South32 executive Brendan Harris would probably like to be at Sandfire Resources right now, helping the copper producer through the biggest transition in its history.
He was named Sandfire managing director on November 10 but can’t make the three-kilometre move up the road from South32’s towering Perth headquarters to his new office in West Perth until April.
By that time, Sandfire might have achieved first production at its new Motheo copper mine in Botswana and done something about the rising power bills weighing on the MATSA copper, zinc and lead mine in Spain it acquired for more than $2.5 billion in February.
Sandfire might also have sold what is left of the now mined-out DeGrussa operations in Western Australia that took it from micro-cap to mid-tier.
Harris is replacing long-time managing director and chief executive Karl Simich, who reached the end of his journey with Sandfire at the same time as the flagship DeGrussa mine.
Simich led Sandfire for 15 years through the discovery, development and highly successful operation of the high-grade, high-margin mine.
As Simich has put it, Sandfire ‘‘maxed out the credit card’’ to buy MATSA. That’s why it has just completed a $200 million equity raising to boost the balance sheet and help fund growth.
There are mixed views in the market about Sandfire after a year of out with the old and, almost, in with the new.
Sandfire launched its capital raising on November 18, the same day BHP announced it had won over the board of copper target OZ Minerals with a sweetened $9.6 billion takeover offer.
Citi reacted by downgrading Sandfire as its analysts took a bearish view of copper prices in the near term.
‘‘We downgrade our Sandfire recommendation to neutral/high risk, driven by recent share price appreciation, and our view that a major near-term demand recovery in copper is unlikely to materialise before second quarter 2023,’’ Citi said at the time.
The Barrenjoey metals and mining team went the other way on the back of the raising, upgrading the stock from neutral to overweight.
‘‘The debt taken on to acquire MATSA has a more rapid amortisation schedule than group free cashflow,’’ Barrenjoey said.‘‘This funding gap was our key issue with our investment thesis and has now been resolved.’’
Barrenjoey still thinks Sandfire paid too much for MATSA, valuing the asset at $1.8 billion, but sees great potential to extend MATSA’s life into the 2030s through exploration, and a case for production at Motheo to grow to 5.2 million tonnes a year.
Jefferies analysts reiterated their buy rating on the stock, saying Sandfire had removed the ‘‘sword of Damocles’’ by improving its balance sheet through the equity raise. They also speculated that investors seeking copper exposure might look to Sandfire as a next best option with OZ Minerals about to disappear into BHP.
Macquarie acted as underwriter for the equity raising in the form of a 1-for-8.8 pro rata entitlement offer at $4.30 which was backed by institutional investors to the tune of $147 million, and had a take-up rate of about 66 per cent on the retail side.
Sandfire might have paid a pretty penny for MATSA – the acquisition was more than double Sandfire’s market capitalisation at the time – but the timing was important.
The company faced a no-production scenario where DeGrussa shutdown about nine months before Motheo started up.
The acquisition also transformed Sandfire from a company that had operated one mine in Australia to a company with assets in Europe and Africa, but no mines in Australia.
The year of change included board renewal, with Sally Martin and Robert Edwards signing on as new independent non-executive directors, and long-time chairman Derek La Ferla stepping down in May.
New chairman John Richards told shareholders at the company’s annual general meeting on November 30 that Motheo was ‘‘firmly on track’’ to begin production in the June quarter and that Harris was the right man to lead Sandfire into a new era.
Harris brings experience as an exploration geologist, a highly regarded equity analyst at Macquarie and as senior executive at BHP as well as South32. He has been part of the South32 executive management team since it was spun out of BHP in 2015, and played a big part in that demerger as South32’s inaugural chief financial officer.
On the capital front, Richards said Sandfire had $US162 million ($242 million) in cash at the end of October and net debt was $US458 million (excluding capitalised transaction costs) after repayments against the MATSA and corporate debt facilities and the first drawdown under the Motheo project finance facility.
He said net debt would reduce to $US324 million on a pro-forma basis with completion of the issue.
Sandfire set aside $60 million from the raise for growth and exploration at MATSA and Motheo.
The company is working on a new power supply contract for MATSA that it hopes will offer relief from rising costs in Spain, and expects healthy interest in the sale of DeGrussa.
Sandfire has launched a formal sales process, being run by Azure Capital, and is holding out the possibility of precious and base metal discoveries in the Doolgunna region.
Up for grabs is a package that includes the Old Highway gold project and associated Bryah Basin gold exploration tenements, the DeGrussa and Monty underground mines and associated near-mine tenements, oxide stockpiles and tailings dam mineral inventory, and the DeGrussa plant.
Acting chief executive Jason Grace said Sandfire moved to a formal sale process after receiving several unsolicited approaches for the DeGrussa package.
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Ash here.
A reasonable summary of where SFR sits as De Grussa ends, fully-mature Matsa pumps and Motheo begins production.
The $200m cap raise transformed the balance sheet and FCF, as shown by SFR's subsequent repricing.
Brendan Harris & team will be scouring the globe for another Cu mine to bring needed balance to the business. That marketplace is crawling with eager buyers armed with ready cash - beware!
There are many projects out there that need just a little little little more drill money to prove up (or disprove) project viability - beware here too!
BH has the credentials for the task. Expect him to hit the ground running with an exciting acquisition - and another capital raise to fund it.
Ash
SFR Price at posting:
$5.42 Sentiment: Buy Disclosure: Held
(20min delay)