Contents

1 Theory 2 Analysis of the Deals 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 Summary of Donner Metals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of Terrex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of Thunderbird . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NovaDX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price Target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3 3 3 4 4 5 5 6 6

Sandstorm Metals and Energy Analysis

Connor Haley, Geoffrey Lee, John Capodilupo, Roman Yevstihnyeyev

March 24, 2012

Theory

We assume the ecient market hypothesis for the commodities market. Essentially, this assumption lets us use geometric Brownian motion to model the price movement of commodities. This stochastic process is governed by the equation dS = Sdt + SdW Where W is Brownian motion, is the drift rate and is the volatility of the commodity. Using this model for the price movement of a commodity, given knowledge of the price of a commodity S0 at the present time, at some future time t, the probability distribution of the price at time t is (ln s ln S0 ( 1 2 )t)2 1 2 PS (s, t) = Exp 2 2 t s 2t Our valuation of Sandstorms deals boils down to the following technique: break down each deal into a series of times ti where Sandstorm will consider buying the commodity. Compute the expectation value of the transaction at the time ti and then discount this value back to present date. For example, if Sandstorm agrees to a strike price q, and a quantity L to be purchased, the expectation value is E(t) = L
q

P (s, t)(s q)ds

Notice that this expectation value is a function of time, this allows us to sum together the expectation values at dierent times ti to get a valuation
iI

V =

E(ti )

1 1+r

t i

Where r is the discount rate. This method of valuation is similar to treating the deal as a successive series of call options at a strike price q on the underlying commodity. However, Sandstorm also has another part of the deal which guarantees them a certain cashow per year. Namely, if the price of the commodity falls low enough that it is no longer protable to buy it, Sandstorm can opt to have the selling company compensate them with some agreed upon cash transaction. This protects Sandstorms downside. In order to value this into the deal, we calculate the point at which it is less protable for Sandstorm to buy the commodity at time ti (say qi ) and then replace E(t) = L

qi

P (s, t)(s q)ds +

qi

P (s, t)Fi ds

Where Fi is the minimum guaranteed cashow at time ti .

Analysis of the Deals

We give a summary of each of the deals and the mathematica script used to calculate the expected value. The volatility is computed as the standard deviation of yearly price uctuations based on a 10 year history and the drift rate is the slope of the line best tting the natural log of the yearly prices.

2.1

Summary of Donner Metals

1. Sandstorm gave Donner $20 million dollars up front 2. Sandstorm can buy 17.5% of the copper that Donner Metals produces at the cheaper price: $0.80 or the market price (production begins approx 2013) 3. If the price of copper drops below $2.75 then Sandstorm can buy the copper at a price of $0.55. 4. It is expected that the mine will produce 21, 000, 000 pounds of copper per year for 4 years. 5. Donner can repurchase 50% of the contract by making a 14 million dollar payment to Sandstorm 6. Sandstorm is guaranteed to receive: $5.7 million in 2013, $5.1 million in 2014, $5.6 million in 2015 and $3.6 million in 2016

2.2

Valuation

Sigma = 1.130; Mu = 0.145; S0 = 3.83; r = 0.1;

L = 21000000*.175; m = {0, 5.7*10^6/L, 5.1*10^6/L, 5.6*10^6/L, 3.6*10^6/L}; f = {0, 5.7*10^6, 5.1*10^6, 5.6*10^6, 3.6*10^6}; p[s_, t_] := 1/(s Sigma Sqrt[2 Pi t]) Exp[-(1/(2 Sigma^2 t)) (Log[s] - Log[S0] - Mu - 1/2 Sigma^2) t)^2]; e[x_] := NIntegrate[p[s, x] f[[x]] , {s, 0, m[[x]]}] + L*NIntegrate[p[s, x] (s - 0.55), {s, m[[x]], 2.75}] + L*NIntegrate[p[s, x] (s - 0.80), {s, 2.75, Infinity}]; V = Sum[e[T+1]*1/((1+r)^{T+1}),{T,1,4}] This valuation gives the price to be $70 million dollars.

