in Sandstorm is no exception to that many companies have begun to formulate plans on further work and as opposed to the years 2013 to 2019 capital is available to execute on those plans. Our portfolio of royalties and stream is seen the benefit of this.

The period we are in right now, is what we wait for as a royalty company. Sandstorm has spent years patiently cultivating small pieces of good projects and accumulating packages of a lower price or no price optionality that are now seen progress happen rapidly. As a royalty company we are valued based on our existing cash flow in near-term development. However we still love the value of the more than 170 other royalties that are going to sitting the background that are now starting to get money spent on them and are beginning to graduate higher and higher levels of development, which we hope will eventually get cash flow states themselves.

The true value of a great royalty purchase is seen the projects progress to cash flow, without spending that capital it takes to get that valuable progress. So with that introduction, I'll lead into quick overview Fruta del Norte and then speak about the entire portfolio in general. Since the restart of Fruta del Norte in Q3, great progress has been made with both exploration and development programs. Something that we have been eagerly anticipating since our for purchase of the Fruta royalty in early 2019 is the prospect of exploration outside of the mine itself in the Suarez pull apart basin very prospective area has virtually no exploration for 13 years, despite having many tantalizing exploration targets.

Finally Lundin Gold has received permits to drill the first target on the list of at least 10 within that pull per patient that project project is Barbasco a great geotechnical or sorry geochemical and geophysical target 6,000m of drilling our plant in 2020 the strike length of this target alone is currently 3.8 kilometers long and rock samples of surface upgrading up to 10.4g per ton, making this as large as a target Fruta itself. In addition to the greater regional exploration program lending continues to push expansion plans at the mine further. We had a great Q3 production number with over 94,000 ounces being almost all expectations and now there are speaking of speeding up previously announced expansions, current nameplate capacity sits at 3500 tons per day but expansions, up to four to 5,000 tons per day in operations are being studied with some of these increases through quite potentially achievable as early as next year. Also the inferred resources in the South zone of Fruta continue to get upgraded and potentially will be converted to reserves, like our investment in Hyundai operated by Endeavour Mining Lundin is pushing expansions as quickly as possible.

This is what happens when you make investments in the best gold projects in the world. Next I'd like to talk about slide 13 of the presentation. This is a little bit of data that I'm grateful that our team was able to put together. What you see is a quantitative assessment of the number of partner projects that are receiving active exploration work in 2020.

Each one of the bars represent percentage of assets that overseeing active exploration work, as I discussed in my introduction, we're really starting to see our portfolio projects receive a lot of investment for producing assets, 67% of the projects are completing exploration. These are programs beyond the typical resource and reserve conversion and development work that is required on an annual basis. It's a variety of near-mine and regional exploration program taking place. Also the bulk of development projects that we hold royalties on or having additional work being completed.

And that number is 71%, 65% of assets with existing resources that are in our advanced exploration category, but we're seeing an additional exploration work in 34% of our projects in the early exploration stage are getting work performed on them. Keep in mind that because most of these royalties for purchased and packages, the deemed cost of most is zero or near zero. But many are working this year with a budget of millions. The point is that as long as the cycle continues and exploration projects junior developers continue to access to capital, we will see many of these projects graduate to successively higher stages year over year, eventually many will start cash flowing without us having to spend a dollar on them.

Although we have lots of capital to grow purchasing cash from royalties and stream Sandstorm has a great organic pipeline of projects that will add to our growth in the future. So with that I'll pass over the call to Mike for Q&A, please feel free to ask questions about any of our royalties and streams.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from Heiko Ihle from HC Wainwright, please go ahead.

Heiko Ihle -- H.C. Wainwright -- Analyst

Hey guys, thanks for taking my questions.

Dave Awram -- Senior Executive Vice President, Co-Founder

Good morning.

Heiko Ihle -- H.C. Wainwright -- Analyst

Good morning. In regards to a little bit more broad-based question on more specific one in regards to your earlier-stage projects and things that you're looking at what are you seeing with operators wanting to move their projects for at the present time and being willing to sell streams that we have very strong gold price environment, obviously, which I assume, at least for them is at least somewhat offset by the impact of the COVID. And do you fairly low interest rates, I mean folks want to get built their mines and a stalled thing to the state that you provide a very good source of capital has anything they are changed in regards to interest levels in the last, call it 60, 90 days.

Dave Awram -- Senior Executive Vice President, Co-Founder

So in terms of really kind of partners and potential deals that are out there for sure gold prices are strong. There seems to be more equity available in the industry, but still streaming and royalty capital going into projects is a very good form of capital. It really is low risk, interest rates are low, but availabilities debt is not as high, I think as it has been periods in the past. I think what we're seeing a lot of the single asset developers are looking together put together packages and honestly those groups have been effectively orphaned by the capital markets for years and so there is still is an ability to really kind of look in and look at streams and royalties on those single asset developers full year bigger companies for sure they have access to capital.

Base metal companies of course to although they're seeing some relief in pricing and higher commodity prices and they saw at the beginning of this year. Still, I think their ability to access debt is not as great as I think the market would assume it is at this time, and there certainly are opportunities there. But it is of course a competitive landscape in that side. There are transactions available to us.

Cash flow-in-ones, and there certainly are a lot of assets and packages of royalties that are available. We are in a competing landscape. But like Norman talked about before, earlier we need to be patient. We need to make sure that we're allocating capital in the right way, making the right choices for our shareholders and we're absolutely willing to be patient.

Heiko Ihle -- H.C. Wainwright -- Analyst

Fair enough. Good answer. I went through your MD&A this morning, which is always has been quite and was briefly remind on the impairment that you had on Diavik earlier this year, and more importantly, the way that you broke down the impairment between mine life and the price of the diamonds. Purely out of curiosity, and again I assume the answer is no.

