Sandfire (SFR)
One of the key points of difference between the market conditions that currently prevail and those of 2008-2009 is the significantly healthier position of most corporate balance sheets.
During the GFC the market was in a state of panic, in part because after Lehman collapsed no one knew who might be next. Every other company seemed to have an unwieldy amount of debt, which was exacerbated by the drying up of liquidity in credit markets. But through numerous capital raisings, most companies repaired their financial positions and won back control of their destiny.
One of the best examples is Oz Minerals, which was forced to sell almost all of its assets to China's Minmetals after its lenders refused to refinance its debt. Following the sale, Oz Minerals went from staring bankruptcy in the face to holding a high-quality copper project at Prominent Hill and more than $1 billion in cash.
The company held $905.6 million in cash at the end of June 2011, of which management had flagged $750 million as available for growth, meaning acquisitions. One contender is copper's new kid on the block, Sandfire. Sandfire rose to prominence from April 2009 following its discovery of the DeGrussa copper-gold deposit, 900 kilometres north-east of Perth.
The project is expected to produce some 77,000 tonnes of copper and 36,000 ounces of gold in each of its first three years of operation. With Sandfire on track to begin copper production at DeGrussa in the first quarter of 2012, an acquirer will not have long to wait before their investment begins to generate cash flows.
This should be particularly attractive to Oz Minerals, given the company's dearth of production growth between now and the addition of its Carrapateena project in 2018. Oz Minerals is unlikely to get a better opportunity to buy the 81 per cent of Sandfire that it doesn't already own following the recent market rout. The company could comfortably write a cheque for upwards of $9 a share to secure Sandfire.
Price
Sandfire's DeGrussa project is very attractive in its own right. The recent weakness in copper prices and the broader equity market has opened up an attractive entry point for long-term investors. In addition, there is a strong case for Oz Minerals to launch a bid for Sandfire, which could provide a swifter return for shareholders than will otherwise be the case. Investors that are comfortable with the speculative nature of resource stocks should consider adding Sandfire to their portfolio at below $7.
Frequently Asked Questions about this Article…
What is Sandfire's DeGrussa copper project and how much metal will it produce?
Sandfire's DeGrussa copper-gold deposit, discovered in April 2009 about 900 km north-east of Perth, is expected to produce around 77,000 tonnes of copper and 36,000 ounces of gold in each of its first three years of operation.
When is Sandfire expected to begin copper production at DeGrussa?
According to the article, Sandfire was on track to begin copper production at DeGrussa in the first quarter of 2012, which means an acquirer would have a relatively quick path to cash flows once production starts.
Why could Oz Minerals be interested in buying Sandfire?
The article argues Oz Minerals could find Sandfire attractive because Sandfire offers near-term copper production at DeGrussa while Oz Minerals lacks production growth until its Carrapateena project in 2018. With a strong cash position after its restructuring, Oz Minerals could move to buy the remaining 81% of Sandfire it doesn’t already own.
How strong is Oz Minerals' cash position and how much is available for growth or acquisitions?
The article notes that Oz Minerals held $905.6 million in cash at the end of June 2011, and management had flagged about $750 million of that as available for growth and acquisitions.
How did Oz Minerals recover after its near-bankruptcy experience in the GFC?
After being forced to sell most assets to China’s Minmetals during the GFC, Oz Minerals re-emerged with a high-quality copper project (Prominent Hill) and a stronger balance sheet. The article highlights that many companies, including Oz Minerals, raised capital and repaired balance sheets following the crisis.
Is now a good time for everyday investors to buy Sandfire shares?
The article suggests the recent weakness in copper prices and the broader market has opened an attractive entry point for long-term investors. It recommends that investors comfortable with the speculative nature of resource stocks might consider adding Sandfire at prices below $7.
What acquisition price could Oz Minerals realistically offer for Sandfire?
The piece estimates Oz Minerals could comfortably write a cheque for upwards of $9 a share to secure Sandfire, given its reported cash resources and the strategic fit of DeGrussa.
What are the main market considerations and risks mentioned for investing in Sandfire or resource stocks?
The article points out that resource stocks are speculative and sensitive to commodity prices — for example, recent weakness in copper prices created a lower entry point. It also contrasts today’s healthier corporate balance sheets with the panic and credit drying up seen in the 2008–2009 GFC, implying market and commodity volatility are key risks investors should weigh.
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