Khoemacau - is SFR interested?, page-3

The AFR has a chatty piece up about SFR's prospects and BH & team's growth dilemmas. A fun read, though light on for genuine insight.

All being equal, SFR would like to buy Khoemacau, which adjoins Motheo and offers interesting synergies.

Much depends on the coming Quarterly. How close is Motheo to initial production? How is Matsa travelling when the European smelters it supplies are energy constrained by the Ukraine war?

Khoemacau would have to be funded largely with fresh capital. Holders will screech and moan. Yet given where the Cu market sits with demand certain to outstrip supply by a wide margin in the immediate future, the buy is likely to look truely inspired in a year's time.

Here is what the AFR said:
_____________________________


Got copper? Let’s talk.

That’s the spirit in the resources sector, with miners and investors scrambling for what’s arguably the most bankable critical metal and an essential part of the energy transition.At the big end of town, there’s deals galore. BHP’s paying $9.8 billion for South Australia’s OZ Minerals and Rio Tinto just outlaid $US3.1 billion for full control of the Oyu Tolgoi mine in Mongolia - both at prices that saw the offers go uncontested - while copper’s also a material part of Glencore’s move on Canadian Teck Resources.

The other part of the equation is the copper price. Copper’s trading at about $US4 a pound, although there are some bulls out there saying it’s headed significantly. Sydney-based stockpicker Regal Funds, for example, has been telling clients it could hit $US20 a pound. (Regal’s proof point is that there are a few periods in history where the copper price shot up reasonably quickly, then traded sideways for a long stretch. It could be about to do the same.)

So, there’s little doubt in investors’ minds that copper is hot. They know it’s needed to build the next wave of electricity infrastructure, and there’s clear proof of a land grab underway.

As always for investors, it’s how to make money out of it. OZ Minerals is the pin-up for pure-play copper or gold on the ASX, having got its act together to finally net logical suitor BHP. OZ Minerals’ shares are up nearly three times in the past three years.

There’s clear daylight behind it, but the potentially lucrative opportunity for a small cap to step up into the big leagues.

Fund managers are talking about three copper exposures that could (in theory) replace it: WA-based Sandfire Resources, WA/Queensland miner 29Metals (in a world of hurt at the moment) or the SPAC that’s still scraping together capital to buy Glencore’s CSA Mine but should end up listed in Australia.

The reality is that none of the contenders come close. OZ Minerals produced 124,065 tonnes of copper last year and 211,147 ounces of gold, for $1.92 billion revenue and $692 million EBITDA.

Second chance

But with OZ Minerals only a week or two away from vanishing from the ASX, investors are looking for a replacement.

So, there’s extra eyes on Sandfire Resources, by far the biggest of the trio, which is juggling a few balls at home and abroad. If everything comes off, it could easily transition into the world of large caps. But some of its biggest investors want to see more runs on the board before trying to shooting for the stars.

Sandfire Resources CEO Brendan Harris, a silver-haired former South32 executive and Macquarie metals and mining analyst, started this week. He walks into a company with an underperforming and still fairly recent acquisition in Spain, a potentially lucrative new mine in Botswana and the prospect of more M&A. The company’s original money-maker, WA copper mine DeGrussa, is mined out and winding down its stockpiles.

Analysts expect MATSA, the $2.6 billion Spanish acquisition made in 2021, to produce about 60,000 tonnes of copper a year for the next decade. The shiny new asset is Motheo, in Botswana, which is due for first concentrate this quarter and could mine 30,000 to 50,000 tonnes of copper a year in the coming 10-years, according to Macquarie’s analysts. There’s also the smaller Black Butte in Montana in the United States, where mining’s years away.

Obviously, shareholders are cheering it all on. They love the thought of Sandfire becoming the next OZ Minerals (Sandfire and OZ Minerals had similar market values a decade ago) and fall on BHP or Rio Tinto’s radar.

The point of contention is on the M&A front. As Street Talk reported last month, another Botswana miner is putting its copper mine up for grabs, and Sandfire shapes as an obvious potential buyer.

The up-for-grabs asset is Khoemacau Copper Mining, owned by private equity backers Global Natural Resources Investments (Barclays Bank’s natural resources private equity business) and Resources Capital Fund VIII LP. Khoemacau is big (it produces about 60,000 tonnes of copper a year) and could put Sandfire in the big leagues.

Miners always love looking at nearby projects - and Sandfire’s got growth on the brain. Analysts reckon it may be a stretch to acquire the asset on its own, but could partner up, depending on who else is around.

But some of its larger shareholders are worried the company’s getting ahead of its skis even thinking about another deal. They reckon the sale is likely to be hot - like all copper auctions globally - and Sandfire needs to deliver on its existing assets before it does anything else.

They particularly want to see MATSA live up to what was promised at the time of its $2.6 billion acquisition in 2021. And they are not keen on tipping into another equity raising, having faced cash calls in both 2021 and 2022.

The other way to think about the situation is whether Sandfire should be predator or prey. If it bypasses Khoemacau, it could fall on the radar of whoever buys its Botswana rival. And getting MATSA and Motheo firing in the meantime would be the best way to create value.

At a $2.8 billion market capitalisation, Sandfire is a long way off OZ Minerals. But given it’s the biggest pure copper play about to be left on the ASX, it’s worth watching. And it’s bite sized compared to the cheques flying around for other copper assets, including OZ Minerals.