Sandstorm Gold (SAND) Q1 2021 Earnings Call Transcript

Sandstorm Gold (NYSE: SAND)
Q1 2021 Earnings Call
Apr 30, 2021, 11:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Talita, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sandstorm Gold Royalties first-quarter conference call. [Operator instructions] Please be aware that some of the commentaries may contain forward-looking statements.

There can be no assurance that the forward-looking statements will prove to be accurate as the actual result and future events could differ materially from those anticipated in such statements. [Operator instructions] Thank you. Mr. Watson, you may begin your conference.

Nolan Watson -- Founder and Chief Executive Officer

Thank you, Talita. Good morning, everyone, and thank you for calling into the first-quarter earnings call for 2021. As normal, this morning I'll provide a brief update on the company, and then Erfan, our CFO, is going to walk us through the first-quarter results. And then Dave Awram will provide an update on some of the assets.

After that, we'll turn it over to the operator for a question-and-answer period. And if anyone has any questions that does not need to be part of the live Q&A, you can ask those questions through the web portal and we'll ensure that each question we get there will get a direct response from you after this call. At this time, we're going to be going through a prepared PowerPoint presentation on the web portal. So if you're able to, please turn your attention there now.

Overall, the first quarter for Sandstorm was fantastic. We had a record number of gold equivalent ounces sold of over 17,000 ounces. We had record revenue of $31 million and we had record operating cash flows excluding working capital changes of $23 million. By all accounts, our business was performing well and it's for this reason that we're raising the bottom end of our annual production guidance up to 55,000 ounces so that our revised guidance range is between 55,000 to 62,000 gold equivalent ounces.

So we're still on track for another record year of annual sales. It's important to note that starting now in the second quarter, the gold stream that we have on Endeavour's Karma mine in Burkina Faso is done with fixed delivery period of the contract. And Sandstorm now has an effective 1.6% NSR. So the deliveries from Karma are expected to be lower by the 1,000 ounces per quarter going forward.

However, as many of you are aware, we have a number of other development assets at various stages of development and we're expecting more growth in annual production over the next years in any of our other streaming and royalty competitors. Now Sandstorm has record amounts of capital available to allocate to either new deals or dividends or share buybacks. And as we stand here today, Sandstorm has over USD 150 million in the bank, plus we have approximately USD 60 million of equity and debt investments in other mining companies that can all be liquidated if need be. On last quarter's earnings call [Technical difficulty]

Questions & Answers:

Operator

Excuse me. This is the operator. Please do not disconnect. The call will resume momentarily.

And today's conference will resume momentarily. Please hold. It will resume momentarily. And you may resume your conference.

Nolan Watson -- Founder and Chief Executive Officer

All right. Thanks, everybody, for your patience here. We just had our work line drop off here so I'm turning into my cellphone. We'll see how this goes.

So I think where I left off, I was talking about share buybacks. And what I was trying to articulate was that we are going to be allocating capital to what I mentioned on the last quarter earnings call of all three alternatives being new deals and dividends and share buybacks and we've got a slide here that you can see that discusses the share buyback part. We bought back a material number of our shares each year for four years running now. And during the first quarter, we were able to pick up on advanced earned shares and have them canceled.

So the value per share for remaining shareholders is continuing to increase. And over the past four years, our average cost per share has been only USD 5.20. So we think we've done a very good job of picking our spots, and we think it's been a prudent form of capital allocation for us and we're going to continue in this spirit going forward. One of the things that makes us excited to buy back our own shares is not only how well the portfolio is doing from cash flow generating perspective but also how incredibly well the exploration upside story continues to unfold over time.

We've finally completed all of the number crunching for the last year. It turns out that 2020 was the fifth straight year in a row that more gold ounces has been found on a royalty ground than at the mine. This is an amazing track record that is exciting to us. In 2020 this firm received 52,000 attributable gold equivalent ounces of production, compared to 54,000 new ounces attributable to Sandstorm being found through exploration.

And what I find even more interesting is that the actual number of ounces attributable to Sandstorm that was found was even higher than 54,000 ounces. And what we've done is we've chosen to be conservative in how we show these figures because under one of our streams and the technical team has decided to take a more conservative set of assumptions on the resource calculation and has what we believe temporarily decreased their ounces on the books and we have netted those ounces off against the ounces pound so that the 54,000-ounce number represents a true net ounces pound figure. Year after year, our portfolio is continuing to not only set new records in revenue and cash flow but it also continues to replace the ounces mined with the amounts that's found. And before I hand it over to Erfan, I would like to remind everyone of a few important catalysts that we see for Sandstorm in 2021 starting with one of our key assets, Hod Maden.

