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Hot Hand At The Sands

There is a very quiet game of poker being played where the stake is one of the world’s highest grade copper mines.

At the table sit Australians, Canadians, Chinese and the Chileans – and nobody is blinking.  But once a call is made, the cash pile will quickly mount, as bidders try to outfox each other for control of Sandfire Resources (SFR).

Sandfire is shipping copper concentrate from its Degrussa mine, just three years after its discovery. And going from project to discovery and then into production so quickly and on budget has reflected well on SFR management

Degrussa has an average copper grade of 5% for life of mine – and this very high concentration, plus the potential for further discoveries has put Sandfire into play.  Sandfire’s grade means it produces copper cheaper than 75% of global producers at around $1 a pound.  Copper sells currently for around $3.50 a pound.  Escondida, the world’s largest copper mine, had an average copper production grade of 1.2% last year.  Global producers are facing declining production grades as their mines age.

Sandfire’s share price is around $7.00. This could quickly rise to $10 once the game opens up.

SFR market cap is around $1.1 billion.

Among those sitting at the gaming table are Oz Minerals (OZL) – it made the first land grab at SFR at $5.90, taking their stake to 19%. The jury is out on whether it has the cash to outbluff its competitors.  OZ Minerals track record puts it at longer odds. And perhaps the best OZL shareholders can hope for is the consolation prize when it sells its $100 million stake of SFR to the top bidder.

The gamblers with the deep pockets are Antofagasta, with a market value of $16 billion. Its CEO has said the company wants to make acquistions outside of Chile and could easily access cash. Antofagasta is already on the ground exploring for copper in South Australia with Monax Mining.

On the other side of the table with deep pockets is Canadian based Freeport  McMoran which is the world’s largest listed copper producer and, like the Chileans, the Canuks are on the hunt for acquisitions.

Last but not least, from the inscrutable middle Kingdom is Minmetals, headed by OZL’s former CEO, Andrew Mitchelmore. It has cash of around $1 billion and Mitchelmore would, no doubt, like to make a point, nailing down a successful high grade acquisition like SFR.

The major players are for the moment maintaining their steely gaze and stony silence. The deterrent being threats to world economic growth arising from the European crisis.

The common theme though is major copper producers want/need to build their reserves and SFR looks cheap. Any final bid could be at as much as a 40% premium to the current price. And certainly the market is not pricing SFR for its earnings potential. The Degrussa mine has the potential to produce 80,000 tonnes of copper per annum.  And SFR should post net income of around $200 million once production gets cranked up. This implies an earnings multiple of less than 6 times!

High grade copper finds are typically discovered in pods. SFR has concentrated on getting production ramped up rather than exploration. The deposit as it stands is small  although  the expectation is SFR will locate further high grade pods in the area, and Degrussa could be the fore runner for another Mount Isa discovery – one of the world’s largest underground copper mining operations. Those of you with long memories will remember the MIM’s board going weak at the knees and capitulating to Xstrata’s ridiculously low bid.  Seems the only hard men in Queensland are in the Maroons rugby league team.

Whichever way the mustard is cut, the market is certainly not valuing SFR on its earnings potential, figuring capital has to be ploughed back into more drilling.   But the smart money is backing the fact that SFR has a pretty fair idea where it has to spud holes to get similar Degrussa style mineralisation hits.

Nor is the market realising the takeover upside, beyond the fact of OZL’s shareholding.

Stay tuned. When the poker takeover game hots up for SFR it will leave “dramality” OMG gobsmacked and in botox dilemma.

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