Sandfire just gets better

Tim Treadgold writes:

There is nothing harder in the resources world to value than the potential for exploration success, which is why not everyone listened to Sandfire's (SFR) extrovert chief executive, Karl Simich, when he was banging on six years ago about VMS-style copper deposits(VMS stands for “volcanogenic massive sulphide).

Simich's likening of Sandfire's 2009 Doolgunna discovery to other VMS-style mines in Canada and Africa with their multiple orebodies was noted, but interest faded as Doolgunna started to look like a one-trick pony; very rich but relatively small and lonely.

The Monty discovery some 25km south-east of Doolgunna has kicked Simich's VMS theories back into play because as Chris Booth explains in his inaugural analysis for Eureka Report “Doolgunna is about to pay off”.

What this fresh look at Sandfire reveals is that Doolgunna might indeed be host to a series of rich copper and gold deposits similar to those found in other countries where ancient volcanic activity has thrown up a series of mineralised structures.

For an idea about how this works picture the famous “black smokers” which are active on parts of the sea floor in the Pacific Ocean where sulphur-rich plumes of material are being ejected by deep-seated volcanic activity.

Wait around a few billion years and what you see today in a Pacific black smoker could be a Doolgunna of tomorrow.

Interesting as the genesis of a VMS mineral deposit might be the reality for investors is that orebodies of its type have historically proven to be rich sources of cash, which is why the latest news from Monty has triggered a fresh look at Sandfire, and is responsible for sharp upward move in the company's share price even as the prices of copper and gold have been falling.

One reason why Sandfire has been slow to make a significant follow-up discovery to the original 2009 strike is a combination of remote location and a thick layer of barren surface material which makes exploration difficult as there are very few rocks on the surface for a geologist to kick around.

The Doolgunna region is so barren that it has even been abandoned as a cattle station, sitting as it does close to edge of the vast central Australian desert.

DeGrussa, the name given by Sandfire to its first mine in the greater Doolgunna project area, was almost an accidental discovery, hit by what could easily have been the last drill hole by Sandfire as it had started to mothball operations in the tough year after the 2008 global financial crisis.

Luck was on Sandfire's side then and luck appears to be playing its part today, along with the application of some of the most sophisticated technology being used by any explorer in the world.

Monty is a game changer for Sandfire, and its less well-known partner in the discovery, Talisman Mining.

Drilling at Monty, which is part of a joint venture called Springfield, is ongoing but the early assays are as good as anything seen in the early days of Doolgunna. The discovery hole revealed 18.9 per cent copper plus 2.1 grams of gold over a very respectable 16.5 metre intersection.

The latest assays reported last week confirmed the quality of the discovery with one yielding 11.8 per cent copper plus 2.9g/t of gold over a 9.2 metres wide intersection.

No-one is yet saying that Monty will be Sandfire's second mine. That takes more drilling and economic assessments which will place a heavy emphasis on the distance from the surface of what's been found – and in mining depth equals cost.

Monty, however, is a discovery that is impossible to ignore because of the way it changes the way geologists see Doolgunna and how it fits into Simich's VMS theories of 2009 – which are certain to be refreshed in the company's future presentations to investors.

What was an interesting theory six years ago the VMS multi-orebody theory could be a better one today.

Chris Booth writes:

Doolgunna is about to pay off!

Since the discovery of the DeGrussa copper/gold deposit in 2009, tens of millions of dollars have been spent by mining and exploration companies in the Bryah Basin trying to emulate Sandfire's success.

OZ Minerals (OZL) identified a long time ago that Sandfire was in the dominant position to repeat its previous success, but as of March 2015 this had not eventuated. OZ lost patience and sold its entire 19.1 per cent stake for a modest profit. In recent weeks, Sandfire has been creating headlines with Doolgunna – a farm-in Joint Venture with Talisman Mining Limited (TLM).

The current flagship project within the JV tenement is Springfield, and they recently announced an initial 16.5m massive sulphide intersection containing whopping grades averaging 18.9 per cent copper and 2.1g/t gold at the Monty prospect.

Since then the good news has continued to flow with two more massive sulphide intersections from as many drill holes.  Starting with a lazy 9.2m at 11.8 per cent copper and 2.9g/t gold from the second diamond drill hole. Then an ‘accidental' 18m of massive sulphide from a RAB precollar, a relatively fast and cheap form of drilling. The key to these results is the recent precollar, which provides a much greater level of certainty as it is less than 100m from surface.

