STORMING INTO CASH FLOW IN A
SHRINKING ROYALTY SPACE
Sandstorm Resources is a royalty company with gold streams on the
Aurizona mine (17%, Brazil), the Santa Elena mine (20%, Mexico), the
Black Fox mine (6-12%, Canada), the Ming project (10%, Canada), the
Bachelor Lake project (20%, Canada) and the Summit mine (22-50%,
US). Sandstorm’s share of annual gold production should grow from
22,000 ounces of gold in 2011 to 47,000 ounces of gold in 2014.
We are initiating coverage of Sandstorm Resources with a
SPECULATIVE BUY recommendation and a target price of C$1.25 per
share for the following reasons.
Investment highlights
• Set to start generating free cash flow in 2011: With four gold
streams expected to contribute in 2011, Sandstorm is set to start
generating significant free cash flow (US$19 million in 2011,
growing to US$30 million in 2012).
• Uniquely positioned in a shrinking royalty space: With the recent
acquisition of Gold Wheaton by Franco Nevada, Sandstorm should
attract attention as an alternative investment and a likely
acquisition target for a larger cap royalty company.
Valuation
We value Sandstorm’s gold streams using a discounted cash flow
analysis. We estimate a peak gold price (US$1,500/oz) NPV (5%) of
US$327.1 million for the company’s six gold streams. In addition, we
ascribe an in situ value of US$22.4 million to account for potential mine
life extensions. We estimate a peak gold price NAVPS (5%, US$1,500/oz
Au) of C$1.03. We value Sandstorm based on a 1.2x multiple to our peak
gold price NAVPS.

COMPANY DESCRIPTION:
Sandstorm Resources is a gold stream royalty company
with gold streams on the Aurizona mine (17%, Brazil), the
Santa Elena mine (20%, Mexico), the Black Fox mine
(12%, Canada), the Ming project (10%, Canada), the
Bachelor Lake project (20%, Canada) and the Summit
mine (50%, USA). Combined, Sandstorm’s share of
annual gold production should grow to 34,000 ounces of
gold per year by 2012 up to 47,000 ounces by 2014.
All amounts in C$ unless otherwise noted.
Share price as of close of market on 20 January 2011.

Figure 80: Sandstorm – peak gold NAV
Shares Out. & ITM 430.7
Gold Price (US$/oz) $1,500
US$/C$ exchange rate $1.00
0% 5%
Sandstorm’s Gold Streams (US$M) per share (US$M) per share
Aurizona NPV $169.0 $0.39 $126.4 $0.29
Santa Elena NPV $89.4 $0.21 $69.5 $0.16
Black Fox NPV $54.6 $0.13 $44.1 $0.10
Ming NPV $81.9 $0.19 $50.7 $0.12
Summit NPV $27.4 $0.06 $22.9 $0.05
Bachelor Lake NPV $17.9 $0.04 $13.4 $0.03
Exploration - In Situ $22.4 $0.05 $22.4 $0.05
Brigus Repurchase $33.2 $0.08 $33.2 $0.08
Working Capital $9.6 $0.04 $9.6 $0.04
Proceeds from ITM Options and Warrants $67.2 $0.16 $67.2 $0.16
Long-Term Debt $0 $0.00 $0 $0.00
Corporate G&A $22.0 $0.05 $17.4 $0.04
Total NAV (US$) $550.6 $1.28 $442.0 $1.03
Total NAV (C$) $550.6 $1.28 $442.0 $1.03
Current Share Price $0.79 $0.79
Multiple to NAV 0.62x 0.77x
Source: Canaccord Genuity estimates
We note that Sandstorm is trading at a 0.86x P/NAV (5%, spot) vs. the junior producer average of 0.89x P/NAV. With the recent acquisition of Gold Wheaton by Franco Nevada, the royalty space is becoming increasingly concentrated. We expect Sandstorm to benefit from the relative scarcity of precious metal royalty companies and the potential for Sandstorm to be involved in further consolidation within the space. Therefore, we believe that Sandstorm should attract a premium valuation in the market.
We value the company based on a 1.2x multiple to our 5%-disounted peak gold price NAVPS (US$1,500/oz) estimate, which gives us a target price of C$1.25 per share (rounded). We initiate coverage on Sandstorm Resources Ltd. with a SPECULATIVE BUY recommendation.