As I've said in the past, 2021 is expected to be a catalyst to each year for the assets with both a feasibility study and an EIA expected to be granted imminently with the granting of the PCM contract to build the mine later in the year. It's still our expectation that both the feasibility study and the granting of the EIA should occur in the second quarter. However, this week, due to COVID, the government of Turkey has implemented a countrywide lockdown to contain the virus. We're still assessing what impact, if any, this will have on the expected time lines.

I think it's safe to say we're all tired of COVID. Well, we certainly want our partners and our employees to stay safe, and we understand if this means a slight delay in time lines. Another important catalyst this year is potential deals. I won't belabor this point but I'm still expecting this year to be an above-average year for new deals and likely the highest level of a deals the past few years for us.

Having said that, deals aren't done until they're actually done. So I'll let the actual deals, if any, speak for themselves. The next catalyst that's worth remembering in which I've already touched on is the return of capital to shareholders through either share buybacks or dividends. We've had the benefit of discussing this further at the board level recently and we're targeting a decision one way or another if not by the end of this year then early next year.

We have an incredibly strong balance sheet, a fantastic and diversified portfolio that's generating record cash flow, and so it's my belief that paying a small but sustainable and growing dividend is effectively imminent. I'm very pleased with how well our portfolio is performing and the opportunities we see to grow the portfolio. And so with that, I need to hand it over to Erfan.

Erfan Kazemi -- Chief Financial Officer

Great. Thank you, Nolan. Hello to everyone joining us today. It's been a great quarter for Sandstorm as Nolan has mentioned.

I'd like to take some time to walk through the financial results in more detail. The chart on the left of this slide show Sandstorms attributable gold equivalent ounces sold as well as sales and royalty revenue for the last four quarters. If you've been tuning into these conference calls for a while, you may recall at the end of 2019, that sandstorm was realizing quarterly records on a regular basis. At the time, I mentioned that we were excited for this record-breaking trend to continue.

After a year of unprecedented change and global upheaval, I'm pleased to say that Sandstorm has once again hit a new quarterly record. Moving to the next slide, we can make a few comparisons between the first quarter of 2020 and 2021. By all metrics listed here, Sandstrom's financial performance was stronger in the first quarter of this year compared to the first quarter of last year. Total revenue with a record $31 million, an increase of 45% compared to the same period in 2020.

Attributable gold equivalent ounces sold with a new quarterly record at 17,444 ounces, an increase of 30% compared to the same period in 2020. These results were supported by a relatively strong gold market in the third quarter with an average realized gold price of $1,777 per ounce. For comparison, the average realized gold price in the first quarter of 2020 was just under $1,600 per ounce. Average cash cost was $307 per attributable ounce which translated to cash operating margins of $11,470 per ounce and a new quarterly record of $23.7 million in cash flows from operating activities.

Net income came in at 5 million for the quarter, compared to a net loss of 10.3 million in the first quarter of 2020. The next slide provides a breakdown of the quarterly production results by cash-flowing assets. The Yamana silver stream was once again the leader with over 4,700 attributable gold equivalent ounces sold. This represents a 12% increase in silver ounces sold compared to the first quarter of 2020.

The Cerro Moro silver stream has benefited from an increase in the silver price. Sandstorm realized an average selling price of approximately $25 per ounce during the quarter, compared to approximately $18 per ounce of silver in the first quarter of last year. A similar story can be told for the Chapada copper stream. Sandstorm received a 29% increase in the number of copper pounds from Chapada during the quarter and realized a 36% increase in the average selling price of copper compared to the first quarter of 202.

The result was a total of 2,588 attributable gold equivalent ounces sold from the stream. Other notable changes in production when compared to 2020 include the addition of the Relief Canyon stream which began fixed gold deliveries to Sandstorm in May 202. An increase in production attributable to the Fruta del Norte mine which commenced commercial production in February 2020 and an increase in royalty revenue from the Bracemac-McLeod mine. Production from the Karma mine in Burkina Faso also increased in the first quarter compared to the previous year partly related to timing of sales and the delay in deliveries compared to the prior-quarter 2020.

The first quarter also marks the end of the five-year period under the Karma gold stream that allowed Sandstorm to purchase 25,000 ounces of gold for ongoing per ounce payments equal to 20% of the spot price. And as Nolan mentioned, as of April 1st, Sandstorm gold stream agreement in time amounts to 1.63% of gold produced at the Karma mine for the same ongoing per ounce payment. The operator, Endeavor Mining, is forecasting between 80,000, 90,000 ounces of gold to be produced at Karma mine in 2021. This final slide depicts the first-quarter revenues by region and metal type.

