Sandstorm Gold Ltd.

Good morning, my name is Anas and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sandstorm Gold Royalties conference call. All lines have been placed on mute to prevent any background noise. Please be aware that some of the commentary may contain forward-looking statements. There can be no assurance that forward-looking statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then the number two. Thank you. Mr. Watson, you may begin your conference.

Thank you, operator. Good morning, everyone, and thank you for calling into this 2021 earnings call. This morning we have a lot of things to review including the 2021 annual results as well as the announcements that we made yesterday relating to the creation of Horizon Copper and the turning of our hot modern interest into a traditional stream. I have to admit that it feels good to be sitting here today discussing record annual revenue and record annual cash flow while simultaneously being able to lay out an elegant path forward with our hot modern stream so that Sandstorm continues to set even higher records in the future and turn Sandstorm back into a pure play precious metal streaming royalty company. In a few minutes, I'll hand it over to Irfan to talk about the specific 2021 results. But prior to that, I'd like to explain both the specifics of the transaction in which we're turning our hot modern interest into a traditional stream. But more importantly, I want to discuss the why and specifically why this way. For those retail investors who may listen to this, I can tell you that every single time I meet with one of our large institutional shareholders that owns millions of dollars of our shares, almost every single time the first two questions they ask are, tell me about HODMOD and when it's getting its permits and when you're turning it into a stream. And then they ask, do you think you can grow Sandstorm with so much competition in the streaming space that's driving down the average returns on streams? I have answered those two questions over the last couple of years, literally hundreds of times. The truth is, they're good questions that should be asked. Fortunately for us, HODMOD and CEIA was granted last quarter, and through this transaction, we are now turning it directly into a stream, which we believe will trade at a higher value in Sandstorm's portfolio because we are once again becoming a pure play streaming and royalty company, and through this transaction, We are putting the risk of CapEx overruns and the risk of operating cost overruns into this new company, Horizon Copper. The reason as to why we are doing it this way is a response to the second question that those institutional investors keep asking, about how does Sandstorm grow in a competitive environment? At Sandstorm, in addition to growing in the way we have in the past, we believe that the marketplace will get us higher rates of return and we can get higher returns for our shareholders. if we work with a select group of growth-oriented mining companies and become their streaming partner of choice, so that when they buy new mines, we are the only streaming company that they are talking to about the financing of that mine acquisition. We're currently in conversations with a couple of existing mining companies that may become future partners of Sandstorm, where we'll buy a gold stream on the next mine they purchase. In addition to talking to existing growth-oriented mining companies, we decided to actually create one horizon copper focused on copper I personally am a big believer in copper I believe it's needed desperately to help electrify the world and to help reduce climate change and I believe that by the year 2030 which isn't too far away there will be a 20% structural deficit of copper production around the world relative to demand and therefore the copper industry is going to have to grow to fix that and the price of copper is definitely going to have to rise in the process Fortunately for us, the majority of the world's gold byproduct production comes from copper mines. So I see a great symbiotic opportunity to create Horizon Copper that goes forward, partnered directly with Sandstorm, where Horizon Copper will look to acquire copper mining interests around the world, and Sandstorm can help make those acquisitions a reality by buying a gold stream or a silver stream upfront upon acquisition to help pay for the acquisition. I believe this will have the potential to get Sandstorm much, much higher rates of returns on the streams it purchases, but also it allows Sandstorm to help Horizon Copper grow its business. The world needs copper now more than ever, and it just so happens that I believe gold streaming companies such as Sandstorm will play an important role in that industry, and we can be a part of the solution to climate change while staying a pure play precious metals streaming and royalty company. That is the why we are doing it this way. I want to emphasize to investors that this is only the baby first step for Horizon Copper. We're already in the background of looking for such acquisitions that we can make together, where Sandstorm will have the precious metal stream and Horizon Copper will have the copper mining interests. So stay tuned for more deals in the future with this partnership model for growth. Now, to dig into the details of the transactions. We're selling our 30% odd bond stake to Horizon and we're taking back three things. The first is a stream on 20% of the gold produced at Hot Modem. The second is a 34% equity stake in Horizon Copper. And the third is a $95 million IOU, or debenture, from