Sandstorm Gold Royalties: Golden Opportunity in the Streaming Sector Set to Double Production by 2028

• Sandstorm Gold Royalties is a gold streaming and royalty company, currently the sixth largest globally, with plans to double production from 75,000 to over 150,000 royalty gold ounces in the next 5 years.
• The company made a significant $1 billion acquisition two years ago, which initially caused concern due to increased debt, but is now expected to drive future growth.
• Sandstorm's growth is primarily based on five key projects: Greenstone (Equinox), Platreef (Ivanhoe Mines), Robertson (Barrick), Hod Maden (SSR), and MARA (Glencore).
• The company expects to reduce its debt from $640 million to $350 million by the end of this year, with plans to eliminate it entirely within three years.
• Sandstorm's CEO, Nolan Watson, expresses confidence in the company's future, citing potential for the share price to double or triple.

In the ever-evolving landscape of precious metals investing, Sandstorm Gold Royalties has emerged as a compelling player in the gold streaming and royalty sector. As the sixth-largest company in its field globally, Sandstorm has positioned itself for significant growth in the coming years. This article delves into the company's recent strategic moves, future prospects, and why it might be an attractive option for investors looking to gain exposure to the gold market without the operational risks associated with traditional mining companies.

Company Overview and Recent Strategic Moves

Sandstorm Gold Royalties, founded by current President and CEO Nolan Watson, has built its reputation on a model that provides financing to mining companies in exchange for the right to purchase a percentage of their future gold production at a predetermined price. This approach allows Sandstorm to benefit from gold price upside while minimizing operational risks and costs typically associated with mining operations.

Two years ago, Sandstorm made a bold move that set the stage for its current growth trajectory. The company acquired over a billion dollars' worth of assets, taking on significant debt to finance the deal. While this initially raised concerns among investors, especially in an environment of rising interest rates, the strategy appears to be paying off.

Nolan Watson explains the rationale behind this decision:

"I'm a big believer that you need to buy things when nobody cares about growth and then when all of your shareholders are banging on the door for growth, that's when you should not be buying things because that's when they're very expensive and that's where everyone else is competing and driving down cost of capital."

This countercyclical approach has positioned Sandstorm to capitalize on assets that are now entering the construction phase, setting the stage for substantial production growth in the coming years.

Production Growth and Key Projects

Sandstorm's ambitious plan to double its production over the next five years is anchored by five key projects:

1. Greenstone (Equinox Gold): This project has already poured its first gold and is in the process of ramping up production.
2. Platreef (Ivanhoe Mines): A large gold stream on this project, which is currently under construction by one of the mining industry's most respected companies.
3. Robertson (Barrick Gold): A royalty on this project being developed by one of the world's largest gold mining companies.
4. Hod Maden (SSR Mining): Expected to enter construction towards the end of next year, this project represents a significant future revenue stream for Sandstorm.
5. MARA (Glencore): A large copper mine with a substantial gold component. Sandstorm has the option to acquire a 20% gold stream for $225 million once the project moves forward.

These five projects alone are expected to drive Sandstorm's production from approximately 75,000 royalty ounces today to over 150,000 royalty ounces within five years. Importantly, this growth projection does not include numerous other development projects in Sandstorm's portfolio, providing potential upside beyond the company's current guidance.

Interview with President & CEO Nolan Watson

Financial Outlook and Debt Management

Sandstorm's financial position is improving rapidly, with debt reduction being a key focus. The company expects to reduce its debt from $640 million to $350 million by the end of this year, with plans to eliminate it entirely within three years. This aggressive debt reduction strategy, coupled with increasing cash flows from new projects coming online, is expected to significantly enhance Sandstorm's financial flexibility.

Watson projects that once the five key projects are operational, Sandstorm could generate nearly $300 million in annual free cash flow at current gold prices. Given the company's current market capitalization of approximately $1.8 billion, this implies a potential price-to-free cash flow multiple of around 6x, which appears attractive for a streaming and royalty company with a portfolio of long-life assets.

Shareholder Returns and Capital Allocation

While Sandstorm currently offers a modest 1% dividend yield, the company's primary focus is on debt reduction and potential share buybacks once the balance sheet is strengthened. Watson emphasizes the company's commitment to maintaining or increasing the dividend, stating,

"We're always going to pay a dividend. Our policy for dividend is it's going to be that number or it's going to go up. We never ask ourselves is it going to go down, and it never will."