Sandstorm's portfolio continues to be well-diversified with mines operating in stable jurisdictions around the globe. In the first quarter, 90% of revenues came from mines operating in the Americas with approximately one-third of revenues coming from North America mines. The majority of revenues came from precious metals with nearly half attributable to gold operation with another 27% from silver. 17% of revenues came from copper this quarter which provided good exposure to rising base metals prices.

Overall, it was a very good start to the year for Sandstorm shareholders. We finished the quarter with over 140 million in cash and over 52 million in equities invested. Sandstorm's balance sheet is strong and ready to support that growth for the company. Based on the company's existing streams and royalties, again, we've updated our forecast for attributable gold equivalent ounces sold to be between 55,000 and 62,000 ounces in 2021.

And with that, I'll turn things over to Dave. Dave?

Dave Awram -- Co-Founder

Thanks, Erfan. My asset updates will be brief this quarter as I focused on two projects that are back in the limelight after a couple of years of us not talking much about. The first project is the Mason project with Hudbay. This asset was once an entree of resources but has spun out into its own vehicle and was eventually purchased by Hudbay in 2018.

Fast forward three years later, along with a $2 per pound increase in copper price, and we are one of the largest greenfield copper projects in the Americas and potentially the third largest copper mine in United States. Hudbay recently released the results of the PEA on the 2.2 billion ton measured and indicated resource. At $3.10 copper and using a 10% discount rate, the project carries the after-tax NPV of almost $520 million. The current mine life is expected to be 27 years, but they are still working on additional exploration that could extend that.

Obviously, more work will be completed on the asset, and assets will need to be achieved. But, Hudbay is expected to put it into the development pipeline once growth line is up and operating. However, it does have the potential to almost double Hudbay's copper output. So clearly, it could be one of the most important growth projects in the pipeline.

With 0.4% NSR on the project, Sandstorm could collect up to $75 million in proceeds, based on this PEA study. At $4.50 copper price, obviously, that's going to be a lot higher. This is another great example of how Sandstorm has been effective at accessing low-cost early stage deals on the right assets. And sometimes, like this one, even we were surprised that it doesn't take nearly as much time as we originally thought to show that great value for Sandstorm.

The other projects I want to talk about now are Barry, Moroy, and Gladiator. These are all now part of what was originally the Bachelor Lake gold mine stream which provides us with a tremendous amount of cash flow for over the last 10 years. Today under Bonterra's management, they're three projects quickly pushing forward which we hold royalties ranging from 1% to 4.9%. Gladiator and Barry form a large land package within the Windfall Lake District in Quebec.

Bonterra has been drilling approximately 10,000 meters per month on the Barry property and has been consistently getting great results. Some of the latest steps of inner steps are 14.7 meters at 7.4 and 6.8 meters at 3.8 grams per ton in each zone. The deposit still appears to be open along strike and with a large amount of drilling planned, very likely has more mineralization to be found. An updated resource expected in Q2 and the PEA is expected before the end of the year.

We've also begun to receive payment for royalty here through the bulk sample taken underground last year. But hopefully, this project will start entering the development stage in the not too distant future. Moving over to the original of Bachelor Lake mine site, not only has Moroy continued to produce good assets, chasing up on the O'Brien intrusion showing, Ontario has made another discovery within two kilometers in the Bachelor Mill. Two holes have begun to outline this new discovery within the steps of 24.9 meters of 1.4 and 10 meters of 1.3 grams.

This goes to show you that combined with the Morory discovery, only a few years ago this is very prospective ground, only just beginning to be understood. Of course, it's also good news on the mill expansion. The old Bachelor Lake mill is still able to operate 800 tons per day, permitted to increase to 2,400 tones per day, and is well through that process. New tailings expansions are approved and Bonterra confined themselves in a few years into storage to start the expansion soon.

For Sandstorm, that means the sooner we get the chance to see revenue from a 4.9% NSR on all these newly discovered areas. So with that, I'll pass it over -- the call back over to the operator for Q&A. If you -- please free feel to -- feel free to ask any questions about our royalties and streams.

Operator

[Operator instructions] Our first question comes from Heiko Ihle with H.C. Wainwright.

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

Hey there. Thanks for taking my questions, and I'm glad you made it back on the call.

Nolan Watson -- Founder and Chief Executive Officer

Me too.

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

I know you're still working diligently on the feasibility study for Hod Maden. And the prior outlook was to be completed in the first half of the year, obviously with the production by the end of '23. And this time line was affirmed in the MD&A that you guys just put out. In contrast, early on the call, you said that Turkey went into a lockdown and there may be a delay to this.