Horizon Copper to be paid to Sandstorm in the future. We're also contributing our equity stake and the equity shares we hold in Entrez Resources to Horizon Copper. However, Sandstorm will continue to hold and own the stream that we already have on the Turquoise Hill through Entrez Resources. I'd like to clarify a couple of points about this $95 million debenture or IOU that will be owed by Horizon Copper at Sandstorm. I've already noticed a couple of analysts that are discounting the value of that debenture by using a high discount rate and assuming a bullet repayment in 10 years. Although this transaction is still at the letter of intent or LOI stage and the final debenture is yet to be entered into, The LOI specifies that Horizon must pay back the debenture with excess cash flow from hot modem, meaning that Horizon Copper cannot simply sit on the cash and make Sandstorm wait to get paid back. We structured it this way so that in the first few years of the mine life, Sandstorm will still effectively be receiving all of the cash flow from hot modem, either through the stream or through the repayment of the IOU. It's also worth mentioning But the LOI also states that as long as Sandstorm maintains a material equity ownership position, it has a right of first refusal on streams sold by Horizon Copper. Now, as Horizon Copper grows its business and issues more shares and starts to dilute Sandstorm's ownership position, we have structured the IOU such that Sandstorm can elect to convert portions of the IOU to shares to ensure that it doesn't get overly diluted and so that Sandstorm can keep its right of first refusal. without Sandstorm having to contribute any further cash. We thought this would be good flexibility for Sandstorm to have. Overall, this transaction will have many regulatory hurdles to cross, and it will take several months to complete the necessary shareholder votes, the exchange approvals, et cetera. And we believe that the actual closing of this transaction is likely to happen in the second half of this year. It's also worth noting that our investor relations team has uploaded a video that goes into much more detail on the transaction that I have time for on this call, so I'd encourage anyone who wants to know more and truly understand this transaction to go to our website and watch that video. Briefly, I think it's worth mentioning details about Horizon Copper and who will own it. As noted, Sandstorm will be taking a 34% ownership stake, and I will sit on the board as chairman. As part of this transaction, there will be a $20 million financing for Horizon. And anyone, including the public and people listening on this call, can participate in those new shareholders, and those new shareholders will own approximately 47% of Horizon. This $20 million, combined with the cash already in the company, combined with the $10 million that Sandstorm is contributing, will be the amount of HODMOD and CAPEX that Horizon will be required to contribute to get the mine up and running. There are some existing investors in that entity. including myself. And it's important to note that because my reputation is very, very important to me, we ensured that the value of the shares that Sandstorm is receiving has no implied shell value or lift, as some people call it. Normally in transactions like these, there would be a shell value, meaning there might be no assets or no cash in the vehicle, and Sandstorm would effectively have to pay a few million dollars in value to take control of the public vehicle that had no real assets. In this case, however, the shell value was $0, meaning Sandstorm got to use the vehicle with no leakage in NAV because the implied value of the existing shares that Sandstorm is receiving of Horizon is equal to the cash in the company plus a conservative value estimate of the one asset the shell company has, which is a royalty that pays approximately $1 million a year every year. And as I said, We have structured this transaction so there will be a $20 million financing that will be done at the same implied price per share. So if there are people out there who are bullish on copper, you can invest at the same value per share. And on that note, we have had a very strong amount of interest in this Verizon copper financing already. And literally within an hour of the press release going out yesterday, we had millions of dollars in investor demand start immediately coming in. So it seems I'm not the only one here that's bullish on copper. copper as well as gold. Now in terms of the specifics of what does this gold stream look like? The stream will be for 20% of the gold produced by the Hodden Modern mine with a purchase price of 50% of the spot price of gold. This mine should be able to produce gold for $500 or $600 an ounce, so even on the ounces that Sandstorm is buying, Horizon Copper should have some profit on those ounces, plus the gold ounces that are entirely Horizons as well as all of Horizons' interest in the copper. Once Sandstorm has purchased 405,000 ounces of gold, the stream will drop to 12% of production for the life of the mine. Some investors will note that this transaction brings down our production guidance in the future, but what's important to note is two things. One, Sandstorm no longer has to pay the capex. So as before, Sandstorm still had ongoing financial obligations to the mine, now it no longer does. And two, Sandstorm is getting back a considerable IOU in the transaction that is just shy of 10% of the value of our entire company. So from an overall NAV perspective, the NAV is approximately the same. It's just that