Sandstorm Gold (SAND) Q3 2021 Earnings Call Transcript

Sandstorm Gold (SAND 0.19%)
Q3 2021 Earnings Call
Nov 04, 2021, 11:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Sandstorm Gold Royalties conference call. [Operator instructions] 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. [Operator instructions] I would like to remind everybody that this call is being recorded today November 4, 2021, and I would now like to turn the conference over to Mr. Nolan Watson. Please go ahead, sir.

Nolan Watson -- President and Chief Executive Officer

Thank you, Michelle. Good morning, everyone, and thank you for calling into this third quarter earnings call for 2021. This morning I'm going to provide an update on the company, including our official announcement about becoming a dividend paying company, as well as answer some common questions that we've been getting from investors. And then, Erfan, our CFO, is going to walk us through the third quarter results.

And then Dave Awram is going to provide a brief update on a few of the assets underlying our streams and royalties. After that, we'll turn it over to the operator for a question-and-answer period. And if anyone has a question that does not need to be part of the live Q&A, you can ask those through the web portal and we'll be sure that each question we get there will get a direct response from us after the call. At this time, we'll be going through a prepared PowerPoint presentation on the web portal.

If you're able to, please turn your attention there now. First thing I would like to update everyone on is -- this is usually the first question I get from investors during meetings, is the timing of the Hod Maden EIA and the status of the project. My understanding that the project has now successfully completed every single stage of EIA process with flying colors and is simply awaiting a signature to be granted. As many of us, who have been in the mining industry for a long time well know, sometimes this last step takes a week and sometimes it takes a few months depending on how busy the government individuals are.

Although we're disappointed with the delays and as a Sandstorm shareholder myself, I'd much prefer to have that signature in hand, I'm happy that the project continues to move forward in many other ways, including other minor permits and government approvals. They keep rolling in and the project continues to take steps forward even during this time. In the meantime, Sandstorm continues to not only be realizing strong cash flow from a streaming and royalty portfolio but we are finally at the long-awaited point where our board has officially approved for Sandstorm to become a dividend paying company. This has been a long time coming but I'm particularly excited to be able to share these details with you.

What we have decided to do is initiate the quarterly dividend each and every quarter going forward. The first of these dividend payments will be paid to investors during Q1 of next year. The exact details of the record date as well as the payment date will be determined soon and we'll send out a separate press release informing investors of those specific details. The dividend has been targeted.

Initially and approximately a 1% yield per annum, which we feel walks the balance of us wanting to return some capital to shareholders and also sends the clear message that we are still a growth company. The bulk of our cash flow will still be used to grow the company aggressively. This 1% yield works out to approximately CAD 0.2 per share per quarter with Canadian shareholders receiving dividend in Canadian dollars and all other shareholders receiving dividends in an equivalent value but denominated in U.S. dollars.

Meaning non-Canadian shareholders would be paid in U.S. dollars but the amount will work out to be a bit less than USD 0.2 per share. Our plan with this dividend is to reevaluate the payout ratio each and every year with the belief that if we're able to execute our business model well over time, we'll be able to demonstrate a long track record of annual dividend increases while maintaining ourselves as a growth company. I'm particularly excited about this milestone for Sandstorm and I hope most of our shareholders are too.

The next thing I would like to update shareholders on is another form of capital allocation that has continued to be relevant to Sandstorm, and that is share buybacks. As many of you know, we have a long track record of stepping into the market and purchasing our shares whenever we feel we're trading at an unjustifiably low valuation. And as share price has come under pressure in recent months, we once again started repurchasing shares under our normal course issuer bid. In fact, we've now purchased approximately $4.4 million shares of Sandstorm during 2021.

The vast majority of which have been purchased very recently in September and October. Over the past four years now, we have repurchased 19.9 million shares, which is over 10% of our company. We believe that the delay in the Hod Maden EIA permit has provided us an opportunity to repurchase some shares at very cheap prices, and we've been very happy to do that over the past couple of months. And if our share price continues to stay in this range, we'll likely continue to pick away in market.

These shares we have repurchased over the past few years have been done at an average price of USD 5.40 per share, which we think is quite the bargain. The last common question I'll address this morning is what is our current deal pipeline look like and do we think we'll be able to continue to grow in this competitive environment. So I'll draw your attention to this next, Slide 6. So far this year, we have completed three acquisitions for a total of USD 153 million.

From what I see in our pipeline, I think there is the possibility of another medium-sized deal in precious metals in the next two to three months. Depending on timing and if it closes by the year end, 2021 could be a record year of acquisitions for Sandstorm since inception. We have plans to continue to aggressively grow the company. And based on the potential deals we see in front of us, we're confident that we can do that.

