Company Overview: Sandfire Resources NL is a mining and exploration company. The Company's principal activities are production and sale of copper, gold and silver from its DeGrussa Mine in Western Australia, and exploration and evaluation of mineral tenements and projects in Australia and overseas. It has two segments: The DeGrussa Copper Mine and Exploration and evaluation. The DeGrussa Copper Mine is a copper-gold mine located in the Bryah Basin mineral province of Western Australia, approximately 900 kilometers north-east of Perth and 150 kilometers north of Meekatharra. The DeGrussa Copper Mine generates revenue from the sale of copper-gold products to customers in Asia. The Exploration and evaluation segment includes exploration and evaluation of the mineral tenements in Australia and overseas, including exploring for repeats of DeGrussa Volcanogenic Massive Sulfide (VMS) mineralized system at the Doolgunna Project and its investment in Tintina Resources Inc and WCB Resources Ltd.


SFR Details

FY19 Top-line posted growth of ~3.9% over the previous year: Sandfire Resources NL (ASX: SFR) is involved in the production and sale of copper concentrate, containing gold and silver by-products from the Group’s 100% owned DeGrussa operations in Western Australia. It is also involved in the exploration, evaluation and development of mineral tenements and projects in Australia and overseas, including investment in early-stage mineral exploration companies. According to the released results for FY19, total revenue for the period was noted at $592.2 Mn, up ~3.9% on the previous year. Total revenue was majorly contributed by sales of copper at 87.1%, whereas sales of gold and silver contributed 11.8% and 1.1%, respectively, to the company’s revenue. Moreover, record low C1 costs at the DeGrussa Operation along with a weaker Australian Dollar, helped offset the fall in Copper prices. This outstanding performance highlights Sandfire’s second-best financial result in seven years of operations reflecting the quality and consistency of the DeGrussa Operation as the springboard for its growth aspirations to build a diversified portfolio of high-quality base metal assets.

The company witnessed a decent performance in terms of top-line, profitable margins along with healthy cash balance at the end of FY19. Going forward, considering the promising copper and gold outlook, the company is likely to improve its bottom-line performance in the upcoming years.
 

FY19 Revenue Segmentation (Source: Company Reports)

DeGrussa Operations contributed $225.7 million in the earnings: Profit before net finance expense and income tax expense for the period was reported at $153.1 million, as compared to $173.8 million in FY18. The DeGrussa operations contributed profit before net finance and income tax of $225.7 million as compared to $226.3 million in FY18, as production from DeGrussa operations reported 69,394 tonnes of contained copper (Cu) and 44,455 ounces of contained gold (Au) at a record low C1 cost of US$0.83/lb, as compared to 64,918t Cu and 39,273oz Au respectively, at a C1 cost of US$0.93/lb in FY18.

DeGrussa Operation costs for FY19 (Source: Company Reports)

SFR’s reported strong cash position of $247.4 Mn with no debt: The exploration and evaluation segment expenditure resulted in a loss before net finance and income tax of $57.7 million, as compared to the loss of $39.1 million in FY18. The Group’s corporate functions that cannot be directly attributed to the Group’s operating segments, contributed a loss before net finance and income tax of $15.0 million, as compared to the loss of $13.5 million in FY18. During the period, dividends of $41.5 million were declared, comprising $30.3 million in respect of the 2018 financial year. Subsequent to the year-end, the Board of Directors declared a fully franked final dividend of 16 cents per ordinary share, with record date and payment date on November 15, 2019, and November 29, 2019, respectively. The total dividend comprises interim dividend of 7 cps and a final dividend of 16 cps, which together represents 35% of the earnings per share for the full year. The final dividend has not been provided for in the consolidated Financial Statements for the year ended June 30, 2019.
 
The cash flow from operating activities was reported at $210.4 million, as compared to $245.0 million in FY18. The company’s cash position on June 30, 2019, was reported at $247.4 million with no debt, as compared to a cash position of $243.3 million in FY18.
 

FY19 Income Statement (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 42.21% of the total shareholding. Mitsubishi UFJ Financial Group Inc and Vinva Investment Management Limited hold maximum interest in the company at 7.64% and 5.96%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)

A Quick Look at Key Metrics: Its gross margin, EBITDA margin and net margin for H1FY19 stood at 66.0%, 48.5% and 17.7%, better than the industry median of 43.6%, 36.4% and 13.7%, respectively, which implies decent fundamentals for the company. Its ROE for H1FY19 stood at 9.2%, better than the industry median of 6.5%, which implies the company generated a better return for its shareholders than its peer group. Its current ratio for H1FY19 stood at 3.62x, better than the industry median of 1.89x, which implies the company is in a better position to address its short-term obligations. Its long-term debt to total capital ratio (%) for H1FY19 stood at 0.1%, below the industry median of 6.5%, which indicates that the company is virtually debt-free and utilizes its funds to fuel its operations.
 

