Sandfire and OZ slug it out

Karl Simich and his team at Sandfire Resources could be calling for the Dom Perignon in a few days if the local copper mining favourite achieves the once unthinkable and overtakes the stock market value of its potential predator, OZ Minerals.

The rise of Sandfire, and the fall of OZ, has shifted the market capitalisation of the two companies close to parity.

At the close of trading on the ASX yesterday, Sandfire was valued at $1.036 billion. OZ, which has more shares on issue but a lower share price, was valued at $1.125 billion.

Less than two years ago there was a $3 billion gap between the two companies, which have been regularly linked – either as merger partners or with OZ making a full takeover bid for Sandfire, in which it already has a 19.2 per cent stake.

Indecision on the part of OZ, which is chaired by Perth lawyer Neil Hamilton, appears to have ended an OZ takeover bid for Sandfire for now as the company struggles to keep pace with its onetime target.

The two companies are, theoretically, a natural fit, with both producing copper and gold from a single mine and both lacking an obvious route to growth at a time of relatively low metal prices and tight capital markets.

OZ’s primary asset is the Prominent Hill mine in South Australia, which is expected to yield up to 75,000 tonnes of copper this year, plus 130,000 ounces of gold at a copper equivalent cash cost of up to $US2.05 a pound.

Sandfire’s primary asset is the DeGrussa mine in Western Australia, which is also expected to yield up to 75,000t of a copper a year, but with a lower gold recovery of 45,000oz.

While metal volumes are roughly similar, Sandfire has a big advantage when it comes to ore grade, with DeGrussa’s 4.7 per cent average copper content helping lower the forecast cost to around $US1.15/lb, and perhaps as low as $US1.05/lb – almost $US1/lb less than Prominent Hill.

The future could produce a different picture as OZ works towards a development decision on its Carrapateena project, which could replace Prominent Hill as its primary focus in the next few years.

Sandfire does not yet have a second flagship project on its books.

However for the next few years, the Sandfire versus OZ situation will be a two-company drag race that could, if profitability becomes the key measure, lift Sandfire ahead of OZ, however briefly, and for shareholders in OZ left to complain bitterly about a missed opportunity.

To put the rivalry between the two companies into perspective, it’s worth looking back a few years to see how the capitalisation gap has closed.

In late 2010, when OZ was being named as a bidder for all of Sandfire, it had a share price as high as $16.40 and a stock market value of close to $5 billion.

Today, with investors jaded by sluggish copper production and relatively high costs, OZ is trading close to an all-time share price low of $3.71 – less than half its $8 price of 12-months ago.

Sandfire has also been weighed down by teething troubles at the DeGrussa mine and uncertainty about future growth plans, but its share price has held up much better than OZ, falling from an all-time high of $9.09 late last year to recent trades at $6.66.

Because the drag race between the two is more a case of two vehicles hurtling towards each other, the ‘pass point’ (if it is to occur) will be a function of their share prices.

If, for example, Sandfire’s price rises back to the $6.85 of yesterday’s peak, the value of the company rises to $1.066 billion given its issued capital of 155.64 million shares.

OZ’s market value, on the other hand, will decline to $1.062 billion if its share price falls by 21 cents to $3.50, given its issued capital of 303.47 million shares.

Interesting as the market capitalisation race seems, it really represents little more than bragging rights and an opportunity for investors to contemplate the old saying about ore-grade being king in mining – and to mull the price of indecision.