So far in 2021, we have allocated a total of USD 180 million with the bulk of that capital being for new acquisitions to grow the company, and with USD 27 million of that being allocated to share buybacks. Sandstorm's portfolio is generating enough cash flow so we can continue to grow the company and shrink the share-load and initiate a dividend. I know that there's been a recent sell-off in gold equities around the world and Sandstorm has been particularly hard hit but we're pleased to be in the enviable position of growing the company and shrinking the shares-load and initiating a dividend. It isn't hyperbole to say that the fundamentals of Sandstorm's business are stronger than they have ever been, and we'll continue to build our business for shareholders.

And with that, I'll hand it over to Erfan to discuss the quarterly result.

Erfan Kazemi -- Chief Financial Officer

Thanks, Nolan. And thank you to everyone, who tune in this morning, and we'll take a few moments to review the highlights from third quarter financials. On this first slide, we see the trend in revenue attributable gold production and average realized gold price over the last four quarters. During the third quarter, Sandstorm generated $27.6 million in sales and royalty revenue from its cash flowing assets.

This represents an increase of approximately 19% compared to the third quarter in 2020. The company sold approximately 15,500 attributable gold equivalent ounces at an average realized gold price of $17.79. A slight reduction in ounces sold this quarter compared to Q2 was previously anticipated due to a few changes in production schedules in certain assets, which I will discuss in a minute. Regardless Sandstorm is on track for another record year of production with nearly 51,000 gold equivalent ounces sold for the nine-month period ended September 30, 2021.

In fact, we're increasing the bottom end of our guidance and believe we'll hit 64,000 to 69,000 gold equivalent ounces in 2021. The next slide compares the third quarter of 2021 with the results of the third quarter in 2020. As I've mentioned, Sandstorm realized a 19% increase in revenue and sold 29% more gold equivalent ounces when compared to third quarter in 2020. The increases were largely due to revenue attributable to the recently acquired Vale royalty package and an increase in revenue from various assets, such as the Fruta del Norte mine.

In addition, the average price of copper and silver have increased by 49% and 36%, respectively, when compared to the same period in 2020, which contributed to the increase in gold equivalent ounces sold at our copper and silver royalty and streaming assets. Moving down the list. Cash costs per attributable ounce was $238 for the third quarter resulting in cash operating margin of $1,541 per ounce. Cash flows from operating activities, excluding changes to non-cash working capital, increased by 16% compared to third quarter in 2020.

And net income was up slightly at $6.6 million. Taking a look at the production breakdown by asset on the next slide, you'll note that the amount of silver stream was a top contributor for the quarter. Cerro Moro, the underlying asset of the Yamana  silver stream contributed over 2,300 gold equivalent ounces in Q3. Despite leading the portfolio in production, silver deliveries were down slightly.

Under the stream agreement, there is a lag of one quarter for silver during deliveries from the Cerro Moro mine. For example, the attributable ounces in the third quarter is based on the mine's production in Q2. Cerro Moro's second quarter production was down slightly compared to the previous periods, partially due to site improvements that were originally slated for the second half of the year. This decrease in production was partially offset by the increase in silver price that I mentioned previously.

It is worth noting that there's an annual cap of 1.2 million ounces of silver under the stream agreement, which works out to 300,000 ounces per quarter. If Sandstorm hits this cap in one quarter but not all quarters, there is a true-up delivery that occurs at the end of the year, which will realize in our first quarter production figures. The Chapada copper stream was another strong contributor to third quarter production. Compared to the third quarter in 2020, Chapada contributed over 80% more gold equivalent ounces.

This was largely due to the increase in average selling price of copper over the last year. As I mentioned earlier, the newly acquired Vale royalty package, which is a large contributor to the company's production results. The long-life assets underlying this royalty package were a welcome addition to Sandstorm's portfolio in June of this year. The other part of the deal announced in June was [Inaudible] gold stream.

This transaction is expected to close in the fourth quarter and we expect the fixed gold deliveries to begin soon thereafter. The next slide provides the breakdown of the third quarter production by region the metal type. Nearly 40% of gold accrued ounces were attributable to North America and over half coming from South America, largely driven by Cerro Moro, Chapada, and the Vale royalty package. Looking at metal type, two-thirds of production came from precious metals, over half of which was gold.

The 30% of production from base metals is largely driven by the company's copper assets and the Vale royalty package. Sandstorm remains focused on precious metals and we continue to anticipate approximately 80% of revenue coming from gold and silver by 2024. Finally, I want to highlight the company's increased revolving credit facility that was announced in October. Sandstorm amended its revolving credit facility agreement allowing the company to borrow up to USD 350 million.

