idle and fond bondage

Sandstorm (SAND) (SSL.to): Mailbag and share buybacks (from IKN433)

This was a small section of IKN433, out last Sunday, that covered the share buyback currently being run by Sandstorm Gold (SAND) (SSL.to). Feedback from the piece (which in turn came from reader mailbag from ‘JH’) was interesting and as one of them said, there are thoughts here that apply to other companies, not just SAND.

I received a mail from JH who took
issue with the fact that I seem to support the share buyback policy at SAND,
that’s been in place for a while but only in the last few weeks has the company
got busy on it. It got a quick mention last week, but the last time I went into
the issue was while looking at SAND’s 2q17 numbers in IKN427. Here’s that
section of the anal ysis:
“I’m assuming that what
Nolan Watson said on the ConfCall (transcript link below(1)) comes to pass and
SAND gets “aggressive” on its plans for share buybacks this current quarter. It
wants to buy stock now, it has the right to buy 7.598m shares from now until
March and it wants to buy as many as it can now before the ETF rebalancing
period kicks in at the end of September (SAND strongly suspects Van Eck and its
friends will be buying chunks of SAND shares). At the moment and now the
Mariana purchase is closed, SAND has 184.514m shares out. I’m guesstimating
that as going down to 181m S/O by the end of this quarter, that means SAND
would use its Q3 cash flow on buying its own shares, plus a bit more.”
As for JH’s opinion, here’s most of
his mail to me (I’ve snipped bits and pieces out to keep it focussed, then
cleaned up a couple of very minor grammar things, but there’s nothing missing
on the message):
“I am a shareholder of SSL,
have been for a long time, and am quite against this way of using cash
considered excess to requirements by management. Can I point out a few numbers?
“There are 184 million
shares. The programme is for a maximum of 7.6 million shares, or 4.1% of the outstanding.
So if the whole thing were done, which it will not be as the price has gone up,
earnings per share would be increased by 4%. Using the numbers you suggest, the
number of shares going from 184.5 to 181 by September, the reduction is 2%, and
the increase in earnings per share more or less the same.
Since 6 August, gold has
gone from 1267 to 1309, so up U$42 dollars an ounce.
“The company sold 12,700 oz in Q2, so
assuming no change in Q3 that would be an extra half million in, which would go
straight down to gross profit, so from 4.6 to 5.1 million, so 10% increase. In
the same time, the share price has gone from 3.87 to 4.75.  Up
22% which is very cheering.
“Do you really think the
driver for the share price increase is the reduction of the number of shares by
2%, or the increase in the price of gold? Conversely, if the price of gold
drops back to 1260 do you really think the share price will hold up?  I will
bet no, but in the meanwhile Mr. Nolan and his board will have given several
million of shareholders money to people who do not wish to be shareholders any
more, and those who have kept their shares will be back to stage one, without
having benefitted from anything, which they would have if they had received a
“…ultimately we are
talking about mines, which are finite resources. The least management can do is
try to return to investors the cost of buying and developing the mine before it
is exhausted.
“Share buybacks are part
of the “pass the parcel” culture and shareholders are not the
beneficiaries. All that to say that when a chap like Nolan declares a buyback
programme, I wish people like you would call him out rather that condone it.”
IKN433 back. OK JH (and others)
here’s my position on the subject, nice and clear: I’m not and never will be
the greatest fan of stock buyback programs and a lot of that is represented in
the argument presented above by JH. I realize the company can always turn
around and say “We think our share price is cheap and think that today, using
cash to buy back shares is a great way of improving Return on Equity”, or they
say, “There’s really not much out there that better than our own shares”,
wrapping itself in the flag along the way. JH is right in several respects, it
is an exercise in ‘pass the parcel’ and surely a company like SAND can find
something better to do with U$12m or so (my best guess on how much they’ll
spend on the buyback).
On the other hand, I’m not the
biggest opponent to the policy, either. For one thing yes, it looks good and
the wider market (especially the US market which SAND is trying to
woo) likes the policy on an optics level. Secondly, I am clear in the fact that
SAND has just made a big investment, it’s not planning on doing any more big
ones for the rest of the year and if it’s collecting cash it’s okay (not great,
just okay)  to generate a marginally
better return for the time being.
As for the idea of declaring a
dividend, yes I’d like that from SAND eventually but a dividend policy at this
point could turn out to be a rod for its own back. Once in place and unless
it’s specifically declared as a special dividend (which needs to be larger
sized to make a difference to the share price else just become a wash), it needs to be a regular and ongoing payment. It can’t be opened in
2017 and then closed, because the optics would be awful (for more on the
subject see TAHO and what’s just happened to that stock price). At this stage
in SAND’s existence I don’t want to see a regular divi, I want them to grow and
develop a more mature asset book before devoting a chunk of its quarterly free
cash flow to us.  But that period will
end and in SAND’s case, once Hot Maden is up and running I won’t just want a
dividend, I’ll be demanding one.
Bottom line: It’s a bit mediocre yes,
but the current buyback policy fits in with their new conservative, well run,
tightly managed financial image. If it were me I’d want to explore other
opportunities and ways of deploying the cash before running a buyback, but I
have no massive gripe about SAND’s decision for this current quarter.

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