Buy: Sandfire

AN upgrade for copper miner Sandfire

Sandfire Resources (SFR)
Analyst: James Brennan-Chong, UBS
Recommendation: Buy (previously neutral)
Price target: $A6.20 (previously $5.90)
Thursday’s close: $5.25
Reason: Is mine life a concern? Not yet. We upgrade to Buy
Comments: Monty is an exceptional discovery. However, with a resource of just 1Mt today and 2-3 years before the asset is commercialised, an argument could be made that Monty is perhaps too little too late given a remaining mine life at DeGrussa of circa five years (2021). In our view, Monty buys Sandfire time and has also improved the outlook for exploration success. Today, Monty could add an incremental 250,000tpa of feed at around 9.4% copper for plus-20,000tpa copper and sustain for over four years, on our estimates. Importantly, further exploration success could result in the discovery of repetitions of Monty, similar to the C1, C4 & C5 conductors at DeGrussa and thereby quickly add mine life. We estimate that each year of mine life could add 80c/share to our net present value. Outside of the Monty discovery, limited drilling has taken place over the wider Springfield project, leaving the door open for further exploration success. Mine development at DeGrussa is set to slow significantly, releasing cashflow. Development is expected to reduce from $70 million in FY16 to $57 million in FY17 and to $29 million in FY18 before reducing to less than $10 million per annum for the remainder of the DeGrussa mine life. However, the impending development of Monty is likely to keep a lid on company free cashflow generation and we do not see cash materially building on to the balance sheet until around FY19. In our view, short-term investors are currently rewarding companies that screen positive quarter on quarter comps, and while SFR has yet to miss quarterly production, the lack of quarter-on-quarter net cash generation near term could hold some investors back. We upgrade SFR to a buy following a pullback in the share price and a small 6% lift to our target price. Our buy call is supported by organic growth opportunities, low-cost domestic production and balance sheet strength. However, mine life and the development speed of Monty are potential risks. While Monty will likely be highly profitable, it is only incremental at this stage and, at some point, the shortening mine life (currently to around 2022 with Monty) could outweigh profitability, especially for long only investors. We make minor revisions to our modelling assumptions and this has led to our NPV lifting 6% to $6.23/share. Our target price, set a 1.0x NPV, increases to $6.20/share.