1Q production in line with budget
Investors have become accustomed to consistent operating performance from Sandfire Resources (SFR) and the 1Q was no exception. Lower copper output (15.6kt) was consistent with SFR's mine plan/stoping sequence requiring no change to FY17 guidance. This pushed C1 costs slightly above guidance (US$0.95-$1.05) at US$1.06. SFR flags copper output of around 18kt in Q2 and Q3 driven by higher grade stopes, which should see C1 costs fall toward the bottom end, or possibly below guidance. We have made no changes to our physical forecasts.
Changes to forecasts
Commodity price and currency movements slightly worse than our forecasts have driven slight downward revisions to our earnings and DCF based valuation. Applying current prices into perpetuity, our spot valuation of SFR is A$3.81ps, implying 25% downside. Clearly buyers of SFR at current share price levels (~A$5.00) must agree with our forecasts for upside in copper and gold closer to long term prices of US$3.25/lb and US$1400 per ounce respectively.
Sandfire Resources (SFR) enjoys robust cash generation from a stable production base. Stable production, diminishing debt servicing and underground development obligations will enable SFR to accumulate a net cash buffer, sustain a modest dividend, pre-develop Monty and aggressively pursue regional exploration opportunities in FY17. Significant near-mine exploration potential offers strong potential to further extend the project life at Degrussa and is SFR's differentiator. This is a key attraction which would improve both SFR's growth and capital management options upon further exploratory success.
Recent share price weakness has seen the share price move below our revised valuation. We note that possible US dollar volatility (pending US rates decision) is a potential headwind, but we're happy to buy now and or/through market volatility. We upgrade our recommendation to Add.
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