CA - Sandstorm Gold: The High Cost Of Missed Opportunities

2023-05-09 14:00:49 ET

Summary

• Sandstorm Gold Ltd.'s key asset is being acquired by SSR Mining Inc.
• SSR Mining has reported that production won't begin until 2027, or more than 6 years longer than Sandstorm's original timeline.
• The project's valuation is also much lower than expected based on SSR's purchase price.
• I break down the details and what this means for Sandstorm Gold Ltd.

SSR Mining Inc. ( SSRM ) has recently declared its intentions to purchase a 40% stake in the Hod Maden project in Turkey from Lidya Mines, at a cost of $270 million. This development significantly affects Sandstorm Gold Ltd. ( SAND ), which holds a 20% gold stream and a 2% Net Smelter Return (NSR) royalty on this project. Currently, Hod Maden represents approximately 12% of Sandstorm's net asset value, marking it as the company's most valuable asset, per the latest company presentation.

This acquisition by SSR Mining, a well-established mid-tier gold and silver miner, can be seen as a favorable long-term move. SSR Mining's proven operational expertise ensures that the project is in more robust hands, for example. Moreover, SSR Mining, being a Canadian company, will ensure regular updates on Hod Maden's progress (something investors have not received to date).

Also note that the Hod Maden project continues to be a top-tier asset, as evidenced by its feasibility study results. The study, conducted in 2021, estimates that the project will yield nearly 200,000 gold equivalent ounces annually at an all-in sustaining cost of $588/oz over a 13-year mine lifespan.

However, the recent turn of events is actually bad news for Sandstorm Gold investors, as I explain below.

The Hod Maden Problem

Hod Maden has no doubt been a disaster for Sandstorm Gold, and things have only gotten worse every year. Remember, Sandstorm acquired 30% of the asset from Mariana Resources back in 2017

The key bad news here is that SSR Mining has now estimated an initial production date for Hod Maden of 2027 , or 3 years later than what Sandstorm had guided for (and a decade after its initial purchase!)

That's also 6+ years longer than the original timeframe set forth when Sandstorm bought the asset back in 2017. It stated: "Hod Maden anchor asset is expected to increase the Company's attributable gold equivalent ounces to more than 135,000 by 2022."

There's been no good explanation for the project delays. Just a year ago, the company stated : "Production from Hod Maden is currently expected in the second half of 2024."

Explaining opportunity cost

But it's more than just delays. There is something called opportunity cost that is killing Sandstorm's returns on this deal. Opportunity cost refers to the cost of foregoing another investment in favor of one you've made. This is significant given the potential returns that could have been made on its $175 million in capital in other investments during the past 6 years.

For example, if the funds could have simply been invested in physical gold, its returns could have been much higher. If you bought $175 million worth of gold in 2017 at a price of $1,200/oz, you would have bought approximately 145,833 ounces of gold. Those gold holdings would be worth ~$291 million today, a rate of return of 66.6%. Not to mention, you'd own a highly liquid asset that could be monetized at any time.

*Note: Sandstorm spun out its ownership in Hod Maden into Horizon Copper, while maintaining a gold stream and NSR royalty.

Remember, Sandstorm bought its original Hod Maden 30% interest for $175 million, which implies a project value of $583 million. What's more: Sandstorm funded the purchase with shares of its stock, at a price of US$3.87 as of the close of trading on June 30, 2017.

SSR Mining is paying a pretty good price for Hod Maden: it's buying its 40% stake for $270 million, which implies a value of $675 million on the project (100% basis).

Therefore, Sandstorm's internal rate of return on Hod Maden is just 2.47% when using these figures. Its original $175 million investment, funded with its equity at depressed stock prices, is currently valued at $202.50 million based on SSR Mining's purchase price. That's a big disappointment given all the money that has been spent on exploring and developing Hod Maden since 2017.

Also, recall that the feasibility study outlined a net present value of $1.3 billion for the project, and this deal with SSR Mining means that it's being sold at a valuation of around .50X NAV. The project's valuation is not as high as expected, normally, a good project will trade much closer to its post-tax net present value. That leads me to believe there are unresolved issues at Hod Maden that haven't been disclosed by Sandstorm or SSR Mining.

More project delays

The bigger issue, though, is the continued project delays, and what that has meant for Sandstorm's associated production guidance, which continues to fall every time it is updated. And that has led to an overall loss of confidence in its management team, in my opinion.

The latest guidance update calls for 93,000 gold equivalent ounces this year, rising to 125,000Oz over its "15-year outlook." So, instead of breaking down production expectations year by year (as it has done in the past), Sandstorm is now providing a more broad, long-term picture of its potential output.

That will not be an issue for new investors who don't know the history of the company. But for investors and analysts who have been following the company for a while now, it's certainly a disappointment.

After all, this is a company that, just last year, was guiding for 150,000ozAu production by 2025:

"Based on the Company's existing streams and royalties, attributable gold equivalent ounces for 2022 are forecast to be between 80,000 and 85,000 ounces. The Company is forecasting attributable gold equivalent production to be over 150,000 ounces in 2025."

Sandstorm: Steer Clear Of This Sector Laggard

Sandstorm Gold is designed to capitalize on the rising prices of gold and silver, and thus, is expected to thrive in a bullish precious metals market.

However, the reality has been different - the company has consistently underperformed compared to its larger counterparts due to a series of missteps. You'll see in the above chart that it's easily been the worst-performing stock out of its group of peers.

Over the last five years, its stock has risen by 27.82%, a stark contrast to the performance of Franco-Nevada Corporation ( FNV ), Royal Gold, Inc. ( RGLD ), Osisko Gold Royalties Ltd ( OR ), and the industry's leader, Wheaton Precious Metals Corp. ( WPM ).

I believe this is largely due to several big failed investments, including Hod Maden, and a few other bad moves, such as diluting investors heavily to finance the acquisition of Nomad Royalty. Not surprisingly, over the past 10 years, its share count has skyrocketed.

Other previous missteps, such as the $55 million spent on Entree Gold and the $75 million lost on the Colossus Minerals debacle, also underscore notable instances of opportunity cost for Sandstorm Gold Ltd.

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