SAND - Why Sandstorm Gold's Growth Story Doesn't Add Up

Summary

• Sandstorm Gold Ltd.'s growth may be overshadowed by share dilution and higher jurisdiction risk.
• Despite the company's positive Q4 2022 earnings report and estimated growth, key development projects face uncertainties.
• I believe Sandstorm's track record of failing to deliver growth and its reliance on shares to finance acquisitions raise questions about its ability to generate value for shareholders.

Sandstorm Gold Ltd. ( SAND ) has reported its Q4 2022 and full-year 2022 financial results. Its latest earnings report shows promising results with record production and increasing cash flows.

However, while the company forecasts substantial growth in the coming years, with several development projects expected to come online, some of these projects have faced numerous delays. And I believe the potential risks associated with mining jurisdictions where its assets are located are too great to ignore.

Here’s a complete breakdown of Sandstorm’s latest earnings, and key risks to consider.

Sandstorm Gold’s Earnings Analysis

Key highlights

• Sandstorm produced 82,376 ounces of gold in 2022, a big increase from the 67,548 ounces produced in 2021.

• Its low-cost streaming and royalty business model led to average cash costs per ounce of just $284, leading to record operating margins of $1,511 per ounce.

• It reported record revenues ($148.7 million), operating cash flow ($109.8 million), and net income ($78.5 million).

• Q4 2022 was a strong quarter in particular, with an increase in attributable gold equivalent ounces for Q4 2022 at 21,753 ounces compared to 16,586 ounces in Q4 2021. Operating cash flow (excluding changes in non-cash working capital) was $29.9 million compared to $22.1 million in the same period last year.

• In August, the company modified its revolving credit agreement, which now permits the company to borrow a maximum of $625 million. As of Feb 21, the company has $486 million outstanding under the credit facility.

• The company is currently producing more than $100 million in operating cash flow annually (at spot metals prices) and expects its debt to be repaid in full by 2027 (see slide 5 of its quarterly results presentation ).

Big growth expected

Sandstorm Gold Ltd. has projected that their attributable gold equivalent ounces for 2023 will be between 85,000 and 100,000 ounces, based on their existing royalties. That represents solid growth over 2022 numbers.

Things get much more interesting looking further into the future. The company is forecasting that its attributable gold equivalent production will be around 140,000 ounces in 2025. That growth is driven by several of its key development projects coming online before then, including Coringa, Greenstone, Platreef, Blackwater, and Hod Maden.

Additionally, Sandstorm has interesting growth potential after 2025, namely from the Oyu Tolgoi streams ( Hugo North Extension ). This asset is a copper-gold porphyry deposit in southern Mongolia. Previously, Sandstorm Gold Ltd. acquired gold, silver, and copper streams for the Hugo North Extension from Entrée Resources Ltd, which has a 20% joint venture interest with Oyu Tolgoi LLC.

While production isn’t expected until 2028, it could end up being one of Sandstorm’s top assets given the massive size of Oyu Tolgoi (probable reserves include 712,466 ounces of gold, 16.7 million ounces of silver, and 1.4 billion pounds of copper).

Sandstorm’s cash flow potential

Based on its current assets and using conservative metals prices ($1,750/oz gold, $22/oz silver, $3.75/lb copper), Sandstorm is estimating cash flows of close to $200 million per year by 2025. That’s excellent growth from the $122 million reported in 2022, and, again, it assumes pretty conservative metals prices.

Its projections also stop at 2026, and it will be really interesting to see how much more cash flow its long-term development and exploration assets add to the profile - namely, the Hugo North Extension, and Robertson Complex assets.

Now, for the not-so-positive.

The Impact of Share Dilution and Stalled Projects

It's important for investors to note that Sandstorm Gold has raised its share count significantly to achieve its growth (and future potential growth).

In 2016, the company had 125 million shares, which rose to 190 million in 2019, and it now has nearly 250 million shares. Acquisitions like the Hod Maden deal and the more recent Nomad Royalty takeover have added to its share count, plus a $92 million equity financing .

While Sandstorm is growing as a company with higher revenue, cash flows, and earnings, it has mostly utilized shares to fund the acquisition of key development assets. And I believe it hasn't generated more value per share with that money. You’ll see above that its share price is essentially flat over the past 5-6 years.

No big updates on Hod Maden or Turkey

I expected to receive more information about Hod Maden, an asset that Sandstorm acquired in 2017 as part of a takeover of Mariana Resources.

As a reminder, in its initial 2017 press release Sandstorm explained that Hod Maden is an:

“anchor asset which is expected to increase the company’s attributable gold equivalent ounces to more than 135,000 by 2022, increasing operating cash flow to more than US$100 million (based on a US$1,250 per ounce gold price).”

However, the project’s development clearly hasn't gone according to plan - it's now been almost six years since the acquisition, with Hod Maden still at least two years away from production!

Unfortunately, Sandstorm's update on the project was minimal, indicating that the project has moved into the next stage of development, which includes securing project debt financing and initiating early works construction.

I was hoping for a clearer timeframe for the next steps in getting the mine into production and perhaps an update on Turkey’s horrible earthquake disaster and if that’s had any impact on the project.

I'll check back to see if Sandstorm comments on Hod Maden in its earnings conference call.

Sandstorm's jurisdiction risk: Higher than ever

If you’re thinking of investing in Sandstorm Gold Ltd., it's important to understand the potential risks associated with the mining jurisdictions where the company's assets are located.

Currently, over 30% of Sandstorm's net asset value is situated in countries that are considered higher risk, such as Turkey, Mongolia, and South Africa.

The Fraser Institute's Annual Survey of Mining Companies provides a ranking of 86 jurisdictions based on factors including environmental regulations, legal and tax systems, infrastructure, political stability, and labor regulations.

According to the latest survey , four out of Sandstorm's top five jurisdictions fall in the bottom half of the rankings, with only Peru being considered slightly favorable.

Mongolia and South Africa are particularly unfavorable, meaning that there is a risk that these countries may either: Change their mining regulations, increase taxes and royalties on the project’s operators, nationalize mines or expropriate assets. Any of these events would likely negatively impact Sandstorm's production, cash flow, and earnings.

Unfortunately, Sandstorm’s recent deal to acquire Nomad Royalties didn’t help reduce its jurisdiction risk with the addition of assets located in South Africa. Compared to its other royalty and streaming peers, Sandstorm has very few producing assets in tier-1 jurisdictions like Canada, the U.S., and Australia.

Sandstorm Gold: The Bottom Line

Sandstorm Gold's latest earnings report showed positive results, with a record production of 82,376 ounces of gold in 2022, a considerable increase from the 67,548 ounces produced in 2021. And the company’s business model is working, with average cash costs per ounce of $284, leading to record operating margins of $1,511 per ounce.

Looking to the future, the company is forecasting an increase in attributable gold equivalent production of approximately 140,000 ounces in 2025 and close to $200 million in operating cash flow, which represents considerable growth from 2022 levels.

However, that growth in production and cash flow is far from a sure thing - especially since it requires multiple development projects to reach production by then, including the oft-delayed Hod Maden mine.

Sandstorm Gold Ltd.'s recent presentation notes that its estimated price-to-net asset value ratio is 24% lower than Osisko Gold Royalties ( OR ), which makes it look undervalued compared to its peers. However, Sandstorm's higher jurisdiction risk is much higher, and its track record of failing to deliver growth (See: Hod Maden, Oyu Tolgoi) should be considered. So, I believe Sandstorm Gold Ltd. deserves to trade at a lower multiple.

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