Sandfire Proves Cheaper Copper Target on Profit: Real M&A

Sandfire Proves Cheapest Copper Target on First Profit
With copper selling for $3.40 a pound, Sandfire will produce the metal at a cost of $1 a pound. Photographer: Carla Gottgens/Bloomberg

Australia’s Sandfire Resources NL, which produces higher quality ore than the world’s largest copper mine, is now the industry’s cheapest takeover target in Asia as it starts to generate revenue.

The Perth-based company has begun to ship copper at its DeGrussa mine just three years after its discovery and yesterday traded at 5.6 times estimated earnings for the current fiscal year, according to data compiled by Bloomberg. That’s lower than every other copper producer in the Asia-Pacific region with a market value of more than $500 million and cheaper than 86 percent of Sandfire’s global rivals, the data show.

Sandfire, which analysts project will turn a profit this year for the first time since its initial public offering almost a decade ago, may now attract interest from Antofagasta Plc and Freeport-McMoRan Copper & Gold Inc., according to Patersons Securities Ltd. and StockAnalysis. Patersons said buyers would have to pay about 40 percent more than Sandfire’s $1.1 billion market value to control the DeGrussa mine’s ore, which has an average copper concentration more than four times that of the minerals extracted at the world’s largest copper mine in Chile.

“Sandfire has something that’s quite special,” Simon Tonkin, a Perth-based analyst at Patersons, said in a telephone interview. “They have some of the highest copper grades in the world. Because they’ve got such a good asset, they should be trading at some sort of premium. It could be a good time for someone” to buy them, he said.

‘Major Discovery’

Sandfire fell 1.3 percent to A$6.87 a share in Sydney today. The benchmark S&P/ASX 200 Index was down 0.7 percent.

Nicholas Read, a spokesman for the company at Read Corporate in Perth, declined to comment on the prospect of a takeover.

When Sandfire sold shares to the public in March 2004, it described itself as looking for a “major discovery” in gold, copper, lead, zinc or silver. Eight years, and four additional share sales later, the company began copper ore production at its DeGrussa mine, 559 miles north of Perth, in February.

OZ Minerals Ltd., owner of the Prominent Hill copper-gold mine in South Australia, bought about 19 percent of Sandfire in July 2010 for A$100 million ($103 million), calling it a “strategic investment.” Nancy Bellistri, a spokeswoman for OZ Minerals, said it doesn’t comment on takeover speculation.

DeGrussa, which was discovered in 2009, made its first shipment of copper ore in May and has the potential to produce nearly 80,000 metric tons of the metal used in tubes and electrical wiring each year, according to Sandfire.

Analysts estimate Sandfire had revenue of A$32 million in the year that ended last month, according to data compiled by Bloomberg. Sales will rise to A$547 million this fiscal year, while Sandfire will post net income of A$186 million as DeGrussa shipments start, analysts project.

‘Pretty Dire’

“Before this discovery, the situation was looking pretty dire,” Gareth James, a Sydney-based analyst at Morningstar Inc., said in a telephone interview. “They’ve got the project from discovery to production very quickly and on budget, and that reflects well on the company. This is a pretty decent copper asset.”

Sandfire’s shares retreated 18 percent from their all-time high in August to A$6.96 yesterday as copper prices declined. That left Sandfire trading at 5.6 times estimated earnings for the fiscal year ending in 2013, less than every copper producer in Asia with a market value of more than $500 million. The multiple compares with an average of 8.7 times for 22 copper miners globally, data compiled by Bloomberg show.

‘Extraordinary Deposit’

A high concentration of copper in the ore body and the potential for more high-grade discoveries are selling points for the DeGrussa mine, according to Peter Strachan, a resources analyst at Perth-based StockAnalysis. DeGrussa has an average copper grade of 5 percent during the life of the mine, compared with an average grade of 1.18 percent in the year through June 2011 at Escondida, the world’s largest copper mine located in Chile, according to its operator BHP Billiton Ltd.

With copper selling for $3.40 a pound, Sandfire will produce the metal at a cost of $1 a pound, cheaper than 75 percent of producers, according to a June company presentation.

“It is an extraordinary deposit by grade,” said Strachan. “It’s likely that as Sandfire goes down and does exploratory drilling, they will find more.”

Sandfire plans to start shipping concentrate in the fourth quarter and said in May that discussions for sales agreements were “well advanced.” Meanwhile, larger copper producers face declining grades of ore as their mines age. Copper production at BHP’s Escondida fell 8 percent last year because of lower ore grades.

