We have seen downgrades on Barrick Gold (ABX) for years. Many keep looking lower and lower, with som...
Sandstorm Gold: In a Win-Win Position?
03/09/2018 5:00 am EST
Most likely, gold needs one more retracement before a third — and successful — attempt to break $1,356 and reignite the gold bull market, asserts Michael Murphy, growth stock expert and editor of New World Investor.
Vancouver-based Sandstorm Gold (SAND) provides financing for precious metal mining companies; known as a royalty streaming company, it earns a percentage of gold product in exchange for upfront financing.
The stock sold off 10% after its latest earnings report. booked $15.4 million in revenues, had $9.9 million in operating cash flow, and reported breakeven earnings per share.
There were a number of one-time credits and charges. They repeated their forecast for 50,000 to 60,000 ounces of gold equivalent production in 2018, growing to 125,000 ounces in 2022.
I think investors over-reacted to the one-time issues like foreign exchange fluctuations and non-cash impairment charges. They also don’t like the share dilution that is necessary because SAND is in a rapid growth phase.
On the conference call management pointed out that 2017 was a record year for both total attributable gold equivalent ounces sold (over 54,000 ounces) and revenues (over $68 million). They acquired another 39 royalties, bringing the total to 174 streams and royalties.
The most recent acquisition is a 2% net smelter royalty on Endeavour’s Hounde mine in Burkina Faso. This royalty was purchased for $45 million and based on Endeavour’s guidance, Sandstorm’s 2% of revenue should be about $6 million in 2018.
Because they paid for the acquisition with a combination of $10 million in cash on hand and $35 million from the revolving debt facility, the acquisition will be materially accretive to cash flow per share because they didn’t issue any shares to do the acquisition.
As for the debt, because of the sale of Equinox securities as well as strong cash flow so far this year, they already repaid the debt down to $7.5 million and expect it to be paid to zero and start rebuilding their cash position by next quarter.
In only a couple of months, the new $150 million revolving debt facility will be totally undrawn and can be used for future acquisitions. This is the kind of management we want shepherding our investment!
CEO Nolan Watson said: “I believe it would be an act of pure magic if the central banks of the world can get themselves out of the situation without letting inflation run hot." He added, "I really do believe that for the first time in nearly a decade, we’re in a win-win situation for gold. Yes, there will be lots of volatility, including volatility in the gold price, but with a strong balance sheet and low fixed operating costs, we’re in a position to profit from that volatility instead of being afraid of it.”
They expect to start paying dividends in 2019. Sandstorm Gold is one of the very best ways to get leveraged exposure to precious metals. I urge you to take advantage of the post-earnings weakness to build a position. The primary risk is the that price of precious metals falls due to US dollar strength. Meanwhile, SAND is a Buy under $10 for a $25 target.
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