Growth Strategies Still Critical For Sandfire

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The high-grade Monty copper-gold mine has made its first contribution to Sandfire Resources' production in the March quarter but exploration remains critical to the medium-term outlook.

-Monty ramps up, with first contribution to the DeGrussa mill
-Clarifying growth strategies critically important
-Formal approval of Black Butte could occur in next six months
 

By Eva Brocklehurst

Improved copper and gold recovery enhance the outlook for Sandfire Resources ((SFR)) after a strong performance in the March quarter, and brokers highlight the company's consistent track record of beating or meeting guidance from better grade reconciliation.

Monty made its first contribution from stope ore in the March quarter, supplying 38,519t of copper at 3.74% grade to the DeGrussa (Western Australia) mill. The initial schedule involves projects that are less than the copper reserve of 8.7%.

The high-grade Monty orebody should lift production in FY20, although it comes with higher mining and haulage costs. The company has upgraded FY19 production guidance by 3% for copper, to 66-68,000 tonnes, and by 6% for gold, to 40-42,000 ounces. UBS suggests guidance is conservative, as Monty is ramping up and this mine has a higher grade profile compared with DeGrussa, at 8-9% versus 4%.

Moreover, Credit Suisse points out diesel and gold prices have moved favourably for Sandfire Resources versus original expectations, while grade recovery at DeGrussa has also outperformed.

March quarter production of copper and gold was ahead of Macquarie's estimates by 5% and 15% respectively. Higher throughput at the mill was the main driver of the stronger result and costs were also lower than the broker had estimated.

Higher average grades should also be forthcoming as mining progresses to the core of the Monty orebody, providing a better grade mix at the DeGrussa mill, and supporting an increase in recovery to 93-94% on Credit Suisse estimates.

Yet, the broker also points out, as Monty ramps up and the DeGrussa mine reduces its contribution to the mill, unit costs will rise, potentially exacerbated by increased average depth and declining average grade. Sandfire Resources generates strong cash flow from DeGrussa and Monty will contribute, but the mine life is short, at just under four years. Hence, brokers believe new discoveries are urgently required.

The company continues its exploration in the Doolgunna region with most of the focus on Morck's Well to test geochemical anomalies. Canaccord Genuity also flags further news flow potential from the phase 1 of the farm-in with Alchemy Resources ((ALY)), which has copper sediments analogous to the DeGrussa deposit.

The broker, not one of the eight monitored daily on the FNArena database, believes Sandfire Resources is entering a period of strong cash flow but clarifying growth strategies is the next critical step. The broker maintains a Hold rating and $7.65 target.

Black Butte

The Black Butte copper project in the US could represent the next stage for Sandfire Resources. Work on the Black Butte feasibility study is in progress and due for completion in mid 2019 and the company could be in a position to formally approve the project in the next six months. The environmental impact study has been completed and an updated mineral resource and mine design are being undertaken along with a maiden ore reserve estimate.

Ord Minnett looks forward to the release of the feasibility study to gain a better insight into the growth outlook beyond current operations at DeGrussa. A development could take 2-2.5 years to first production and UBS, therefore, does not include development of Black Butte in forecasts at this stage.

FNArena's database shows two Buy ratings, four Hold and two Sell. The consensus target is $7.50, suggesting 0.8% upside to the last share price. The dividend yield on FY19 and FY20 forecasts is 3.6% and 5.9% respectively.

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