‘Strong Argument’

Demand may increase in the second half of the year as China, the world’s biggest consumer of metals, boosts economic growth with fiscal stimulus measures. Copper will climb to $3.80 a pound in 2013, according to the median of 11 analysts’ forecasts compiled by Bloomberg.

“Copper grades around the world are declining,” Morningstar’s James said. “There’s a very strong argument for copper going forward. In that context, you can see why people would be interested in a copper mine in a very low-risk location such as Australia.”

The threat to global economic growth and copper demand from Europe’s sovereign debt crisis may be enough to deter acquirers, according to Katana Asset Management Ltd.’s Matthew Ward. Smaller potential buyers may also find it difficult to raise funds to buy Sandfire, while larger suitors may prefer a bigger project than DeGrussa with a longer life, he said.

“It’s got a fantastic grade, but the deposit as it stands at the moment is small,” said Ward, who helps manage about A$40 million at Perth-based Katana. “Its life is limited. So who is going to buy it?”

‘Almost Inconceivable’

Still, Sandfire is looking beyond DeGrussa. It owns 17 percent of White Star Resources Ltd., a Perth-based company with a market value of A$7 million that’s searching for copper and gold in northern Chile. Sandfire has also said it’s exploring in the Northern Territory, Queensland and New South Wales, and is seeking more deposits near DeGrussa.

“If someone were to come and buy it, they think they’re going to find more,” Jo Battershill, a Sydney-based resources analyst with UBS AG, said in a phone interview. “It’s almost inconceivable to believe that in four years’ time, the mine will only have a four-year mine life left.”

Rather than its limited potential, DeGrussa’s mine life of at least seven years reflects the fact that Sandfire has focused on developing its existing resources instead of expanding its reserves, Strachan said. Copper deposits typically occur in clusters, Sandfire says.

Mount Isa

“The upside there in the region is quite spectacular,” said Strachan. “The whole region could turn out to be another Mount Isa,” he said, referring to one of the largest underground mining operations in the world.

Owned by Xstrata Plc, the Mount Isa mine in Australia’s Far North Queensland produces copper, zinc, lead and silver, and has been in operation since 1924.

OZ Minerals, already Sandfire’s largest shareholder, is “actively looking” to buy assets globally, Chief Executive Officer Terry Burgess said in April. Still, Strachan and Katana’s Ward said a takeover of Sandfire may be beyond the reach of the Melbourne-based company, which had A$886 million in cash at the end of December and a market value of A$2.3 billion as of yesterday.

Instead, Antofagasta, the copper producer that’s controlled by Chile’s Luksic family with a market value of $16.6 billion, may be able to win over Sandfire shareholders by offering a premium as small as 25 percent, Strachan said.

“For Antofagasta, this could be a good way to get their foot on the ground in Australia,” he said. “A very strong foot on the ground, an established business.”

Antofagasta, Freeport

Antofagasta CEO Marcelo Awad said in a March 2011 interview the company planned to make acquisitions outside Chile. He said the company could “easily” access cash and would consider “early stage” projects as well as existing operations. The company struck a strategic alliance in November with Monax Mining Ltd. to explore for copper in South Australia.

A spokesman for Antofagasta declined to comment on whether the company would be interested in Sandfire.

Sandfire is more likely to lure a North American buyer such as Phoenix-based Freeport, the world’s largest publicly traded copper miner, according to Patersons’ Tonkin. Any suitor would likely have to pay a 40 percent premium for a high-grade producer such as Sandfire, he said.

Freeport CEO Richard Adkerson said in an interview last April that the company was prepared to make acquisitions.

Eric Kinneberg, a spokesman for Freeport, declined to comment on whether it wants to buy Sandfire.

Minmetals Resources

Minmetals Resources Ltd.’s CEO Andrew Michelmore said in March that the Hong Kong-based company needs to close an acquisition each year, including of copper assets, to meet its growth targets. The publicly traded unit of China’s biggest metals trader had $1 billion in cash at the end of December, data compiled by Bloomberg show.

Minmetals doesn’t comment on market speculation, Sally Cox, a Melbourne-based spokeswoman for the company, said in an e-mail.

Investors aren’t yet giving Sandfire the credit it deserves for its earnings potential, said UBS’s Battershill.

“Every copper producer in the world is saying they want more copper producers,” Battershill said. “Most people would probably agree that based on the current share price, based on that scenario, it looks a little bit cheap at the moment.”

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