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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 latter expected 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.

While there are plenty of opportunities for Sandfire to improve the mining rate, the broker does not believe this acquisition will be easy to tuck in, given the technical and cultural challenges, and downgrades the stock to Neutral from Outperform.


Canaccord Genuity, on the other hand, believes Sandfire has a driver of value in Botswana. The maiden reserve for the A4 deposit at Motheo is 9.7mt at 1.2% copper.

Exploration results have revealed a strong case to either lift overall grades or extend the mine life beyond 2030 and the broker increases the valuation of Botswana to $806m from $626m. Production is expected to peak at 60,000tpa with a 5.2mtpa plant, as outlined in the pre-feasibility study. The overall grade will rise towards 2027, reaching 1.2% copper before easing back.

Moreover, Canaccord Genuity forecasts DeGrussa will contribute $350m in free cash flow over the next 18 months as the mine comes to an end. The broker calculates, even without debt, the cash balance will not fall below $200m.

There are options, too, in the Old Highway gold deposit, and Canaccord Genuity expects Sandfire will assess this asset and, given there has been no copper discovery, ultimately may choose to divest.

Canaccord Genuity, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $8.75 target. The database has two Buy ratings and three Hold. The consensus target is $7.05, signalling 28.9% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 5.6% and 0.5%, respectively.

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