Company Overview: Sandfire Resources Limited (ASX: SFR) engages in the exploration and production of copper concentrate, comprising gold and silver by-products from its 100% owned DeGrussa operations in Western Australia. In Botswana, South Africa, SFR undertakes the evaluation of the Motheo expansion project and the development of the Motheo copper mine. In the US, SFR’s subsidiary Sandfire Resources America Inc. operates the high-grade Black Butte copper project in Montana. SFR has recently expanded its portfolio and footprint with the acquisition of MATSA mining operations in Spain on 1 February 2022.

SFR Details

BMO Global Metals & Mining Conference Presentation Highlights:

Closed A Transformational Acquisition – MATSA Mining in Spain:

• On 1 February 2022, SFR acquired the MATSA mining complex in Spain for ~US$1.865 billion with access to three underground mines, thereby setting up a platform for stronger growth.
• MATSA is expected to contribute ~26,000 tonnes of contained copper production by June 2022 (five months to June 2022).

Robust Production Pipeline:

• With the recent acquisition of MATSA mining operations in Spain, SFR plans to update the mineral resource and ore reserve estimates on the project and execute a 5-year plan to optimise operations, grow value drivers, and expand the mine life.
• SFR anticipates the first production from the Motheo copper mine (T3 Deposit) in the June quarter of 2023.
• SFR is progressing on feasibility studies on the Motheo expansion project and the Black Butte copper project (~87%-owned) to build a pipeline and production profile for the future.

Growth Drivers for SFR; (Analysis by Kalkine Group)

Key Takeaways of 1HFY22 (Ended 31 December 2021):

• SFR recorded an increase in revenue to ~US$311.8 million in 1HFY22 versus ~US$256.1 million in 1HFY21.
• The metal sales of contained copper amounted to ~33,946 tonnes in H1FY22 compared to ~32,252 tonnes in PcP due to strong copper prices (~US$9,000 – US$10,600 per tonne in the period).
• NPAT rose by ~24% YoY to ~US$55.2 million in 1HFY22 from ~US$44.4 million in 1HFY21. EPS declined to ~US14.2 cents per share (cps) in 1HFY22 from ~US$24.0 cps in 1HFY21 due to the issue of equity for the recent MATSA acquisition.
• Liquidity Post Acquisition: SFR held ~US$1,201.7 million cash on hand as of 31 December 2021. SFR reported ~US$321.4 million cash as of 1 February 2022 comprising ~US$50.0 million cash from MATSA post acquisition.

Key Metrics Growth from 1HFY21 -1HFY22, Highlights; (Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form ~33.67% of the total shareholding. AustralianSuper and Vinva Investment Management Limited hold a maximum stake in the company at ~11.58% and ~4.88%, respectively.

Source: Analysis by Kalkine Group 

Key Metrics Performance: SFR witnessed a significant rise in net margin from ~11.0% in FY20 to ~21% in FY21. ROE rose also jumped significantly from ~10.6% in FY20 to ~21.4% in FY21.

Net Margin Trend; (Analysis by Kalkine Group)

Key Risks:

• Exploration Risk: SFR faces the risk of identification of new targets for exploration on existing and new projects, besides ore depletion, and correct resource estimation.
• Shortage of Skilled Labour: The prevalent COVID-19 crisis has impacted the labour mobility and availability. SFR faces the risk of scarcity of skilled labour and rising wage costs during the pandemic impact.  

Production Outlook:

• SFR expects to produce ~90,000 - ~95,000 tonnes of contained copper with the C1 cost guidance between ~US$1.10 - ~$1.20/lb in FY22.
• The DeGrussa operations are progressing on track to deliver ~64,000 - ~68,000 tonnes of contained copper and ~30 - ~34koz of contained gold in FY22. The DeGrussa production will be phased out after Q1FY23 and expected to be replaced by new production from the Motheo copper mine project in Botswana by FY23-end. Along with the development of the US-Black Butte copper project, SFR anticipates to more than double its production towards ~300,000 tonnes of copper equivalent by 2030.

Valuation Methodology: P/E 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: The stock of SFR gave a positive return of ~1.30% in the past three months and a negative return of ~0.61% in the past six months. The stock is currently trading slightly below its average of the 52-weeks’ low-high band of $4.908-$7.495. The stock has been valued using the P/E multiple-based-illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ mean P/E multiple, considering the uptick in the debt-to-equity ratio, acquisition risk, COVID-19 risks, and volatility in copper prices. For this purpose of valuation, a few peers like St Barbara Ltd (ASX: SBM), Regis Resources Ltd (ASX: RRL), OceanaGold Corp (ASX: OGC), and others have been considered. Considering the current trading levels, decent financial performance in 1HFY22, a growing production profile, robust commodity outlook, an expanded portfolio with MATSA acquisition, indicative upside in valuation, and associated key business risks, we give a ‘Buy’ rating on the stock at the current market price of $6.055, as of 2 March 2022, 10:50 AM AEST (GMT+10), Sydney, Eastern Australia. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

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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