Ocean Equities published Wednesday a bullish note on Sunridge Gold (CVE:SGC) (OTCQX:SGCNF), after the junior explorer released a prefeasibility study for the Asmara North project in Eritrea, North Africa.
The capital markets firm said the publication of the study is a "key milestone" for Sunridge, and that it expects a re-rating of the company's share price in reaction to the news.
"Sunridge Gold’s C$47m market capitalization belies the underlying value of the projects it owns," the report said.
"The headline $555m net present value of the North Asmara project equates to $4.72/share. While the $4.72/share level is not an accurate price target for the company’s share price (as it does not reflect financing costs and dilution) it does illustrate the complete disconnect between the share price and the underlying value of the company’s project."
Sunridge Gold's shares are changing hands currently at around 39 cents. Ocean said that uplift in the share price will reduce the dilutive effect of a pre-production fund raising, or prevent Sunridge from being acquired at "too low a value."
The prefeasibility study concluded that at a 10% discount rate, the project is estimated to have a net present value of $555 million, for an initial capital cost of around $489 million, and has an internal rate of return of 27 percent.
This is based on metal prices of $3.28/lb for copper, $0.99/lb zinc, $1,111/oz for gold and $21/oz for silver.
Work has already begun on the recommended feasibility study for the Asmara North
project, Ocean noted, with the project to potentially enter production in 2016.
The gold explorer's North Asmara project is made up of four deposits located around the capital of Eritrea, Asmara: the Emba Derho, Debarwa, Gupo and Adi Nefas deposits.
During the 15.25 year life of the mine, it is expected to produce 804 million pounds of copper, 1,789 million pounds of zinc, 415,000 ounces of gold and 11 million ounces of silver.
The company concluded that an integrated, three-phase mine operation is the "optimum economic situation", using a centralized mill and plant, to be located close to Emba Derho.
As part of the plan, Adi Nefas will be exploited using underground mining methods, while the other deposits will be mined as open pits.
"We are particularly interested in the zinc component of the North Asmara project as we believe that this component of Sunridge’s project has been undervalued until this point," Ocean noted.
"In our view, zinc is one of the more interesting in the base metal complex looking into the mid-term. With a high grade, open pittable zinc ore at both its Adi Nefas and Debarwa deposits we think Sunridge should receive recognition as a zinc play as well as a copper-gold play."
With an anticipated zinc shortage in the mid-term due to a closure of big mines, and increasingly higher demand, many analysts are expecting a surge in price for the metal.
Ocean continued: "Progress to the feasibility study level will truly illustrate the potential value of the North Asmara project and the company will be able to examine the different ways in which it can add value.
"Sunridge has already outlined several ways in which it can improve the economics of the project including heap leaching the precious metal ores, increasing throughput and assessing the viability of different power sources."
The report noted that updates on these opportunities are expected in due course, as well as continued drilling results that have the potential to increase the project's resource base.
"Sunridge has been in discussions with several parties interested in taking a strategic stake in the company as North Asmara is likely to be one of the next mines to be brought online in Eritrea, a mining jurisdiction that continues to draw the attention of minor and major mining companies.
"We think Sunridge presents a very good investment opportunity at this point before a significant uplift in the share price," Ocean Equities concluded.
When the mining license is granted, following completion of a feasibility study, Sunridge said the Government of Eritrea will have a 10 percent carried interest in the project and has the option to purchase up to a 30 percent working interest.
The feasibility study is targeted for the first quarter of 2013.