mirabaud stock analysis sum gold and copper

Sumatra Copper & Gold (SCG) has begun trading on ASX following an IPO in which the company raised approximately A$12m at A$0.20/share. The proceeds will be used to advance SCG’s gold and base-metals exploration properties on the Indonesian island of Sumatra.

A portion will also be used to repay A$3.87m under a debt facility from Macquarie Bank, which has provided interim funding since a £5.3m pre-IPO funding round was completed in November 2007 with UK and European investors at 18p per share (now equivalent to A$0.32) after accounting for subsequent share splits.

Valuation

As SCG’s most advanced project, Tembang, is still at only the prefeasibility-study stage, our valuation is based on a multiple of the in situ resource ounces that the company has thus far established, adjusted for our estimated net cash (post money) of ~A$8.1m plus cash from at-the-money options (17.21m @ A$0.20 per share). The peer group median is currently US$32.9/oz for gold (see full table on p5 of attachment) and US$0.55/oz for silver.

This results in a valuation of A$0.65 per fully-diluted share, a 160% premium to the current price (see attachment for details). We initiate coverage with a Buy recommendation.

· The main use of proceeds, apart from repaying the debt facility, will be exploration, with the priority given to drilling. Consequently, we believe the medium-term driver of the share price will be drilling results, rather than advancing the Tembang project.

· We rate the Lebong project as the most promising exploration target (best intersection from drilling to date: 28.8m at 5.6g/t Au).

· The independent competent person (Perth-based CSA Global) estimates Lebong’s target potential for resources at 3.5-5.5Moz, plus 3-6Moz at the Tandai project. Both projects have been mined since Dutch colonial times, and have large known mineralised systems.

· SCG has established a greenfield exploration target at Sontang, with gold-silver-zinc-lead mineralisation. The deposit is a manto-type mineralisation.

· Indonesia passed a new mining law in January 2009, reducing associated uncertainty and introducing a new form of basic licence (IUP) which allows full foreign ownership.