As with all initial discoveries there are still significant risks due to the outstanding issues with continuity, average grade and thickness. However these results alone indicate that they are on the cusp of a significant ore body, which at only 10km from DeGrussa would create a highly strategic resource for future growth.

Monty's VMS style mineralisation is hosted within similar volcano-sedimentary host rocks as DeGrussa, and has similar mineral composition and textures. DeGrussa is about 2 billion years old and lies on the northern limb of the Robinson Range Syncline. Therefore it is possible Monty's is a time equivalent mineralising event which now lies on the southern limb. It should also be considered that unless this is an exceptionally world class deposit these super high grades will most likely average out and decrease as drilling continues.

DeGrussa concentrator with copper flotation cells in the background. Source: Sandfire.

The size usually relates to the longevity of the mineralising system and the ability for it to be preserved which at this stage is still unquantifiable. What we do know is that the Sandfire management team brought DeGrussa from discovery into production in record time. There is no reason to suggest it will be any different for Monty if results continue as expected.

Although the hype over the exploration success has taken the limelight, on July 15 Sandfire announced the signing of a Power Purchase Agreement (PPA) with juwi Renewable Energy Pty Ltd.  This signing marks the end of the formal approval process and has cleared the way for the construction of the largest off-grid solar power system in Australia. The project will be state of the art and will comprise of 34,080 solar panels over 10 hectares and 6MW of short term battery storage.

The 10.6MW solar power system will be fully integrated with the current 19MW diesel system already in place. But there may be some risk of downtime during the initial stages of the untried system. The overall downtime risk will be reduced due to the significant 6MW battery backup system. Sandfire will contribute less than $1m funding to the project. 

Although the details of the PPA have not been disclosed, the solar power generated is expected to be cheaper than the historic diesel power cost.

We need to wait for more details, but at this stage we are assuming that the $40m capital and operating margins may need to be recovered from the current six-year agreement, so the savings may not be significant in early stages.  A certain saving here is in reduced CO2 emissions and it shows that Sandfire is thinking outside the box to become an environmentally responsible corporate citizen.

Artist's impression of a potential solar and diesel plant. Source: Sandfire.

In relation to Sandfire's major asset, DeGrussa, Sandfire announced in the March quarterly the completion of the plant upgrade. They are seeing nearly a 2 per cent rise in recoveries and milling rates up from 1.5Mtpa to 1.6Mtpa in March. Only time will tell if these are sustainable. Costs were down on previous quarters and production guidance is on track for FY2015 thus far. The copper price is around six year lows at $US$2.39/lb as stocks on the London Metals Exchange (LME) indicate subdued demand. However, this has still largely been offset due to the still falling Aussie dollar.

Valuation

The market certainly responded to the recent results as the share price rocketed from $5.10 on June 16, to close at $6.40 on July 23. The 25 per cent increase, implies the SFR portion of the discovery is worth around $200m. Including TLS's 30 per cent, this values the total deposit closer to $260m.

Eureka's current Sandfire Discount Cash Flow model (DCF) based on DeGrussa is robust enough, but as mentioned in previous reports there is no exploration upside factored in to this valuation.  The new exploration success at Monty's will likely have significant synergies with the DeGrussa plant so it would be logical to use and expand the current DCF model rather than calculating a crude ‘metal in the ground' valuation.

To put this into perspective, during the first few years of production after 2021, at 5.5 per cent cu head grade, about $130-150m or about 90-95c a share is added to the NPV per year.  This could create even more value if production could be brought forward to potentially blend higher grade ore with the dwindling grades at DeGrussa.

At this stage it is unclear what will eventuate at Springfield but there is certainly a good chance it will add significant value to the existing operation. Assuming there is 1.5mt of shallow high grade ore to blend with DeGrussa from 2017/18 the speculative valuation will be around the $7-8 per share mark.

This is sensitive to tons and grade so assume there is still plenty of upside in this valuation to come.  Sandfire will be evolving rapidly as the ramp up to define the deposit continues, construction of the solar plant begins and optimisation of the plant is finalised. Updates will come accordingly. 

Summary

SFR is leading the way with solid low cost metal production, environmental innovation and now the potential for longevity. Overall we maintain our BUY recommendation with a revised discount cash flow valuation of $7.31 on the stock.

When David and Tim last recommended this company back in February the share price was only $4.16 and admittedly was looking slightly shaky in a tough resources environment. It is now well over $6 and those who persisted have held a great company and new investors can now benefit from Sandfire growing into its full potential. 

To see Sandfire's forecasts and financial summary, click here.