Sandstorm's risk is materially reduced and we are once again a pure play streaming and royalty company. I think it's also important to note that our cost when we originally bought this 30% interest in HODMOD is approximately $180 million. And we are monetizing it for a $200 million stream, and shares, and a large IOU, so we're crystallizing a considerable amount of profit over and above our cost base. Looking at our track record of growth over the years, we have had a new production record every single year since inception, with the only exception being during the dark days of COVID when some of the mines temporarily curtailed operations. You can see that consistent growth from this production chart. What this chart doesn't show, however, is the complete transformation over the years of the quality of our portfolio, as well as the average mine life in our portfolio. In 2016, for example, with around 50,000-ish ounces of production per year, our average mine life was only about eight years. Only five years later, fast forward to today, we not only increased our production to 68,000 ounces, but the average mine life in our portfolio now stands at 16-plus years. It literally doubled in the last five years. So we're not only growing our production per year, but we're also increasing dramatically and growing the average mine life underlying our streams. It is not an easy feat to grow both of these things at the same time, but we have managed to do it. Sandstorm is a growth company, and I personally find it exciting to be in this position with our production growing from 68,000 ounces last year to over 100,000 ounces in a few years, with absolutely no additional cost to Sandstorm. This is all now bought and paid for growth. If you compare how much growth we now have, fully bought and paid for compared to the peers in our industry, it's clear that Sandstorm has more growth built in than anyone else. And now, as of this moment, that growth is largely permitted and is officially in the form of a stream. I'm excited about the state of our company I'm excited about the growth coming from within the portfolio. I am very bullish on the gold price, and I'm excited that we have both the opportunity in front of us to grow and the balance sheet flexibility to do so. So shareholders can expect further growth through acquisitions this year. Before I turn it over to Irfan, I would like to take a minute to thank the Sandstorm employees for working so hard these past few months. Normally, I wouldn't do this on an investor call, in fact, I've never done this before on an investor call, but I know our employees do listen to these. And I can say I've never before been part of a team that has put in so many hours of work day after day. These transactions are not only hard to put together and to complete in their own right, but they're only the tip of the iceberg on the number of deals that we're working on behind the scenes. Our team has been putting in 16-hour workdays literally for months now. And because we're a small team, it may be months more of work like this. So I just want to take the opportunity to thank them. I'm proud to be working with these people as part of the Sandstorm team. And I think if our investors saw how hard they're working, they would be proud too. I'm very excited about where we're going with this company. And with that, I'll hand it over to Irfan to talk about the 2021 results.

Thanks, Nolan. And I echo those comments as well. 2022 is certainly shaping up to be an exciting year for Sandstorm shareholders and, uh, I want to take the next while to look back at 2021 and cover a few of the financial highlights. 2021 continued the trend of record revenue in production at Sandstorm. For those of you joining us on the webcast, the chart on the left-hand side of this slide shows this trend over the last four years. Revenue in 2021 came in at $114.9 million in attributable gold equivalent ounces or 67,548. This is approximately a 23% and 29% increase, respectively, compared to the year previous. It's worth reminding investors that 2020 production was affected by temporary shutdowns at certain operations due to the pandemic. But this year, all cash-flowing operations appear to be back on track. The second chart on this slide shows the year-over-year trend of the average realized gold price, which remained relatively constant at around $1,780 per tributal ounce. This next slide provides a bit more detail on the financial results for the year ended December 31st, 2021, along with the year-over-year comparison. The total revenue figure I mentioned was comprised of $71.7 million in sales from our stream agreement and $43.1 million in royalty revenue. These top line figures were driven in part by the increase in silver and copper prices in 2021 when compared to 2020. In particular, the Yamana silver stream, the Chapada copper stream, as well as the addition of the Valley royalties package they acquired in June, all contributed to the increase in revenue this year. In a moment, we'll walk through more detail regarding a few of these assets. Continuing down the list, with an average realized gold price per tributary ounce of $17.88, the average cash cost for the year was $249 per tributary ounce. This resulted in strong cash operating margins of 15%. $139 per trivial gold equivalent ounce. Sandstorm also set a new record for cash flow from operation, including changes in working capital, at $83.5 million. This is an increase of 22% compared to 2020. Finally, net income for the year was $27.6 million, almost double the company's net income in the previous year, and another