Key Metrics (Source: Thomson Reuters)

Key Risks: The company is vulnerable to specific risks such as operation and business risks which include the wrong estimation of mineral resources, ore reserves and mine life; fluctuation in commodity prices and foreign currency; health, safety and environment; risks associated with environmental regulation and performance, etc.
 
Proposed Acquisition of MOD Resources Limited: On June 25, 2019, Sandfire Resources NL and MOD Resources Limited (ASX: MOD) executed a binding Scheme Implementation Deed for the implementation of a Scheme of Arrangement, under which Sandfire will acquire 100% of the issued and to be issued share capital of MOD.
 
On August 21, 2019, MOD has lodged a copy of the Scheme Booklet in relation to its acquisition, with the Australian Securities and Investments Commission. Following which the court approved the issue of scheme booklet and convening of scheme meeting to be held on October 1, 2019. The Independent Expert, Deloitte Corporate Finance, has concluded that the scheme is fair and reasonable and therefore in the best interests of MOD shareholders proposal. The transaction has received clearance from the Competition Authority of Botswana.
 
In the meantime, both the parties will continue to co-operate to plan for the integration of their businesses following the completion of the Scheme.
 
MOD has also released a Notice of General Meeting to be held immediately before the Scheme Meeting for shareholders to consider resolutions relating to MOD’s acquisition of Metal Tiger Plc’s 30% interest in specific exploration licenses on the Kalahari copper belt. Assuming MOD shareholders vote in favour of the Scheme and the Supreme Court of Western Australia subsequently approves the Scheme at the second court hearing to be held on 8 October 2019, the transaction is scheduled to be implemented on 23 October 2019. As part of this arrangement, SFR has agreed to extend its dividend record date to 15 November 2019 in order to allow MOD shareholders to participate in the dividend if the Scheme of Arrangement is completed by this date.
 
What to expect: Despite the headwinds of a weaker copper price environment, growing geopolitical uncertainty and market volatility, SFR delivered impressive and well-rounded performance for FY19. Company’s strong cash position along with investments in mine property development, acquisitions, exploration and organic growth, reflects its willingness to deliver sustainable value to its shareholders in the forthcoming years.
 
During the year, the ramp-up of the new high-grade Monty Copper-Gold Mine which now feeds ore into the DeGrussa Concentrator is expected to help the company in advancing on its global growth strategy.
 
Company’s proposed acquisition of MOD Resources Ltd will add a third emerging production hub based around the advanced T3 Copper Project in Botswana plus a belt-scale of 11,700 km2 land-holding in the Kalahari Copper Belt, which will provide an exceptional pipeline of exploration opportunities. On the other fronts, the company is working on its multi-pronged exploration efforts in the Doolgunna Region, and it has increased its stake in Adriatic Metals to 12.78%.
 
FY20 Production Guidance: As per the release, FY20 production guidance for copper and gold have been estimated at 70-75 kt and 38-42 koz, respectively, at a C1 cash cost of US$0.90-0.95/lb. With the debt-free balance sheet and strong liquidity position, the company is expected to look for expansion in the global base metal sectors.
 
Copper Outlook: Copper Futures (MCU/USD), at the time of writing, traded at US$5,655.00 (August 27, 2019, 13:24 (UTC+10)). It reached to its 52 weeks high on June 7, 2018, at US$7,347.00, since then it has corrected by ~23%, which can be attributed to the long-started trade war between the USA and China, which slowed the global growth rate. The recent turbulence in the copper prices can be attributed to the recent escalations in the macro-economic concerns; however, the metal’s supply and demand fundamentals will continue to improve, particularly, in light of looming demand from the electric vehicle and energy storage sectors.
 
Gold Outlook: Recent escalation in the trade war between the USA and China, has added a smile to the Gold investors. At the time of writing, Gold Spot (XAU/USD) traded at US$1,528.31 (August 27, 2019, 13:39 (UTC+10)). It recently broke its important resistance level at ~US$1366, and therefore, the present rally is expected to continue in the coming time.
 

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price to Earnings (PE) Multiple Approach (NTM):

Price to Earnings (PE) Multiple Approach (Source: Thomson Reuters), *NTM-Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: SFR’s share is trading close to the 52 weeks low level of $5.510, and hence indicates an opportunity for accumulation. Decent cash position, respectable margins, and ongoing MOD Resources acquisition process reflect the company’s determination in improving its bottom-line performance. Considering the present scenario, a decent outlook for copper and gold is likely to help the company to deliver a sustainable return for its shareholders in the coming times.
 
Looking at the business prospects over the long-term, we have valued the stock using a relative valuation method, Price to Earnings (PE) multiple and have arrived at a target price of double-digit growth (in percentage term). Hence, in view of aforesaid parameters and current trading levels, we recommend a “Buy” rating on the stock at the current market price of $5.70 per share, up 3.074% on August 27, 2019.

 
SFR Daily Technical Chart (Source: Thomson Reuters)

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