Buying Sandstorm’s Sister

By Travis Johnson, Stock Gumshoe, December 14, 2010

With Sandstorm Resources being among my larger personal stock holdings, I tend to keep a pretty close eye on what they’re doing. I also had a small holding in Sandstorm Metals and Energy, the company they spun out earlier this year to be a commodity “streaming” type of royalty company for base metal and energy projects … and this week, now that they’ve finally showed their hand, raised a bit of money to become a significant player, and made some initial deals, I’m willing to get on board with a small investment.

Sandstorm Metals and Energy (SND in Canada, STTYF on the pink sheets) has signed a deal to “stream” the coal production from two mines in central appalachia, they get 18% of the first six million tons produced by two mines owned by Royal Coal in Kentucky. One mine is producing now, one should start sometime in 2011. That six million tons at their target production rate is about five years of production — and about 75% of their current recoverable coal estimates and far more than their permitted production level so far), but assuming they extend their workings or increase their resource or permitting Sandstorm would get 12% of production after that first six million tons … and they have a small revenue royalty and a guaranteed minimum cash flow amount to help protect them from falling coal prices or slow production. They pay $55 per ton, which is about $15 less than the current going rate, so if prices stay the same they should theoretically net $90 million over those first five years from the coal streams, not counting the royalty (prices will NOT stay the same, I’m sure, coal has been fairly volatile, but it is in an upward trend thanks largely to Chinese consumption). The deal cost Sandstorm Metals $14 million up front, plus the ongoing $55 per ton payment, so this is going to provide some pretty hefty leverage to the price of coal.

They also made a larger deal with NovaDX, you can see the details of that here if you’re interested, at basically the same terms for pricing ($55/ton for thermal coal, though this also has a large metallurgical coal component and that’s priced higher at $75/ton), and this deal cost them $38 million up front. The full press release for both of these coal deals is here, including the reserves numbers ...

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