Sunridge Gold : Stepping up the pace in Eritrea

Sunridge Gold Corporation, one of the early movers in the Eritrean Gold Rush and the first to attract a major JV partner to the country, is stepping up the pace and size of its exploration program at its large and highly prospective copper/zinc/gold/silver Asmara project.  The project lies immediately to the north, west and south of the Eritrean capital, Asmara. As part of the current work program Sunridge is investigating the possibility of fast tracking copper production from a small but high grade zone of one of its deposits in order to generate cash within 18 months.

The company has already notched up a number of notable successes.  Perhaps the most tangible is that it has discovered and advanced four deposits in the area which together contain indicated 43-101 resources of 1.28 billion pounds of copper, 2.5 billion pounds of zinc, 1.05 million ounces of gold and 31.8 million ounces of silver. The most advanced of these deposits is Emba Derho where a scoping study, completed in June 2009, concluded that open pit mining could be conducted for 10 years in the base case at an annual rate of 4M tonnes and at an operating cost of $21/tonne.  The pre-tax NPV of the deposit in this case would be more than $200M, assuming average metal prices for the 5 years to June 2009 (i.e. gold at $650/oz and copper at $2.50/lb) while the IRR would be 21.6%.

But there may be more deposits to come.  Recent ground gravity surveys have identified larger and stronger gravity anomalies than those of the known deposits. These, together with other coincident electromagnetic, geochemical and surface anomalies have enabled Sunridge to advance several new high priority targets to the drill ready stage. 

A further success has been the JV with the Chilean copper giant Antofagasta, announced in September 2009.  Under the terms of the agreement Antofagasta purchased an 18% stake in the company through the acquisition of $5m worth of common shares.  It also agreed to fund $10m of exploration over five years to earn a 60% interest in the areas of the project (the 'Exploration Areas') which are not already in the four defined resources (the 'Development Areas'). Antofagasta may earn a further 15% by completing a feasibility study on any project in the Exploration Areas (see the Proactive Investors article of 2 October 2009 for more detail).  The JV has brought cash and expertise to the project and has acted as a strong endorsement of the potential of both the project and the country.

Sunridge has also recently been successful in extending its project area; in January 2010 it was awarded licences for an additional 5km on both the western and eastern margins of the project.  Together these additions represent a 60% increase in the licence area, which now totals some 1065 square kilometres (an area not far short of, say, the size of Los Angeles).  The company believes that these extensions include continuations of the known mineralisations.

Current Work Program

So with drill targets ready, four known deposits, more land to explore, $5.7M cash in the Treasury following the Antofagasta investment, and Antofagasta's $10M commitment to fund the program in the Exploration Areas Sunridge is now almost midway through a busy year's program.  Several parallel workstreams are underway.

In the Exploration Areas the JV has drilled 12 holes at the Daero Paulos copper target, commenced a 4-hole drill program at the Adi Rassi copper-gold prospect and will be embarking shortly on a third drilling target. Regional target generation covering all parts of the exploration areas using stream sampling, satellite imagery analysis and mapping is also being undertaken.

Meanwhile in the 100%-owned Development areas 4 holes have been drilled this year at the Debwara copper-gold-zinc volcanogenic massive sulphide (VMS) deposit, in addition to the 30+ holes drilled to define the maiden resource.  Results released in February showed that the mineralisation had expanded both down dip and along strike and that a new Eastern limb had been discovered.  The deposit remains open in several areas.  Drilling will continue at Debarwa and Emba Derho and the two nearby satellite deposits (Adi Nefas and Gupo Gold); prefeasibility studies on all the deposits will begin shortly.  Sunridge may also be looking for a partner to help develop these deposits.

In March Sunridge commissioned Toronto-based PEG Mining Consultants to conduct a Strategic Production Engineering Study to examine mining and processing options for the known deposits on the project. The study will initially focus on the viability of fast-tracking the mining and shipping of a high-grade copper section (comprising some 60-80,000 tonnes at a grade of 15-20% copper) of the Debarwa zone, an option which could have low capital cost but generate cash for the company within 18 months.  Total revenues from this section could be in the order of $75-80M.  It will then focus on the compatibility of mineralisation for combined ore processing and on the longer term objective of optimising mining/production from the project.

Analysis

Eritrea lies on the Arabian-Nubian shield which lies astride the Red Sea and hosts deposits stretching from Jordan and Israel through Saudi Arabia and Yemen to Egypt, Ethiopia, Eritrea and Sudan.  Although the Shield hosts some large deposits, (including Centamin's 13 million ounce Sukari gold project), and some of the earliest gold discoveries known to man, (allegedly including King Solomon's gold), there has been little exploration in Eritrea until recent times.

But now that is changing and Eritrea is acquiring a reputation as a new mining frontier. It now has an 'open for business' mining policy - the mining code is based on that of the Northern Territory of Australia - there is some artisanal gold production and more than a dozen companies are currently exploring in the country.  Eritrea's first mine, Nevsun's gold/copper/zinc mine at Bisha, which has resources of 1 million ounces of gold, 9 million ounces of silver, 734 million pounds of copper and over 1 billion pounds of zinc, is due to come onstream by the first quarter of 2011.  It is anticipated to be both low-cost and high-grade.

Sunridge was an early mover in the Eritrean gold rush; it acquired its first interests in the Asmara project in 2003 on the recommendation of geologist John Clark, formerly of Ashanti who had significant experience working across Africa and viewed Eritrea as the most prospective country at the time.  It has reaped the benefit of this early interest as it was able to acquire a large and geologically prospective land package with a fantastic address.  While the Asmara project is not unique there are certainly not many other projects which spring to mind which are within 15km of a capital city.  The project's location means that it is close to power (the power station is just a few kilometres distant), roads, rail, an airport and labour.  The nearest deepwater port, Massawa on the Red Sea is just 120km away.  There is plenty of groundwater on site as the area is 2000 metres above sea level on a plateau with a river and a dam within the project area.  There is clear evidence too that the area is highly prospective; the in ground value of the resources of the known deposits at today's prices exceeds $8bn.

The JV with Antofagasta has demonstrated that a major also has faith in the prospectivity of the project and in the mining framework of Eritrea. Antofagasta, which produced 440,000+ tonnes of copper at its Chilean operations last year and which has a market cap of over $12bn, conducted considerable due diligence into both the project and Eritrea.  Sunridge's share price doubled from under 40 cents in August 2009 to over 80 cents by October following the announcements about the JV.  However it has since fallen back to 40 cents, possibly partly in response to a higher political risk discount since December 2009 when the UN imposed sanctions on Eritrea.  To date, according to Executive Vice President Don Halliday, sanctions do not appear to have had a major direct effect on business in Eritrea but they have affected the investor perception of it.

For the moment Sunridge has sizeable indicated resources, an experienced management team (including four people who previously worked for Nevsun), a prestigious JV partner and considerable upside potential for more discoveries. There is the likelihood of plenty of newsflow this year from both the Exploration and Development areas of the project.  If Nevsun's mine begins production on schedule by the first quarter of 2011 this could provide a significant filip to investor confidence, though the share price will always remain vulnerable to commodity price risk.

Sunridge's market capitalisation is currently C$28M compared to Nevsun's C$600M (though, of course, Nevsun is some 3-4 years further down the development road).