Sumatra Copper & Gold: Moderate Delays Expected

Moderate delays expected
Due to the knock-on effects of lower gold and silver prices on debt and credit markets (thus affecting project financing), Sumatra Copper & Gold (SUM.AX) has optimised its Tembang mine plan. This generally means higher grade mining during Stage 1 (years one to five) using the Buluh/Belinau resources. However, both of these resources require further drilling and technical work to satisfy financiers. SUM states this will be completed in Q413. We believe the number of discrete deposits at Tembang has always allowed SUM flexibility in scheduling and mining its deposits. Further, with all required mine permits already in place, we believe there is only a moderate risk to project execution. SUM anticipates being able to draw down on its US$35m debt facility during Q413.

H113 – write-down of non-core exploration projects
SUM’s H113 accounts largely reflect its status as a company transitioning from exploration into development. The largest item relates to SUM’s board deciding to write-down US$4.6m (£3.0m) of exploration expenditures relating to non-core projects (Sontang, Jambi, Madina 1&2 and Musi Rawas).

Drilling vindicates decision to mine Buluh first
6.7km of a 9km optimisation diamond drill programme (to replace lower quality RC drill holes) has been completed so far, with completion due by end-October 2013. Results to date have indicated higher grades (ranging from 5.2m at 7.52g/t Au to 2.4m at 21.4g/t Au) at Buluh compared to Asmar (reserve grade 1.3-1.7g/t Au), vindicating SUM’s decision to revise its mine schedule to satisfy its financiers.

Valuation: Adjusted only for H113 results
Sumatra’s revised Stage 1 Tembang mine plan will bring the Buluh open pit (OP) resource (originally to be mined during Stage 2) forward, ahead of mining the lower-grade Asmar deposit (originally scheduled first in Stage 1). Following the Buluh OP, the Belinau resource will be mined, first OP then underground (UG). After this Asmar will be extracted, mining higher tonnage at slightly lower grades.

SUM is also revising its capital programmes. These revisions will amount to a materially different shape to mining Tembang, so we resist adjusting our last valuation of A$0.30 until the optimisation study is announced. Instead we adjust only for its H113 results. On this basis our valuation reduces to A$0.28 at a 10% discount rate and gold prices of US$1,578/oz (2014) and US$1,676/oz long term. As long as capex remains largely unchanged at c US$67m, the emphasis on increasing grade in the early years of production should affect our valuation positively.

To Read the Entire Report Please Click on the pdf File Below.