Company Overview: Sandfire Resources Limited (ASX: SFR) is a gold and base metal exploration company with a strong history of safe, consistent, and profitable production from its flagship high-margin DeGrussa Copper-Gold Mine, located in Western Australia. The company intends to grow into an international diversified and sustainable mining company with growing production and exploration hubs spanning the world’s major continental zones: Europe, Africa (EMEA), Middle East, Asia-Pacific, and The Americas. The company is focused on building a global development and exploration pipeline comprising projects that fit with its strategic and operational capabilities.


SFR Details


 
Consistent Financial Performance: Sandfire Resources Limited (ASX: SFR) is a leading mid-tier mining and exploration company, involved in the production and sale of copper concentrate, containing gold and silver by-products from its 100% owned DeGrussa operations in Western Australia. The company has an excellent track record of safe, consistent, and profitable production from its DeGrussa Operations. The company’s vision is to become a diversified international mining house, with growing production and exploration hubs spanning the world’s major continental zones. The continued decent production and cash-flow from the DeGrussa Operations have allowed the company to maintain a strong and consistent financial performance. From 2013 to 2019, the company’s revenue has increased at a CAGR of 3.11%. 


Financial Performance Overview (Source: Company Reports)

Progressing on its growth vision, the company has recently begun its transformation from a single-mine company operating in Australia into a diversified and sustainable mining company. Last year, the company completed the development of the new high-grade Monty Copper-Gold Mine located 10km east of the DeGrussa Copper-Gold Mine. Lately, the company has commenced programs and undertaken various initiatives that are designed to strengthen its asset base and give its shareholders exposure to a quality pipeline of development and exploration assets. Amid Covid-19 pandemic, the company’s DeGrussa operations are running at full capacity, with strong mine production and milling rates. The company is on track for a decent completion of the 2020 financial year.

FY19 Performance Highlights: During the financial year 2019 or FY19, the company performed well across every facet of its business, while also taking significant steps to further diversify its asset base and secure its long-term future. The company’s DeGrussa operations generated robust margins and cash-flows, underpinned by consistent production performance and record low cash operating costs. 

During the year, the company produced 69,394 tonnes of contained copper and 44,455 ounces of contained gold while maintaining a low operating cost profile with C1 cash operating costs dropping to an exceptional US$0.83 per pound for FY19. The company reported sales revenue of $592.2 million and net profit after income tax of $106.5 million, equating to earnings per share of 65.23 cents. Further, the company reported a strong cash flow from operating activities of $210.4 million. For the year, the company paid a total dividend of 23.0 cents per share, which includes a final dividend of 16.0cps (fully franked) and an interim dividend of 7.0cps.


FY19 Results Highlights (Source: Company Reports)

H1FY20 Performance Highlights: During the first half of FY20, the company produced 34,988t of contained copper and 19,370oz of contained gold produced with C1 cash operating costs at US$0.84/lb. A total of 147,808 dmt tonnes of concentrate was sold during the half-year containing 35,129 tonnes of copper and 19,673 ounces of gold. During the half-year period, the company’s multi-pronged exploration programs continued across its Greater Doolgunna Project, Australian Eastern States Projects, and Tshukudu Project.

For the period, the company reported revenue from ordinary activities of $313 million, up 15% on the previous corresponding period (pcp). The company recorded strong cash flow from operating activities of $109.1 million and a net profit of $33.3 million. The company declared an interim dividend for 1HFY2020 of 5.0cps (fully franked). 


H1FY20 Results Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 44.4% of the total shareholding. Mitsubishi UFJ Financial Group Inc and Vinva Investment Management Limited hold maximum interest in the company at 6.39% and 5.05%, respectively.


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
 
A Quick Look at Key Ratios: For H1FY20, the company’s gross margin stood at 62.6%, higher than the industry median of 46.8%. Further, the company’s EBITDA margin stood at 45.6%, higher than the industry median of 36.6%.  The company’s current ratio stands at 3.9x, higher than the industry median of 1.76x, demonstrating that the company is well-equipped to pay its short-term debts. 
 

