Sandfire Resources still first choice in ASX copper after March quarterly

Sandfire Resources (ASX: SFR) is widely considered the only pure-play copper stock left on the ASX of any major size, and many have suggested this makes it the next obvious takeover target in the sector. This fact, as well as the fact copper is the ‘it’ commodity of 2024, means the company has found its way into many Aussie investors’ portfolios.

Sandfire has just released its March quarter production and activities report. Here’s the lowdown on the key developments at the company, how its operations are tracking, and most importantly – what the biggest brokers in the land think about it. Stay tuned for their consensus rating and price target at the end.

Firing up

2023 was a transformational year for Sandfire. It phased out production at its De Grussa mine in Western Australia, commenced production at its massive Motheo Copper Project in Botswana, and continued the ramp up at its flagship MATSA operation in Spain. This momentum appears to have continued into 2024.

During the March quarter:

Production (Group copper equivalent production of 33.1kt (+2% vs December quarter)

• MATSA

  • Copper equivalent production of 21.4kt (-7% vs December quarter)

  • Annualised mining rate of 4.7Mt in Q3 FY24 – a new record

  • Underlying operating costs at $72/t1 of ore processed, C1 cost $2.15/lb (+8% vs December quarter)

• Motheo

  • Copper equivalent production of 11.7kt (+25% vs December quarter)

  • Average annualised processing rate of 4.7Mt (including 6.0Mt p.a. over a 20-day period to 26 April)

  • Underlying operating costs at $36/t1 of ore processed, C1 cost of $1.67/lb (steady vs December quarter)

Exploration

• Finalising a multi-year plan to materially increase reserves at MATSA

• Confirmed maiden Inferred Resource estimate for A1, with extension drilling underway at A4 and at T3

• Drilling underway to test high-grade extensions at Johnny Lee

Corporate/Finance

• Underlying Operations EBITDA of $93M

• Underlying Operations EBITDA margin of 45% (Motheo 56%, MATSA 39%)

• Motheo Finance Facility successfully increased to $200M with final $20M drawdown completed in March

• Established $200M Corporate Revolver Facility and subsequently repaid $88M balance of MATSA Facility A

Guidance

• Retained FY24 Copper Equivalent (CuEq) production guidance

• Small decrease in capital expenditures and costs

Broker response

Barrenjoey

Rating: OVERWEIGHT; Price Target: $9.00⬆️ vs A$8.60

• Expects strong production as Motheo continues to ramp up

• Has a bullish view on copper due to industry trends

• Gearing will improve as Motheo expenditures tail off, net debt peaking now

• Only concerns is whether growth potential is already factored into stock price

Canaccord Genuity

Rating: BUY; Price Target: $10.25⬆️ vs $9.75

• Likes increases in copper production but notes operational cost challenges

• Points out that zinc production negatively impacted profitability

Citi

Rating: SELL; Price Target: $7.90⬆️ vs $7.30

• A “solid” operational quarter, zinc performance was the only detractor

• FY24 EBITDA forecast increased by 7% due to higher copper price estimates and revised cost guidance

• FY25/26 EBITDA forecast increased by 7% and 4% respectively on improved pricing

• Notes share price is outperforming because market view is “SFR is the ASX’s only liquid ‘copper ETF’”

Jarden

Rating: NEUTRAL; Price Target: $6.80⬆️ vs $6.50

• There may be issues relating to the scheduling of waste stripping at Motheo

• Mill operating performance was impressive

• Has a dim view of the company’s financial performance during the quarter

• Operational disruptions trigger downward adjustments to production and cost forecasts

Macquarie

Rating: OUTPERFORM; Price Target: $10.50⬆️ vs $9.00

• Copper production was 10% below broker’s forecast with operating costs 25% higher than forecast

• Pares back prior expectation that Motheo would beat FY24 guidance, but boosts long term throughput forecast by 6% on positive commentary

• Processing rate forecast at Motheo increases to 5.5Mtpa and triggers EPS upgrades of 1% in FY25, 23% in FY26, and 18% in FY27

Morgan Stanley

Rating: EQUAL-WEIGHT; Price Target: $8.40⬆️ vs $7.65

• Zinc production at MATSA missed broker’s estimate by 18%, but was due to an unforeseen operating issue, and production is deferred until the fourth quarter

• Zinc issue caused MATSA costs to be 30% higher than the broker’s forecast

• SFR is “looking cheap on multiples”, cites 12 month forward EV/EBITDA of 5.0x vs global peers at 8.3x

Ord Minnett

Rating: ACCUMULATE; Price Target: $10.00⬆️ vs $9.20

• Result was “marginally softer” than expected due to lower zinc production at MATSA

• Group level copper production was better than expected

• Momentum in SFR’s share price may continue as “sentiment turns more positive towards copper” – this could also include an element of M&A expectation

RBC Capital Markets

Rating: OUTPERFORM; Price Target: $9.50

• It is likely the company will exceed consensus forecasts for production and costs

• The quarters zinc miss is likely deferred, and this will boost profitability in future quarters

• Financially, the quarter’s performance was resilient, and overcame several challenges

• Sees potential for de-gearing over the next financial year

Wilsons

Rating: OVERWEIGHT; Price Target: $9.30

• Several challenges faced during the quarter did not derail MATSA production, which demonstrates project’s flexibility

• Company could deliver a positive surprise with respect to costs in FY24 results

• Motheo has positive exploration potential, sees ongoing operational improvements at MATSA

• MATSA's long-term potential is likely underappreciated by market

Sandfire Resources broker consensus

Based upon the above individual ratings and price target, let’s calculate a Sandfire Resources’ broker consensus. I like to assign a value of 0 to any rating better equivalent to a HOLD/NEUTRAL, a +1 to any rating better, and a -1 to any ratings worse. If the average rating is +0.5 or greater, I call the consensus rating a BUY, and if the average rating is -0.5 or worse, I call it a sell.

On this basis, Sandfire Resources’ average score is +0.56 giving it a consensus rating of BUY.

The price target is a little easier. The average price target for Sandfire Resources among the brokers sampled is $9.07, well up from the average price target of $8.29 prior to the March quarter update. If you prefer, Sandfire Resources’ median price target rose to $9.30 from $8.60.

Based upon Sandfire Resources’ price at the time of writing of $9.20, this implies an 1.4% downside to the brokers’ average price target, and a 1.1% upside to their median price target.