But just thinking ahead, not 30 days but six months, nine months, 12 months, how much the -- impact does this delay really pose to you getting first production by the end of '23? And building on that, can you maybe provide some color on longer lead time issues that you're particularly concerned about?

Nolan Watson -- Founder and Chief Executive Officer

Yes. So the lockdown was just announced a couple of days ago. So it's a bit early for us to tell some of those answers because it's only been in effect for a couple of days. At the moment, we don't foresee it changing, when we think the asset will get into production, some of the long-lead items which are still working their way through the system would be things like forestry permits, but also EPCM contractors, getting them signed up and ready to go.

And that work is still ongoing full force, and most of that work is digital work where people are submitting the bids and phone calls are being had, and that's still going ahead, irrespective of the lockdown. So a lot of these long lead items are not in fact slowing down. It's just if EIA permit is expected to be granted next month and they'll be showing up at the desk of the government for the next month. That might slow it down, but that was never really a long lead item.

We're just waiting to see how or if any, it will impact it. And at the moment we're not updating our guidance because we don't think it will be too material.

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

OK. Yes. That's what I figured because this is so far in the future and even to stay locked down for 90 days, I just don't see how that will change a 2023 time line.

Nolan Watson -- Founder and Chief Executive Officer

Yes. And a lot of those were [Inaudible] project is at the stage right now is at the desktop level and so people are still pushing that work forward at the same pace even though they happen to be in their homes.

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

Got it. The second question, I'm not sure how much of this you're willing to say. I mean, you obviously renewed your NCIB, and I think that's the right move, especially when I saw the $5.20 average price that you paid over the past few years and the presentation that you had. You actually used the program reasonably aggressively in Q1.

Have you done anything in Q2 so far? I mean, we're a third way through the quarter. I don't know if you're willing and able to comment on that.

Nolan Watson -- Founder and Chief Executive Officer

In Q2, we haven't. Most of Q2 so far, we were in blackout, because of preparing financial statements, so we weren't allowed to legally anyway. So --

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

Fair enough. I will get back in queue. Thank you.

Nolan Watson -- Founder and Chief Executive Officer

Thank you.

Operator

And our next question comes from Hilary Chak with Canaccord Genuity.

Hilary Chak -- Canaccord Genuity -- Analyst

Hi. Thanks for taking my question. So I actually just had a question on Hounde gold. I see that you've been increasing the size of the investment.

And I was wondering if you're able to speak about the rationale behind that.

Nolan Watson -- Founder and Chief Executive Officer

Yes. It's a question that we get every now and then and answered it on some of our past calls. The gist is that we own a very significant percentage of their company already. And based on the liquidity, selling that at a reasonable price is not very feasible at the moment, and we think that there's actually a tremendous amount of value there.

We think the company is worth a lot more than what it's trading at. We have not been shy to say that publicly in the past. And so we think that picking away shares that are well below value gives us the benefit of building a stronger position if someone wants to come along and buy them, making sure we get fair value for shares. Or if nobody buys them then we own effectively 25% of the company on a partially diluted basis.

We'll get 25% of their dividends from their equity interest and we'll see how it goes. Either way, whatever the outcome is we're happy and we think it's intelligent capital allocation given how much capital we have available to us and the value we see there.

Hilary Chak -- Canaccord Genuity -- Analyst

OK. And one last question on guidance. You've increased the bottom end of the guidance and based on Q1 that implies an annual run rate about 68,000 ounces, which is above the high end of guidance. I know you said that Karma is expected to decrease in the coming quarters, but are you expecting any other assets to decline, or is this just like a conservative estimate?

Nolan Watson -- Founder and Chief Executive Officer

I would say we try to be conservative in our estimates, sometimes it's tough to tell. We -- I wouldn't say that there is any imminent declines that we're expecting for many of our other assets then Karma. And, Erfan, I don't know if you have anything to comment on the conservativeness of our guidance.

Erfan Kazemi -- Chief Financial Officer

Yes. I think our guidance is the fair potentially on the conservative side, but we have more than just one commodity in our mix and that impacts our guidance figures. So as the year goes on, we'll provide more clarity on that.

Hilary Chak -- Canaccord Genuity -- Analyst

OK. Awesome. Thanks. That's it for me.

Operator

And our next question comes from Derick Ma with TD Securities.

