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Sandfire (SFR)

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.


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.

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