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speedybure (< 20)

Realizing Exploration Upside: Sandstorm Gold & Franco-Nevada Update

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June 13, 2011 – Comments (14) | RELATED TICKERS: SAND , FNNVF.DL , SLW

 Sandstorm Gold 

Saint Elena

Silvercrest Mining in Mexico owns Saint Elena Mine, which went into production in the fourth quarter of 2010. Sandstorm will receive 20 percent of the gold production at this mine, which was initially projected to be 25,000 ounces annually. St. Elena recently released their full expansion plan in late April and a more in depth explanation just days ago. This expansion consists of 4 phases, the first of which will be completed by year end. The second phase is to further increase processing to 3,500 tpd followed by development of an underground mine at St. Elena. Finally the development of a nearby deposit will finish off the last phase.

1)       Increase throughput to 2,500 tpd - Au production increase from 25,000 to 39,000

2)       2011-2013- Further increase tonnage to 3,500 tpd and build a new processing facility. Production increase to between 55,000- 60,000/yr

3)        2012-2013 - Develop an Underground mine. Production increase unknown yet but assume 10,000-15,000 ounces annually. This brings production to between approximately 65,000- 75,000.

4)       Develop the St. Elena Norte deposit. ????

In other words when Sandstorm made this deal they were expecting attributable ounces of 5,000 ounces/yr to between 13,000- 15,000 ounes annually by 2013 - 2014. 

Black Fox
       On November 9th 2010, Sandstorm made a deal with Brigus Gold involving Black Fox Mine in Canada, which is their flagship mine. Sandstorm will get 12 percent of the gold production annually at $500 per ounce in addition to 10 percent of the black fox extension, (which includes Grey Fox/Pike River) which has shown multiple bonanza grades intercepts over the past few months. Black Fox will produce 110,000 ounces in 2011 and increase production thereafter.

      Based on recent discussions with management, a larger mill is planned in the near future, which will increase throughput by approximately 30 to 40 percent (studies still ongoing for optimization). This will increase annual production to approximately 150,000 or so, in turn increasing ounces attributable to Sandstorm from 13,400 to 18k ounces annually. At first glance the Black Fox stream acquisition appears expensive with Sandstorm paying Brigus $54 million but very reasonable when taking a closer look.

       Black fox provided immediate cash flow (which is important to a company such as Sandstorm with an aggressive growth strategy), has a current mine of life of 8 years (though will inevitably be increased substantially going forward), tremendous upside potential, notably in the extension, (Grey Fox/Pike River) which Sandstorm has a 10 percent stream interest. Due to the close proximity of the adjacent properties, construction of an additional mill unnecessary, allowing Brigus to bring additional production online in a timely manner. 

       Also, Brigus Gold will have until Jan 1, 2013 to repurchase 50 percent of the gold stream for a payment of $36.6 million. If they exercise their option, Sandstorm cash flow would decrease substantially but it will provide them capital to deploy and fund growth while maintaining 6 percent of over 155,000 and s 4.5 percent streaming interest in the extension ( approximately 9,000 attributable ounces and additional production from the extension). 

Bachelor Lake Mine

      Another great deal made about one month after their Black Fox gold purchase agreement. It will become their last producing asset barring no further acquisitions. The mine is set to come online in 2012. The Bachelor Lake mine will not only provide 12,000 ounces in attributable production to Sandstorm, but there is a high probability for exploration upside. A pre-feasibility study for an underground mine produced amazing results, with more positive news likely to come from more studies in 2011 and 2012. Although it is easy to dismiss this stream as rather immaterial given the very short initial mine life, this must be put into the proper perspective as the 43-101 was that released from their early 2005 exploration program. Bachelor Lake also shows promising drill results for a potential open pit and heap leach operation which could greatly increase attributable ounces to Sandstorm.

