Sandfire Resources: Further MATSA re-rate potential

About the author:

Author name:

By Tom Sartor

Job title:

Senior Analyst

Date posted:

25 January 2022, 11:00 AM

Sectors Covered:

Junior (Emerging) Resources, Bulk Materials

• 2Q cost pressure shouldn’t surprise in the context of industry-wide pressure.
• We now incorporate MATSAs into our earnings forecasts, contributing from February.
• Important detail on operating improvements and Reserves extension at MATSA keenly anticipated over the coming 6-12 months.
• DCF based valuation/ target adjusts to (login to view) helped by higher A$ metals prices.
• Sandfire Resources (ASX:SFR) looks attractive relative to fair value and particularly relative to peers, and suits assertive investors.

No major 2Q surprises

Higher FY22 C1 cost guidance (up 10% to US$1.10-1.20/lb) on higher diesel, shipping and labour costs shouldn’t surprise in the context of broader industry challenges.

In fact, Sandfire Resources (ASX:SFR) appears to be managing labour risks well in WA (particularly as Degrussa winds down) and has managed COVID admirably in Botswana where the Motheo development remains on-schedule.

Full MATSA approvals allowing end-January completion means we now include earnings contribution into our FY22 forecasts and beyond.

Analysis

Given the fair-to-full price paid for MATSA (~A$2.57bn), we think the market needs detail on potential operating improvements (safety, mining modes, productivity, costs) and geological upside (Reserves conversion, mine life) as a priority. Investors may need to wait 3-6 months for first details as SFR admits somewhat of a ‘learning’ process begins on handover from February 1.

MATSA addresses long-standing concerns on SFR’s earnings continuity (80-85% of revenue from FY23). However, SFR’s strategy still looks somewhat fluid with possible developments/operations across 4 continents plus an ongoing appetite to evaluate M&A.

We think the stock would benefit from a narrower focus, allowing better leverage of in-house mining and exploration expertise into building value at MATSA and Kalahari. We see scope for non-core assets to be divested to owners to whom they would make a better strategic fit in time.

For now though, the building of optionality and value in both Degrussa (regional gold-copper/ Old Highway) and in Black Butte (improved scale) will likely see clarity on their futures within SFR remain ‘TBC’ for a further 12-24 months.

Forecast and valuation update

Upgrades to copper and downgrades to our AUD assumptions assist in lifting of our DCF-based valuation and target price to (login to view).

We risk-weight potential life extension at MATSA to ~A$100m which we think is conservative. We also do not yet fully incorporate the 5.2Mtpa expanded production scenario at Motheo despite SFR already moving toward early works.

Investment view

SFR offers ~19% upside to our valuation and trades at a material discount to comparable peers.

Pre-MATSA, SFR’s share price suffered from chronic underperformance versus global peers, we think for cashflow uncertainty post-Degrussa and for a material uplift in geographic risk as operations transitioned from WA to Africa.

MATSA has re-invented SFR’s cash flows and improves geographic risk exposure. We think the stock can now narrow its discount to NPV and relative underperformance, helped by recognition of copper’s compelling medium-term fundamentals, and a scarcity of quality listed pure-play exposures.

Price catalysts

Proof of MATSA upside (CY22).

Motheo 5.2Mtpa DFS, Old Highway Resource/PFS – Both due Mar-Q 2022.

Risks

Operational/cultural integration of MATSA, in parallel with Motheo development.

Production disruption, development risk, M&A risk, commodity and FX volatility.

Recycling of ~231m shares (~56% of SFR) issued at $5.40ps Sep-21.

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