With this new loan, Sandstorm became the first royalty company to establish an ESG-linked credit facility and one of the first mining companies to have an internally customized KPI-based facility. This loan incorporates sustainability-linked incentive pricing terms that allow us to reduce the borrowing costs if the company's sustainability performance targets are met. These performance targets include increasing the percentage of our investments that align with sustainability and climate-related reporting standards, as well as maintaining or improving certain external ESG ratings and diverse representation among senior management and board members. Since the beginning of Sandstorm, management had been committed to taking actual steps to improve ESG factors in our industry.

And that's why we continue to be highly rated across so many of the different metrics that rate the companies in the industry, and I'm particularly pleased to be part of innovative solutions like this that benefit shareholders while also improving corporate responsibility. With that, I'll pass the mike over to Dave for some asset update.

Dave Awram -- Senior Vice President and Co-Founder

Thanks, Erfan. On this quarter, we'll focus on developments on three of our larger projects that have all had great exploration success, a trend we expect to continue for all of them. In September, Equinox announced the results of a pre-feasibility study on a future expansion, Aurizona. The project is now expected to produce an average of 137,000 ounces of gold per year over 11 years with the extra life coming from an underground mine under the curve Piaba pit and two satellite open pits.

What's really exciting about this new plan is that it leaves the door open for additional satellite pits and, of course, additional underground material both Tatajuba and Genipapo were discovered years ago. But other more recently discovered zones like [Inaudible], [Inaudible], [Inaudible], and Piaba north trend are still yet to be folded into a potential mine plan, but all remain legitimate candidates for further development. Even beyond that area are the greenfields areas to the south, which hosts the same perspective rocks. Underground, there yet remains opportunities to explore at depth.

Equinox has done a great job of revealing the potential of this asset, and with any luck, we may see the mine life extend much longer than the current 11 years. Moving on to lending gold in Fruta del Norte, we see some great operational results from the mine with now at least five quarters in a row of beating expectations on production. Lundin has been talking about this year's mill expansion from 3,500 tonnes to 4,200 tonnes per day operation for almost a year. And as of today, they are mining at a rate of 4,200 tonnes per day.

The stockpiling of the ore speaks to their confidence of completing the expansion and processing at the higher rates soon. Lundin also continues to focus on resource expansion. A particular interest is the current inferred resource, which is being drilled from the underground sites. Hopefully, this will add meaningful life to the mine.

In addition, they are well into their long-awaited regional exploration program on Barbasco and Puente-Princesa within the Suarez pull-apart basin. This exploration is focused on finding a look-alike Fruta deposits in previously untested but prospective areas. Other regional targets will be pursued once permits are obtained. Initial assay results are expected this quarter on at least the Barbasco target, but by early next year we should know whether these are new discoveries within the basin.

For Cerro Moro, speak a little bit about how that deliveries have worked quarter to quarter and then a little on some new plans for expanded production. In Q3, high clay content caused clarification challenges. But despite this, production was 86% higher than Q2 and a further increase is expected into the fourth quarter. A new method of feed blending and a new supply of feed water have been implemented, which seemed to have increased recoveries overall will go a long way to addressing this problem.

Humana has also opened more mining faces to increase mill feed, which is another trend expected to continue. Q4 is expected to have the strongest quarter of the year and the mine should get back to normal rates compared to the beginning of the year. And as Erfan pointed out earlier, there was one quarter delay in delivery, so expect this better Q4 performance at Cerro Moro to be reflected later on for Sandstorm. As for expansions, Humana has commented on the ability to scale up to as high as 20 to 100 tonnes per day, which is double the original design, and they expect to do this at a minimal cost.

The additional tonnage may come from existing material that is currently below cut-off grade but could be -- become economic based on the increased throughput. In addition to the expanded milling scenario understudy, Cerro Moro is also contemplating a potential heap leach scenario. Recognizing that there are lower grade oxides presence allows for the opportunity to examine this potential new mining method. An initial study has begun and metallurgical is ongoing as they study this addition to the overall production at Cerro Moro.

Exploration work continues to focus on the Escondida-Zoe structural corridor with success along strike and down depth. The bulk of the samples taken this year are still out for assay. However, results received have indicated that they are seeing strong success within this corridor. On a more regional basis, they are employing more geologic mapping, geochemical sampling, and CSAMT geophysics to identify targets.

