Sandstorm plummets on cheap financing

Shares in Sandstorm Gold Ltd. (TSE:SSL, NYSE MKT:SAND) dropped sharply on Tuesday in heavier than usual volumes, after the company announced the signing of a production streaming deal with fellow Canadian miner Yamana Gold Inc (NYSE:AUY, TSE:YRI) and bought deal financing with a syndicate of banks.

In early afternoon trade the Vancouver-based company was trading at $2.64, down more than 12.6% in New York, after recovering somewhat from a 13.6% plunge at the open. The $315 million company is down by more than a fifth in value this year while investors on the Toronto Stock Exchange have to cope with only a 10% decline thanks to the weak loonie. Yamana added 2.2% affording the Toronto-based gold miner a C$3.3 billion market capitalization.

What hurt the shares of Sandstorm was a $25 million bought deal with with a syndicate of underwriters co-led by National Bank Financial and BMO Capital Markets with the banks buying 8.77 million units of Sandstorm for $2.85. In addition, Sandstorm granted underwriters an option to purchase up to an additional 1.3 million units on the same terms. Each unit will consist of one common share of Sandstorm and one-half of one common share purchase warrant which entitle the holder to acquire one common share of Sandstorm at a price of $4.00 within five years.

The streaming deal appeared to be on better terms with the agreement with Yamana including production streams from up to five of Yamana’s projects. According to a company statement for $148 million cash upfront, $4 million in cash payable in six months and 15 million Sandstorm warrants, the company will receive a silver stream on Yamana's Cerro Moro development project in Argentina that includes interim silver deliveries during years 2016 to 2018 from currently operating mines, a copper stream on the operating Chapada mine in Brazil and a potential gold stream on the Agua Rica project in Argentina.

The Sandstorm warrants issued to Yamana have a strike price of $3.50, a term of 5 years and are exercisable upon achievement of specific milestones with respect to the construction of Cerro Moro.

Streaming transaction highlights according to Sandstorm include:

  • Imminent Cash Flow: New silver and copper streams expected to contribute US$10 million of cash flow annually starting in 2016, increasing to US$20 million annually by 2019 representing a 55% increase in the Company’s 2019 cash flow;
  • Asset Diversification: Multi-asset silver stream that includes production from Chapada, Minera Florida and Cerro Moro, a copper stream on Chapada, and an Early Deposit Gold Stream on Agua Rica;
  • Downside Protection: 24-month silver stream backstop from the El Peñon mine if Cerro Moro does not reach production by 2019;
  • Asset Quality: The projects underlying the Transaction are low cost, economically robust assets with significant exploration upside;
  • Improved Counterparty Profile: 90% of Sandstorm’s cash flow to come from majors, mid-tiers and debt-free junior mining companies by 2019;
  • Precious Metal Focus: Precious metals and diamonds to make up approximately 83% of the Company’s cash flow by 2019.