Franco Nevada (FNV) is the world’s largest gold streaming and royalty company. The diversification and exceptional quality asset base of FNV make it as close to bulletproof as you can get in this sector. When you have 1-2% NSR royalties on a plethora of top-shelf assets, the risk becomes extremely low, and the optionality is off the charts. It’s why FNV has consistently outperformed almost all other gold stocks over the last decade.

Sandstorm Gold (NYSE:SAND) is following this blueprint but is still in the early stages and hasn’t reached critical mass.

However, SAND has just taken a big step to getting closer to FNV status, as they recently announced two transactions for a total of US$1.1 billion. Actually, the price is about $920 million, and I will explain why in a bit.

$590 Million For Nomad Royalty

The first transaction is the all-stock acquisition of Nomad Royalty (NSR) for US$590 million.

There have been several bullish articles on Nomad lately. If you look at the company’s growth profile and then consider the market cap was under $500 million when the deal was announced, NSR seemed like a no-brainer. But what many were missing was that the Mercedes gold and silver streams account for 35% of the current production, and those streams were capped and coming up on the delivery obligation threshold. Only a 30% silver stream would be left on Mercedes, even though some incorrectly assumed that the fixed quarterly gold deliveries and 100% silver stream would continue for many years. Also, Greenstone is a key growth asset, but there are still some question marks on the mine. Centerra Gold (CGAU) passed on Greenstone and disagreed with the results of a bullish study done on the project by Premier Gold (the former owner). Centerra has a strong technical team; maybe they were right, maybe they were wrong, but I’m hesitant on Greenstone until we see some production numbers. Either way, I felt Nomad overpaid for the Greenstone stream last year. Platreef seems that it could be a high-quality stream, but it doesn’t become a major contributor until 2029-2030. Finally, the Blyvoor stream is a significant component of Nomad’s current production profile, but that mine has been struggling, and I felt the company’s assumptions on what Blyvoor could become were too optimistic.

I’m not suggesting that Nomad has a poor-quality portfolio. There are some solid streams/royalties (e.g., Caserones, Robertson, Platreef, Bonikro, and possibly Greenstone). But pre-acquisition news, I don’t think there was incredible value in NSR like others (incorrectly) assumed.

Considering SAND paid a small premium and that Nomad agreed to be sold at that small premium, I believe it is proof that the growth and valuation assumptions for NSR were too optimistic.

Sandstorm confirmed that in the press release:

Sandstorm expects Nomad’s production to grow to approximately 40,000 GEO by 2025, which is below current analyst expectations. Sandstorm has included assets that are currently in production, construction (Greenstone and Platreef) or at the advanced stage of development (Robertson) in the 2025 production figure. Based on the Company’s review of current operating plans at Blyvoor, Sandstorm is budgeting for long-term production rates of 60,000–80,000 ounces of gold per annum, based on conventional mining methods.

40,000 ounces by 2025 is well below what Nomad was forecasting, and that’s mostly because of Blyvoor. I believe the 23k-27k GEOS assumption from 2022-2030 (represented by the bar in gray) in the chart above included significant contributions from Blyvoor based on 242,000 ounces of annual production from the mine. As the below graph shows, Nomad expected ~20,000 gold ounces per year from this stream. Which is why production stayed constant from the currently producing assets over the next few years through 2030, even though the Mercedes stream dropped off. But now, at 60,000-80,000 ounces for Blyvoor (and there could still be some risk with that assumption as well), this gold stream will only be 6,000-8,000 ounces per year. In other words, there would likely be a sharp drop-off in Nomad’s production in 2023-2024 until growth picked back up again in 2025.

I don’t think SAND knocked it out of the park with this acquisition, but I was glad to see them use much more conservative production estimates and valuation for Nomad’s portfolio.

I would have much-preferred for Sandstorm to purchase Maverix Metals (MMX), but maybe that’s still a possibility further down the road.

$525 Million For BaseCore Metals

The second transaction was for BaseCore Metals for US$425 million in cash and US$100 million in Sandstorm shares. BaseCore is owned by Glencore and the Ontario Teachers’ Pension Plan Board and holds a portfolio of 10 royalty and stream assets. Three are currently producing assets, including a 1.66% NPI on the Antamina copper mine in Peru (the third largest copper mine in the world on a copper equivalent basis), a 1.0% stream on production from CEZinc, and a 0.5% NPI on the Highland Valley copper mine.

The Antamina NPI payment in 2021 was $40 million, so it shows the value of the asset. However, Sandstorm isn’t retaining the entire NPI, as they are selling it to Horizon Copper in exchange for a 1.66% silver stream on Antamina, a 0.55% NPI (or 1/3 of the Antamina NPI), $50 million in cash, a US$105 million debenture, and US$26 million in Horizon shares. In other words, of the $525 million SAND is spending on this transaction, they will recoup $181 million in cash, shares, and debt from Horizon.