Derick Ma -- TD Securities -- Analyst

Thank you. My question relates to Chapada. Lundin boasts of a pretty positive exploration results of their Q1 earnings, and an 80% increase in it's land division. Looking at the maps I believe most of the property is still covered by the stream area, but can you confirm that the Southwest near-mine exploration areas are covered, and more specifically, I guess the Formiga area that they're looking at, north of the pit?

Nolan Watson -- Founder and Chief Executive Officer

Yes. So under Chapada, the way we structured that agreement is that all of the land that they had at the time fell under our agreements. So if the discovery is on the land that was owned at the time, it comes under our agreement. In addition to that, we have the concept of expanding area of interest for another three kilometers outside that border.

So if they picked up new land that they did not previously have within three kilometers of the old land that they had back in 2015, that falls under our deal as well. So we have, I think, if memory serves me correct, almost 700 square kilometers of land covered by our stream.

Derick Ma -- TD Securities -- Analyst

I guess one more question on Chapada then. Should we expect some decrease in the dues paid to stand some in Q2, the shutdown or are we through that now?

Nolan Watson -- Founder and Chief Executive Officer

I'm not expecting material decrease in gold ounces in Q2. Having said that, there is a cap in annual production that we get in copper and there is a true up mechanism. So for example if they hit the cap in one quarter and then under another quarter, then we get through that at the end of the year. So I do think we're going to get our maximum number of pounds of copper up through the year whether or not they get it lowered in Q2 or later in the year.

Derick Ma -- TD Securities -- Analyst

Got it. Thank you very much.

Operator

And our next question comes from John Tumazos with John Tumazos Very In.

John Tumazos -- Very Independent Research -- Analyst

Good morning. It's John Tumazos. In earlier presentations, there was a focus on the pending feasibility study update for Hot Moden. Has that been delayed with COVID and other complications in the world? Or is that still due in a quarter or so? And what are some of the changes possibly in CAPEX ore grades, recovery rates, anything that you can comment?

Nolan Watson -- Founder and Chief Executive Officer

Yes. Thanks for that. So in terms of the feasibility study, it is still tracking well, it's still tracking past, most of the work is desktop work. So we don't think the lockdown in Turkey, that was just announced, should have a material impact on time line, maybe it will have a small impact on time line.

So it's definitely still going to be in the first half of this year. In fact, late last night, I actually got some of the first sections of the [Inaudible] for it's actually been drafted as sent to me in my inbox, and I better start reviewing that. But we're expecting a fairly similar number of total payable ounces as previous studies, when you take into account grade with the feasibility study in a larger recovery, some of them are run down. But net-net, I'm expecting the total number of payable ounces to be pretty similar and it's an incredibly robust mine.

And based on the knowledge that I have so far, the feasibility study will show that.

John Tumazos -- Very Independent Research -- Analyst

Thank you very much.

Nolan Watson -- Founder and Chief Executive Officer

Thank you.

Operator

And our next question comes from Brian MacArthur with Raymond James.

Brian MacArthur -- Raymond James -- Analyst

Good morning. Just following up on John's question, since you were kind enough to comment on the ounces at Hot Maden. One of the things I was just curious about, the original study was done with the Turkish Lira rate of TUR 3.8. I guess it's eight or something now.

Can you just remind me, or if there's any changes, any guidance you can give on how that's going to impact your capital, i.e., your outlay and just ongoing operating costs? How much of it was sensitive to the Turkish Lira because if your ounce and everything else the same, you're getting a better Lira, it could have turned out to be a better-looking project. I don't know if you can comment on that.

Nolan Watson -- Founder and Chief Executive Officer

Yes. What -- I won't comment on too much specifically. But what we're seeing generally is, there is some cost inflation in Lira, but the value of the Lira is going down. And so our expected capital in U.S.

dollars is pretty similar.

Brian MacArthur -- Raymond James -- Analyst

Thank you. That's very helpful.

Operator

And there are no further questions at this time. I'll turn the conference back over to Mr. Nolan Watson.

Nolan Watson -- Founder and Chief Executive Officer

Great. Well, thank you, Talita, and thank you, everyone, for phoning in today's call. Apologize for the little hiccup, but myself held in there. And I hope everyone has a good day.

And like always, if you have any questions, feel free to give us a shout here at the office. Thank you.

Operator

[Operator signoff]

Duration: 34 minutes

Call participants:

Nolan Watson -- Founder and Chief Executive Officer

Erfan Kazemi -- Chief Financial Officer

Dave Awram -- Co-Founder

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

Hilary Chak -- Canaccord Genuity -- Analyst

Derick Ma -- TD Securities -- Analyst

John Tumazos -- Very Independent Research -- Analyst

Brian MacArthur -- Raymond James -- Analyst

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