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 Updates:

• Debt-free balance sheet and higher cash flows: The company has a strong balance sheet, which is virtually debt-free, and suggest that the company’s capital investments are done through its cash flows and internal accruals. A lower debt indicates higher financial flexibility, which is a key positive considering the capital-intensive nature of the sector. Moreover, despite a sluggish economic scenario, the group reported a higher cash from operations of USD 81.1 million in FY21, as compared to USD 65.6 million in FY20. The company is expected to report consistent growth in its cash flows in the coming years, which looks positive.

• Growing asset-base: Historically, the company reported an increase in its number of assets, which is a key positive and supports better exploration and drilling programs. Notably, at the end of FY21, the company has 230 streams and royalty mines (v/s 200 mines in FY20), of which 29 of them are underlying producing mines.

Source: Company Presentation

• Higher profitability margins: For FY21, the company reported higher EBITDA and operating margin of 70.1% and 39.1%, respectively, as compared to the industry median of 38.4% and 18.1%, respectively. Additionally, the group posted its net margin at 24% in FY21, which is higher than the industry median of 10%. This indicates improved operational efficiencies as compared to the industry median.

Risks associated with the investment:

The company’s operations are correlated with the international gold prices, and volatility in the international commodity would impact the group’s margins and cash flows. 

FY21 Financial Highlights:  

FY21 Income Statement Highlights (Source: Company Report)

• SSL announced full-year result, wherein the group posted its total revenue of USD 8 million, jumped from USD 93.0 million in FY20. The growth was aided from the increase in royalty revenue and higher income from commodity sales.

• Gross profit stood at USD 3 million, surged from USD 45.8 million in pcp. The growth was driven by higher revenue, partially offset by an increase in the cost of sales and depletion.

• The quarter witnessed a rise in administrative expense, higher project evaluation costs and slightly higher finance expense and a rise in other expense. This was more than offset by a gain on revaluation of Vale Royalties financial instrument amounting USD 5.8 million.

• The company posted its net income of USD 6 million, significantly higher than USD 13.8 million in pcp due to the above-mentioned reasons.

 Valuation Methodology (Illustrative): Price to Cash flow based

Analysis by Kalkine Group 

Stock Recommendation:  

The company has a lower cash conversion period of 32.1 days in FY21, as compared to the industry median of 56.4 days, which indicates that the company takes lower time to covert its investments to cash flows, which is a key positive. We have valued the stock using the Price to CF-based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered peers like Wheaton Precious Metals Corp, Franco-Nevada Corp etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of SSL at the closing price of CAD 9.79 on March 03, 2022. 

One-Year Technical Price Chart (as on March 03, 2022). Analysis by Kalkine Group

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