Under the Spotlight AUS: Sandfire Resources Ltd (SFR)

Likely the last remaining major copper miner on the ASX, Sandfire Resources ($SFR) has made a fortune from its good luck. Founded as Borroloola Resources in the early 2000s by previous CEO Karl Simich, prospector Graeme Hutton and mining executive Miles Kennedy, the company was searching for metals on various properties in Australia. Its 2004 ASX listing saw the name change to Sandfire Resources Ltd.

International interest came from South Korean steelmaker POSCO taking a 19.9% stake in 2008, with hopes of finding manganese. However, the company still had little to show for their efforts and the pressure increased as funds dried up during the global financial crisis. 

Their hunt for gold hadn’t proved fruitful either, and in early 2009 they had issues accessing their Doolgunna plot near Meekatharra in Western Australia. Then the team headed a few kilometres up the road to another area of interest and geologist Margaret Hawke made a few extra drill holes. 

They were astonished when results from the laboratory came back with some of the highest grades of copper ever found in Australia. Afterwards came a rapid path to production for the DeGrussa copper mine by 2013, with the unusual distinction of being on time and within budget.

Extracting value

A decade later, Sandfire stands at a new crossroad, with DeGrussa reaching the end of its life. Mining there stopped in October and there are currently trials to test whether the processing of stockpiled material could be extended beyond January 2023. The business has formally initiated plans to sell the mine and related landholdings. They’re hoping for suitable profits from a buyer that believes there’s still potential to find other metals nearby. 

February 2022 saw the acquisition of the new cornerstone asset, the MATSA copper operations in Spain’s south-western Huelva province. For the substantial sum of US$1.865b they received three operating mines that can continue to produce copper, zinc and lead concentrates for at least 12 years. They’ve optimised activities to increase mining output and started to explore the area for potential expansions. However, they’ve also faced unplanned maintenance for the processing plant and are negotiating a new energy contract to reduce costs. 

Their second major copper mine is expected to start production in the June 2023 quarter. The Motheo Project has secured US$140m for construction in Botswana. It could be the source of 440 kilo tons of copper and 18.4 million ounces of silver over its 10 year life. A future extension of operations to a neighbouring deposit has also been approved. Sandfire expects around 55 kilo tons of copper from Motheo, adding to the 60 to 65 kilo tons of copper from MATSA per year.

Under the wire

Sandfire’s transition has not been a smooth run and they’ve amassed an undesirable net debt of US$374.7m by Q1 FY23. The leadership made an unexpected announcement to raise approximately US$134m in funds from institutions and retail investors in the latter half of November. Many saw the subsequent decline in share price as confirmation of concern about the burdens of repaying for the MATSA and Motheo takeovers. The current growth period meant that the latest dividend was cancelled and not paid out to investors.

There may also be delays in other income streams. Sandfire holds an 87% interest in the Black Butte copper project in Montana, USA, via its Canadian listed company. They’ve struggled with permits and the second phase of development has been delayed due to an ongoing legal challenge. The group’s other properties in Portugal, Botswana, Namibia and New South Wales are considered as longer-term prospects.

Nevertheless, Sandfire remains well placed to take advantage of the growing demand for copper as the ‘metal of electrification’. They’ve set strong foundations in a sector where many new projects see red lights, with new deposits being harder to find and more expensive to develop due to lower average grades of copper. Q1 FY23 saw the group’s average cost of producing copper amount to US$1.73 per pound, which puts them below the industry’s 50th percentile of around US$2 per pound. 

Many expect a copper shortage in the coming years, from which established miners could greatly benefit. However, as copper tends to track general economic sentiments, its price will be impacted by the fears of recession and the emergence of China from its lockdowns in the near term. For Sandfire’s new CEO Brendan Harris, set to take over in April 2023, the challenge is to navigate through these uncertain times ahead.

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.