Buying Sandstorm’s Sister

by Travis Johnson, Stock Gumshoe | December 14, 2010 11:06 am

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[1], 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[2], including the reserves numbers for the miners.

So that’s what Sandstorm Metals and Energy has done with their first private placement, in which they recently raised $60 million to pay for these two initial deals. I’m keeping this a relatively small position right now, but wanted to add a bit more than the tiny basket of shares I received from the initial spinoff … in large part because my portfolio currently has no exposure to coal and I already have a level of trust for this business model and this management team. It will be interesting to see how they grow in the coming years, and I assume that growth will come with heavy dilution even though their coal streams will bring in revenue immediately, so the share price should certainly be quite volatile.

Sandstorm Resources, incidentally, looks like it’s building quite nicely as well — their large deal with Brigus Gold got them another big gold stream, and their current streaming partners continue to produce (in most cases) or near production (for the Ming mine), and to explore to increase the size of their reserves and, therefore, increase the value of Sandstorm’s ongoing streaming rights, all of which are at relatively low ongoing payments mostly in the range of $400-550 per ounce. The shares got a bit of a pop recently when Gold Wheaton (on whose board Sandstorm CEO Nolan Watson sits) got a bid from Franco Nevada, lifting investor interest in the few remaining royalty-type companies who have producing assets. Next year should be a breakthrough year for Sandstorm in terms of ramping up cash flow, absent any collapse in the gold price, so I hope they stay independent long enough to let early investors enjoy these growth years.


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Endnotes:
  1. see the details of that here if you’re interested: http://www.steelguru.com/raw_material_news/Novadx_Ventures_enters_agreement_with_Sandstorm_Metals/177982.html
  2. full press release for both of these coal deals is here: http://pr-canada.net/index.php?option=com_content&task=view&id=301220&Itemid=59

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