Shares of Sandstorm Gold (NYSEMKT:SAND) slumped on Wednesday, falling more than 10% by 11:00 a.m. EDT, after it agreed to combine with Mariana Resources in a cash-and-stock deal.
The combination will create a leading midtier stream and royalty company with a diversified portfolio of 155 streams and royalties. In addition to that, the entity would hold a 30% interest in the Hot Maden gold-copper project in Turkey, though Sandstorm plans to convert that equity stake into a gold stream at a later date. Finally, the company would initially hold several exploration properties around the globe that Sandstorm plans to spin-off into a separate entity in the future.
In commenting on the transaction, Sandstorm CEO Nolan Watson said:
We believe that, by combining Mariana and Sandstorm and converting the Hot Maden JV interest into a gold stream, we can unlock the inherent value of Hot Maden and deliver the optimal outcome for shareholders without incurring further equity dilution to finance the interest in Hot Maden. We believe that Hot Maden is a unique asset with a robust cash flow profile and will be an anchor gold stream asset that has the potential to more than double Sandstorm's attributable gold equivalent production once in full operation.
However, the market isn't thrilled with the deal for several reasons. First, Sandstorm agreed to pay a hefty premium of 84% to acquire the shares of Mariana it doesn't currently own. Furthermore, the deal adds operational risk and uncertainty until the company can complete the Hot Maden conversion and the exploration spin-off.
Sandstorm is taking a significant risk by acquiring the rest of Mariana to facilitate the development of Hot Maden. While it believes this bet will pay off in the long run, there's ample uncertainty in the short term, which is something the market doesn't like. That said, for investors who are looking for a long-term gold stock with lots of upside, Sandstorm is worth a closer look, especially after today's sell-off.