Sandfire's great deal in the making

The ever-bustling Karl Simich has fixed Sandfire’s looming production gap in grandioso style with the A$2.6 billion acquisition of the MATSA copper-zinc-lead complex in Spain (writes Barry FitzGerald on MiningNews).
30th September 2021

It is grandioso all right, with the acquisition cost being more than twice Sandfire's pre-deal market cap for a 1.4 times uplift in copper equivalent production.

On those simple metrics, it is clear Sandfire did not get a bargain, as might be expected in a UA$4.20/lb copper market and with stiff competition for MATSA from Grupo Mexico in particular.

While not a bargain, the MATSA acquisition is nevertheless a great deal in the making.

First and foremost, it solves Sandfire's production gap problem, the result of its mainstay DeGrussa copper/gold operation in WA's Bryah Basin coming to an end in the third quarter of FY2023.

The loss of DeGrussa's 70,000tpa copper and 40,000oz-a-year gold production will eventually be made up by a 55,000tpa copper project in Botswana, and a 23,00tpa copper project in Montana.

But there was going to at least six months or so when Sandfire was going to have no production.

That is why Sandfire was trading at a pre-deal EBITDA multiple of 1.2x (Macquarie) compared with OZ Minerals at 6.7x, the recently listed 29Metals at 4.4x, and a 6-8x global average.

MATSA's 12-year plus production runway of 110,000tpa of copper equivalent (60-70% of revenue is from copper) means that Sandfire can now expect a re-rating.

It is a double one in fact - one for plugging the DeGrussa production gap, and one adjusting for the multiple in the MATSA acquisition price (4.8x MATSA's FY2021 EBITDA of US$387 million) being below the global average.

The MATSA deal is due to be concluded in March next year. So there is no rush with the market re-rate. Besides, the market first needs to digest what is a momentous deal.

Sandfire is suddenly very different company. Quant funds in the stock for a dividend harvest on the rundown of DeGrussa have been exiting the stock in the wake of the MATSA deal, and there was the dilution from the discounted shares issued as part of the deal's funding package.

So there is no wonder that Sandfire shares took a 12.5% share price hit on resuming trade after the fund raising, and are now back at A$5.34 ahead of the market-rerating required to reflect its newfound status as a 150,000-200,000tpa copper equivalent producer for the long-run.

All that came through in analyst commentary on the MATSA deal, and the new 12-month share price targets set for Sandfire. Across six broking firms, the targets averaged $7.40, 38% higher than the current share price.


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