Monsters of Rock: Sandfire eyes second half comeback, driller DDH1 falls on soft start to 2023

Sandfire Resources focuses on debt as transition from Australian to international copper miner reaches inflection point
DDH1 cops 12% whack as it reveals softer start to 2023 despite posting record dividend

Sandfire Resources’ (ASX:SFR) transition from Australian copper darling to international base metals player has not been a smooth one.

Having said goodbye to retired long time managing director Karl Simich last year, the company’s interim management have been left to manage the tough task of bedding in a major acquisition in the MATSA mine in Spain, all while building what will eventually be a 55,000tpa operation at Motheo in Botswana’s Kalahari copper belt and saying goodbye to their mainstay DeGrussa mine in WA.

It all added up to a US$27-odd million loss in the first half, with no dividend on the cards, as Sandfire prioritises construction at Motheo and paying down debt accrued to finance the US$1.8b MATSA deal, which closed early last year.

Falling copper prices in the September quarter of 2022, when Covid was running rampant in China, did little to help Sandfire’s cause, especially given its exposure to what are now thankfully lower energy prices in Europe.

Jason Grace, the acting CEO who will step aside for South32 (ASX:S32) executive Brendan Harris soon, told analysts on a call today the second half would be stronger at MATSA, with the potential of one shipment from Motheo before the middle of calendar year 2023.

That is all dovetailing with the planned completion of a process to divest the DeGrussa mine, the discovery which turned Sandfire from a penny stock into an ASX copper mid-tier 14 years ago.

SFR expects production to be at the lower end of the 60,000-65,000t copper guidance at MATSA for FY23 (total guidance 83,000-91,000t Cu, 78,000-83,000t zinc) but Grace says Sandfire is “is one of the few copper miners that has a firm production growth pathway over the next three years, growing to around 110,000t of copper, and over 80,000t of zinc production per annum.”

Investors will be hoping that growth story will start over the next six months, with Grace saying SFR would be able to access higher grade ore originally scheduled for late 2022 at MATSA.

“We originally for the year forecast that there were rising grades, particularly with zinc and to a degree copper, towards the back end of the year,” Grace said.

“So that was exacerbated by some of the ground conditions that we saw in Magdalena affecting access to higher copper ore, particularly in half one, and in particular, the second half of Q2, or the December quarter last year.

“We’ve started to see that overall production at Magdalena has been impacted by that but access to those higher grade areas is now deferred to the second half.

“So we will see particularly rising copper production on the back of access to that ore. And we do see an underlying improvement on the back of higher grades there, particularly in the mill on recoveries.

“So there are some improvements and the team is working on a very important project at the moment on recovery improvements.

“And we have factored in some of those improvements that we’re already seeing in the plant, and in the very detailed test work that we’ve done.”

Grace said Sandfire hopes to return to dividend payments after “resculpting” its debt facilities. The miner has US$452m left to pay on its MATSA facility, having closed its corporate Australian facility recently, and is looking at options to upgrade its $140m Motheo facility to $180-200m along with a small working capital facility.

Sandfire is balancing the idea of returns to shareholders alongside capital investment in its mines and the need to grow resources and reserves through exploration.

“At the moment we have have continued to pause in terms of a nil interim dividend, which I think is well understood given the position and the transformation of the business. But we do hope to return back to our dividend paying position that we are so proud of over the last few years,” Grace said.

Sandfire Resources (ASX:SFR) share price today:

DDH1 tumbles but denies hints of market softness is creeping in

DDH1 (ASX:DDH) has delivered a record dividend of 3.33c per share, but seen its share price tumble by over 12% after revealing it expected a drop in business revenue for the first two months of 2023.

DDH1 is the biggest standalone drilling stock on the ASX, boasting 190 drill rigs and pulling in record revenue of $286m in the first half on strong demand for drilling services from a booming mining and exploration industry.

Its half-year results, which saw DDH1 report a proforma 15.7% lift in revenue, 15.9% rise in operating EBITDA to $65.6m and a lift in NPAT to $28.4m, came a day after ABS data which showed exploration remains strong, with drilling expenditure in the December quarter across the country rising $91m year on year to $1.04 billion.

But DDH1 boss Sy Van Dyk said wet weather, especially in Queensland, and deferred programs from clients have led to a materially weaker January and February.

“This year we haven’t seen that same quickness to the market, as we’ve seen in the past and we’re seeing a little bit of a slowdown,” he said on a conference call.

“Because we are still confident that we’ll enter into a high drilling period based on current discussions my long answer is we can’t claw back what wasn’t there in January and February.

“We still had good performance in January and February, but it was less than what we as a company expected.”

However, Van Dyk denies the pullback in activity in January and February is a sign that tougher market conditions are forcing companies to pause on exploration spending.

“The delay in the clients taking a bit longer to jump back on, in my view is purely driven from the fact that if you look over the last two years or three years, the people we deal with and they are the exploration divisions of our mining clients have been running very hard,” he said.

“I think very few of them have taken any significant leave. I think the clients have all taken a bit of a bit of a breather and decided to take a bit of an extended break, catch up on I guess their theoretical analysis, the core they actually have analyse that, before they restart drilling.