A Short Term Pause For Sandfire Resources?

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

 – Sandfire continues to progress DeGrussa project
 – Exploration and M&A activity potential sources of upside
 – Value becoming an issue for some brokers
 – Citi downgrades to a Neutral rating

By Chris Shaw

As Sandfire Resources ((SFR)) continues to transition from explorer to copper and gold producer, this week's interim profit result was somewhat irrelevant in the view of UBS. More significant was the fact progress at the DeGrussa project remains on schedule.

Citi notes mining of ore is now underway at the open pit and underground mines, which implies first ore will be in the mill in the third quarter of this year. The project is still on track to be delivered within its budget of $385 million and UBS expects production of 13,000 tonnes of copper and 2,000 ounces of gold this year. 

This is expected to increase to production of 76,000 tonnes of copper and 37,000 ounces of gold at a cash cost of US$1.43 per pound in FY13. This will be the first full year of production.

One positive out of the interim report for JP Morgan is during the December half, Sandfire executed final documentation for a $390 million project finance facility. Of this, $190 million has been drawn to date, while Sandfire at present has net debt of $86 million.

Looking at coming months, Citi notes exploration efforts from Sandfire will ramp up this year as management looks to underpin a longer operating life and/or expansions to the existing infrastructure. Around $20 million per year will be spent on exploration commencing this year.

This offers some upside, UBS viewing Sandfire's tenement positions in Western Australia as highly prospective and likely to lead to both extensions to current resources and new discoveries. Early drilling activity has returned some interesting gold-only results notes JP Morgan.

Further positive exploration results are required in the view of JP Morgan, as the broker suggests the market is continuing to price in such exploration success beyond perfect execution of the existing DeGrussa project.

This is enough for JP Morgan to retain an Underweight rating on Sandfire, while Citi has downgraded to Neutral from Buy on the same valuation basis. The FNArena database shows total ratings on Sandfire number two Buys, two Neutrals and JP Morgan's Underweight. Goldman Sachs is not in the database but rates Sandfire as a Buy on valuation grounds.

One of Citi's concerns is heightened operational risk as commissioning approaches. The other factor in Citi's downgrade is share price upside via exploration success is unlikely in the near-term, while potential M&A activity involving Sandfire is also viewed as unlikely in coming months.

JP Morgan agrees, pointing out Sandfire has two major shareholders and one, Oz Minerals ((OZL)), has continually downplayed interest in a full takeover offer. Corporate action involving the company should not be totally ruled out in the view of UBS, especially given Oz Minerals has a 19.8% stake at present and the funds to consider acquisitions.

UBS continues to see value in Sandfire at current levels, its Buy rating supported by a $9.50 price target. This is well above most other targets in the market, as Macquarie has a target of $7.00 and JP Morgan $7.40. The consensus price target according to the FNArena database stands at $8.44.

Shares in Sandfire today are slightly weaker and as at 11.20am the stock was 1c lower at 7.85. Over the past year Sandfire has traded in a range of $5.52 to $8.62, the current share price implying upside of about 7% relative to the consensus price target in FNArena's database.

 
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