It has been a troublesome month and a half for the Gold Miners Index (GDX), as a number of names have slid greater than 20% from their highs given the sharp correction we have seen in valuable metals costs. Sandstorm Gold (SAND) has not been immune from the sector-wide weak spot, down almost 25% from its August highs. Luckily, concurrently the inventory has been beneath stress, we have seen analysts ratcheting up earnings estimates, with FY2021 estimates now up from $0.17 to $0.19, which suggests we’ll see an earnings breakout subsequent 12 months for the inventory. Whereas I consider there are higher names within the sector to personal given the jurisdictional danger with Turkey, I proceed to consider any dips beneath $8.15 will likely be low-risk areas to start out a place within the inventory.
(Supply: Firm Presentation)
Sandstorm Gold launched its preliminary GEO gross sales and income statistics this week and reported gross sales of 12,300 gold-equivalent ounces (GEOs) and unaudited income of $23.three million for Q3. It is a 12% improve sequentially from the powerful Q2 Sandstorm had on account of COVID-19-related shutdowns, and it means that the worst is behind the corporate. That is additionally an enormous enchancment from a quarterly income standpoint, translating to a 24% soar in income sequentially from the $18.7 million reported in Q2. This sharp improve regardless of low-double digit GEO gross sales development is because of greater metals costs, which is anticipated to bolster Sandstorm’s backside line in FY2021.
(Supply: Writer’s Chart)
As proven within the chart above, we have seen a disappointing pattern in quarterly GEO gross sales for Sandstorm, with GEO gross sales peaking in Q3 2019 and trending decrease for 3 consecutive quarters in a row, with the wrongdoer for Q2 weak spot being COVID-19. Luckily, GEO gross sales have lastly begun to show up once more, and This autumn ought to be even stronger on condition that Lundin Gold’s (OTCPK:FTMNF) Fruta del Norte mine ought to have a powerful end to FY2020 with the paste plant expected to be complete in Q3, and Americas Gold and Silver Corp.’s (USAS) Aid Canyon mine anticipated to lastly begin commercial production in This autumn after a disappointing initial ramp-up. In the meantime, Endeavour Mining (OTCQX:EDVMF) is anticipated to have a a lot stronger second half at its Hounde mine, the place Sandstorm Gold holds a 2% web smelter return (NSR). It’s because Endeavour will likely be mining a lot greater grades in This autumn on the Kari deposits and better grades from the Vindaloo primary pits.
Sadly, we just lately obtained some dangerous information that might offset among the improved manufacturing from Sandstorm’s different royalty property. This was the announcement from Lundin Mining (OTCPK:LUNMF) that there was an influence outage at its Chapada copper-gold mine in Brazil. On account of the safety system on the mine’s primary electrical substation failing through the outage, there was vital injury to all 4 SAG and ball mill motors. Provided that Sandstorm has a deal in place to buy 4.2% of the copper yearly at Chapada, this isn’t very best. Whereas this is not going to have an effect on the Q3 outcomes because the outage occurred on September 27th, it’s prone to take a chew out of This autumn quarterly GEO manufacturing, on condition that it is anticipated to take 60 days to return to full capacity.
(Supply: Firm Report)
That is very nasty information for Lundin Mining buyers concerning expectations for FY2020 manufacturing and added prices to get the mine again up and working, nevertheless it’s extra of a rounding error for Sandstorm Gold, fortuitously. As we are able to see within the desk above, Chapada contributed 7,910 GEOs of a complete of 63,829 GEOs in FY2019, which signifies that the mine solely contributes about 12% of complete GEO manufacturing to Sandstorm. My expectation is that Chapada will produce at a capability of 45% for This autumn, that means that Sandstorm ought to see a ~1,100 GEO headwind worst case, which interprets to barely 2% of FY2019 manufacturing (63,800~ GEOs). I’ve arrived at this quantity by dividing 7,910 GEOs in FY2019 by 4 quarters, after which multiplying the quarterly determine by 0.45 (7,910 / 4 = 1,978 | 1,978 x 0.45 = 890 vs. common contribution of 1,980).