Aurizona & Ming Mine - Have both reported great drill results, with annual production likely to be increased going forward in addition to increases in the life of the mine. Past and recent drill results indicate a high potential to develop an underground operation at Aurizona, which I expect to be announced sometime in 2012.

Just the Black Fox & St. Elena annoucenments of increasing the mill size and increased tonnage adds approximetaly 25% additional growth to the forecast peak production levels!

 

 

 Franco-Nevada Updates

        Franco made its biggest acquisition in the company’s history via the purchase of smaller rival Gold Wheaton. Not only does this add 5 precious metal streams (3 palladium, platinum and gold & 2 gold streams), but provides immediate cash flow (expected to increase 2011 Cash Flow over 40 percent for 2011). In aggregate, these streams allow Franco to purchase approximately 115,000 to 130,000 GEO at $400 per ounces. But what makes this a great deal is the low purchase price of $830 million , which is well below the industry average of 20x current years gross royalties/share, at just over 8x 2011 royalties. 

Palmarejo

       What sets Franco-Nevada apart from rival Royal Gold thusfar is its eye for investments that bare substantial upside exploration potential.  Just over the past two years we have seen this illustrated in several notable acquisitions. Following the financial crisis in late 2008, Coeur d’Alene was in some financial distress, whereby Franco was able to purchase a 50% stream from its Palmarejo property in Mexico, which is scheduled to produce 120,000 ounces in 2011. In 2010, it was discovered Palmarejo had multiple potential mine sites on the property, notably the Guadalupe deposit, which Franco also has claim to. Although the timeline for development is not known yet, Guadalupe looks more and more as if it will be undertaken as a 90,000 to 100,000 ounces producing deposit within the next 2 to 3 years, which would mean Franco paid a mere $80 million for 100,000 to 105,000 ounce per year for the life of mines.

Tasiast

        Franco has also seen its past investments grow into future growth assets in which it acquired royalties which have grown several fold is projected annual production. Franco’s investment in Tasiast, (formerly operated by Red Back Mining before Kinross acquired them in early 2010) is a 2 percent net smelter return, which was initially projected to produce 550,000 to 600,000 annually or 11,000 to 12,000 attributable to Franco has drastically increased Proven and Probable reserves and increased production estimated to a whopping 1.5 million ounces annually (by 2015) or 30,000 attributable to Franco.

Prosperity

Finally, what most people tend to forget to due permitting issues is the acquisition of a 22 percent stream from Taseko’s Prosperity project. Taseko was met with concerns over environmental impacts and thus was denied permitting of prosperity. The latest proposal, however, addresses the main issues including that surrounding Fish Lake. So although uncertainty still remains it is likely only a matter of time before the necessary permits are granted. Prosperity, once constructed is scheduled to produce 300,000 ounces a year or 65,000 ounces attributable to Franco. Franco will pay $350 million to Taseko upfront once certain milestones are reached and an ongoing per ounce cost of $400 per ounces for over 20 years. Taseko has resubmitted the paperwork to apply for the necessary paperwork which addresses all the concerns.

 

14 Comments – Post Your Own

#1) On June 14, 2011 at 2:24 AM, traderbach (< 20) wrote:

Great information Speedybure.  Thanks for the update!

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#2) On June 14, 2011 at 9:51 AM, XMFSinchiruna (27.47) wrote:

Great stuff, speedy!

I visited the Black Fox mine last week (write-up forthcoming), and everything is progressing beautifully at Black Fox. 

Thanks for the great update. Sandstorm has delivered some nice gains already, and I/we have you to thank.

Fool on!

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#3) On June 14, 2011 at 10:03 AM, kdakota630 (29.58) wrote:

Ditto what Sinchi said for me, minus the part about going to Black Fox mine.

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#4) On June 14, 2011 at 12:02 PM, Jbay76 (< 20) wrote:

So, simply put, Sandstorm' biz model is similar to SLW with the exception of the PM of interest?

