Sandfire Firing, On Both Production And Price

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

 – Sandfire's quarterly update solid
 – Open pit production good, first underground ore mined
 – DeGrussa expansion is ahead of schedule
 – Valuation and mine life remain issues for brokers

By Chris Shaw

September quarter production for Sandfire Resources ((SFR)) was 23,400 tonnes of copper and 7,200 ounces of gold from the DeGrussa open pit, while the underground operation also performed better than had been expected. The production report has been well received, especially as the DeGrussa project is only 82% complete at present. 

With direct-shipping ore production expected to be completed either late this year or early in 2013, the production focus for Sandfire will switch to oxide and massive sulphide ore in coming months. Deutsche Bank notes oxide copper/gold ore is yet to be factored into the production mix, and with underground production ahead of schedule the broker expects Sandfire can lift output to 300,000 tonnes in the March quarter next year from a forecast 200,000 tonnes in the December quarter.

An annual run rate of 1.5 million tonnes per annum should be achieved by the June quarter of 2013 in Deutsche's view. DeGrussa remains a high quality mine in the view of Credit Suisse, the issue for the broker being mine life given a current life of just seven years. This implies further exploration success is required.

UBS is confident further discoveries can be made, this given the geological sequence that hosts the DeGrussa orebody. At present UBS's model factors in a two-year extension to the current mine life of the project, with further drilling results expected in the December quarter.

On the back of Sandfire's quarterly report there have been modest changes to forecasts across the market. Deutsche Bank lifted its earnings per share (EPS) estimates in FY13 to 83c from 81c, while Credit Suisse lowered its estimates for the same period by 10% to 119.6c. Consensus EPS forecasts according to the FNArena database stand at 127.7c for FY13 and 150.2c for FY14.

Changes to UBS's estimates were enough for the broker to lift its price target on Sandfire to $9.10 from $8.40. This puts the broker at the top of price targets for the stock among brokers in the FNArena database, where the consensus target is $8.26 and targets range from $6.80 to $9.10.

Despite the increase in price target, UBS has downgraded its rating on Sandfire to Neutral from Buy on valuation grounds. There were no other changes in ratings, the database showing Sandfire is rated as Buy once, Hold four times and Sell twice, though not all database brokers have updated post the production report.

Deutsche Bank's Hold rating is retained. While there is upside risk from a more rapid ramp-up of operations and higher commodity prices, Deutsche also sees potential downside risks associated with commissioning and the ramping up of new mining and processing operations.

Credit Suisse is more cautious and rates Sandfire as Underperform on a valuation basis. Of note, the broker points out its valuation is based on current reserve life at DeGrussa, while the discovery of an additional orebody equivalent to the current best orebody would add around $2 per share to the broker's valuation.

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