Key Metrics (Source: Refinitiv, Thomson Reuters)
 
March Quarter Highlights: During the March quarter, the company produced 17,936t of contained copper and 9,352oz of contained gold. Over the period, the company sold 73,945t of concentrate containing 17,564t of copper (16,801t payable) and 9,226oz of gold (8,369oz payable).


March Quarter Performance (Source: Company Reports)

During the quarter, the company made significant exploration progress with permitting at the Black Butte Copper Project in Montana, with the final Environmental Impact Statement (EIS) issued over the period. The company progressed with Multi-pronged exploration programs across Sandfire’s Greater Doolgunna Project and reported positive results from exploration at the Tshukudu Exploration Project in the Kalahari Copper Belt. At the end of the quarter, the company had cash and deposits of $242.0 million.

Tshukudu Exploration Update: On 25 May 2020, the company reported significant exploration results from resource drilling at the A4 Dome satellite discovery, part of its Tshukudu Project in the Kalahari Copper Belt in Botswana. The company has received encouraging new results from resource drilling at the A4 discovery, demonstrating the continuity of high-grade vein-hosted mineralisation which remains open along strike.

Given the lifting of the COVID-19 lockdown restrictions in Botswana, the company is looking forward to getting rigs back to the site to resume the resource drill-out within the A4 discovery zone, as well as testing some exciting structural targets that have emerged from AEM data in recent weeks. It is worth noting that these new zones have strong potential for new discoveries immediately along strike from the resource area. 

DeGrussa Ore Reserve and Mineral Resource Update: On 17 April 2020, the company 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)
 
Vinva Investment Management Becoming a Substantial Holder: Recently, Vinva Investment Management became a substantial holder of the company by holding 9,004,937 FPO in the company. Vinva Investment Management now holds 5.05% voting power in the company. 

Covid-19 Update: In response to the Covid-19 pandemic, the company has implemented several protocols to minimise the potential transmission of the virus. Despite the operational challenges, the company’s performance has remained strong throughout this period and its DeGrussa Operations has continued to operate at full capacity, with strong mine production and milling rates.

Key Risks: The company’s operating and financial performance is subject to a range of risks and uncertainties. Its mining operations are subject to uncertainty with respect to ore tonnes, mine grade, ground conditions, mill performance, metallurgical recovery or unanticipated metallurgical issues infill resource drilling, the level of experience of the workforce, operational environment, regulatory changes, accidents and other unforeseen circumstances such as unplanned mechanical failure of plant or equipment, storms, floods, bushfires or other natural disasters. Further, the company’s financial performance is exposed to fluctuations in the prices of copper, silver and gold. 

What to Expect: Sandfire Resources Limited has begun its transformation from a single-mine company operating in Australia into a diversified and sustainable mining company and it continues to build on the robust foundations at DeGrussa and leverage off its strong, debt-free balance sheet to realise its vision of becoming a multi-asset international base and precious metals company. With the production of 9,932t of contained copper and 6,500oz of contained gold for the first half of the June 2020 Quarter (to 15 May 2020), the company is on track to maintain the performance in FY2020. Following the strong production for the first half of the June 2020 quarter, the company expects production from DeGrussa Operations to be in the range of 70-72,000t contained copper and 38- 40,000oz contained gold at C1 unit costs ~$0.90/lb. 

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

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation: Over the last six months, the company’s stock has corrected by 17.66% but has increased by 73.21% in the last three months. The company currently has a strong balance sheet with $242 million cash at 31 March 2020 and no debt. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and have arrived at a target price with lower double-digit upside (in % terms). Considering the company’s decent YTD production performance, decent financial performance in H1FY20, robust balance sheet, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $4.950, up by 2.062% on 23 June 2020.  

 
SFR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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