Should you buy Sandfire Resources?

Few Australian mining companies successfully proceed from exploration to production on a large scale. Copper is one commodity that has been sought for thousands of years, both on its own and as an alloy of bronze and brass. Today it is still widely used and there is an ever-increasing demand for it from countries to our immediate north, especially China, as it continues to industrialise on a massive scale.

A great success story in this country is Sandfire Resources (ASX : SFR). The latest annual report reveals a company with strong cash flow and profitability. The company has progressively increased reserves and production, while reducing costs of production. The main operation for Sandfire is the DeGrussa project in Western Australia. It also intends to develop a high quality resource base in other strategic commodities, including copper, manganese, lead, zinc, silver, gold and iron.

Sandfire Resources reported a maiden net profit after tax of $88 million for the 12 months ended 30 June 2013. In his address to shareholders, Managing Director Karl Simich said, “This is a very pleasing result, with the DeGrussa operation generating earnings before net finance, taxation, depreciation and amortisation of over $317 million. That is a tremendous result in anyone’s language given this was a ramp-up year where we completed a highly profitable open pit Direct Shipping Ore program, plant construction and ramp-up, with a substantial investment in underground mine development.”

After earning 57.4 cents per share last financial year, forecast earnings for 2014 are 77.5 cents, and for 2015 of 90.8 cents.

Major shareholders are Oz Minerals (ASX: OZL), Posco and National Bank Australia (ASX: NAB) owning 18.9%,17.6% and 5.0%, respectively. Although a future takeover cannot be ruled out, these holdings signal positive long-term support. These holders view Sandfire Resources as an excellent way to invest in copper in this country due to its profitability and growth.

Foolish takeaway

Although much depends on the long-term price of copper, Sandfire Resources is a stock with real value and sound growth potential, currently selling for just 10 times last year’s earnings. Investors wanting a stake in copper would find it hard to do better than to acquire a holding in Sandfire Resources.

This is a company with sound management and substantial high-grade copper reserves that is starting to reap the rewards of a very successful mining operation. In addition, operations in Australia reduce many of the risks associated with mining overseas.


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Motley Fool contributor Chris Koenig does not own shares in any of the companies mentioned in this article.

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