Sandstorm Metals and Energy Is Strengthening Returns While Minimizing Risk

Sandstorm Metals and Energy (TSX-V: SND) is a commodity streaming business based in Vancouver, British Columbia.  Founded  in 2010, Sandstorm has developed a portfolio of commodity streams and has plans to acquire more interests in the coming years.  While they are involved in the mining and resource industries, Sandstorm does not consider themselves a mining and resource company per se.  They are a company that finances such projects but one that leaves the intricacies of the actual operation to their partners in the field, while they strive to make the balance sheet as attractive as possible.

Their business model is an attractive one.  They find companies with attractive growth prospects that are in need of capital.  They negotiate an initial payment in return for a share of ongoing proceeds with no additional expectation of further contribution from Sandstone.

Leadership

Sandstorm Metals and Energy was founded by Nolan Watson and David Awram.  Nolan Watson fills the President and CEO roles.  Formerly the CFO of Silver Wheaton Corporation, a mining company listed on both the TSX and NYSE and the largest  metal streaming company in the world, Watson distinguished himself in that role by helping raise more than US $1 billion in debt and equity to fund the company’s growth strategy.  Considered a rising star in Canadian business circles, the chartered accountant by trade was named one of Canada’s Top 40 Under 40 and also merited an Early Achievement Award from the Province of British Columbia’s Institute of Chartered Accountants.  Watson is also the CEO and President of Sandstrom Gold Limited, a director of Blue Gold Mining Corporation, and Chairman of the Audit Committee of the Board of Bear Creek Mining Corporation.

Like Watson, Sandstorm Executive Vice President David Awram is a Silver Wheaton alumnus, having served as their Director of Investor Relations until 2008.  Trained as a geologist at the University of British Columbia, Awram also was the Manager of  Investor Relations with Diamond Fields International.  Awram also has roles at Sandstorm Gold where he fills the posts of Executive Vice President and Director.

Current Status

Sandstorm Copper Stream

Sandstorm provided an upfront payment of US $27 million to Donner Metals, owners of a 35% joint venture interest in the Bracemac-McLeod mine in Southwestern Quebec.  In return, Sandstorm acquired US $1.4 million in common Donner shares in June 2012 along with an agreement to purchase 24.5% of the life of the copper mine at US $0.80 per pound.  If the spot price of copper drops below US $2.75 per pound, Sandstorm is further protected, as their purchase price drops to US $0.55 per pound.  The mine has experienced a recent transfer and revitalization of operations.  When combined with the discovery of promising orebodies,  the mine life  should  be extended well beyond the current  three to four year expectancy.  Production is expected to be 3,000 tonnes per day.

Palladium Stream

In September 2012, Sandstorm paid US $ 15 million to Toronto based Colossus Minerals for the ability to purchase 35%% of the palladium produced from the Brazilian mine Serra Pelada at a fixed price of US $100 per ounce.  Located in the mineral rich Carajas region of Para State, Serra Pelada gained fame as the site of the largest gold rush ever in Latin America.  Colossus has been developing Serra Pelada since 2007 and expects to begin production by the end of 2013, meaning Sandstone should see a quick return on its investment.  Sandstorm is less protected in this deal than it is in Quebec, as Colossus has the option to buy back half of the Sandstorm investment for US $9.75 million, thereby decreasing the allowable purchase amount to 17.5%.  Should that scenario unfold Sandstone will realize a 30% profit of US $2.25 million on that half of their investment.

Natural Gas Stream

In July 2011 Sandstorm made a partial payment US $15 million (with an additional US $ 10 million payment due in May 2013) to Calgary based Thunderbird Energy to acquire 35% of all natural gas produced at the Gordon Creek Fields in Utah at US $ 1.00 per mcf, with an additional 20% of the market price received  for gas that exceeds US $4.00 per mcf.  Thunderbird has the option to buy back half the stream for US $16.25 million before the end of 2013.  If exercised, Sandstorm would again net a 30% profit of US $3.75 million on that half of their investment.  As part of the deal, Thunderbird has guaranteed Sandstone a cumulative before tax cash flow of US $24 million through 2019.  This provision virtually negates risk for Sandstone.

The Gordon Creek Fields abuts Drunkard’s Wash, Utah’s largest coal bed natural gas field.  They share a common geology.

Coal Stream

Sandstorm paid US $30 million to acquire 25% of the first 3.8 million tons of metallurgical coal and 16% of any additional amount realized from the Rosa and Rex No. 1 mines for US $65 per ton.  Located in Alabama and Tennessee respectively, the sites are owned by Vancouver  British Columbia’s Novadx Ventures Corporation.  Rex #1 in particular shows much promise as it is one of the Central Appalachian coal belt’s largest single continuous resources of metallurgical coal .  Late in 2012 Sandstorm agreed to subscribe to a maximum of CDN $ 5 million of a special warrant offering with a secured credit facility of up to CDN $ 2 million to fund ongoing working capital.  Bearing annual interest of eight percent, the credit facility automatically converts into Novadx equity at the same terms come the offering’s close.

The Future

Given Sandstone’s history of making resource deals in a variety of sectors, it is difficult to predict where they will strike next.  Industry watchers should look for operations in historically lucrative regions that are run by quality companies that only need some up front capital.  If a project meets those criteria, Sandstone Metals and Energy may become involved.