As copper bulls make a stampeding start to 2022, growing Sandfire positions for a re-rating

Sandfire’s ever-bustling MD Karl Simich is about to head off to sunny Spain to collect the keys to the MATSA copper-zinc operation, acquired in a transformational $US1.865 billion deal first announced in September last year.

MATSA is an established low-cost producer of 100,000-120,000tpa of copper equivalent (the red metal accounts for about 66% of the value) and its acquisition builds Sandfire’s (SFR) group copper output to one of the biggest on the ASX.

Sandfire has long been a 70,000tpa copper (and gold) producer from its DeGrussa mine in WA. But that comes to an end later this year, with the treatment plant there likely to continue on as a gold producer.

MATSA obviously more than compensates for the end of copper output at DeGrussa. But Sandfire is not stopping there.

With its Botswana copper development underway (up to 60,000tpa from the second half of 2023), an expansion of MATSA, and the eventual 30,000tpa Black Butte copper development in the US, Sandfire is on its way to becoming a 200,000tpa-plus copper producer for the long run.

Trading at $7.37, Sandfire has yet to capture the sort of market premium that OZ Minerals commands for its copper growth profile, even if analyst price targets on the stock range from $8.50 up to $10.

But copper’s outlook means that a re-rating for the remarkable shift in Sandfire’s copper production profile from a disappearing 70,000tpa (DeGrussa) to more than 200,000tpa (MATSA, Botswana and the US) cannot be far off.

On copper’s outlook, Simich was obviously talking his own book at Thursday’s analyst briefing for Sandfire’s quarterly report when he said that in his 35 years in the business, he had never seen such unanimity on the direction of copper – onwards and upwards.

He is right about that, although there are some differences in opinion on the metal’s price ahead of the market absorbing committed new mine production in the next couple of years and 2025, which is when demand from the world’s decarbonising efforts is widely expected to overwhelm supply.

Copper is already doing nicely, rising from its $US2.80/lb average of CY2020 and $US4.22/lb in 2021 to be trading this week at $US4.46/lb.

Goldman Sachs is one of the more bullish out there, forecasting an average annual copper price of $US5.39/lb in 2022 and $US5.44/lb in 2023. It is a shame its forecast does not extend further.

That’s because it expects “extreme” deficits in supply come mid-decade due to a lack of new development commitments causing “peak” supply by then, just as accelerating growth in green demand swamps supply.

“To solve the long-term supply gap copper faces, we would need to see close to 40 new average-sized copper mine projects being approved,” Goldman said. And as we all know, bringing forward a new mine of any description is getting harder to achieve in a timely fashion.

That was highlighted by South32 (S32) boss Graham Kerr earlier in the week, when he was talking about the group’s $US1.7 billion Hermosa zinc development in the US.

“Everyone including ourselves likes the look of copper. There is going to be strong demand for new material and the reality is for that to occur you are going to need to have to induce new projects and those projects are going to be more and more challenging,” Kerr said.

As it is, zinc has soared from a CY2020 average of $US1.02 to $US1.63/lb this week. Given the second biggest value chunk at Sandfire’s MATSA comes from zinc, it is another reason for Simich to be itching to get the keys to the operation.

ORION MINERALS (ORN)

Away from the big end of town, copper’s red-hot outlook can be relied upon to fire up interest in the exploration and development efforts of the juniors.

After all, the additional 40 new mines Goldman says are needed in a hurry have to come from somewhere.

On the development front, Orion Minerals (ORN, 2.6c for a $112m market cap) has unveiled an early production strategy for its flagship Prieska copper-zinc project in South Africa’s Northern Cape Province.

Prieska is an historic producer that Orion originally intended to return to production by accessing a new resource position it has outlined at depth via the dewatering of the existing shaft in a 33-month all-up development phase.

The plan was to follow the end of the large-scale underground mining operation (12 years-plus) with a relatively short-lived (19 months) and smaller scale open-cut operation that would extract the pillars left unmined in the historic mining operations.

Orion has now flipped its thinking – as you would in a $4.50/lb copper and $US1.60/lb zinc market – to consider an early production option by going with the open-cut first while the new underground operation is developed, with the backfilling of the voids between the pillars with cemented tailings making it possible.

It looks like a sensible response to the bull market in copper and zinc with the added benefit of the free cash flow reducing peak financing requirements for the underground operation, which very much remains the main show.

CARNABY RESOURCES

On the exploration side of things, there has been no better demonstration of the market’s interest in copper exploration than the recent share price performance of Carnaby Resources (CNB, $1.58, market cap $198m).

It was a 60c stock before Xmas for a market cap of $75m. The leveraged share price response to some exciting assays results from its copper-gold exploration effort in the Mt Isa region of north-west Queensland is partly due to its tight capital base.

But that’s not to detract from the buzz around the copper and gold hits at Carnaby’s Nil Desperandum and the nearby Lady Fanny prospects, part of the broader Greater Duchess copper-gold project.

Best results included a 41m hit grading 4.1% copper and 0.5g/t gold from 247m, including 9m at 10.3% copper and 1.2g/t gold from 264m, at Nil Desperandum, and a 27m hit grading 2.8% copper and 0.8g/t gold from 61m, including 9m at 4% copper and 0.3g/t gold from 65m, at Lady Fanny.

The prospects are of the iron oxide copper gold (IOCG)-type common in the broader region with notable examples including Ernest Henry, Osborne and Eloise.

The hope is that the 5km-plus corridor of prospective IOCG rocks that Carnaby is focussed on at Greater Duchess also shapes up into something special.