2.3

Summary of Terrex

1. Sandstorm gave Terrex Energy $14.7 million dollars in an upfront payment 2. Sandstorm agreed to buy 25% of all oil pool A and the same commodities from pool B for 5 years. Furthermore, Sandstorm will buy 15% of the commodities produced by a third facility. The price of $15.00 per barrel of oil plus royalty and transportation costs (approx $20.00 per barrel). 3. Expected production peaks at 345 thousand barrels per year. 4. Cash ow guarantees of: $0.5 million in 2011, $1.1 million in 2012, $1.8 million in 2013, $2.2 million in 2014, $2.6 million in 2015, $2.4 million in 2016, $2.2 million in 2017, $1.9 million in 2018.

2.4

Valuation

Sigma = 30.4; Mu = 0.145; S0 = 112.71; r = 0.1; L = (345000/2*.15 + 345000/2*.25)*.80; (* a conservative 80% recovery *) m = {0, 1.1*10^6/L, 1.8*10^6/L, 2.2*10^6/L, 2.6*10^6/L, 2.2*10^6/L}; f = {0, 1.1*10^6, 1.8*10^6, 2.2*10^6, 2.6*10^6, 2.2*10^6}; p[s_, t_] := 1/(s Sigma Sqrt[2 Pi t]) Exp[-(1/(2 Sigma^2 t)) (Log[s] - Log[S0] - Mu - 1/2 Sigma^2) t)^2]; e[x_] := NIntegrate[p[s, x] f[[x]] , {s, 0, m[[x]]}, MaxRecursion -> 20] + L*NIntegrate[p[s, x] (s - 20), {s, m[[x]], Infinity}, MaxRecursion -> 20]; 4

V = Sum[e[T+1]*1/((1+r)^{T+1}),{T,1,5}] This valuation gives a value of $44.6 million dollars.

2.5

Summary of Thunderbird

1. Upfront payment: $25 million 2. Sandstorm can buy 35% of the natural gas that is produced from Gordon Creek at the price of $1.00mcf (thousands of cubic feet) plus 20% of the market price above $4.00mcf (if it happens to rise above that level). 3. It is expected that the mine will be producing 5 bcf = 5,000,000 mcf of natural gas per year. Based on the period of payback, the conservative estimate is that the production will last for at least 5 years. 4. Thunderbird can repurchase 50% of the contract by making a $16.25 million payment to Sandstorm before December 31, 2013 - right before the full production is expected to begin. 5. Sandstorm is guaranteed to receive: $2.3 million in 2012, $5.1 million in 2013, $4.6 million in 2014, $4.2 million in 2015, $3.8 million in 2016, $3.3 million in 2017 and $1.7 million in 2018.

2.6

Valuation

Sigma = 2.5; Mu = 0.0058*12; S0 = 2.55; r = 0.1; L = 5000000*.35; f = {2.3*10^6, 5.1*10^6, 4.6*10^6, 4.2*10^6, 3.8*10^6, 3.3*10^6,1.7*10^6}; m = {2.3*10^6/L, 5.1*10^6/L, 4.6*10^6/L, 4.2*10^6/L, 3.8*10^6/L, 3.3*10^6/L, 1.7*10^6/L}; p[s_, t_] := 1/(s Sigma Sqrt[2 Pi t]) Exp[-(1/(2 Sigma^2 t)) (Log[s] - Log[S0] - Mu - 1/2 Sigma^2) t)^2]; e[x_] := NIntegrate[p[s, x] f[[x]] , {s, 0, m[[x]]}] + L*NIntegrate[p[s, x] (s - 1), {s, m[[x]], 4}] + L*NIntegrate[p[s, x] (0.8 s - 0.2), {s, 4, Infinity}]; V = Sum[e[T+1]*1/((1+r)^{T+1}),{T,1,5}] This prices the deal at $30 million dollars.

2.7

NovaDX

While these techniques should in principe apply to the pricing of NovaDX, we found that Mathematica was unable to numerically integrate the relevant functions - therefore we resorted to a more naive form of valuation based on expected production and a constant price (based on the current price). Essentially, the valuation can be done as follows: Sandstorm has the right to buy 25% of 650, 000 tons of metallurgical coal per year at a price of $75 dollars. Even with the extremely conservative pricing of $152 dollars per ton of coal, we can price the deal at about $50 million dollars.

2.8

Price Target

Our price target for Sandstorm then is the sum of the values of the deals and the cash on hand divided by shares outstanding; this value is Deals = 70*10^6 + (44.6)*10^6 + (30)*10^6 + 50*10^6; (Deals + 44*10^6)/(323*10^6) This gives a price target of $0.74.