9/9/2014 Sandstorm Metals & Energy (TSX: SND) Q3 FY13 update | MyValueEdge

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MyValueEdge
Value Investing Blog
Sandstorm Metals & Energy (TSX: SND)
Q3 FY13 update

November 7, 2013

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I have mostly contributed my thoughts on SND at the Corner of Berkshire and Fairfax message board. I
wanted to give a quick update on Q3.
CEO Nolan Watson addressed the current direction, capital allocation, and headwinds facing the
company on the Q3 call. He is expecting $10M on the balance sheet in 6 months time. $4.157M cash on
hand now, $1M payment from coal asset restructuring, and $4M from the sale of non-core assets ($4M
face value Anterra convertible debentures and Anterra shares). I imagine the royalty from Bracemac-
Mcleod will cover the current run rate of expenses. There are 2 possible capital allocation options in the
near term:
1) small acquisitions from cash on hand or raise minimal equity financing to make deals. Nolan thinks
the stock price is cheap and does not want to dilute shareholders at current prices.
2) sit on their hands wait for the palladium stream from Serra Pelada to kick in, accrue royalty cash
from Bracemac Mcleod, and hope for a readjustment in share price and more cash to make more deals.
See below updates for each stream.
1) Bracemac-Mcleod marketed for a private placement deal to meet Donners cash calls to buyout
Donners 35% stake. Word got out into the investor community about possible dilution from the deal,
which tanked the stock price making the equity dilution severe. Decided to work out a 2.4% net smelter
royalty (NSR) with Glencore. Recorded an impairment charge of $6.3M in Q3. Received $.4M check from
Glencore for the months of August and September. Assuming production remains at the current level
you can assume revenue from the royalty to be $2.4M annually. I think production will increase at the
mine over the year allowing for greater cash flow.
2) Serra Pelada noted significant improvements in the past 6 months in regards to putting the mine
into production (expect production by the end of 2014). Nolan said the palladium stream has the
potential for 20% cash return to the current SND market cap per year.
3) Gordon Creek Thunderbird has negative working capital and they are currently attempting to raise
small financing to acquire the water pumps to dewater the wells. There is a big question mark on how
this stream plays out over the next 6-12 months. Thunderbird could go bankrupt, they could sell the
9/9/2014 Sandstorm Metals & Energy (TSX: SND) Q3 FY13 update | MyValueEdge
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asset to a party with deep pockets.
4) Novadx past few months spent completing the restructuring. Expected to be complete by the end of
this month. In the newly formed company Black Paw, they expect a small royalty, an equity stake
around 20%, and a cash payment of $1M.
5) Royal Coal SND now has a direct interest in the assets. Currently a contractor is operating the
property and SND is collecting a small royalty.
There are no significant updates on the Entre Gold and Canadian Zinc streams.
Nolan mentioned that his family has personally invested approximately $300K over the past few months
into SND. From the proxy in April it was noted that Nolan only owned .343% of the company as of April
2013, which at current prices is around $165K. So it is encouraging to see the CEO buying shares in the
open market.
Conclusion: SND is now cash flow positive. The palladium stream at Serra Pelada looks promising. We
should have more clarity into the future of the coal assets by the end of 4Q. The Gordon Creek stream is
in trouble. I am hoping an E&P investor snatches these assets up and gives SND a royalty going
forward. Nolan Watson seems to have the right idea about capital allocation going forward. The
outcome of the first streams could not have been worse so Nolan should be more cautious going
forward. It will be interesting to see how the assets play out over the next few years.