Sandfire Resources: MATSA first impressions

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
28 September 2021, 8:30 AM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • Sandfire (ASX:SFR) appears to have paid a full-ish price for MATSA on our input assumptions.
  • Upside therefore looks linked to higher metals pricing, operating improvements and life extensions.
  • Strategically, the acquisition looks attractive in terms of production/cashflow continuity and certainty via a reasonable jurisdiction, and far improved investor appeal.
  • Tactically SFR looks attractive relative to our (login to view) valuation and relative to peer metrics, but still suits assertive investors. ADD Rating.

Transformational MATSA acquisition 

SFR has agreed to acquire 100% of the “MATSA” mining complex, Andalusia, Spain for A$2,572m from Trafigura (trader) and Mubadala (Sovereign fund).

Funding comprises A$1,248m in new equity (placement, entitlement, A$5.40ps), A$1.1bn in debt (new and existing) and ~A$300m cash (gearing to ~23%). We take the acquisition materials as read.

First impressions

We value MATSA at A$2,732m (SFR physicals & costs, 10% d.r, US$3.40/lb LT Cu) suggesting SFR has acquired the notional 12-year mine plan at only a 6% discount (~3% including transaction costs).

Upside therefore looks linked to higher metals price scenarios, targeted productivity/production improvements and life extension beyond 12 years. The “fullish” price suggests SFR was highly motivated for strategic reasons.

Strategically MATSA looks like a solid deal relative to the market appearing to discount SFR for: a potential gap in cashflows; a migration of operating/geographic risk toward Botswana/ Africa; and ongoing M&A risk (trading ~50% cash backing). MATSA brings solid and certain cashflows, via a reasonable jurisdiction in terms of sovereign risk.

We agree that SFR’s investor appeal for leverage to the compelling copper outlook will likely benefit from: 1) improved scale/profile/liquidity; 2) cash flow certainty; 3) less reliance on greenfields execution; and 4) diluted exposure to riskier jurisdictions.

Balance sheet outlook looks reasonable as SFR is forecast to de-gear over 4-5 years. Surplus cash and first quartile MATSA costs offers protection against a market downturn, as does the ability to delay growth options if need be.

Forecast and valuation update

We incorporate MATSA into our updated valuation, but await completion to incorporate earnings/higher interest. Our updated, fully diluted DCF valuation revises to (login to view).

We risk-weight MATSA by 5% (close to cost), and risk-weight potential life extension to ~A$100m, which we think is conservative.

Investment view

Pre-MATSA, SFR’s share price was starting from a position of chronic underperformance versus its global peers for some of the issues noted above.

Tactically we think that SFR can narrow its fundamental valuation discount, and unwind recent underperformance, helped by much improved investability noted above, and by reasonably attractive relative valuation metrics versus its peers as detailed on page 4.

We do note that the share price/register may take time to re-set and digest given the sheer volume of new paper on issue at $5.40ps (1.3x previous volume).

Price Catalysts

MATSA acquisition aiming to complete in Mar-Q 2022.

Motheo 5.2Mtpa DFS, Old Highway Resource/PFS – Both due Mar-Q 2022.

Risks

Execution risks around completion and operational/cultural integration of MATSA, in parallel with the development of Motheo, and ongoing WA exploration/evaluation will likely pose challenges in the year ahead.

Production disruption from a single key asset, development risk, M&A risk, commodity price and FX volatility.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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