Sandstorm is doing this for two reasons:

1. They want to focus on precious metals, and Antamina was mostly a copper royalty. This way, they turn part of it into a silver stream and still retain 0.55% of the Antamina NPI, net of the silver stream.
2. They are trying to build up Horizon Copper and make it stronger and more valuable, which this NPI accomplishes.

Franco Nevada owns a 22% silver stream on Antamina, and last year this stream generated $94.1 million of revenue for the company (as Antamina is one of the top 10 largest silver mines in the world). FNV expects the stream to produce ~3 million ounces of silver per year over the long-term, so that gives us a good idea of what Sandstorm can expect. I would estimate $6-$7 million per year from this silver stream for SAND at $25 per ounce silver, or ~3,500 gold equivalent ounces (which is a nice size stream). And that doesn’t include the additional GEOs from the 0.55% NPI.

Sandstorm expects this portfolio from Basecore to generate $25 million of royalty revenue next year, increasing to $40 million over the coming years.

The quality of the BaseCore asset portfolio is exceptional, but they are primarily copper/zinc royalties, and I wonder if Sandstorm mistimed (i.e., top ticked) the market as copper and zinc prices were near all-time highs when the deal was announced. That’s my only qualm.

I do prefer the Basecore purchase over Nomad Royalty, but who knows which assets will be the big winners/losers over time. Jurisdictional risk is something that could be a determining factor.

Like with Nomad, I don’t believe SAND knocked it out of the park with Basecore. However, these two transactions diversify Sandstorm’s portfolio substantially, gives them a total of 39 cash-flowing assets of much greater overall quality, and there will be even more significant growth than before. The company has increased 2022 production guidance by ~22% (from 65,000–70,000 GEOs to 80,000–85,000 GEOs) and increased 2025 production guidance by 55% (from 100,000 GEOs to 155,000 GEOs).

Update Cash Flow Profile And Diversification Of Sandstorm Gold

This graph shows it all, and notice the diversification of the cash flow. Most of those individual segments in the yearly columns represent a single asset, with one or two segments being a grouping of other (i.e., smaller) royalty assets.

The following graph further highlights the diversification of Sandstorm’s portfolio, as the top 5 assets account for only 38% of the overall value contribution, well below its peers in the space.

This is also an important graph (a slightly different measurement than the one above) as it shows the % of NAV of the principal assets. 4 out of the top 6 are assets from these two transactions.

Negative Share Price Reaction But 40% Re-Rating Potential To Get Inline With Royal Gold

SAND dropped by over 10% on the news as merger arbitrage players shorted SAND and bought NSR, and SAND has underperformed the sector since.

While these transactions wouldn’t have been my first choice for SAND, the company is doing exactly what I thought they should do: diversify via quality assets, which makes SAND a much stronger and more resilient company, which will translate into more demand for the stock and a higher valuation. Nolan Watson, CEO of Sandstorm, drove this point home in his remarks on these two deals (including a lengthy video discussing the transactions). I like seeing my thoughts in line with those of the management.

These acquisitions have only made SAND stronger and more undervalued.

The pro forma market cap of Sandstorm is $1.85 billion, which is about ~25% of the value of Royal Gold (or closer to 30% using enterprise values). However, SAND will be producing 40% of the gold equivalent production of RGLD by 2025. There is substantial re-rating potential in SAND, even without the help from the price of the underlying metal (or metals), as 40% of Royal Gold’s ~$7.45 billion EV is ~$2.9 billion, which means SAND would need to increase 40% to get in line with the valuation of RGLD. Franco Nevada, Wheaton Precious Metals, and Royal Gold are the three largest streaming/royalty companies in the sector and they command a premium valuation over the smaller players because of their diversification and optionality of their respective assets. As Sandstorm becomes a larger entity (it will be the fourth largest streaming/royalty company in the space when these deals close), it should be awarded with a higher multiple than before.

SAND went from overbought to oversold in a matter of a few weeks as shares did a round trip from $6 up to $9 and then back down to $6. The technicals remain bullish as the 2021 lows have held, a series of higher lows remains in place, and the 200-week (currently where SAND trades) has been acting as notable support over the last five years. Sandstorm shouldn’t be trading at this large of a discount and I think it’s one of the best buys in the sector at the moment. You can play SAND via NSR, as NSR is still trading at a slight discount to the terms of the deal, but that gap has closed from about 4% a few weeks ago to now less than 2%.