Today Sandstorm Gold and Teck Resources reached a deal that shows how much trouble some of the major mining companies are in.

Sandstorm is acquiring 56 royalties from Teck for $22 million USD (Click here to read the full news release). Let’s first stick to the positive and that is what Sandstorm was able to accomplish – in note form…

• Of the 56 royalties 4 are producing assets, 9 are development stage and the remaining are exploration stage.
• The immediate cash flow (estimated for 2016) is between US$1.5 to $2.0 million. This could grow at US $10 to $15 million per year … But that will take a while and need some serious help from rising commodity prices.
• Some of these royalties are with strong counterparties, such as Glencore, Kinross Gold (NYSE:KGC), Newmont Mining (NYSE:NEM), Barrick Gold (NYSE:ABX), New Gold (NYSEMKT:NGD) and Alamos Gold (NYSE:AGI) … Which certainly lowers Sandstorm’s risk.
• Even through some of the royalties are with smaller cap and even micro-cap companies, from my research royalties are tied to the land so if there is change in control Sandstorm holds strong bargaining rights. Obviously the company does not want the properties to have issues but it is bound to happen.
• Although the deal is valued at US$22 million Sandstorm only has to pay US$1.4 mill in cash. The remaining US$20.6 million is in shares that were valued at a 21% premium over the current share price.

When we take the royalties above and consider the deal made with Yamana back in October (click here for that news release), Sandstorm will have up to 20 assets generating cash flow by the end of 2016. The deals the company is closing are bringing Sandstorm to the table with the big boys as a serious player.

To wrap up the Sandstorm side of the equation I still see the stock being weighed down for at least another couple months. Teck will most likely offload some of the shares it received (see why I think this below) in the deal. Also with my belief that commodity prices will not significantly appreciate in the short term the cash flow will be limited to the lower end. Nonetheless Sandstorm is on my watch list and a definite buy when I see the sentiment changing for the miners.

Now to the worries I have with this deal. Teck is one of the largest mining companies in the world but it has been offloading assets. First 31 royalties to Osisko back in October 2015 (click here to read the news) for C$28 million and now 56 royalties to Sandstorm for US$22 million. It’s interesting that at face value Sandstorm got a better deal – note, I could not find any cash flow estimates from the Osisko deal yet.

A quick look at Teck’s balance sheet and we see over C$1.4 billion in the bank as of September 30, 2015 (the most recent financials filed). That’s a big number and dwarfs the US$22 million. The issue is when we look at the liabilities side and see C$9.2 billion in long term debt plus C$439 million of current debt. Teck is showing the world that it took on too much debt during the bull run and now is unloading assets for cash purposes. The overall debt is what makes me think that Teck will be selling at least a portion of the Sandstorm shares.

Even though Teck has C$1.4 billion in the bank the company is moving forward with the Fort Hills mile which is touted to cost $1.5 billion. I guess the saying you have to spend money to make money does not work when you are at the top of a bull market…

As we progress through this year and we get closer to a true bottom in gold and and uptrend being established these are the types of deals and companies to keep in mind and add to your shopping list. We will try to keep you up to date of other deals as they happen.