Cashed up and exploring
A cashed up Sandfire Resources (ASX:SFR) has commenced activities at its Morck’s Well East & Doolgunna farm-in projects in the Bryah Basin in Western Australia. To meet its farm-in obligations at both project sites, the company is about to embark on a versatile time domain electromagnetic (VTEM) survey across its Morck’s Well East joint venture project. The following figure shows the location of the company’s interests (Morck’s well East and Doolgunna projects are highlighted by the light green rectangle):
Source: Sandfire Resources (ASX:SFR)
To farm-in to Morck’s Well East and Doolgunna, the company will be required to A$1.2 million to Auris Minerals and then spend a further A$2.0 million over two years on exploration. After reaching the A$2.0 million exploration spend, the company may continue to sole fund exploration to a discovery of not less than 50,000 tonnes of equivalent copper. Additionally, a feasibility study on the discovery must be completed and the mineral resource estimate for the discovery must contain a classification greater than 50% in indicated. On reaching these milestones the company will earn a 70% interest in the Doolgunna project. Automatically, on completion of these milestones, the company will also earn a 70% interest in the Morck’s Well East project. The following figure shows the location of the Morck’s Well East and Doolgunna projects (both are highlighted):
Source: Sandfire Resources (ASX:SFR)
The payment of A$1.2 million has been made to Auris Minerals.
The company can earn an additional 5% in the Morck’s Well East project through carrying Auris Minerals to commercial production of the discovery.
The period of the agreement varies under varying requirements between a minimum two years out to ten years or within three years of its DeGrussa mine going into care and maintenance. We certainly consider the Bryah Basin to be prospective and the timeframe ample to make further discoveries. We look forward to the company exploring across this extra acreage in the region of its DeGrussa mine.
To get the exploration ball rolling on the farm-in spend, the company is about to embark on a VTEM survey on the Morck’s Well East project. The focus of the VTEM survey will be to aid in identifying base metal conductors similar to those discovered at DeGrussa (now a mine), Horseshoe Lights and Monty, with the latter two hosting mineral deposits.
There is no doubt that the company has the financial capacity to deliver on meeting the spend commitment under the farm-in.
At 31 December 2017, the company held a cash hoard of A$164.4 million and carried no debt. The company will shortly be, and prior to the end of April 2018, updating the market on its March 2018 quarterly activities that will include its liquidity position as at 31 March 2018.
For the first half to 31 December 2017, the company reported record revenue of A$280.9 million representing a 13.3% increase on 2016. The improved revenue flowed to the bottom-line with the reporting of a 66% increase in net profit compared to the first half 2017, to A$59.5 million. Free cash flow from operations rose by a modest 10.0% compared to the same result from a year earlier, to A$106.3 million. Moreover, and as discussed above, the balance sheet is pristine.
Operations for the first half delivered a softer outcome with the reporting of a 6.6% decline in copper production compared to the same half for a year earlier, to 31,521 tonnes. Gold production was also lower by 5.6% compared to the first half 2017, to 18,799 ounces. Guidance for 2018 was unchanged with copper expected to come in in the range of 63,000 to 66,000 tonnes of copper, and for gold in the range of 35,000 to 38,000 ounces. For 2017, the company delivered 67,088 tonnes of copper and 38,623 ounces of gold.
C1 cost for the first half came in at US$1.00 per pound compared to US92 cents from a year earlier, representing an 8.7% increase over the period. The higher C1 costs were driven by the lower copper and gold production. Guidance for 2018 for C1 costs remained unchanged in the range of US$1.00 to US$1.05 per pound. C1 costs for 2017 came in at US93 cents per pound.
The first half result was such that the company declared an A8 cent fully franked dividend. The current dividend compared favourably to the A5 cent fully franked interim dividend declared from a year earlier.
We believe the DeGrussa mine and adjacent sites have added blue sky exploration potential. Add to the near-site potential the significant acreage around the DeGrussa mine held by the company (approximately 5,846 square kilometres) could see future exploration having a major impact on the company.
The company has now added further ground exposure in the Bryah Basin with the Morck’s Well East and Doolgunna farm-ins. The company will be exploring for DeGrussa style copper deposits across these tenements.
Moreover, with Sandfire Resources (ASX:SFR) robust financial position, it held a cash resource of A$164.4 million at 31 December 2017, to act as a springboard to explore this latent potential. Sandfire Resources appears to be well positioned to deliver future shareholder value on incremental improvements in the copper and gold prices and exploration success.
Consequently, Sandfire Resources (ASX:SFR) will remain firmly held in the Fat Prophets portfolio.
Disclosure: Sandfire Resources (ASX:SFR) is held within the Fat Prophets Mining & Resources portfolio.
