Bargain Shares: Playing the commodities super cycle

UK investors have yet to cotton onto the significance of the latest resource estimate from Sandfire Resources (ASX:SFR), a mining and exploration group that is developing the T3 Copper-Silver and A4 projects in the Kalahari Copper Belt, Botswana.

Metal Tiger (MTR:22.5p), an Aim-traded investment company primarily focused on undervalued natural resources opportunities, holds 6.14m shares in the A$1.3bn market capitalisation Australian Stock Exchange-listed company worth A$43.5m (14p a share) in addition to a capped US$2m Net Smelter Royalty (NSR) on Sandfire’s T3 Motheo Project, and an uncapped 2 per cent NSR over 8,000km2 of Sandfire’s adjacent licence holdings, which includes the A4 resource area.

Bearing this in mind, Sandfire has just increased the Indicated and Inferred Mineral Resource Estimate for the A4 copper-silver deposit by a third to 9.8m tonnes at 1.4 per cent copper and 21g per tonne silver with contained copper of 134,000 tonnes and 6.6m ounces of contained silver (using a 0.5 per cent copper cut-off). Moreover, 93 per cent of contained copper is reported in the higher confidence Indicated Mineral Resource category and is available for inclusion in Sandfire’s maiden ore reserve for the project, due to be announced in the fourth quarter, ahead of completion of a feasibility study in the first quarter of 2022.

Sandfire’s directors also note that “given its location [8km from the planned processing plant and infrastructure at Motheo], the A4 Deposit has potential to become an important source of satellite ore for the Motheo Copper Mine to support Sandfire’s plans to increase production from the base case 3.2m tonnes per annum production rate to 5.2m tonnes per annum.” This is important news for shareholders in Metal Tiger. That’s because the higher-grade and near-surface nature of the A4 resource makes it logical for Sandfire to mine the project as early as possible to boost returns during the early life and improve its economics. Analysts at brokerage Arden Partners estimate that royalties from A4 could be worth US$8.9m (£6.4m) per annum to Metal Tiger (at an annual production rate of 3.2m tonnes and based on a copper price of US$9,300 per tonne), a material sum for a £38m market capitalisation company.

Note 1. Chenavari Capital Solutions made a compulsory capital redemption of 34.73 per cent of the share capital at 85.72p a share in March 2020, and subsequent compulsory capital redemption of 21.9 per cent of the share capital at 72.93p a share in July 2020. The total return takes into account the capital redemptions. The company delisted its shares from AIM on 30 September at a closing bid-price of 35p. Approximately 17.9 percent of each holding was then redeemed on 9 November 2020 at 65.26p per share, and a further 67 per cent at 44.7p in May 2021. The board plans to make further compulsory capital redemptions in due course.

Note 2. Metal Tiger shares consolidated on the basis of one share for every 10 shares previously held on 1 July 2020.

Source: London Stock Exchange.

Furthermore, Sandfire’s directors point out that “recent drilling in vicinity of the A4 Deposit has already given us early encouragement, and we’re very optimistic that we will be discovering new deposits and drilling out additional resources in the Kalahari Copper Belt for many years to come.” Sandfire’s A1 Deposit is located only 25km from the A4 Deposit and has similar geophysical signatures and stratigraphic setting. It contains 2.5m tonnes at a grade of 1.8 per cent copper and 45g per tonne of silver. Development of the A1 resource could add significant value to Metal Tiger’s uncapped NSR. Furthermore, there are another seven targets subject to Metal Tiger’s uncapped NSR over the 8,000km2 of Sandfire’s adjacent licence holdings.

In addition, Metal Tiger  owns a 50 per cent interest in Kalahari Metals (carrying value A$3.85m), a company that is developing four projects in the Kalahari Copper Belt. The nearby Sandfire T3 and A4 deposits are located 15 miles north of Kalahari Metals Kitlanya East Project. The other 50 per cent of Kalahari Metals is owned by Australian Stock Exchange-listed Cobre Pty (ASX:CBE), a company in which Metal Tiger holds 26m shares worth A$4m (1.3p a share).

Admittedly, Kalahari Metals’ projects are more speculative than Sandfire’s, but given the low carrying value of Metal Tiger’s stakes in them then any positive drilling news could put a rocket under the company’s share price as I noted three months ago (‘A copper bottomed investment, 6 May 2021).

Metal Tiger’s shares have produced a 86 per cent gain since I included them in my 2020 Bargain Shares Portfolio and have contributed to the portfolio’s 71 per cent total return in only 18 months. There is potential to make further significant gains in the event of positive news emerging from the company’s projects in the Kalahari Copper Belt. Indeed, although Arden has a base case sum-of-the-parts valuation of £63m (37.3p a share) on Metal Tiger’s portfolio, the upside range is £122m to £135m (72p to 80p a share) assuming another deposit of similar scale to the T3 Deposit is found. Strong buy.

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