Sandfire Resources Progresses Cautiously

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

Sandfire Resources has erred on the cautious side, withdrawing production guidance while development projects are likely to be delayed.

-More contained copper/gold at Monty but more costly to extract
-Timing risk around developments at Black Butte and T3
-Botswana expected to lead future developments
 

By Eva Brocklehurst

Despite appearing on track to meet guidance, Sandfire Resources ((SFR)) has withdrawn its guidance for copper and gold production, pending an assessment of the impact of the coronavirus pandemic.

Macquarie is surprised that guidance was withdrawn, as the March quarter production report was firm across all key production and cost metrics. Exploration in Botswana (T3) is also encouraging, signalling there is more potential upside to the broker's base case forecasts.

DeGrussa operations continue to operate at full capacity, while the ramp up at Monty has been hampered by lower milled tonnage. Grades have fallen despite more copper and gold being added to reserve estimates.

Cash costs were down -11% in the March quarter and the company has no debt. The total underground reserves at DeGrussa and Monty are 4.2mt at a 4.9% copper and 1.6g/t gold. Sandfire should still produce the same, or more, copper and gold from Monty but brokers ascertain it will take longer and be at higher cost.

Bell Potter assesses this was the most upbeat quarterly report for some time from Sandfire  having been concerned about copper grades at Monty. These have lifted significantly and the updated reserve points to strong margins and a key production contribution from the project.

Monty is more structurally complex than previously estimated but Citi notes the life-of-mine plan is drilled out and that essentially de-risks production to the September quarter 2022.

Still, this does not solve the company's problem with the short mine life at DeGrussa. The broker assesses there is still a high risk of a gap in production between the cessation of mining at DeGrussa and the commencement of either T3 or Black Butte. Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $5.45 target.

Ord Minnett acknowledges there is a path to replacing DeGrussa production with the US and African projects but points out this carry significant development risk, particularly around timing and budget.

New Projects

The company provided no further information on feasibility studies at its new projects, with the timing of outcomes likely to be delayed. Black Butte has received government approval but there are no further developments.

Goldman Sachs points out regulatory hurdles were a key risk overhanging Black Butte as no mine has been permitted in Montana in the last 26 years. The broker expects copper production will take a step down to around 50-60,000tpa, from 70,000tpa, with the depletion of DeGrussa and assuming both T3 and Black Butte are developed.

The optimisation study of T3 in Botswana was also expected in the June quarter and, while continuing, a final outcome is likely to be delayed. Exploration has been temporarily suspended and management is considering increasing the scale of the T3 plant.

Goldman Sachs endorses the company's approach to the project expansion, increasing its modelling to include a 4.5mtpa mill, and believing there is attractive exploration upside as well.

The broker also assumes T3 is given priority as it appears to deliver higher returns than Black Butte, expecting Sandfire will develop these projects in a series rather than parallel, to reduce execution risks. Goldman Sachs, not one of the seven, has a Neutral rating and $4.10 target.

UBS expects the two projects could replace around 70,000tpa of production from DeGrussa and also suspects Botswana may be developed ahead of Montana, while Citi incorporates a delay to both projects of around nine months, believing T3 will need to break ground during 2021 to avoid a gap in copper production. Upside from oxide stockpiles and tailings at DeGrussa could buy some time, the broker adds.

Given the current uncertainty, Citi expects the share price is likely to move in tandem with the copper price and expects this to lift in the second half of 2020, as industrial activity picks up and the stimulus in China has an impact.

There are four Buy ratings and three Hold on the database. The consensus target is $5.40, suggesting 29.4% upside to the last share price.

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