So far, [Inaudible] has found some promising targets, and I'll remind you that this is a very large area, over 2,000 kilometer square under our EIA, so we hope much more high grade material to be discovered on the property. So with that, I'll pass over the call to the operator, Michelle, for a Q&A. Please feel free to ask questions about any of our royalties and streams.

Questions & Answers:

Operator

Thank you, sir. [Operator instructions] Your first question comes from Heiko Ihle of H.C. Wainwright. Please go ahead.

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

Hey, it's Heiko. How are you? Your already answered my first question in relation to Hod Maden in your prepared remarks but I got just two more little quick ones for you there. Can you elaborate a bit on the environmental, social, and governance-linked credit facility. I've never really heard of anything like it.

And I just did some Google Search earlier today and there's only a few results, frankly, with just a few banks and firms. What exactly are the terms and benefits? I mean you mentioned various targets earlier on this call that maybe just in more detail? And also assuming you hit these targets, what does that do to the rate that you have to pay versus just having a normal facility? I guess in other words what I'm trying to say is this mostly punishment if the ESGs aren't met, or what's your upside if you actually deliver?

Nolan Watson -- President and Chief Executive Officer

Yeah, thanks so much for that question. And then yes, I agree. Not many companies, especially in North America, are familiar with ESG-linked loans. It's something that originated mainly in Europe and it's slowly made its way into the markets here and so you can see that that being the first that there's a lot of questions on it.

I'll maybe address the last point of your question about what is the impact? The impact of the facility on the ESG ratings, if we're able to hit those ratings, the impact on our pricing is about five basis points from a -- whether it's drawn or standby basis. And the extent we are very offside on those performance metrics, then you can have unfavorable pricing of the same amount of five basis points. So it's not a material impact on our cost of capital but it, I think, signals the things that we care about and the things that are important. And those specific metrics are, one, as entity that gets to deploy capital, we can encourage the people that we deploy capital to in meeting certain reporting standards from a carbon sustainability perspective.

And so there's some formulas and percentages there to get there but as you can see, as our portfolio matures and the quality and strength of our counterparties improved, you can see that oil will hopefully be hitting a lot of those metrics. The other one being standard important. They do a rating of a company based on essentially various metrics from water usage and carbon impact to governance and the social impact that the company has. And then they give you a score and that score is like AAA or AA, all the way to B.

So similar to other rating agencies. And Sandstorm, we're actually rated AA, and I don't believe there's any other mining company out there that has a higher rating than us. And so the key is maintaining that rating. And then the third component is as we started Sandstorm many years ago over the last decade, we've ensured that our workforce, senior management board is diverse and we have about 40% of our senior management board members that have that diverse mix of thoughts and opinions and makeup and that the metric under the ESG loan is improving that or maintaining that threshold.

So that's the summary of the ESG-linked loan.

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

Got it. And then just thinking out loud conceptually here. I mean you're initiating the dividend and you also have a quite meaningful share repurchase program, thinking out loud here. Do you think these shareholder returns from the dividend are going to be in addition to returns from the share repurchase program or do you think the repurchase figures that we saw in Q3 and, frankly, also in Q4 thus far are likely to shrink in the longer term as the dividend keeps growing?

Nolan Watson -- President and Chief Executive Officer

So the way we look at it is now that we're a dividend-paying company, we're going to have that dividend repayment to shareholders be a permanent thing and hopefully growing year over year over year. So when it comes to share repurchases, the way we're going to be evaluating it is weighing the capital allocation of share repurchases versus the capital allocation of acquiring new streams and royalties. It's my hope that over time as we continue to build the company that our share price will rerate and trade more in line with our peers, in which case, we will probably stop buying back shares and refocus all of that capital to aggressively growing the company. That takes time and we continue to trade these low multiples.

You'll see some of that capital being allocated to share repurchases. And the interplay of those two is going to determine how much capital gets allocated to share repurchases.

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

Makes sense. Thanks for taking my questions. I'll get back in queue.

Nolan Watson -- President and Chief Executive Officer

Thank you.

Operator

[Operator instructions] Mr. Watson, there are no further questions from the phone line, sir. I'll turn the conference back over to you.

Nolan Watson -- President and Chief Executive Officer

That's great. Thanks, Michelle, and thanks again, everybody, for calling in to today's call. And as always, we're gonna be here in the office all day. If you have any further questions, feel free to just follow us here at the office and we'll answer them.

Have a great day.

Operator

[Operator signoff]

Duration: 26 minutes

Call participants:

Nolan Watson -- President and Chief Executive Officer

Erfan Kazemi -- Chief Financial Officer

Dave Awram -- Senior Vice President and Co-Founder

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

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