record for the company. Looking at the quarterly results in more detail, total revenue for the three months ended December 31st, 2021 was $29.8 million, and attributable golden ounces for the quarter totaled $16,586. Taking into consideration all four quarters of 2021, we notice a relatively consistent stable trend in revenue and production throughout the year. Comparing the three months ended December 31st, 2021, with the same period in 2020, total revenue and attributable gold from ounces were up slightly, the latter representing a 5% increase year over year. The average cash cost per attributable ounce for the fourth quarter was $224, resulting in cash operating margins of $15.34 per attributable ounce. This was down from $1,632 per ounce in the same period of 2020. Cash flows from operating activities excluding changes in non-cash working capital were comparable to the fourth quarter in 2020 at $22.1 million, while net income for the fourth quarter was $7.4 million. The decrease in net income compared to the fourth quarter in 2020 was partially attributable to a decrease in gains recognized on the revaluation of the company's investments during the three months ended December 31st, 2021. On the next slide, we see the top contributors in the portfolio for 2021. The Yamana Silverstream, which is from production at the Cerro Moro mine, contributed over 14,000 gold equivalent ounces in 2021. In January, Yamana Gold announced that production at Cerro Moro continued to benefit from access to additional mining faces, which supported the increase in mill feed coming from higher grade underground ore and stable throughput. According to the company, the mine had its strongest quarter of the year, producing over 58,000 gold equivalent ounces. Due to the timing of when Sandstorm receives deliveries from Yamana, Sandstorm expects to see strong first quarter production delivered from this asset in 2022. As I mentioned earlier, Cerro Moro was a key beneficiary of the nearly 30% increase in Sandstorm's average realized selling price of silver between 2020 and 2021. The Chapada Copper Stream was another strong contributor to Sandstorm in 2021. with nearly 8,500 gold-equivalent ounces sold. Recently, Lundin Mining reported that Chapada had exceeded its copper guidance for the year. Similar to Saramoro, sales from the Chapada copper stream benefited from a rise in our average realized selling price of copper, which increased from an average of $2.73 per pound during the year ended December 31, 2020, to an average of $4.04 per pound during the equivalent period in 2021. Other assets to highlight on this list include the addition of the valet royalties package. Sandstorm purchased the valet royalties in June 2021, and the transaction was the largest royalty transaction or acquisition of the year. The royalties contributed over 5,700 gold equivalent ounces to Sandstorm's production. These long-life and low-cost assets are expected to produce for several decades. The last asset I want to touch on is the Arizona mine. Arizona contributed just over 5,500 gold equivalent ounces for the year. The operator, Equinox Gold, released a pre-feasibility study in September 2021. This PFS outlined an expansion to Arizona through the development of underground mine and additional satellite open pit deposits, which would be operated concurrently with the existing open pit mine. The assessment outlines the total production of 1.5 million ounces of gold over 11-year mine life. As a Sandstorm shareholder, it's encouraging to see this study outlined further upside in Arizona. As a reminder, Sandstorm has a 3% to 5% sliding scale NSR royalty on the Arizona project. At current gold prices, between $1,500 and $2,000 per ounce, the royalty is a 4% NSR. increasing to 5% NSR when the gold price is above $2,000 per ounce. The next slide provides a breakdown of Sandstorm's attributable gold equivalent ounces for the year ended December 31, 2021, broken out by region and metal type. Over 90% of production came from assets operating in the Americas, with over half coming from South America. Sandstorm remains a precious metal-focused royalty company with nearly 70% of attributable gold equivalent ounces from precious metals. A few final highlights from the year before I wrap up. As many of you are aware, Sandstorm declared its first dividend in 2021, which was paid out to shareholders in January of this year. With the stable and consistent growth that Sandstorm has demonstrated over the last several years, it feels great to be able to include a dividend as another way of returning capital to shareholders. This is in addition to the 5.5 million shares of the company purchased and cancelled through its active share buyback program in 2021. Another highlight this year was in regards to our continued efforts to ensure Sandstorm is a leader in sustainability. Sandstorm became the first royalty company with a credit facility tied to various sustainability goals. Incorporating incentive pricing based on the company meeting certain ESG-related criteria improved our sustainability efforts while benefiting shareholders at the same time. The $350 million revolving credit facility represents an increase of approximately 55% in Sandstorm's credit capacity, further expanding the company's available capital for future acquisitions. And as Nolan mentioned earlier, we're quite busy working on a number of opportunities. 2021 was a busy year for Sandstorm in many ways. And with today's announcement that Nolan discussed earlier, I expect that 2022 will be truly transformative. And with that, I'll send things back over to Nolan.