Company Overview: Sandfire Resources Limited (ASX: SFR) is a leading mid-tier Australian mining and exploration company involved in the business of producing base and precious metals safely and profitably from its operations. The company has a strong history of safe, consistent and profitable production from its flagship high-grade DeGrussa Copper-Gold Operations, located in Western Australia. SFR continues to focus on building a diversified portfolio of high-quality base metal assets and in order to do so, it intends to acquire and explore properties and projects in locations that are highly prospective for significant economic discoveries.


SFR Details
 

 
Strong Production from DeGrussa Operations: Sandfire Resources Limited (ASX: SFR) is a leading mid-tier Australian mining and exploration company which intends to become a diversified international mining house, with growing production and exploration hubs spread across the world’s major continental zones. Lately, the company has been focusing on further strengthening and diversifying its global development and exploration pipeline, expanding its reserve base and building a robust longer-term growth strategy that centres on developing new mines that are a sound strategic fit with its business. The company continues to enjoy strong production and cash flow from its DeGrussa Copper-Gold Operations, located in Western Australia (WA). Last year, the company completed the development of the new high-grade Monty Copper-Gold Mine, which further strengthened its exploration pipeline. From 2015-2019, the company’s sales revenue has increased at a CAGR of 2.51%.


Revenue Trend (Source: Refinitiv, Thomson Reuters)

The cumulative sales revenue from DeGrussa and the company’s debt-free balance sheet have allowed it to move decisively to capitalise on attractive and value-accretive growth and acquisition opportunities. With consistent and strong production from the DeGrussa operations, coupled with the growing contribution of high-grade ore from the Monty Mine, the company is currently well placed to maintain its status as a leading high-grade, low-cost copper producer in Australia. 

FY19 Results Highlights: In FY19, the company took significant steps to continue its transformation from a single mine company into a global, diversified and sustainable metals company. At its flagship DeGrussa Operations, the company saw record copper and gold production and record low C1 operating costs, underpinned by a continued strong focus on reliable production, cost control and optimisation. During the year, the company also completed the development and ramp-up of the new high-grade Monty Copper-Gold Mine, which is now feeding the ore into the DeGrussa Concentrator.

During the year, the company produced 69,394 tonnes of contained copper and 44,455 ounces of contained gold. For the full year, the company reported a net profit after tax of $106.5 million and total sales revenue of $592.2 million. During the year, the company also witnessed strong cash flow from operating activities of $210.4 million. This strong financial performance allowed the company to declare a final fully franked dividend of 16cps, taking the full-year dividend to 23cps.


FY19 Income Snapshot (Source: Company Reports)

H1FY20 Results Highlights: The company entered 2020 in a strong position at a time of great opportunity in the global base metals sector. In the first half of FY20, the company saw a strong operational and financial performance, supported by robust production and cost management at its DeGrussa Operations. The company reported total sales revenue of $313.1 million, payable metal sales 33,616 tonnes of Copper and 18,252 ounces of gold. For the period, the company posted a net profit after income tax of $33.3 million and earnings per share of 20.6 cents.  For H1FY20, the company declared an interim fully-franked dividend of 5 cents per share.

During H1FY20, SFR completed the acquisition of MOD, and continued progress with the permitting and Feasibility Study for the Black Butte Copper Project in Montana, USA and the commencement of a major new exploration campaign in Botswana.


H1FY20 Income Statement (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 43.64% of the total shareholding. Mitsubishi UFJ Financial Group Inc and Vinva Investment Management Limited hold maximum interest in the company at 6.39% and 5.15%, respectively.
 

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

A Quick Look at Key Margins: For H1FY20, the company’s gross margin stood at 62.6%, higher than the industry median of 46.8%. For the same period, the EBITDA margin stood at 45.6%, higher than the industry median of 36.6%. The company has a current ratio of 3.9x, higher than the industry median of 1.76x, demonstrating that the company is well equipped to pay its short-term obligations.


