The following editorial is extracted from the January 2014-1 Issue
By Resource Opportunities,
Sunridge’s Asmara gold-base metal project is continuing to advance toward development, with some important mile-stones expected shortly which could positively impact the share price.
Asmara, as one of the most attractive large, advanced-stage mining projects available anywhere, is attracting consider-able attention from the mining industry. That interest has not yet been reflected in the share price, which continues to languish, along with the rest of the companies in this industry. A feasibility study completed early last year showed very favorable economics: an after-tax net present value (8%) of $443 million with an internal rate of return (IRR) of 27%.
At a time when investors are particularly risk-averse, many investors are concerned about the location of the project, being in Eritrea in Africa. The reality is that Eritrea is a favorable place for mining: Nevsun (NSU-TSX) successfully developed and operates the Bisha mine in that country. Nevsun received debt funding for the project from international banking firms, and those same groups are willing to lend to the Sunridge project. Another mining project is presently under development in the country, after it was acquired by a Chinese mining company. There are a number of international mining companies that would be very happy to be involved in a project as attractive as Asmara and see Eritrea as a favorable place to operate a mine.
The capital required for mine development is modest, an important feature in the present market. The initial capital cost for the first phase of development is estimated in the feasibility study at only $46 million. The first phase in-volves extracting some very high grade ore that would be shipped directly to a smelter (116,000 tonnes at 15.6% cop-per, 3 grams per tonne gold and 76 g/t silver). At the same time, they will develop a heap leach operation to extract gold and silver from the oxidized surface layer of the deposit. That operation will provide two years of production from ore grading 1.5 g/t gold and 8 g/t silver, attractive grades for an open pit, heap leach operation.
While that initial phase of the project is developed and be-gins producing, the main part of the project will also be in development, involving the full-scale open pit mining operation and construction of a flotation mill, with a total capex of $357 million. In the second and third year of the project, the “supergene” ore will be processed. That en-riched layer of the deposit has an average grade of 2.2% copper, 0.76 g/t gold and 21 g/t silver.
Over the first eight years, the feasibility study estimates average annual production of 65 million pounds of copper, 184 million pounds of zinc, 42,000 ounces of gold and 1 million ounce silver. The life of mine (15 year) total is 841 million pounds of copper, 1.8 billion pounds of zinc, 436,000 ounces of gold and 11 million ounce silver. This project is a very attractive size large enough to be of inter-est to a large company, but with a manageable capital.
Sunridge is advancing the project on several fronts, including engineering, permitting and financial. The Eritrean National Mining Corporation (ENAMCO) is buying a 30% stake in the project. (It already holds a 10% carried interest.) Negotiations are continuing, intended to arrive at an agreed fair market value of the project, which will be the basis for the amount that ENAMCO will pay for its stake. The state-owned company will also pay 30% of the on-going development cost. ENAMCO and the government are working with international agencies which are expected to contribute financing.
The permitting process is underway, with completion expected around the beginning of the fourth quarter. Management are in discussions with various engineering firms, with the objective of having an EPCM (engineering, procurement and construction management) contract in place later this year. Work under that contract is then expected to begin immediately.
Management is also advancing arrangements for project financing. Discussions are now underway with several lenders who have been reviewing details of the project. Interested parties include commercial and development banks, export credit agencies, equipment suppliers, metal off-take companies, as well as royalty and streaming groups. A highly regarded international engineering firm has completed an independent review of the feasibility study and other technical materials for the benefit of the potential lenders.
While management continues to advance the project toward development, other companies are watching closely. Not surprisingly, given the attractive nature of the deposit as outlined in the feasibility study, “Sunridge has been approached by a number of companies interested in acquiring all or part of the Asmara project or possibly the Company” according to a January 13 news release from the company. That interest does not imply that a takeover offer is imminent. Firstly, bidders will not risk upsetting the ENAMCO negotiations. They will also want to see further progress with regard to the permitting process: at the very least, they will want some certainty that there are no fatal laws or items that will result in lengthy delays. It appears most likely that there will be no problems, but a company looking at a multi-hundred million dollar acquisition and capital project will want a further level of comfort.
Shares of Sunridge are greatly undervalued, based on normal metrics. For example, the current market capitalization of the company is less than one tenth of the value implied by Sunridge’s share of the after tax NPV, as determined in the feasibility study. That steep discount implies that an acquiring company could pay a multiple of the current share price and still be getting a bargain. Again, there is no suggestion implied that a takeover is imminent or even likely: rather, this analysis implies that the company is trading at a big discount to what a mining company might eventually be prepared to pay.
In addition to the generally improving market sentiment for companies with high quality, advanced stage projects, there are a number of catalysts expected from the company in the coming weeks which point to a higher share price. Most importantly, the negotiations with ENAMCO appear near to a conclusion. Having a deal in place will enable the various mining and other investment groups looking at the project to finalize their analyses and to bring forward offers.
In short, Sunridge has a high quality, feasibility stage project and is trading at a steep discount to its fundamental value. The share price will move toward the fundamental value as investors return to the mining industry and as Sunridge makes further progress at the project and at the corporate level.
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