Delay In High Grade Shades Sandfire Outlook

This story features SANDFIRE RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: SFR

Delays to the high-grade feed at Monty and the looming end to DeGrussa's mine life are pressuring Sandfire Resources to find and develop more copper-gold resources.

-FY19 guidance below expectations because of delays in accessing higher grades
-Growth now being pursued on several fronts
-Stock at current price requires faith in the company's development strategy
 

By Eva Brocklehurst

Sandfire Resources ((SFR)) comfortably met FY18 guidance for gold and copper production and remains disciplined on operating costs, yet FY19 guidance is below expectations because of a delay in access to higher grade ore at Monty.

Mine sequencing has deferred higher grades until late FY19, despite first ore being due on schedule in the second quarter. The costs will also be higher because of the greater hauling distance and narrower stopes.

While this is simply a deferral, Morgans suspects the latest news has knocked the market's confidence in the stock. Citi agrees, pointing out that while the copper ramp-up is delayed into FY20, it is not lost. The broker expects FY20 copper output will increase to 87,000t with sustained high grades at Monty.

Beyond DeGrussa?

The need for a material discovery to extend mine life at DeGrussa is intensifying. The outlook is increasingly dependent on exploration and development at Black Butte, which moves into development from early 2019 if approved on schedule.

Credit Suisse finds reasons to be optimistic regarding the Black Butte, Montana, permit process, and the two-year underground development could commence within 12 months, meeting first production expectations in early 2021.

Yet the broker is extremely cautious about modelling 2018 preliminary economic assessments, particularly when the numbers were stated with an estimation risk of circa plus or minus 40%. In addition, this assessment excludes the Lowry zone, which offers near-term upside, and was based solely on the Johnny Lee zones.

Morgans suggest the stock may have materially different risk profile within 1-2 years and this may not suit the current market, which is primarily rewarding near-term cash accumulation.

The broker believes the market will become increasingly concerned as DeGrussa reserves are depleted over the remaining four years of its mine life, while the stock currently requires trust in the company's growth strategy. Morgans maintains a Reduce rating and a preference for Oz Minerals ((OZL)) in pure copper.

The stock is performing well from an operating standpoint, while Monty offers the potential for higher-grade feed, yet Ord Minnett would become more positive at a lower entry point.

The company is pursuing growth on several fronts, including aggressive exploration around Doolgunna,and has been increasingly active in the M&A and joint ventures, mopping up Talisman's ((TLM)) minority in Monty and farming into zinc projects in Alaska and Bosnia.

Nevertheless, its DeGrussa flagship copper-gold project in Western Australia has limited mine life at around five years, although the declining development profile and associated increase in cash flow is well timed for the increased expenditure expected at Monty, Credit Suisse asserts.

The broker suggests Sandfire paid a full price to take over Monty and, while understanding that may be necessary to remove complexity and save costs, hopes this is not used as a pricing approach for future transactions unless the deal terms use Sandfire paper.

Production

Guidance on costs drives a downgrade to UBS estimates. FY19 guidance is for 63-67,000t of copper and 37-40,000 ounces of gold at a cost of US$1-1.05/lb versus UBS estimates of 68,000t of copper at a cost of US$0.88/lb. Production is expected to benefit in the next couple of years from the step-change in grade from Monty.

Macquarie notes the strong outcome in the June quarter for both copper and gold production as well as lower costs enabled a cash balance of $243m in FY18, 9% above forecasts. Lower grades in the early months at Monty and lower grades at DeGrussa drive a reduction in the broker's forecasts by -10% and -6% for copper and gold respectively.

DeGrussa produced 17,900t of copper and 9,500 ounces of gold in the June quarter. Cash costs of US$0.80/lb were -19% lower than Macquarie forecast. This was a result of higher byproduct credits and lower transport charges.

There are three Hold ratings and four Sell on FNArena's database. The consensus target is $7.92, signalling 3.8% upside to the last share price. Targets range from $6.70 (Credit Suisse) to $9.10 (Macquarie).

See also Sandfire Needs Options Beyond DeGrussa on May 1, 2018.

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