Emerging copper miner Sandfire Resources NL (ASX: SFR) is likely to face some selling pressure on news that fellow miner OZ Minerals Limited (ASX: OZL) has decided to cash in its chips by selling its stake in Sandfire.
Both companies have gone into a trading halt as OZ Minerals is reported to be shopping around its 19.1% investment in Sandfire at $4.20 a share.
Shares in Sandfire were last trading up 1% at $4.28 but investors in the company have suffered big losses over the past year.
As the chart below shows, Sandfire has been a big laggard to OZ Minerals over the past year with the former nursing a near 30% drop in value compared with OZ Minerals’ 4% gain.
At least OZ Minerals is likely to book a profit as it bought the stake in Sandfire back in July 2010 when shares in the smaller copper producer were trading at around $3.20.
Shareholders in Sandfire had been anticipating (or hoping) that OZ Minerals would eventually make a full takeover bid, but the lack of exploration success at Sandfire’s key copper and gold DeGrussa project was probably the key reason behind OZ Minerals’ exit.
DeGrussa has also been struck with operational issues recently. Flooding saw a temporary suspension of activity in November last year and cost the company around $8 million to rectify.
The recent sharp drop in copper prices is also putting strain on the company’s balance sheet with the company’s $130 million in project debt becoming due over the course of this calendar year.
However, the removal of the OZ Minerals overhang could prove to be a blessing in disguise. While Sandfire deserves to be trading at a discount to peers, many believe the risks are more than priced in.
Sandfire is cash flow positive even with the depressed copper price as it managed to lower operating costs. Management is targeting a cash cost of $1.05-$1.15 a pound and the weakening Australian dollar will only pad margins.
Most analysts polled by Reuters are calling Sandfire a buy and OZ Mineral’s exit could put the stock in the sights of other suitors.
I am expecting corporate activity in the mining sector to pick up in the coming months as there are a lot of savvy investors looking to capitalise on the dramatic downswing in the sector. Assets are cheap for cashed up and patient predators.
It is not surprising to see recent reports that former Xstrata chief executive Mick Davis and Western Mining Corporation boss Hugh Morgan have set up competing funds for this purpose.
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Motley Fool contributor Brendon Lau does not own shares listed in this article. Follow me on Twitter - https://twitter.com/brenlau
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