Macquarie rates SFR Outperform

DeGrussa site tour

Event
We attended a site tour to SFR’s DeGrussa mine in Western Australia and viewed the latest drill core from Monty.

Impact
DeGrussa site tour provides confidence: We visited the three key operating levels in the DeGrussa mine, namely the decline, which is advancing quickly to the bottom of Conductor 5, the first stoping area at Conductor 4 and an active stope in Conductor 1. Ground conditions remain excellent and we remain confident that our production forecasts for the mine are achievable.

Monty looking the goods: We viewed some of the latest drill core at Monty from the recently announced holes. We have recut our development scenario after building a 3D model on the deposit and now assume a mineable inventory of 1.2mt @ 8% Cu. Our mining inventory is broken down into an upper zone and lower zone, with the lower zone containing around 85% of the contained copper.

Production could climb beyond 90ktpa: The adjustments to our development scenario for Monty have translated to only modest changes to our overall copper production outlook for SFR. We assume Monty starts delivering ore to the concentrator in late FY17, and lifts group production to ~90ktpa for FY18 and FY19.

Earnings and target price revision
We make only modest changes to our earnings forecasts after incorporating the modifications to our development scenario for Monty. Mark-to-market adjustments for the 1QFY16 translates to a ~2% uplift to our FY16 estimate while our FY17 and FY18 forecasts rise 6% and 14% to reflect a shorter ramp up at Monty. However, a reduction in the size but earlier development of Monty, which shortens the life at DeGrussa by around 12 months, sees our price target fall 4% to $7.70 from $8.00.

Price catalyst
12-month price target: A$7.70 based on a DCF methodology.  Catalyst: SFR is set to report its 1QFY16 production result on 23 October while the initial resource for Monty should be released with the annual resource and reserve update in January.

Action and recommendation
Maintain Outperform: The site tour reaffirmed our confidence in the production outlook for SFR and the potential for Monty. We have made some modest changes to our development scenario for the project, but our base case remains that it is blended in as an effective grade boost for DeGrussa, pushing production to ~90ktpa for the last few years of the project. SFR is generating strong cash flow on our forecasts and should have the equivalent of its market capitalisation in cash within four years. We note that at spot prices our valuation for SFR falls to ~$6.00/share.