By Michael Curran (Beacon Securities Ltd.),
WE are initiating coverage of Sunridge Gold Corp. (SGC-V) with a BUY rating and a 12-month target price of $0.55/sh.
Sunridge’s Asmara Project looks to be a robust project capable of generating significant cash flows over a 17-year mine life. Annual production is forecast to average 65 million pounds (29Kt) of copper, 184 million pounds (83Kt) of zinc, 42Koz of gold and 1.0MMoz of silver per annum during the first 8 years of primary sulphide ore mining (Phase 2-3).
Staged Development Reduces Initial Capital Needs: with the availability of high-grade direct shipping ore (DSO), initial Phase 1a operations will be mining-only (i.e. no processing – mined ore will be shipped directly to smelters), thus materially reducing the initial capital to achieve operations. Phase 1b would involve open pit mining of gold-silver rich oxides using heap-leach processing, which is one of the lower capital-intensive processing methods. The bulk of the capital spending for Asmara is related to the ramp up of mining rates (Phase 2 – 2MMtpa and Phase 3 – 4MMtpa) and addition of processing facilities (grinding and flotation circuits), to recover copper and zinc from primary sulphide ores.
Acceptable Geopolitical Risk: while many investors may initially be troubled with the prospect of investing in Eritrea, we believe much of the political risk of that country has been removed by Nevsun Resources. Nevsun’s Bisha mine is a similar project that has successfully transitioned from exploration, through feasibility, to operation. The Bisha mine has a similar corporate structure, with the Eritrean Government holding a combination of free-carried and fully-paid minority interests. The mine has operated for close to four years, having generated significant profits through the gold oxide phase, and more recently, after transitioning into a primary copper producer.
Management Team Has Done It Before (in Eritrea): several members of Sunridge Gold’s team were involved in the advancement of Nevsun’s Bisha mine, thus have experience doing business in the country, working with the Eritrean Government as a partner, etc.
Additional Exploration Potential: SGC’s landholdings in Eritrea have several other targets with potential for oxide–hosted gold-silver and/or sulphide-hosted copper-zinc mineralization.
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We consider Sunridge Gold to be an attractive investment for the re-rating opportunity as permits and financing are secured to move the Asmara project into construction over the next few quarters.
In summary, our recommendation is based on the following:
> Robust Mining Project: SGC’s main asset is the Asmara VMS project in Eritrea, located in northeastern Africa. SGC holds a 60% interest with the Eritrean Government holding the remaining 40% (10% free-carried). The feasibility study is completed on the copper-zinc-gold-silver project, and permits to begin mine construction are expected in Q1/15.
> Multi-Staged Development: initial operations will involve open pit mining of direct shipping ore (DSO) containing high grade copper, gold, and silver. Next, near-surface oxides will be processed at site using heap-leaching methods to recover gold and silver. Finally, additional processing circuits will be added, and throughput rates increased, to recover gold and silver. Finally, additional processing circuits will be added, and throughput rates increased, to recover zinc and copper from primary sulphide ores.
> Experienced Management Team: SGC’s team includes several people involved in taking the Bisha mine from exploration to production in Eritrea.
> Re-rating Opportunity With Permits/Financing: we expect renewed market interest in SGC shares as additional milestones are achieved towards moving the Asmara project into construction in the coming few quarters.
Valuation/Rating: SGC shares currently trade at 0.2x our NAV of the company’s assets, which compares to the peer group of companies averaging 0.5-0.6x. Employing our target P/NAV and forward-looking P/CF multiples (0.6x and 6.0x respectively), generates our 12-month target price of $0.55/sh, and we are initiating coverage of SGC with a BUY rating.
The project covers 111 square kilometres in central Eritrea, immediately to the south, north and northwest of the capital city of Asmara, in Eritrea. The property currently hosts four known deposits – Debarwa, Emba Derho, Adi Nefas, and Gupo, all located 10-30km from Asmara. Sunridge entered into option agreements for the property in August 2003, and exercised its option to purchase 100% in early 2006. Sunridge now has a 60% interest in the property, with the remainder held by the Government of Eritrea, through the Eritrean National Mining Company (ENAMCO). A 10% carried interest has been established and ENAMCO has completed $3MM of $18.33MM of payments with respect to acquiring a 30% working interest.
The recently completed the partnership agreement has created the Asmara Mining Share Company (AMSC), where ENAMCO will fund the next US$6MM of funding, then future spending will be split 2/3 SGC and 1/3 ENAMCO.
For mining operations, profitability and cash flow are materially dependent on the realized prices for the commodities produced. In the case of non-producers, the most important factor to economic viability is the assumption of future commodity prices. The Asmara project is more sensitive to base metal prices (copper and zinc) than precious metals (gold and silver).
Even with a successful mine development at Asmara, geological risk will remain, relating to how the actual mining results (grade, tonnage, recovery, etc.) compare to forecasted rates. With multiple deposits and mineralized zones, we view Sunridge as having slightly more geological risk than some single deposit projects.
Sunridge’s main asset is located in Eritrea, in northeastern Africa. While we would normally consider this region of the world to be a higher risk area, the combination of the recent success of Nevsun Resources’ Bisha Mine, and the involvement of the Government of Eritrea as a significant partner in the Asmara project, give us significant comfort that the current framework (royalties, tax structure, etc.) can be maintained over the minelife.
Sunridge has material financial risk, given the low current cash balance and significant total capital requirements for the Asmara project. However, the staged development plan does mitigate some of this risk, as initial capital for the DSO is pegged at $30 million ($20 million to Sunridge), and management believes there are reasonable prospects for export credit equipment financing for some of the initial capital. Our modeling assumes a $15 million equity raise in 2015 for Phase 1a capital, and an $80 million equity raise in mid-2017 for Phase 2-3 capital.
Sunridge’s Asmara Project looks to be a robust project capable of generating significant cashflows over a 17-year mine-life. Annual production is forecast to average 29,000t of copper, 83,000t of zinc, 42Koz of gold and 1.0MMoz of silver per annum during the first 8 years of operation.
Near surface, high-grade supergene ore (+15% copper) and oxide-hosted gold-silver mineralization should allow Sunridge to initiate mining operations with minimal capital, establish operations and generate cashflow prior to the more significant capital requirements for the larger conventional flotation operation to recover copper and zinc from primary ores.
Having the Government of Eritrea as a 40% partner in Asmara we believe should facilitate permitting and financing for the project.
Several members of Sunridge Gold’s management team worked previously with Nevsun Resources, and have experience moving a project from exploration to production in the country, as well as dealing with the Eritrean Government as a partner.
Longer-term, the large land position in the Asmara region of Eritrea should provide SGC with additional discovery potential once the mine is operational.
At this point in time, we consider Sunridge to be trading in undervalued territory, at 0.2x NAV, with major catalysts for re-rating of SGC shares over the next few quarters. As a result, we are initiating coverage of Sunridge Gold Corp. with a 12-month target price of $0.55/sh and a BUY rating.