The price of Copper is approaching levels not seen since the GFC. It is not the only commodity that has come under pressure from the deceleration of the Chinese economy. Just ask RIO on Iron Ore and S32 on the performance of its base metal portfolio. At the same time the AUD to USD rate has declined in lock step with the fall in copper.
We are contrarian by nature at the initial stages of bottom fishing. Our philosophy has always been it is during periods where the future is the most uncertain that the expected return will be the highest.
SFR is our play on the recovery in Chinese growth story. While we already have a positions in China focused stocks like Crown and diversified resources like Rio which is leveraged to Iron Ore. SFR is a pure copper play with exploration upside.
It is during times like these a strong balance sheet is just as important as being a low cost producer. Luckily for Sandfire, it is both.
Production and Cost Structure
Sandfire owns the DeGrussa mine which has reached a steady state production rate above. Management is also guiding cash cost range of $0.95 to $1.05 per pound. There is sufficient margin even at the current copper price level for investors to ride out the current weak sentiment.
At current rate of production and existing reserve and resource, DeGrussa is expected to have a mine life up to 2020 – 2021.
It repaid $300m in debt for the debt portion of the DeGrussa mine. Management guides $20mil net debt by Q1 2016. The market cap is near $1 billion so a low debt level means equity holders will not be needed to fund its growth pipeline.
Key Upside Catalysts
- Exploration drivers and resource upgrade. SFR has been carrying out a drilling program in Monty which is 10km from the current mine. Initial drilling has been positive. Any future development has significant synergy with current footprint.
- Sandfire has a number of exploration projects which on one hand can be considered too much in the current enviornment. However it does provide optionality for the company. One interest outside Australia is the Tintina Resource stake in North America. Prospective resource of 15.7mt with 3.4% grading. Target is to complete the mining application and file by Q4 2014.
- The company is a key customer in a 10.6mw solar plant. It will be used in conjunction with existing power sources and ramp up in early 2016.
Overall it is a small cap with a steady buffer. Given the low cash cost, decent balance sheet and growth options. SFR provides immediate earnings at current weak copper prices with upside once the price recovers.