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#5) On June 14, 2011 at 12:11 PM, speedybure (< 20) wrote:

It is the exact same business model except gold instead of silver, right down the tax structure, both of which only pay income tax on Canadian Assets, which will soon be repealed so they both pay no income taxes. 

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#6) On June 14, 2011 at 1:58 PM, Jbay76 (< 20) wrote:

amazing.......they've been on my radar for quite sometime and I haven't pulled the trigger yet...yet being the key word.

Thanks for the confirmation Speedybure and the right up

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#7) On June 14, 2011 at 3:39 PM, SN3165 (< 20) wrote:

+1 good info! Looking forward to seeing some future Sandstorm acquistions (hopefully soon?) Any update on that?

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#8) On June 14, 2011 at 3:50 PM, speedybure (< 20) wrote:

I talk to management quite frequently and they are eyeing 1-2 acquisitions this year and 2-3 in 2012. In not so many words, they indicated they would only be making 1 this year but they are looking for their biggest acquisition to date. I inquired about how they will finance future deals and they plan to use OCF combined with milestone payments in order to fund larger streams. I also think they know they will be getting the 36.6m back from Brigus under the stream buyback provision.

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#9) On June 15, 2011 at 1:47 AM, awallejr (83.92) wrote:

Don't forget there is an energy fund on the same model.  I actually own both.

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#10) On June 15, 2011 at 1:32 PM, speedybure (< 20) wrote:

Its a base metals and energy streaming company as opposed to a fund. From what I;ve gathered by speaking to them is that they will likely pursue a copper stream in the near future and possibly another oil & gas. Right now they are overweight coal as a percentage of NAV so I expect them to add 1-2 streams over the next 6 months as they become cash flow positive combined with 31m of cash on hand. 

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#11) On June 18, 2011 at 10:59 AM, lalabronx (< 20) wrote:

Isnt the company richly valued with a market cap exceeding $300 M?  

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#12) On June 18, 2011 at 12:45 PM, speedybure (< 20) wrote:

It's richly valued if you use 2011 numbers or 2012 numbers to some degree. Obviously I can't post a DCF model here, But I will say using a $1,500 gold price deck, 10% discount rate & 2% long term growth yieled a valuation of $2.11. But another common way when valuing royalties is the Gross Royalties multiple/ Royalties per share. Although not yet updated in the slides managment agreed the following are realistic attributable production numbers for 2011-2014.

Note: The following numbers include St. Elena Expansion, Brigus Mill expansion and an assumption the black fox "extension"will produce 20-40k ( which will prove to be ultra conservative)

(2011: 24,000 oz) (2012: 36,000 oz) (2013: 47,000) (2014:66,000) (2015: 68,000-70,000)

Gross Royalties/Share: (2011,2012,2013,2014,2015): $.08,$0.11,$0.15,$0.19

The average royalty/shr multiple for the royalties has avg'd approx 20x +/- 3. 

Using 2011 numbers: $0.08 x 20 = $1.60/share

Using 2012 numbers: $0.11 x 20 = $2.20/share

Using 2013 numbers: $0..15 x 20 = $3.00/share

This excludes the high likelihood of an U/G mine @ Aurizona as well as other mines running below optimization numbers. Not to mention the mgmt team alone is worth a few hundred million, notably Nolan Watson (Current CEO and former CFO of Silver Wheaton).

I was early to the game when Sandstorm was more or less a cash pool solely due to the fact I trust Nolan Watson to create shareholder value and thats exactly what he;s done.  

 

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#13) On June 18, 2011 at 2:23 PM, speedybure (< 20) wrote:

Also consider Sandstorm as well as Silver Wheaton only pay tax on their Canadian assets, but a bill likely to be passed before year end will eliminate this as well as provide tax refunds to SLW and SSL. So whatever valuation model(s) you use, it wouldn't be unreasonable to multiply your value per share x 1.15-1.2

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#14) On June 18, 2011 at 11:15 PM, Bays (30.24) wrote:

Great info here.... Thanks, speedy.

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