Sandfire Resources NL (ASX: SFR) shares resumed trading following an announcement the miner would acquire MOD Resources Ltd (ASX: MOD). The Sandfire share price got sold down heavily on the news.
About Sandfire
Sandfire is a leading Australian copper producer which operates the high grade DeGrussa copper mine 900kms north of Perth.
About MOD
MOD is an Australia-listed copper exploration company with projects in the central and western Kalahari copper belt in Botswana.
Sandfire’s Acquisition
With Sandfire’s desire to build a global mining company, the company is using a combination of cash and scrip to pay around $167 million for MOD, via a scheme of arrangement. The ‘Scrip’ part means Sandfire will sell/issue shares in itself to MOD as part payment. It’s another way of raising capital.
Indeed, Sandfire is offering MOD investors 0.0664 Sandfire shares for every MOD share they own, or cash of $0.45 per share up to a cap of $41.6 million.
If the cash cap is exceeded, the remainder of the consideration will be in the form of Sandfire shares. The proposal, pitched at a 45% premium to MOD’s last closing price, is unanimously recommended by the MOD board.
Why Is Sandfire Buying MOD?
Sandfire believes MOD is a “compelling fit” for it as the company owns a highly prospective and dominant landholding in the underexplored Kalahari copper belt in Botswana, which they believe to be a stable and mining friendly jurisdiction with a supportive government.
The first project, known as T3, is expected to start production in 2021, following permitting and construction in 2020.
Is Sandfire A Buy?
The copper price is down almost 20% this year, likely on the back of the trade war. Will it go back up? Earlier this month, analysts at Macquarie Group Ltd (ASX: MQG) said they were a little wary about just how much Australian base-metals miners are earning amid the trade-fight-linked retreat in commodity prices.
“There is significant downside risk to our short-and medium-term [metals forecasts]“, the investment bank noted. Meaning, profits may be at risk for the likes of Oz Minerals Ltd (ASX: OZL), Western Areas Ltd (ASX: WSA) and Sandfire, each of which relies on buoyant copper prices.
However, the analysts also added to their statement by saying, “still, most Aussie base-metal miners boast high margins thanks to low production costs, so are likely to remain very profitable even with the price retreat, so stay bullish on the stocks”.
Then there’s the Aussie dollar – which way is that headed? As you can tell, I’m no expert in the mining space, which means these companies don’t often see my investment dollars.
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Disclosure: At the time of writing, David does not have a financial interest in any of the companies mentioned.
