Company Overview: Sandfire Resources Limited (ASX: SFR) is a leading mid-tier mining and exploration company that operates the high-margin DeGrussa Copper-Gold Mine, located in Western Australia. The company also owns several other projects including Black Butte Project and Tshukudu Project. The company mainly produces high-quality copper-in-concentrate with significant gold credits. SFR’s vision is to become an internationally diversified and sustainable mining company with growing production and exploration hubs. The company is also involved in the exploration, evaluation and development of mineral tenements and projects in Australia and overseas.

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. SFR intends to establish itself as 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. The continued stable production and cash-flow from the DeGrussa Operations has allowed the company to maintain decent financial performance. Over the last five years, SFR has witnessed decent improvement in its top-line. From 2016 to 2020, the company’s revenue has increased at a CAGR of 7.82%.

Revenue and Gross Profit Trend (Source: Company Reports)

Despite the operational challenges presented by the COVID-19 pandemic, the company was able to report decent production numbers in the June quarter, supporting the full-year production. The company will continue to assess and monitor the potential impacts of COVID-19 on project execution and timeframe to production. Going forward, the company intends to continue mining operations at DeGrussa operations and plans to continue exploration and evaluation over its areas of interest. SFR intends to develop new operational centres and execute new business development opportunities by leveraging off its robust balance sheet and its strength in project evaluation and execution. The company also plans to take full advantage of the recent recovery in the copper price, which is already up around 35% from its COVID-19 lows. Further, the company intends to unlock the potential of its building global development pipeline.

FY20 Results Highlights: For the year ended 30 June 2020 or FY20, the company reported total sales revenue of $656.8 million, up 11% on the previous year, supported by the payable metal sales totalling 69,593 tonnes of contained copper and 40,004 ounces of contained gold. From its DeGrussa Operations in Western Australia, the company produced 72,238 tonnes of contained copper and 42,263 ounces of contained gold, at a C1 cost of US$0.72/lb. The EBITDA from DeGrussa Operations stood at $414.4 million, up 13.4% on the previous year, driven by decent operational and sales performance. The FY2020 net profit after income tax stood at $72.3 million and EPS at 42.88cps.

The decent financial performance allowed the company to return funds to shareholders and declare a final fully franked dividend of 14 cents per share, taking the total FY20 dividend to 19cps fully-franked. At the end of FY20, the company had cash of $291.1 million with no debt in the balance sheet.

During the year, the company made significant investments in long-term growth and diversification projects. One of the major highlights of FY20 was the acquisition of MOD Resources Limited (MOD) by way of a scheme of arrangement. This acquisition provided a large land holding to the company in the highly prospective Kalahari Copper Belt in Botswana, including the advanced T3 Copper-Silver Project. Over the year, the company also completed the acquisition of 100% of Trans Kalahari Copper Namibia (Pty) Ltd, which holds a block of nine licences in Namibia covering large, under-explored area within the western part of the Kalahari Copper Belt.

FY20 Income Statement (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 43.47% of the total shareholding. Mitsubishi UFJ Financial Group Inc and Dimensional Fund Advisors, L.P. 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 FY20, the company’s gross margin stood at 67.4%, higher than the industry median of 44.8%. For the same period, the company’s net margin stood at 11%, higher than the industry median of 8.7%. The company has a current ratio of 5.44x, higher than the industry median of 1.76, demonstrating that the company is well equipped to pay its short-term obligations. The company’s debt to equity ratio stood at 0.02x in FY20, lower than the industry median of 0.21x.

Key Metrics (Source: Refinitiv, Thomson Reuters) 

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 some adjustments in the usual operating procedures, the direct impact on the Degrussa operations was limited to social distancing. Further, the company was able to maintain a decent production performance throughout the period. Going forward, the company will continue to assess and monitor the potential impacts of COVID-19 on project execution and timeframe to production.

Board Succession: To supervise SFR’s next growth phase and its aspiration to become a sustainable international mining business, the company has started an orderly and measured succession process to make sure it has a strong, well-credentialed Board. As part of this process, the company recently announced the appointment of experienced human resources and accounting executive Sally Langer to the Board as an Independent Non-Executive Director.

Key Risks: Due to the evolving COVID-19 pandemic, the company is exposed to various emerging risks and uncertainties, which could impact the company’s business. The COVID-19 pandemic can cause interruptions to supply chains, travel restrictions and boarder closures, adverse impacts to the company’s people’s health and wellbeing, material delays to project timelines and reduced demand for the company’s copper in concentrate. Further, the company is exposed to a range of climate change risks, including those related to the transition to a lower-carbon economy and those related to the physical impacts of climate change. In addition, the company’s financial performance is exposed to fluctuations in the market price of copper and gold.

What to Expect: The company continues to build on the robust foundations at DeGrussa operations and leverage off its strong, debt-free balance sheet to realise its vision of becoming a multi-asset international base and precious metals company.

In FY21, the company expects its copper production to be in the range of 67-70,000t and gold production to be between 36-40,000oz with C1 cost in between US$0.90-0.95/lb. The company’s growing cash position and debt-free balance sheet are providing flexibility in project development.

In the coming months, SFR expects to complete and announce the results of its Feasibility Studies on the T3 Copper-Silver development project in Botswana and the now fully permitted Black Butte Copper Project in Montana, USA. Further, the company expects to post a maiden resource for the exciting A4 Dome discovery in Botswana, located just 8km from its T3 development project, with scoping underway to include it along with T3 in an expanded Motheo production hub.

Going forward, the company intends to continue its active exploration across the Kalahari Copper Belt in Botswana and is targeting the next VMS discovery across the emerging Bryah Basin VMS district in Western Australia. The company plans to take full advantage of the recent recovery in the copper price, which is already up around 35% from its COVID-19 lows. Further, the company intends to unlock the potential of its building global development pipeline.

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: On a YTD basis, the stock of SFR has corrected by 20.85% on ASX. However, in the last six months, the stock has increased by 8.1% and is currently trading slightly higher than the average 52-weeks price level band. We have valued the stock using the price to earnings based illustrative relative valuation method and have arrived at a target price with low double-digit upside (in % terms). For the purpose, we have taken peers like OceanaGold Corp (ASX: OGC), St Barbara Ltd (ASX: SBM), Regis Resources Ltd (ASX: RRL), etc. Considering the company’s decent financial and operational performance in FY20, significant investments in long-term growth, FY21 production guidance and robust balance sheet, we give a “Buy” recommendation on the stock at the current market price of $4.630, down by 0.857% on 1 September 2020.

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

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