Will MATSA Bring Value To Sandfire?

Australia | Sep 28 2021

To counter the decline at its DeGrussa copper mine and before Motheo ramps up, Sandfire Resources has splurged on the purchase of a mining complex in Spain. Is it good value?

-MATSA targeting plant debottlenecking and increased exploration expenditure
-Is Sandfire Resources taking on too much debt?
-Motheo still likely to be the main driver of value

By Eva Brocklehurst

Sandfire Resources ((SFR)) is tweaking its production outlook, attempting to smooth the profile to first production at Motheo in Botswana from when its mainstay, DeGrussa in Western Australia, winds down.

To do this, the company will acquire the MATSA (Minas De Aguas Tenidas) mining complex in Spain for US$1.865bn. This will be paid for by a $1.25bn equity raising, split between a placement and entitlement offer, US$650m in syndicated debt and some short-term debt & cash.

Morgan Stanley believes the deal, at first glance, is good value at 4.8x operating earnings (EBITDA) on an FY21 basis. The transaction would counter the decline in production at DeGrussa until Motheo ramps up from FY24 onwards.

The broker's main concern is whether reserve life could be extended beyond the current six years at MATSA as the resource life is potentially more than 20 years. Morgan Stanley accepts it is too early to determine the cost of any extensions.

Citi believes, strategically, this is a sensible move, noting Sandfire is expecting group copper equivalent production of 175,000tpa including with Motheo when DeGrussa finishes.

MATSA is a well-established copper producer in Spain and there are three mines that provide feed to a 4.7mtpa processing plant, producing two copper concentrates (59% of production) plus silver, lead and zinc.

There is a six-year reserve and 12-year resource life based on a 122mt resource base. MATSA is anticipated producing 100-120,000tpa of copper equivalent at C1 costs of US$0.40-0.50/lb for FY22.

The process plant is targeting more than 5mtpa via debottlenecking and increased exploration expenditure, the latterexpected to accelerate resource conversion and bring access to higher grade ore to the fore.

There is an offtake agreement with SWiss-based commodity trader Trafigura for 100%, although Credit Suisse points out it is unclear what this actually means. That said, Sandfire does have a relationship with Trafigura which takes Degrussa concentrate.

Credit Suisse accepts the acquisition is accretive on a reserve and resource basis yet highlights the dilution for shareholders on a net asset value per share basis, calculating the stock requires a re-rating to 6.5-7x FY23 EBITDA to make this transaction accretive, based on the cost.

Balance Sheet Strain?

Moreover, the broker now envisages a risk that debt amortisation, coupled with the current capital expenditure timeline at Motheo, could put strain on the company's balance sheet, with gearing likely to step up to 26% in FY23 amid risk of project delays, unless prices remain robust.

Credit Suisse acknowledges it does not factor in hedging, operating improvements or significant extensions to the mine but points out MATSA is a technically challenging operation and the mill is underutilised because of low mining rates.

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