This is not investment advice and is general in nature. Do your own research before taking any positions in the securities listed below
L1 buys a stake in $SFR
In Sep’22, L1 acquired a >7% stake in Sandfire Resources ($SFR), which they have now partially sold down. In the same month - BHP made a bid for $OZL (which was subsequently revised on Nov 22). As luck would have it, I followed suit by also buying a small stake in $SFR which I too have partially sold down at $5.50(ish) mark
Before I go any further - it is worth clarifying that I do not generally invest in materials companies (excl. energy) and I generally hold long-term. The reason for that, I generally do not have an edge in this space. However in this instance - it seemed that there was a pretty straightforward catalyst for a valuation re-rate .
Without knowing anything about L1's motives my assumptions were as follows:
First-order thinking - $OZL disappearing means ASX investors will seek another source of copper exposure even if $SFR's assets are arguably inferior to Olympic Dam & Prominent Hill which $OZL own
At the date of purchase, $SFR traded at >30% discount to book value
Whilst there is evidence that copper supply in Chile will ramp up in 2023, hurting prices, my simple thesis on copper is:
Copper is a mild beneficiary of the energy transition
BHP chose now a time to ramp up Olympic Dam which means there is likely some medium-term price support because BHP logically has a better grip on commodity prices than most sell-side analysts
Quick debrief on $SFR
$SFR is a much more complicated player and is generally traded at a discount (>30% discount to NAV) and ascribed limited value beyond the MATSA mine
The reason for this was
DeGrussa has a short mine life. Even if other projects (e.g. Black Butte and T3 Project) could expand SFR's production at a lower production rate; that's not sufficient to 'move the dial on this.
MATSA (acquired for $1.9bn) - 3 underground copper mining operations with 4.7Mtpa central processing facility to produce 100-120ktpa CuEq per annum. This is a high-quality mine with c.12yrs of mine-life. The big upside here for $SFR is converting resources to reserve
Matheo - This is a completely different play; longer mine life, more expansion capacity, and more sovereign risk (Botswana). The base case for $SFR is the commencement of Motheo production in FY24 which will deliver material CF
Why this was not purely a resource play
There were a few factors that made $SFR appealing in Sep'22:
The bad news of a dilutive equity raise to pay down debt had occurred
At the time of purchase - $SFR was trading at a 30% discount to book value. It now trades closer to book value
Limited value had been ascribed to Motheo production so there is a material "margin of safety" to how that is valued
Possible cost savings at MATSA from a reduction in gas prices
Conclusion: This was a shorter-term net-net trade that I made because:
Whilst book value is not how you value mining business, the fact that $SFR was trading at a 30% discount to book with a neutral Copper outlook was compelling
Shortly the capex profile will fall away for Motheo and the business paid down debt, with most of the dilution already taking place
The MATSA mine was of sufficiently good quality & the purchase price was sufficiently reasonable for the discount to book value to not be reasonable
Overall - I do not think I will make many more net-net trades on mining businesses because whilst this one panned out well it is not my area of expertise.
Comments