Sandfire Resources Ltd (SFR.ASX; $5.80/sh; Mkt Cap ~$900m).
Should OZL acquire Northparkes and sell SFR stake, it may act as a catalyst for M&A.
TRADING BUY.
•Despite what we considered to be a positive quarterly report with increased production guidance, SFR’s share price has not rallied in line with the broad resurgence across mid-tier mining stocks in recent days.
•A primary concern seems to centre on the potential of OZL being successful in acquiring Northparkes from RIO, and in turn requiring the divestment of their 19% stake in SFR which is worth ~$170m (and acquired for ~$100m in mid 2010).
•OZL has rallied strongly in recent days, up almost 15% leading up to the quarterly to be released today. The consensus view seems to be that OZL are likely to be successful in purchasing Northparkes, as other parties have pulled out of the process.
•Whilst there is a risk of a large crossing on market to institutional investors, we believe that the market is incorrectly discounting the potential for an OZL sell down to act as a catalyst to facilitate M&A activity on SFR. Any M&A activity would likely need to be at a significant premium to current trade to get support from the SFR Board and the remaining shareholders (52 week high was $9.09/sh, reached in January 2013).
•Looking through the rest of the SFR register, we note POSCO is a 15% shareholder, having initially entered the register back in May 2008 at a price of $0.40/sh which was associated with offtake of up to 30% of production. POSCO then made a follow on investment of a further $9m at $3.20/sh in February 2010 as part of a $50m private placement.
•Given any M&A on SFR will likely be facilitated via OZL, it would also be logical to expect OZL to rally given an expected premium for their SFR holding.
•Whether M&A eventuates or not, SFR remains our preferred large cap exposure of the Big 3 (SFR, OZL and PNA). Future quarterlies should show ongoing improvement as the ramp up is complete and recoveries increase. Least leveraged to the gold price and will benefit from the lowering AUD. Potential for commencement of dividend payments once Degrussa commissioning complete and debt repaid. Exploration success is further upside.
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