Key Metrics (Source: Refinitiv, Thomson Reuters)
 
Covid-19 Update: In response to Covid-19, the company has proactively implemented, appropriate protocols to minimise the potential transmission of the virus. As per the update provided on 17 April 2020, the company’s DeGrussa Operations are continuing at full capacity. In Doolgunna region, the exploration programs are continuing, however, the exploration team is now separated from the production team. At Tshukudu, the company has delayed the commencement of development activities at T3 pending the potential impact of COVID-19. The exploration in Botswana continued till late March 2020 but was later suspended in compliance with the 28-day lockdown imposed by the Government. The drilling is planned to resume once Government restrictions have been lifted and conditions allow for the safe resumption of exploration activities on site.

March 2020 Quarter: In the March 2020 quarter, the company reported copper production of 17,936 tonnes and gold production of 9,352 ounces at a C1 cost of US$0.74/lb. Over the quarter, the company’s production was sourced from all lenses at DeGrussa and Monty with the mine remaining in balance between production and back-fill. One major development that happened during the quarter was the company’s withdrawal from the Red Mountain Project Earn-In and Joint Venture Option Agreement with White Rock Minerals Ltd (ASX: WRM), and Sandfire retaining an 11.07% shareholder of White Rock Minerals Ltd. At the end of March quarter, the company had cash in hand of $242.0 million.


Quarterly Production (Source: Company Results)

Recent Updates:

1. Acquiring Trans Kalahari Copper Namibia: Recently, Sandfire Resources Limited agreed to buy 100% of the issued capital in Trans Kalahari Copper Namibia (Proprietary) Limited (TKC), for an upfront consideration of $1 million cash and $1 million in Sandfire shares.

2. Tshukudu Exploration Update: On 17 April 2020, Sandfire Resources Ltd provide an update on recent exploration activities at its Tshukudu Project in the Kalahari Copper Belt in Botswana, wherein it informed that it has received outstanding new results from step-out drilling at the A4 discovery, 8km west of T3-Copper-Silver Project, extending the zone of near-surface, vein-hosted mineralisation to a strike length of over 700m (previously 250m).

3. DeGrussa Ore Reserve and Mineral Resource Update: The company recently provided an updated Ore Reserve and Mineral Resource for the DeGrussa Operations, wherein it reported, 4.2Mt grading 4.9% Cu and 1.6g/t Au for 203kt of contained copper and 210koz of contained gold. A combined DeGrussa and Monty Underground Ore Reserve and Mineral Resource are summarized in the below tables:

(Source: Company Reports)
 
What to expect: Before Covid-19, the company was expecting to produce 70-72kt of contained copper and 38-40koz of contained gold during FY20. Further, the company had set C1 cost guidance of ~US$0.90/lb. Although the year to date, production and costs have remained broadly in-line with the FY20 guidance, due to uncertainty regarding the ongoing impact of COVID-19, the company has withdrawn its FY20 guidance. The company is proactively planning for the operating challenges that Covid-19 outbreak may bring in terms of access to human resources as well as to its production and project development supply chains and sales markets. Notwithstanding the short-term impacts of Covid-19, the company remains positive about the medium-term outlook for copper, which remains an essential ingredient for a sustainable, low-carbon future.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to earnings Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: In the last six months, the stock of SFR has declined by 30.98% on ASX and is currently trading below the average price of its 52-week trading range. The company currently has a robust balance sheet with strong cash holding and zero debt. We have valued the stock using a Price to Earnings multiple based illustrative relative valuation method and have arrived at a target price with lower double-digit upside (in % terms). For the purpose, we have taken peers OceanaGold Corp (ASX: OGC), St Barbara Ltd (ASX: SBM), Resolute Mining Ltd (ASX: RSG), etc. Considering the aforesaid facts, company’s decent production results, robust balance sheet, recent operational developments, and current trading levels, we give a “Buy” recommendation on the stock at the market price of $4.22, down by 1.86% on 12 May 2020. 
 
 
SFR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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