Analysts agree with Simich: there’s value in sold-off Sandfire

The coronavirus-induced market meltdown is creating buying opportunities everywhere, especially among base metals companies.
28th February 2020
Resources Rising Stars

The coronavirus-induced market meltdown is creating buying opportunities everywhere, especially among base metals companies.

None more so than mid-tier copper-gold miner Sandfire Resources (ASX: SFR), whose shares plumbed 5-year lows of $4.48 this week.

In show of confidence in the mid-tier miner’s ability to bounce back strongly from the current malaise, Sandfire chief executive Karl Simich shelled out $226,395 earlier this week to top up his holding to the tune of 50,000 shares.

If the recent rash of broker reports following Sandfire’s half-yearly profit result are anything to go by, Simich’s on-market purchase could ultimately prove to be well-timed.

Of the 11 or so mainstream broking firms and investment banks covering Sandfire, six had BUY or ACCUMULATE recommendations on the stock, with an average price target of $6.13, while three had HOLD and NEUTRAL recommendations and just two had SELL recommendations following the interim profit result.

And several of the brokers see value emerging in the stock at these levels.

For instance, Bell Potter’s David Coates has a BUY recommendation with a $6.02 price target, saying the recent downward share price move is “overdone”.

“This was a good result from SFR and keeps it on track to meet expectations for FY20,” Coates says of the company’s first-half profit of $34.2 million on sales revenue of $313.1 million.

“We continue to monitor for news on improving mined grades from the Monty deposit, which are crucial to FY20 production, earnings and life-of-mine cash build,” he said. “….with the latest share price move, we now see some value emerging.”

Citi’s Kate McCutcheon, who has a $6.20 target price on the stock, says SFR shares have been “weighed down by COVID-19 copper demand disruptions and transient operational issues at Monty.”

“SFR’s growth options present an opportunity to board Citi’s 2H20+ bullish copper thematic but shareholders will need to consider if they want to hold on for the project development ride,” she wrote.

Argonaut’s Jeff Sansom and Matt Keane are bullish on copper as a key commodity pick into the 2020’s based on a recovery of underlying demand from China, improving trade relations between China and the US and a looming supply deficit based on declining discovery rates and mine grades.

In a broad-based review of ~70 copper companies, the Perth-based broker picks Sandfire as one of its key producers, with a BUY recommendation and $7.50 target price.

Meanwhile RBC Capital Markets’ Paul Hissey says there is valuation support emerging for SFR which has to be balanced against the looming shift to development mode as it embarks on the development of new copper mines in Botswana and the USA.

“We acknowledge that there is valuation support emerging for SFR, but we balance this against the framework of the Company’s looking transitory phase to development,” he said.

“To this end, the expected studies on the group’s two development projects will be key to providing 1) visibility to mine life beyond DeGrussa and ii) further colour around scope and CAPEX profile in the near term.”

RBC has a SECTOR PERFORM rating on Sandfire with a price target of $6.25-a-share.

Finally, Macquarie Equities sees a number of “key catalysts ahead” for Sandfire, with the optimisation study on its T3 project in Botswana and an updated Reserve estimate for the Monty deposit due in April.

“An update to the Monty reserve is expected to be released in April and presents the opportunity for SFR to confirm the rising production outlook for DeGrussa,” wrote Macquarie analyst Hayden Bairstow.

Macquarie has an OUTPERFORM rating on Sandfire and a $6.00 price target.

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