New deal for Sandstorm

By Travis Johnson, Stock Gumshoe, November 9, 2010

Now we know why Sandstorm Resources raised so much money a few weeks ago: They had a deal cooking. They just agreed to buy 12% of the gold stream from a producing mine (The Black Fox Mine, owned by Brigus Gold) that should have years of production and reserves increases ahead. Terms are not as friendly as their earlier deals, since gold was far cheaper then, but they’re getting the gold at $500/ounce in exchange for a $56.3 million upfront payment (a payment that Brigus is apparently using to close their hedging operations, interestingly enough). Details in Sandstorm’s press release here.

So just to spitball some potential returns along the lines of the last time I looked at Sandstorm, we could assume that they’re going to produce 80,000 ounces a year for the next several years (that’s their current rate of production, roughly, though they say they’re “ramping up”). Sandstorm can buy 12% of that, so that’s 9,600 ounces. If we assume the gold price stays at $1,400 (a big assumption, perhaps), that effectively means $900 of cash coming to Sandstorm from each ounce, so that’s $8.64 million per year.

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So they paid $56.3 million for what they must hope is a baseline (assuming a steady gold price) of $8.64 million in annual income (before Sandstorm’s administrative expenses). That’s not a spectacular return, but production should grow and the life of the mine should be many, many years if they’re right about the prospects, and it’s actually probably slightly accretive to the baseline price/sales numbers I was coming up with before of about 10, along with the benefit of diversifying their income stream with gold that should begin delivery in just about two months.

Oh, and those numbers are all in Canadian dollars, though it doesn’t make much difference at the moment.

I haven’t profiled Sandstorm as an “Idea of the Month” (and that’s perhaps for the best, since the stock hasn’t done much since I’ve owned it, either, with my various purchases averaged out I’m probably roughly even), but it remains one of my larger personal holdings. I’m still happy with Sandstorm as effectively a royalty play that I think is well managed and should grow. I still intend to hold and keep this as my major “low volatility” (by comparison) exposure to junior gold miners. The stock went up slightly ...

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