Recommendation: BUY Sandstorm Gold (SNDXF) Green & Gold Fund
Industry Overview • Gold mining is capital intensive • Capital is very expensive for small exploration and production (E&P) miners, known as “junior miners” • Debt financing is unavailable due to lack of current cash flow to service the debt and high risk • Equity financing dilutes current shareholders • Exploration costs are going up • Increasingly complex exploration • Declining ore grades • Energy intensive process 2
Industry Overview • Gold prices going up – scarcity and inflation • Increasingly difficult to replace current reserves • Global government debt load increasing investor demand for inflation hedge CEO Explains business model: http: //www. youtube. com/watch? feature=player_embedded&v=VVQjuy. OE_ ag 3
Industry Overview 4
Company Profile The Company is a growth focused company that seeks to acquire gold purchase agreements (“Gold Streams”) from companies that have advanced stage development projects or operating mines. In return for making up front payments to acquire a Gold Stream, Sandstorm receives the right to purchase, at a fixed price per ounce, a percentage of a mine’s gold production for the life of the mine. Sandstorm helps other companies in the resource industry grow their businesses, while acquiring attractive assets in the process. The Company is focused on acquiring Gold Streams from mines with low production costs, significant exploration potential and strong management teams. The Company currently has seven Gold Streams. 5
Company Profile Sandstorm investment (lower counterparty risk) 6
Company Profile 7
Investment Information Fwd P/E: 14. 2 x 8
Chart: Steady Bid 9
Key Investment Points #1: Experienced Management #2: Large growth opportunity #3: Significantly undervalued 10
Management • Watson began as CFO at age 26 at Silver Wheaton • Raised over $1 B in funding for SLW operations • Left to form Sandstorm 11
Growth Opportunity 12
Growth Opportunity 13
Growth Opportunity 14
Growth Opportunity 15
Growth Opportunity 16
Significantly Undervalued 17
Significantly Undervalued 2012 2013 2014 $50 $60 $70 Multiple 14. 5 x Implied Value $725 $870 $1, 015 383 383 $1. 89 $2. 27 $2. 65 30% 57% 83% Cash Flow (YE run rate) Diluted Shares OS Value Per Share Upside % Current Price: $1. 45 Ignores upside provided by (1) new agreements, (2) return of cash to shareholders, (3) a rise in gold prices above $1, 650 18
Significantly Undervalued Why the valuation discount to peers? 1. Illiquid: Should improve as company grows 2. Small: Many institutional buyers have restrictions on market cap / share price 3. Perceived risk of early-stage growth story, customer concentration, focus on smaller mining companies What is NOT causing the valuation discount? 1. 2. 3. 4. 5. 6. 7. Poor management Unproven business model Lack of market opportunity Risky balance sheet / lack of financial liquidity Poor governance practices Low quality financial reporting / audit Inadequate investor relations 19
Significantly Undervalued Upcoming Catalysts: 1. Earnings in February 2. Additional agreement announcements • Current financial liquidity = $70 M • Enough to fund Op. CF growth of approx. $20 M 3. Potential for QE 3, return of inflation in China 20
Other Financial Information 21
Other Financial Information 22
SWOT Analysis Strengths Experienced management Insider ownership ~11% Free cash flow generation Financial resources to execute strategy No double taxation Proven business model Production volume / timing guarantees Weaknesses Exposure to gold prices Not the only competitor in the market Illiquid Focused on smaller projects with shorter mine lives Opportunities Increased output at current mines New agreements (significant catalyst) P/E Multiple expansion Gold price strength Potential to expand deal size as company matures Threats Inability to execute new agreements Gold price declines Loss of key management Equity may be issued to fund growth Counter party risk 23
Portfolio Recommendation BUY 6, 900 shares of SNDXF at a limit price of $1. 45 (cost: $10, 000, 2% of portfolio) SELL 200 shares of ASPS at a limit price of $53. 75 (proceeds: $10, 750) Rationale: With gains of >75% on our cost basis, it is prudent to take profits on half of our position before the February 16 earnings release. The risk that the company disappoints investors has risen after a 56% rally in less than 4 months. 24
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