Company Overview: Sandfire Resources Limited (ASX: SFR) is an Australian mining and exploration company mainly involved in the production of copper. The company is also involved in the production of gold. The company’s DeGrussa Operations includes both the DeGrussa and Monty Copper-Gold Mines, which are two of the Asia-Pacific region’s premier, high-grade copper mines. The company operates Motheo Copper Mine in Botswana and Black Butte Copper Project in Montana, USA.

SFR Details

Key Takeaways from FY21 Results:

• Production Guidance Met: For the year ended 30 June 2021 (FY21), the company reported production of 70,845 tonnes of contained copper, which is above the guidance range of 67,000-70,000 tonnes. Further, the company had reported production of 39,459 ounces of contained gold, which is at upper end of the guidance range of 36k-40k ounce.
• Improved Financial Results: For FY21, the company has reported total revenue of $813 million, up from $656.75 million in FY20. Further, the company reported an operating cashflow of $471 million, and a record net annual profit after tax of $170.1 million. The results were driven by the increased copper prices during the year and strong and low-cost operational performance at the DeGrussa Operations.
• Rising Cash Balance: Despite making significant investments in the company’s growth projects to support the execution of its Strategic Growth Plan, the company’s cash balance grew to $573.7 million as at 30 June 2021, up from $291.1 million in FY20.
• Increase in Dividend: For FY22, the company reported fully-franked final dividend of 26cps, taking the total full year dividend to 34cps, which is ~80% over dividends paid in FY20.

Cash Balance Trend (Source: Analysis by Kalkine Group)

Key Metrics: EBITDA Margin for FY21 stood at 55.4%, up from 51.6% in FY20. Gross margin for FY21 stood at 71.1%, up from 67.4% in FY20. ROE for FY21 stood 20.7%, up from 11.0% in FY20, demonstrating the company’s improving returns. Current ratio for FY21 stood at 3.50x, up from 5.44x in FY20.  

Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 24.98% of the total shareholding, while the top four constitute the maximum holding. AustralianSuper and The Vanguard Group, Inc. are holding a maximum stake in the company at 5.54%, and 4.12%, respectively, as also highlighted in the chart below:   

Top 10 Shareholders (Source: Analysis by Kalkine Group)     

Transformational Acquisition of the MATSA Mining Complex: On 23 September 2021, the company announced that it entered into a binding sale and purchase agreement with Trafigura and Mubadala Investment Company for 100% acquisition of Minas De Aguas Teñidas (MATSA) for a total consideration of US$1,865 million. Key highlights of the acquisition are as follows:

• This acquisition will help SFR to transform into a first quartile copper producer of global scale.
• The acquisition will improve SFR’s earnings and cash flow per share in its first full year of ownership.
• The company will fund the traction through a combination of a US$650M syndicated and underwritten debt facility secured by MATSA, and A$1,248 million fully underwritten equity raising, A$297 million from existing cash reserves and the drawdown of A$200 million corporate debt facility.
• It is expected that the transaction will be completed by March 2022 quarter.

A$1,248 million fully underwritten Equity Raising: On 23 September 2021, the company had announced A$1,248 million fully underwritten equity raising, which is comprised of A$120M strategic placement to AustralianSuper, A$165M institutional placement and A$963 million 1 for 1 accelerated non-renounceable entitlement offer.

Completed Retail Entitlement Offer: On 18 October 2021, SFR announced that it has completed the retail component of its 1 for 1 pro-rata fully underwritten accelerated non-renounceable entitlement offer of new fully paid ordinary Sandfire shares. This follows the completion of the institutional entitlement offer and placement in September 2021. Including the funds raised under the institutional component of the Entitlement Offer and placement to institutional investors, the company has raised around $1,248 million.

Sale of investment in Adriatic Metals Plc: On 14 October 2021, the company announced the sale of its investment in Adriatic Metals Plc for A$97 million. As per the announcement, SFR has sold around 34,600,780 CHESS depositary interests (CDIs) representing ordinary shares in the capital of Adriatic Metals Plc at a price of AU$2.80 per Secondary Placing Share.

Key Risks:

• Commodity Price Risk: The company is exposed to the risk related to the fluctuations in the prices of copper and gold as it could impact its financials.
• COVID-19 Uncertainties – The company is also exposed to the uncertainties surrounding the COVID-19 pandemic, as it could disrupt the company’s operations and impact its production performance.

Outlook: The demand for copper has been increasing due to its essential role as a critical metal in green technologies, construction and industrial sectors. The copper demand is expected to rise further in the future, due to the acceleration in green electrification trends. SFR with its high-quality copper development pipeline is well placed to cater to the rising copper demand. For FY22, the company expects the production to be in the range of 64-68kt of contained copper and 30-33koz of contained gold, at C1 US$1.00-$1.10/lb. With its high-quality debt and equity funding, the company seems well placed to fund the acquisition of MATSA while retaining balance sheet flexibility to deliver its 5.2Mtpa Motheo Copper Mine in Botswana and maintain a global exploration program.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by ~3.86%. The stock has a 52-week high and low price of $3.773 and $7.314, respectively. The stock has been valued using EV/Sales multiple based illustrative relative valuation method and arrived at a target price of a low double-digit upside (in % terms). The company can trade at slight premium to its peers, considering the rising cash balance, and modest copper outlook. For the valuation purpose, peers such as OZ Minerals Ltd (ASX: OZL), Aeris Resources Ltd (ASX: AIS), Copper Mountain Mining Corporation (ASX: C6C), etc., have been considered. Considering the company’s improved financial and operational performance in FY21, rising copper demand, modest long-term outlook, and valuation, we give a “Buy” rating on the stock at the closing price of $5.710, as on 20 October 2021, down ~3.06%.

SFR Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:  

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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