Once the debt is paid off, the company is likely to prioritize share buybacks over significant dividend increases, especially if management continues to believe that the stock is undervalued relative to its intrinsic value.

Management Confidence and Insider Investment

One of the most compelling aspects of the Sandstorm story is the high level of confidence displayed by management, particularly CEO Nolan Watson. In a striking vote of confidence, Watson has personally borrowed $3 million to purchase additional Sandstorm shares. Watson declared:

"I'm convinced Sandstorm shares can double or triple, and so I'm very, very long Sandstorm. I'm thinking every moment of every day how to get the share price up."

This level of personal financial commitment from the CEO is often seen as a positive signal by investors, as it aligns management's interests closely with those of shareholders.

Risks and Considerations

While Sandstorm's growth story is compelling, investors should be aware of potential risks:

1. Gold Price Sensitivity: As a gold-focused company, Sandstorm's profitability and share price are significantly influenced by gold prices.
2. Project Execution Risks: While Sandstorm is not directly responsible for mine development and operation, delays or issues at its partners' projects could impact the company's growth trajectory.
3. Geopolitical Risks: Sandstorm's portfolio includes assets in various jurisdictions, some of which may carry higher geopolitical risks.
4. Interest Rate Environment: While the company is focused on debt reduction, changes in interest rates could affect financing costs and valuations in the sector.

Conclusion

Sandstorm Gold Royalties presents an intriguing investment opportunity in the gold streaming and royalty sector. With a clear path to production growth, improving financial position, and strong management alignment, the company appears well-positioned to capitalize on its recent strategic moves. As always, investors should conduct their own due diligence and consider their risk tolerance when evaluating any investment opportunity.

The Investment Thesis for Sandstorm Gold Royalties

• Strong Growth Potential: Projected doubling of production over the next five years from existing assets.
• Improving Financial Position: Aggressive debt reduction plan with potential for significant free cash flow generation.
• High-Quality Asset Base: Portfolio includes streams and royalties on projects operated by major mining companies.
• Management Alignment: Significant insider investment, particularly from the CEO.
• Leverage to Gold Price: Upside potential in a rising gold price environment without direct operational risks.
• Potential for Shareholder Returns: Focus on debt reduction now, with potential for increased buybacks or dividends in the future.
• Diversification: Exposure to multiple projects and operators provides risk mitigation.

Macro Thematic Analysis

The investment case for Sandstorm Gold Royalties is closely tied to the broader macroeconomic environment and the outlook for gold. Several factors contribute to a potentially favorable backdrop for gold-focused investments:

1. Economic Uncertainty: Ongoing concerns about global economic growth, inflation, and geopolitical tensions often drive investors towards safe-haven assets like gold.
2. Monetary Policy: Central banks' monetary policies, including interest rate decisions and quantitative easing measures, can significantly impact gold prices. Low real interest rates historically tend to support gold prices.
3. Currency Devaluation: Concerns about the devaluation of fiat currencies, particularly in the face of large government debts and deficits, can increase the attractiveness of gold as a store of value.
4. Supply Constraints: The gold mining industry faces challenges in discovering and developing new, high-quality deposits, potentially supporting gold prices in the long term.
5. Emerging Market Demand: Growing wealth in emerging markets, particularly in countries with cultural affinities for gold like India and China, could provide sustained demand for the precious metal.
6. Portfolio Diversification: Gold's low correlation with other asset classes makes it an attractive diversification tool for institutional and retail investors alike.

In this context, Sandstorm's business model offers a compelling way to gain exposure to gold. The streaming and royalty approach provides leverage to gold prices while mitigating many of the operational and financial risks associated with mining. Sandstorm Gold's CEO Nolan Watson encapsulates the opportunity:

"Never before in my career in any job have I or in working in any public company have you been able to say if I literally just do nothing, yeah, this doubles - both in production and I expect share price to double as well."

Key Takeaways

Sandstorm Gold Royalties offers investors an opportunity to participate in the gold market through a streaming and royalty model, which typically provides lower risk exposure compared to traditional mining companies. The company's strategic acquisitions and focus on debt reduction have positioned it for significant production and cash flow growth over the next five years. With a clear path to doubling production, improving financial flexibility, and strong management alignment, Sandstorm appears well-positioned to capitalize on its recent investments. However, investors should remain mindful of the inherent risks associated with the mining industry and gold price volatility. As always, thorough due diligence and consideration of one's investment goals and risk tolerance are essential when evaluating any investment opportunity.