GSJBWERE view:Event: When announcing its 19% investment in SFR...

GSJBWERE view:

Event:
When announcing its 19% investment in SFR on 2 July, Oz Minerals
(OZL) stated, "Our intention is to maintain the interest in Sandfire at
this level, at this stage". Nevertheless, we have looked at what OZL
could offer SFR shareholders in order to make a valuation-neutral bid for
100% of the company.
Key take-outs:
We have made the following assumptions:
- An offer would be entirely cash.
- The transaction would take place at the end of calendar year 2010.
- SFR's DeGrussa Copper-Gold Project (DeGrussa) will commence
production in the December quarter of 2012.
An NPV-neutral offer would be $7.68 per SFR share on our
estimates, or a 96% premium to SFR's current share price ($3.90).
We estimate that the combined entity would be marginally EPS dilutive
in FY11 and FY12 owing to the loss of interest earnings, and highly EPS
accretive once production commences at DeGrussa.
We assume a total offer of $800m based on our pre-tax valuation of
SFR's DeGrussa Copper-Gold Project using OZL's WACC of 10.47%.
We believe the value to OZL would be further enhanced by OZL's current
tax shield.
Earnings and Valuation Impact:
Our proforma OZL/SFR model includes DeGrussa Copper-Gold Project's
base case plus an extra two years added to mine life. We have also
deferred commencement of DeGrussa production to the December
quarter in 2010.
We have not included the early cash flow from the chalcocite cap
(currently in SFR's upside valuation), Conductor 4 or the recent
announcement of Conductor 5 (see separate Daily Cable article).
The resultant pro-forma earnings change is a small downgrade in FY11E,
but significant upgrades from FY13E. By assumption, valuation remains
neutral.
Investment View:
Our analysis shows that if OZL were to make a valuation-neutral bid for
SFR it would be at a significant premium to the current share price.
We believe that the recent 19% investment by OZL in SFR is an
indication that DeGrussa is of high quality. We believe an attempt by
OZL to gain control of SFR is a real possibility.
We would view an acquisition of SFR as a positive for OZL as it would
provide OZL with exposure to a new project with upside potential and a
prospective tenement package. OZL has over $1b in cash, so this
investment would be well within its means.