Sandstorm Gold Ltd.

Sandstorm Gold Ltd. (TSX: SSL) provides financing to companies engaged in gold mining through gold stream and royalty. Geographically, the company has operational footprints in North America, South & Central America, Africa, and Asia & Australia.

Key Highlights:

• Strong margin profile: The company reported a slide in average cash cost per attributable gold equivalent ounce at USD 227 in Q2FY21, as compared to USD 257/ ounce in Q2FY20. The above resulted in a higher operating margin of USD 1,569 per ounce in Q2FY21, climbed from USD 1,458 per ounce in Q2FY20. Hence, EBITDA margin and operating margin stood at 63.7% and 49.8%, respectively, in Q2FY21, which was significantly above the industry median of 40.7% and 26.4%. Moreover, the company reported its net margin at 32.7% v/s the industry median of 15.6%.
• Growing asset base: The company has a diversified asset-base, which are located across several important mining areas across the globe. Since 2010, asset-base of the company has grown from 5 mines to 229 mines in 2021. The above is mentioned worthy as it would lead to improved prospects for the company. Notably, the company expects its gold production to grow to 130,000 oz in FY25, from an estimated 65,000 oz in FY21.
• Recent acquisitions to spur growth: In Q2FY21, the company made some meaningful acquisitions, which are likely to provide immediate cash flow growth, exposure to quality assets, additional exploration opportunities. The group acquired Vale royalties and a company which operates in the Vatukoula gold mine in Fiji. Notably, Vale Royalties is known for long-life, low-cost assets, which is expected to contribute to the future prospects of SSL.

Q2FY21 Financial Highlight:

• SSL announced its quarterly result, wherein the group posted total revenue of USD 446 million, up from USD 18.730 million in the previous corresponding period (pcp). The increase was driven by a higher average realized gold price (1,796 /ounce v/s 1,715/ounce). Moreover, the company reported a higher royalty revenue of USD 8.959 million, as compared to USD 6.150 million in pcp also supported the company’s top-line.
• Gross profit was recorded at USD 547 million, surged from USD 7.599 million in pcp. The growth was driven by higher revenue partially offset by an increase in the cost of sales (USD 12.899 million v/s USD 11.131 million in pcp).
• The company reported net income of USD 636 million, which increased from USD 7.137 million in pcp.
• The company reported net income of USD 636 million, increased from USD 7.137 million in pcp mainly due to gain on revaluation of Vale Royalties during the quarter.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s financial performance is correlated with the international gold prices; hecnce, volatility in gold price would impact the group’s margins and cash flows.

Valuation Methodology (Illustrative): Price to Cash Flow 

Stock Recommendation: The company’s operations were benefitted from higher commodity prices, which has further resulted in elevated net profit and increase in cash from operations. Notably, cash from operations stood at USD 43.720 million in H1FY21, jumped from USD 27.725 million in pcp. For FY21, the company expects its gold equivalent production within the range of 62,000 and 69,000 ounces. We have valued the stock using the Price to CF-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 8.35 on September 14, 2021. 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on September 14, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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