Sandfire, Oz vulnerable to low-ball bids amid copper’s failure to join sanctions spike

The red metal has not run with the likes of nickel and lithium, but the strong demand outlook means big inventories are very valuable, while explorers like Sunstone and Stavely are increasingly appealing amid the hunt for the next generation of producers.

It’s quarterly reporting time for the miners and things could get a bit messy due to some serious cost inflation.

In some good old-fashioned field research, Goldman Sachs hit up 20 mining companies in Western Australia to gauge the level of cost pressures on the industry.

It wasn’t pretty – labour costs 5-20% higher, higher diesel costs adding $US1-$US2 to Pilbara iron ore costs, higher chemical prices and a 10% increase in capex budgets driven by higher steel, labour and concrete costs.

By Goldman’s estimate, the WA industry is short some 10,000 workers, with the lifting of the state’s COVID iron curtain resulting in only a modest inflow of interstate and international workers.

But it won’t be all doom and gloom in the quarterlies because commodity prices on the whole have more than offset the inflationary pressures.

The copper space is one to watch. While the red metal has not enjoyed the prices spikes of lithium and nickel, the LME 3-month price of $US4.67/lb is in record territory, and is up from last year’s calendar average of $US4.23/lb, and its average in 2020 of $US2.80/lb.

“Mine supply disruptions in Russia and Chile, and recovering Chinese demand and exports, and strong demand from green capex, underpins our $5.30/lb copper price forecast for 2022,” Goldman said in a April 11 note.

From that it can be assumed there is less downside in the copper price than some of the other commodities that have put in sexy performances of late.

Outside of the majors and ahead of the quarterly reports, Goldman upgraded OZ Minerals to a buy from neutral, while Sandfire was upgraded from a sell to neutral.

Of the pair, it is Sandfire that has the most leverage to strong copper and zinc prices (a MATSA co-product).

That is due to its share price underperformance in the year-to-date as the market digests its MATSA acquisition in Spain and the impact on the operation of the spike in European gas/energy prices.

As a result, Sandfire is down 17% in the YTD to $5.60 from $6.77 despite the strong copper/zinc thematic. OZ in the meantime is about steady.

RBC said in a March 7 note that MATSA was actually more leveraged to the particularly strong zinc price than energy costs. It has an $8.50 price target on the stock while Citi on March 11 set a $8.30 price target.

Barrenjoey on March 9 had the lowest price target of $6. But unlike OZ where its price target was below the share price, its price target for Sandfire was ahead of the market price.

“The market was disappointed by guidance provided in February for the balance of FY22 on production/costs,” Barrenjoey said of Sandfire.

“We think it’s possible this is temporary and a short-term sequencing issue. If so, production could lift and costs may fall in FY23-24.”

Beyond the short-term, the absolute shortage of copper expected to emerge around 2025 means both Sandfire and OZ remain vulnerable to low-ball takeover bids in the absence of a re-rate to acknowledge that cost pressures or not, their copper positions have never been more valuable.

Copper Explorers:

Pressure on production costs is not an issue for the copper explorers.

They continue to enjoy buying support on the thematic that they are being relied upon to come up with the next generation of copper mines required to meet the surge in demand from a decarbonising world.

That support was reflected in Sunstone (STM) easily pulling in $20m from a share placement at 6.7c a share. The placement is being followed up with a $4m share purchase plan at the same price.

The fund raising increases the cash kitty to $30m and comes as drilling for the big-time porphyry potential of Sunstone’s southern and northern gold-copper projects in Ecuador is stepped up.

At Bramaderos in the south, three drilling rigs are whirring away at the Alba and Brama targets, with a maiden resource estimate for the former expected in late 2022. The next batch of assays from the exciting Alba prospect are expected any day now.

Up in the north and in the same neck of the woods as SolGold’s Cascabel project, the next batch of drill results are expected late April/early May.

Locally, Stavely (SVY) is preparing a maiden resource estaimate for the shallow and high-grade Cayley Lode at its Thursday’s Gossan project in Western Victoria. The estimate is due sometime this quarter.

It will potentially underpin development studies while Stavely continues to probe the bigger porphyry target at Thursday’s Gossan, as well as following up other porphyry targets along the Stavely volcanic arc.

At the greenfields level, Inca (ICG) and Greenvale (GRV) are well into exploration programs to confirm that the frontier Tennant East province in the Northern Territory does indeed have the makings of a major new copper-gold province.