Are there any other assets of yours, when we might see an impairment in the next quarter or two? I mean gold prices are strong, silver pricing is pretty strong but I figured, I just. I just ask thank you.

Dave Awram -- Senior Executive Vice President, Co-Founder

Yeah, great question. We go through a detailed impairment analysis every single quarter as part of our internal control processes and so if something hasn't been written down at this moment. It's not impaired, and I think that your, your point about gold prices being higher is exactly right. I don't see anything in our whole portfolio right now that I see as a candidate for anything that would need to be written down Diavik was the only thing that was recent and that's because the diamond market that hit really hard because of COVID.

So outside of that, I don't see anything material coming down the pipe.

Heiko Ihle -- H.C. Wainwright -- Analyst

Wonderful. Stay safe everybody, be good take care, bye.

Dave Awram -- Senior Executive Vice President, Co-Founder

Thank you.

Operator

Your next question comes from Derick Ma from GE Securities. Please go ahead.

Derick Ma -- GE Securities -- Analyst

Thank you. Two questions from me. First, a general question as a result of the and disclosure potential transaction. Is there more of an appetite or eagerness among the players in the space that syndicate larger deals? I think there stand as a partner.

Dave Awram -- Senior Executive Vice President, Co-Founder

Yes, we've had a number of conversations with various competitors. And I would say I have met personally with all of the CEOs in our streaming and royalty industry at least of material streaming and royalty companies and the vast majority of them are looking to syndicate transactions where the size of the transactions larger than they want to focus that much risk on and. And so, although you haven't seen a lot of syndicated transactions actually get over the line yet. I expect it will become a normal operating procedure for the streaming royalty space for large deals.

Derick Ma -- GE Securities -- Analyst

That's good to herein probably good news for Sandstorm one more question on Chikpada, has obviously examine various expansion scenarios there have been reached at the Sandstorm in terms of a potential conversion of the copper stream to gold and if so, or would that be something manageable is management is amenable to.

Dave Awram -- Senior Executive Vice President, Co-Founder

That's not something that we're having conversations on right now.

Derick Ma -- GE Securities -- Analyst

Appreciate that. Thank you. Best of luck.

Operator

Your next question comes from Hilary Chak from Canaccord. Please go ahead.

Hilary Chak -- Canaccord Genuity -- Analyst

Hi. So you mentioned at the Hod in visibility is expected to be completed at the end of Q1. I'm just wondering is there any change on how you plan financing the project?

Dave Awram -- Senior Executive Vice President, Co-Founder

Yeah, great question. No. We've been in contact with lady main in charge, she is the one that make that decision in the end and we're in contact with them regularly and their current plan for project financing is the exact same as it was two, three years ago. So it's nothing changed there.

Which is still about 70% debt financing at the project level in about 30% equity contribution by the partners.

Hilary Chak -- Canaccord Genuity -- Analyst

OK, thank you.

Operator

Your next question comes from John Tumazos from John Tumazos Very Independent Research. Please go ahead.

John Tumazos -- Very Independent Research -- Analyst

Thank you. I just wanted to congratulate you on the total assets to equity ratio of 1.01 I think that's the strongest I've ever seen for an operating company. There is no deferred tax asset. There is no goodwill.

It's real well done.

Dave Awram -- Senior Executive Vice President, Co-Founder

Thank you.

John Tumazos -- Very Independent Research -- Analyst

As I look at the quarterly production of course, there is the two new producing assets and there is Bachelor Lake and which are not producing and some that may be had a lower grade ore tons like Black Fox as well as some assets where there was virus impact how many ounces do you think you lost in the third quarter due to virus as opposed to depletion.

Dave Awram -- Senior Executive Vice President, Co-Founder

I would say I can't pick the exact number, and I would be absolutely guessing but I think what you'll see come through in the fourth quarter is more representative of what production would have been, if no COVID. And I think that would be an extra 2000 or 3000 ounces just from COVID.

John Tumazos -- Very Independent Research -- Analyst

Back in the angle I was looking at five companies that reported this morning. 2.2000 ounces would be Bachelor Lake ending, and then something for Black Fox or others produce well for diamond as opposed to the net gain that you have ounces. When do you think you'll be back to 16,000 ounces of production and when do you think you'll be at a new higher threshold of say 20,000 ounces in the quarter?

Dave Awram -- Senior Executive Vice President, Co-Founder

I think, although it's hard to predict exactly when they'll hit 16,000 ounces again. I wouldn't be surprised that in a quarter next year. Depending on how things go with respect to hitting a new threshold of say, 20,000 ounces in the quarter or say 80,000 ounces a year. My personal belief is that's going to happen after we make our next acquisition.

Obviously if we don't make a material acquisition, it will one half top line is up and running in 2023, but it would surprise me if we don't make an acquisition of an asset that kept cash flowing before them. So I would say stay tuned for the next acquisition.

John Tumazos -- Very Independent Research -- Analyst

And congratulations again on the balance sheet. I've been doing this too long. I can't remember anything better.

Dave Awram -- Senior Executive Vice President, Co-Founder

Thank you. All right. [Multiple speaker] Thank you, operator. I hope everyone has a fantastic day and thanks again for calling into this call.

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

Nolan Watson -- President

Erfan Kazemi -- Chief Financial Officer

Dave Awram -- Senior Executive Vice President, Co-Founder

Heiko Ihle -- H.C. Wainwright -- Analyst

Derick Ma -- GE Securities -- Analyst

Hilary Chak -- Canaccord Genuity -- Analyst

John Tumazos -- Very Independent Research -- Analyst

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