Rising Regulatory Risks And Concentrated Anchor Assets Will Pressure Long Term Profitability

Catalysts

About Sandstorm Gold

Sandstorm Gold is a precious metals royalty and streaming company providing financing to mining operators in exchange for a share of future production.

What are the underlying business or industry changes driving this perspective?

• Heavy reliance on elevated gold prices to sustain record cash operating margins means any normalization in bullion prices would quickly compress per ounce economics and pressure earnings growth.
• Pro forma concentration in a defined set of anchor assets, despite improved diversification on paper, leaves the portfolio vulnerable to operational disruptions or permitting setbacks that could materially reduce attributable volumes and revenue.
• Ramping projects such as Greenstone and Platreef face execution and timing risks. Delays, cost overruns or underperformance versus mine plans would undermine projected production growth and weigh on future cash flow.
• The long life nature of many royalties and streams increases exposure to tightening environmental regulations and shifting geopolitical regimes. These forces could introduce higher operating costs for partners and indirectly pressure Sandstorm’s net margins.
• Industry wide intensification of exploration and mine expansion, as seen at assets like Fruta del Norte, raises the risk that capital is allocated into marginal or technically complex projects that fail to deliver expected incremental production. This could limit long term earnings expansion.

Assumptions

This narrative explores a more pessimistic perspective on Sandstorm Gold compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Sandstorm Gold's revenue will grow by 8.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 17.8% today to 55.4% in 3 years time.
• The bearish analysts expect earnings to reach $135.4 million (and earnings per share of $0.48) by about December 2028, up from $34.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 24.0x on those 2028 earnings, down from 100.8x today. This future PE is greater than the current PE for the CA Metals and Mining industry at 21.5x.
• The bearish analysts expect the number of shares outstanding to decline by 1.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.77%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The planned acquisition by Royal Gold is being positively received by both Sandstorm and Royal Gold shareholders and is expected to close in the fourth quarter. This could provide an immediate value bump and re rating potential that supports or increases the combined company valuation and therefore earnings and share price over the long term.
• Sandstorm continues to post record financial performance, with second quarter revenue up 24 percent year over year and net income up 61 percent, driven by strong gold prices and record cash operating margins. If these trends are sustained, they would support higher long term revenue, net margins and earnings.
• The pro forma portfolio following the Royal Gold and Kansanshi transactions will include roughly 80 cash flowing assets and nearly 400 royalties and streams, significantly improving diversification and anchoring value in a suite of long life, high quality mines. This reduces asset specific risk and supports more stable long term revenue and earnings.
• Multiple key assets are on positive operational trajectories, including Greenstone, which is ramping up production with improving mining rates and recoveries, and Platreef, which is advancing on schedule toward becoming a large, low cost PGM producer. These developments can drive volume growth and support higher future cash flow, revenue and earnings.
• Exploration success at assets like Fruta del Norte and Chapada, including high grade gold discoveries, expanded drill programs and potential mine life extensions, increases the probability of longer and potentially higher production profiles on Sandstorm linked royalties. This underpins sustained or growing long term revenue and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Sandstorm Gold is CA$13.25, which represents up to two standard deviations below the consensus price target of CA$18.26. This valuation is based on what can be assumed as the expectations of Sandstorm Gold's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$22.0, and the most bearish reporting a price target of just CA$13.25.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $244.5 million, earnings will come to $135.4 million, and it would be trading on a PE ratio of 24.0x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of CA$16.5, the analyst price target of CA$13.25 is 24.5% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.