Upgrades Spreading Like Sandfire

This story features SANDFIRE RESOURCES LIMITED. For more info SHARE ANALYSIS: SFR

-Maiden interim profit
-DeGrussa problems in hand
-Results instigate re-rating
-Costs uncertain
 

By Eva Brocklehurst

Ratings upgrades came thick and fast for Sandfire Resources ((SFR))  in the wake of the company's interim results. The copper-gold producer/explorer has dealt with many of the problems that plagued the DeGrussa underground mine ramp-up, posting a maiden first half profit of $79 million as operational expenditure declined. The commissioning problems that surfaced late last year caused a substantial sell-off in the stock and brokers have now come back with a more favourable view.

So what produced the excitement? Other than the maiden profit, the company showed progress on problems with copper recovery and concentrate quality at DeGrussa, which is part of the Doolgunna project in Western Australia. Credit Suisse remains a little cautious, wanting an update on the zinc that is displacing copper in the concentrate, which attracts a penalty from smelters. On the plus side, underground mining remains on schedule and grade is reconciling well with reserve grade estimates. UBS believes the ramp-up problems at DeGrussa are minor and the underground mine and plant should be running at nameplate capacity by mid year. The broker also expects DeGrussa to produce around 75,000 tonnes per annum for the first three years before reducing to 60-65,000 in the remaining 4-5 years. Moreover, recent exploration results are expected to add to underground resource and provide potential new mineralised areas.

Citi likes Sandfire because the company owns its land in the barren WA sands (no trees to contend with) and has a direct interest in the mine. The broker also highlights the potential for continued exploration success, given the VMS-style nature of the deposit. With the worst of the commissioning problems now over, Deutsche Bank has upgraded the stock but notes, while plant performance is improving, recoveries will be affected in the second half by the 24% of mill feed that is coming from transitional open pit ore. The broker expects a reserve/resource update in April, possibly replacing mine depletion, and flags the underground drilling start in late in 2013 which will assess the C4/C5 lenses and assess depth potential. 

UBS finds, on an earnings multiple, the stock price is undemanding. Reconciling the latest result and using a mark-to-market for gold the broker has lifted earnings forecasts for FY13 substantially. Brokers have also welcomed the closing cash balance of $115m, which provides Sandfire with sufficient funds to start repaying its $380m project facility. Credit Suisse, and JP Morgan for that matter, were a bit more concerned that no actual costs were divulged. Credit Suisse hesitates to make projections until actual performance can be assessed, hence the broker has upgraded to Hold with a $6.90 target. C1 cash operating costs are to be reported when plant commissioning and ramp-up is complete, presumably by the end of the June quarter. In the meantime, C1 cash cost guidance remains at US$1.20/lb of payable copper production.

JP Morgan has upgraded the stock to Hold, given improving operations and based on copper price expectations. The broker notes Sandfire is most exposed to near-term copper price weakness given the front-loaded production profile. Citi finds the project attractive from an operational perspective. Accepting that optimisation work continues, the cost performance is uncertain and recoveries are below target, the broker notes the stock has fallen significantly and there is now value to be had. Citi has upgraded to Buy with a $7.70 target, noting benchmark earnings multiples are at a discount to global peers. This reflects the elevated risk as Sandfire proceeds with commissioning its one big asset.

Those on the FNArena database that ticked the upgrade box include UBS, Credit Suisse, Deutsche Bank, JP Morgan and Citi but they're not all Buy ratings. Credit Suisse and JP Morgan upgraded to Hold from Sell. There are four Buy and three Hold in total on the database. The consensus target price is $7.79, revealing 13.7% upside to the last close. Targets range from $6.80 (JP Morgan) to $8.40 (UBS).

See also, Sandfire Firing, On Both Production And Price on October 31 2012.
 

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