Nothing is thrilling a couple of 1,100 GEO gross sales headwind for This autumn, however to this point, the market has shrugged off the information for probably the most half. Whereas Lundin Mining dove over 13% on the announcement, Sandstorm Gold barely budged, which is a reminder of why it is good to carry royalty performs versus producers. It’s because royalty names which are diversified and do not should take care of capex can digest this information a lot simpler than an organization reliant on the asset for money circulation, and compelled to pay for the rehabilitation to get again into manufacturing. In abstract, whereas the Chapada mine information is actually value mentioning, as a delayed restart (above the 60-day estimate) might be an much more vital headwind in This autumn for Sandstorm, I do not see the information as overly materials, as a 1,100-1,300 GEO gross sales headwind isn’t the top of the world.
(Supply: YCharts, Writer’s Chart)
If we take a look at the pattern Sandstorm’s quarterly revenues beneath, we should always see a 24% improve sequentially in Q3 ($23.three million vs. $18.7 million), and estimates are projecting additional enchancment in This autumn and Q1 2021. Primarily based on present Q1 2021 forecasts of $26.Four million, quarterly income is on monitor to hit a brand new multi-year excessive – a bullish growth. This improve would translate to a different quarter of 24% development 12 months over 12 months (Q1 2019: $21.three million), pushed by greater metals costs and a excessive chance that Chapada will likely be again to regular operations, Fruta Del Norte will likely be working at full capability, and Aid Canyon will likely be set for its stronger quarter after reporting industrial manufacturing in This autumn. Assuming all of this stuff come to fruition, we should always see file income in FY2021 for Sandstorm, which confirms the improved earnings pattern we see beneath.
(Supply: YCharts, Writer’s Chart)
As we are able to see from Sandstorm’s earnings pattern above, annual earnings per share (EPS) is anticipated to have a breakout 12 months in FY2020, with estimates presently sitting at $0.19, which might be a brand new all-time excessive versus the earlier excessive of $0.17 in FY2016. Usually, earnings breakouts are very bullish developments, occurring when annual EPS trades in a spread for a number of years after which launches to a brand new excessive. That is usually on account of a constructive change within the enterprise, which, in Sandstorm’s case, is greater metals costs, resulting in improved margins.
So, what does the technical image appear to be?
Whereas the current correction has possible scared many buyers away with a double-digit decline that is sliced by way of the 50-day shifting common, we have seen minimal injury to the long-term chart. As proven above, Sandstorm Gold broke out of a multi-year base earlier this 12 months, and this pullback stays properly above the breakout degree close to $7.00. The catalyst for this breakout is probably going the market realizing that Sandstorm is turning into a higher-margin story with a considerably improved earnings pattern. Apart from, issues might look even higher long run, assuming a constructive building resolution at Sandstorm’s 30%-owned Hod Maden challenge in Turkey. Primarily based on a preliminary economic study, this might be a 250,000-ounce-per-year operation on a gold-equivalent foundation, with 30% attributable to Sandstorm.
Whereas I proceed to see higher royalty performs on the market on a valuation foundation, I see no motive for long-term buyers in Sandstorm Gold to panic right here at $8.25. Clearly, this correction has been sharp, and the Chapada information isn’t very best, however it is a short-term problem, and the technical chart stays favorable in the meanwhile. Given my perception that we’ll see an earnings breakout in FY2021 and that the worst is behind the corporate after unprecedented shutdowns in Q2, I proceed to face by my perception that any pullbacks beneath $8.15 will likely be low-risk shopping for alternatives.
Disclosure: I’m/we’re lengthy GLD, EDVMF. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from In search of Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
Further disclosure: Disclaimer: Taylor Dart isn’t a Registered Funding Advisor or Monetary Planner. This writing is for informational functions solely. It doesn’t represent a proposal to promote, a solicitation to purchase, or a advice concerning any securities transaction. The knowledge contained on this writing shouldn’t be construed as monetary or funding recommendation on any subject material. Taylor Dart expressly disclaims all legal responsibility in respect to actions taken based mostly on any or all the info on this writing.