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:

• Record Annual Sales: For FY21, the company reported ~67,500 attributable gold equivalent ounces of sales, which is higher than 52,176 attributable gold equivalent ounces in FY20. Moreover, total revenue for the year recorded USD 8 million, which is higher than USD 93 million in FY20.

• Debt-free balance sheet with strong cash flow generation: In Q3FY21, the company has a strong balance sheet, which is virtually debt-free, which 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 61.634 million in 9MFY21, as compared to USD 45.810 million in pcp. The company is expected to report consistent growth in its cash flows in the coming years, which looks positive.

Source: Company Presentation

• Higher profitability margins: For Q3FY21, the company reported higher EBITDA and operating margin of 73.5% and 39.8%, respectively, as compared to the industry median of 41.4% and 27.4%, respectively. Additionally, the group posted its net margin at 24% in Q3FY21, which is higher than the industry median of 14.2%. This indicates improved operational efficiencies as compared to the industry median.
  

Risks: 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. 

Q3FY21 Financial Highlights:  

• SSL announced quarterly result, wherein the group posted its total revenue of USD 596 million, jumped from USD 23.267 million in the previous corresponding period (pcp). The growth was aided from the increase in royalty revenue and higher income from commodity sales.

• Gross profit stood at USD 278 million, surged from USD 12.452 million in pcp. The growth was driven by higher revenue, partially offset by an increase in the cost of sales (USD 12.318 million v/s USD 10.815 million in pcp).

• The quarter witnessed a rise in administrative expense, higher project evaluation costs and an increase in foreign exchange loss. The company net income of USD 622 million, climbed from USD 6.518 million in pcp.      

Q3FY21 Income Statement Highlights (Source: Company Report)

  Valuation Methodology (Illustrative): Price to Cash flow based

  Analysis by Kalkine Group

Stock Recommendation:  

For FY22, the company expects production in between 65,000 to 70,000 gold equivalent ounces, which is higher than the previous guidance of ~68,000 ounces, which is a key positive from the operational point. 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). We have considered peers like Osisko Gold Royalties Ltd, Altius Minerals Corp etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of SSL at the closing price of CAD 7.48 on January 18, 2022. 

One-Year Technical Price Chart (as on January 18, 2022). Analysis by Kalkine Group 

  Technical Analysis Summary:

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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