Company Overview: Sandfire Resources Limited (ASX: SFR) is a mid-tier mining and exploration company involved in high-margin copper-gold production in Australia. The company produces high-quality copper-in-concentrate with significant gold credits from its 100% owned DeGrussa operations in Western Australia. The company also holds interest in large land holding in the highly prospective Kalahari Copper Belt in Botswana. SFR’s vision is to become a leading mid-tier mining company operating in the upper quartile of global performance benchmarks and its mission is to produce base and precious metals safely, profitably, and ethically from its operations.

SFR Details 

Improving Bottom Line: Sandfire Resources Limited (ASX: SFR) is an Australian mining and exploration company with a diversified portfolio of high-quality base metal assets. From its 100% owned DeGrussa operations in Western Australia, SFR produces and sells copper concentrate, containing gold and silver by-products. The company’s other projects include T3 Copper-Silver Project in Botswana and high-grade Black Butte Copper Project in Montana, United States. The company is focused on safely managing the productivity of its operations, increasing, and diversifying its resource base and securing new assets through business development initiatives. The company has a track record of decent financial performance, underpinned by the consistent and profitable production from its assets. From 2016 to 2020, the company’s revenue has increased at CAGR of 7.8%. Over the same period, the company’s dividend has increased at a CAGR of 14.64%.

8-Year Financial Performance Summary (Source: Company Reports)

Looking ahead the company is focused on transforming itself into a diversified and sustainable mining company. The company intends to continue its exploration, evaluation and development of mineral tenements and projects in Australia and overseas, including investment in early stage mineral exploration companies. SFR’s growing cash holding and debt free balance sheet is expected to provide flexibility in project development. To maximise long-term value and returns to shareholders, SFR plans to optimise its capital structure so that it can maintain the strength of its balance sheet while funding the company’s global development plans and organic growth opportunities.

FY20 Result Highlights: For the year ended 30^th June 2020, SFR reported production of 72,238 tonnes of contained copper and 42,263 ounces of contained gold, sourced from all lenses at DeGrussa and Monty operations. Despite the disruptions and uncertainty caused by the global COVID-19 pandemic, the company reported total sales revenue of $656.8 million, up 11% on FY19.

From its DeGrussa operations, the company reported production of 72,238 tonnes of contained copper and 42,263 ounces of contained gold, at a C1 cost of US$0.72/lb. Further, the EBITDA from DeGrussa Operations stood at $414.4 million, up by 13.4% on the previous year. During the year, the company earned a net profit after income tax of attributable to equity holders of $74.1 million, down by 30% on FY19, impacted by depreciation and amortisation of $201.4 million and an impairment charge of $23.6 million for oxide copper stockpiles and regional resources.

One of the important milestones of the year was 100% acquisition of MOD Resources Ltd, providing SFR with large land holding in the highly prospective Kalahari Copper Belt in Botswana. The company declared a final fully franked dividend of 14cps, taking the full-year dividend to 19cps fully franked. As on 30^th June 2020, the company had cash balance of $291.1 million and no debt in its balance sheet.

FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 43.39% 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, SFR’s gross margin stood at 67.4%, higher than the industry median of 44.5%. For the same period, the company’s net margin stood at 11%, higher than the industry median of 7.2%. The company’s debt to equity ratio stood at 0.02x in FY20, lower than the industry median of 0.21x. SFR’s current ratio stood at 5.44x in FY20, higher than the industry median of 1.74x, demonstrating that the company is well-placed to pay its short-term obligations. 

Key Metrics (Source: Refinitiv, Thomson Reuters) 

Divestment of Sams Creek Gold Project: On 1^st October 2020, the company announced that it is going to sell its interest in the Sams Creek Gold Project in New Zealand to Auris Minerals Ltd for an estimated value of $23.2 million. This divestment will provide SFR an opportunity to leverage value from a non-core asset in partnership with Auris and will allow it to focus on the development of its advanced base metal development projects in Botswana and in Montana, USA.

Board Succession and Management Restructure: To progress towards the next growth phase, SFR has commenced an orderly and measured succession process to ensure has a strong, well-credentialed Board. As part of this process, the company has announced the appointment of experienced human resources and accounting executive Sally Langer to the Board as an Independent Non-Executive Director. The company has announced the retirement of two Non-Executive Directors - Maree Arnason and Robert Scott. SFR has also established a streamlined Executive Committee (EXCO) consisting of Karl Simich (Chief Executive Officer and Managing Director), Jason Grace (Chief Operating Officer) and Matthew Fitzgerald (Chief Financial Officer and Company Secretary). These changes are expected to help SFR on its next growth chapter as a diversified, international multi-asset base and precious metals company.

What to Expect: Looking ahead the company is focused on executing delivery of its existing operating assets, building a sustainable production profile, accelerating discovery, aligning, and empowering its people and prudent capital management. In the next few months, the company expects to complete and announce the results of its Feasibility Studies on the T3 Copper-Silver development project in Botswana and the Black Butte Copper Project in Montana, USA. SFR also expects to post a maiden resource for the exciting A4 Dome discovery in Botswana.

At is Tshukudu project, the company is targeting high-grade satellite discoveries with potential to expand the scale of Motheo as a central production hub. At its DeGrussa operations, the company is progressing with its multi-pronged exploration strategy which focuses on accelerating discovery to extend mine life and rolling out new geophysical technology to allow deeper targeting.

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: In the last three months, the stock of SFR has corrected by 20.30% and is trading lower than the average 52-weeks price level band, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$3.93 and a resistance level of ~$5.24. 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 current trading level, decent financial and operational performance, debt-free balance sheet, FY21 production guidance, we give a “Buy” recommendation on the stock at the current market price of $4.4, down by 2.223% on 20 October 2020.

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

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