Who wants copper? Sandfire Resources scales up by dropping $2.5bn on Spanish mine

Sandfire Resources (ASX:SFR) will splurge more than $2.5 billion on a major copper operation in Spain to transform itself into the biggest pure play copper miner on the ASX.

Copper has receded somewhat from the record highs of over US$10,000/t it reached earlier this year as China’s economic growth has retracted.

But the long-term bull case remains strong according to analysts, who say it will be an essential ingredient in the deep electrification of industry required to meet the world’s emissions reduction goals.

$1.1b capped Sandfire was facing a supply conundrum of its own. While the DeGrussa copper-gold mine has underpinned an impressive balance sheet – $573.7m and no debt as of June 30 – a lack of exploration success means the ~65,000tpa operation is due to close within 12 months.

It has a replacement in the wings in the form of the smaller Motheo mine in Botswana, but Sandfire’s US$1.865 billion (AUD$2.58b) deal to acquire the MATSA complex in Spain from commodity trader Trafigura and Abu Dhabi’s Mubadala will propel it further into the ranks of copper’s major players.

The complex consists of three underground mines feeding a central 4.7Mtpa processing facility with a mine life of more than 10 years, which is expected to produce 100-120,000t of copper metal equivalent in FY2022 at cash costs of US$0.40-0.50/lb.

Massive equity raising underpins deal

Sandfire entered a trading halt this morning to raise $1.25 billion for the transaction, which will triple its proforma copper production to 170,000-194,000t copper equivalent in FY22.

The transaction will be funded through an $897m debt facility, $297m from Sandfire’s cash reserves and the raising.

That primarily consists of an entitlement offer to existing shareholders, but highlighting the growing significance of copper to mainstream investors, super giant AustralianSuper will also come on board with a $120m share in the placement and a pledge to underwrite $150m of the retail entitlement offer.

MATSA, about 130km from the Spanish city of Seville, contains ore reserves of 36Mt at 1.8% copper (3.1% CuEq) and mineral resources of 122Mt at 1.5%Cu (3.3%CuEq), and generated US$387m in EBITDA in 2021, pricing the deal at a 4.8x multiple according to Sandfire.

“Base metal assets which offer this combination of scale, grade, mine life and exploration upside are extremely rare globally,” Sandfire MD and CEO Karl Simich said.

“The MATSA acquisition transforms Sandfire into a first quartile copper producer of global scale and allows us to leverage our skill set to deliver on our growth ambitions to create one of the highest quality and most compelling copper exposures on the ASX.”

It is certainly a big leap for Sandfire, which is believed to have competed with some global names to secure the MATSA operations, with Canada’s HudBay Minerals, South32 (ASX:S32) and Rio Tinto (ASX:RIO) among those rumoured to have taken an interest in the sale.

Deal at a premium, but value accretive

According to analysis from Argonaut PCF’s MinesOnline.com platform, the deal was completed on an ore reserve basis of US$0.747/lb, a 131% and 54% premium to the three and five year averages.

MinesOnline notes the deal will “fill the gaps in production between its DeGrussa and Motheo operations” and “may be accretive to Sandfire’s existing operations, decreasing its C1 costs and increasing its annual production.”

“It’s eminently justifiable in terms of securing an asset with this production profile, it’s a future facing metal, the outlook for copper is fantastic and you can see why they’ve got the hammer on it,” Argonaut PCF deputy chair Liam Twigger said.

It is harder to get a gauge on the average value of copper assets because there are less deals done in the space than gold.

“Assets of this size and quality are few and far between,” Twigger said.

“With a 12 year mine life moving into a supply shortage and increasing demand, it’s a fabulous deal.

“It’s just trying to manage an international portfolio with assets all over the world.”

Long-term demand projections driving copper bulls: UBS analyst

It is generally accepted that copper will see significant demand growth in the long-term to meet the twin challenges of electrification and decarbonisation.

While investment bank UBS expects prices to drop from the record highs seen this year to US$3.50/lb in 2022, Melbourne based mining analyst Lachlan Shaw told a media roundtable this morning it was not surprising to see producers looking to lock in long-term production now.

He said the long-term outlook for copper demand is extremely strong.

“If you look at what needs to be done, for Paris 1.5, or Paris 2 degrees, it’s a doubling or tripling of electricity as a source of primary energy in the global economy by 2050,” Shaw said.

“Copper happens to be the best material and the best value material for transporting electricity.

“And so when we look at the new technologies that have emerged and will emerge to displace fossil fuels, they are more copper intensive than what they’re replacing.”

Electric vehicles use 2-4 times as much copper as internal combustion engine cars, Shaw said, renewable energy sources like wind, solar and batteries outstrip the amount of copper required in gas, coal and nuclear generators by between four and 12 times.

Shaw says metals recycling will rise as well, but new mines need to be brought online in the coming years as well. It means companies bullish on copper will be keen sew up operating mines given the long lead times to get new ones into production.

“Pretty much any mining company that has been and continues to be bullish on copper is scouring the globe for good assets,” Shaw said. “I don’t see that changing anytime soon. The world needs a lot more copper.

“It is getting harder and harder to add significant new capacity at a time when demand is going to accelerate because of the energy transition.”