Here comes another Sandstorm: Metals & Energy
Those familiar with Silver Wheaton and Sandstorm Gold know these managment teams are truly a shareholders best friend. These same investors may or may not be aware with Sandstorm's sister company which Sandstorm Resources spun off in 2010. The purpose of this is three-fold:
1) Create the only 100% gold royalty company - Which should earn Sandstorm Gold a higher multiple.
2) Create the first royalty company focused on the entire base metals and energy markets.
3) Increase deal flow via doing joint streaming deals whereby one takes gold component of the deal and the other takes the base metals component.
While the royalty model and most recently "streaming" are becoming well known within the mining industry, the same can't be said for base metals nor energy,with some exceptions such as Franco-Nevada, but never an entire royalty company. While Sandstorm Gold has and continues to remain one of my top holdings, I would be poorly served by not paying attention to the M&E company.
Other than great management and a brilliant business model, Sandstorm Metals and Energy has the added bonus of being the first "streaming" company in both these industries. I could easily see several more companies trying to mimic this model going forward, but given the aggressive growth strategies implemented by Sandstorm M&E, it should remain the largest in this new niche that is starting to develop.
Although Sandstorm M&E is earlier in its infancy relative to its brother company, its has already completed several streaming deals, focused on thermal and mettalurgical coal as well as Oil. Thus far, six coal streams, two oil streams and a overall company royalty have been acquired. Going forward Sandstorm mgmt has indicated its desire to complete the first of what will likely be many base metal streams. It also will look to acquire Uranium (royalties), Geothermal, Natural Gas, Copper, Zinc, Lead, Iron-ore, etc. the following is a brief summary of deals completed to date, valuation of its coal and oil streams and the financial capabilities to fund growth going forward.
1) Rex - Far and away Sandstorms most lucrative asset in which the NPV of all future cash flows is worth more than the current market cap (more on this later). With cash flow expected towards the end of the year, investors should see a revaluation of the company after the bottom line reflects just how great of an acquisition this truly was. Rex is a Met Coal stream in the U.S, which is expected to produce 450-500k t/y and 2p reserves of >30m tons. In other words, barring a substancial increase in annual production, current reserves dictate a LOM >60 years!! Sandstorm will receive 25% until a pre-determined amt is produced, at which time it will decrease to 16%. Cost per ongoing ton is $75 with a guaranteed payback of 5 yrs.
2) Rose Mine - Currently producing Met Coal, Sandstorm currently has a 25% streaming interest which will drop back to 16%. Annual Production is approx 150k tons with on-going cash costs of $75/t. *
3) Ikerhd - Production soon to come-online for this thermal coal stream. Like the previous coal streams, Sandstorm will initially have a 25% streaming interest, dropping back to 16%. Estimated production is 320k tons annually @ $55/t. *
4) Big Branch + BB extension - Currently producing approx 500k tons of thermal coal annually, which will increase courtesy of the extension to 800k tons annually. Sandstorm currently has an 18% streaming interest, which will fall back to 12% @ $55/t. *
5) SID - Advanced development, with completion expected in early 2012. Like Big Branch, Sandsotrm will initially have a 18% streaming interest, which falls back to 12% @$55/t. Annual Production estimated to be 500k tons annually. *
6) A 2.7% Royalty on all assets owned by Royal Coal
7) Two Creek (Jurrasic A pool for life of ops, 5 yrs B pool) - Enhanced Oil Recovery with guaranteed pay back. Sandstorm will recieve 25% of all Oil, nat gas & NGL produced foe the life of asset @ $15/bbl, $1/mcf, $8/ngl. **
8) Strathmore - 15% of all oil, nat gas and nat gas liquids produced @ $15/bbl , $1.00/mcf and $8/ngl for life of asset.**
* - Guaranteed paypack within 5 years ** - Subject to buydown right of 50% of stream (Two Creek - 12.5%) (Strathmore - 7.5%).
Valuation - Using a DCF with inputs of 10% required rate of return, 2% long term growth, $90/oil, Met Coal : $250/T , Thermal Coal : $75/T & Oil : $90/Barrel into perpetuity, translates into a valuation ranging from $1.79 - $1.93. But given the fact many of these are very long lived assets, replicating this model via european call options seems more appropriate as DCF will not grasp a 60 year asset life. On a NAV basis using 8% discount rate and no long term growth, yields nearly .90 cents per share. Using the lower option bound in option valuation, yields a value of $3.25/share.
Blended Valuation: applying 1.5x NAV and underweighting the option value equates to a fair value of $2.05/share. While I am in no way trying say this estimated fair value is gospel but rather useful in merely illustrating how cheap the company is cuurently trading for. For example, If my valuation estimates are over estimated by 20,30,40,50 cents, this would still indicate Sandstorm M&E is trading at less than 1/3 its fair value.
Going Forward: With Operating Cash flow now online and increasing in the years ahead, Sandstorm M&E is finacially positioned to fund substancial growth going forward. Given the fact they have over 20m of net cash on hand and growing OCF, it wouldn't be unrealistic to say it is likely to acquire its biggest stream to date.