Sub-Sahara Resources SBS ASX
December 30, 2007 - 12:58am EST by
raf96
2007 2008
Price: 0.07 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 32 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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Description

Net of its securities holdings, Sub-Sahara’s high potential Zara prospect and JV with Barrick Gold trade at a knockdown price.

 

501mm out

+66m options and warrants mostly at 15c

 

 

Projects:

 

Zara – 69% of 760k ozs, per initial resource study. Located in Eritrea, 150km north of Nevsun’s Bisha deposit. The resource should grow since the 760k oz figure is a “first pass” that does not incorporate the positive drilling results reported since the initial update. Also, the deposit remains open, so it has the potential to continue increasing beyond the updated resource estimate to be reported in February.

 

Tanazania – Nyanzaga Joint Venture with Barrick Gold.  Sub-Sahara will hold a 30% interest in the project after a positive production decision by Barrick. Sub-Sahara would be carried through the completion of a bankable feasibility study.

The “Tusker” deposit has a current resource estimate of 4.5mm ozs.  Additional drilling has taken place on this property as well, so the estimate is likely to grow.

 

The company has several other JV’s and properties that are at a relatively early stage.

 

 

Valuation:

 

$A 4.4m cash as of June 30

 

7.6mm shares SGC CN 1.60                            $C  12mm = $A 13.97m

6mm shares Currie Rose (CUI CN) 31c           $C $1.89m = $A 2.2

 

Cash and Securities                                          20.6mm

 

MC  35.8mm $A - $20.6mm = $A 15.2mm;     adjusted MC = $US 13.3mm

 

For $US 13.3m, you get 525k attributable high grade ounces at Zara. These are highly likely to grow as the recent spectacular drilling results were not included in the initial resource estimate.  At current prices for SBS stock, you are paying about $25 per oz in the ground. A larger mining company could easily pay $75 per ounce and declare the transaction accretive. The real interest here though, is not a 760k oz. deposit, but the possibility of Zara growing into a world class find. Nevsun, with its excellent Bisha desposit in Eritrea,  currently has a $300m market cap and, as louisc indicates, is quite undervalued. By buying Sub-Sahara here, you get exposure to that kind of eventuality at a low entry cost.

 

That kind of per oz. valuation makes the stock cheap in its own right. But, SBS also has a JV with Barrick in Tanzania called Nyanzaga, whose “Tusker” deposit boasts a low grade (1g/ton + ) resource. If Barrick proceeds with this project, SBS will be left with a 30% interest, carried through feasibility.  Given the bargain price just for the Eritrean play, the market apparently believes Barrick is going to walk.  I don’t know what Barrick is going to do, but Barrick is already producing in Tanzania and has experience with low grade projects. The rise in the gold price above $800 per oz has got to make projects such as Tusker look more attractive and the majors all face challenges growing their production profile. At 4.5mm ozs, currently, Tusker could be a tad small for a major, but might very well attract a player like Ian Telfer’s Peak Gold.  A reasonable $100m valuation would more than double the stock price.

 

 

Eritrea-

I have not visited Eritrea, but understand that it is actually a pleasant, hospitable place to operate. Democracy is absent, but crime and tribal conflict are low. Infrastructure is significantly better than many African locations. Formal hostilities with Ethiopia have ended, but a war of words continues. I do have some concern about the U.S. government’s threat to label Eritrea a terrorist state. Islam is the dominant religion, but allegedly of a mild variety. There have been allegations of involvement in Somalia, which Ethiopia has invaded after an Islamic government was installed.  Having been jerked around by most of the world powers, Eritrea has an almost paranoid attitude toward the outside world and does make bizarre statements from time to time.

 

 Most everyone agrees that geologically, Eritrea is a highly prospective place.  There’s been no large scale commercial mining in the country since Italian colonial times.  The long war with Ethiopia has left the country unexplored by modern exploration techniques.  The country adopted a mining code based on that of the Northern Territories of Australia to encourage investment.

 

Yet, the market perception of the country is very negative. Valuations of Eritrean focused mining stocks are low – along the lines of Venezuelan plays. The concerns do have some basis in fact. A couple years ago, the government unilaterally shut down Nevsun’s activity.  The freeze was eventually lifted, but investors were given a scare from which they’ve never really recovered. I believe the country wants and needs mining to further the development of their country. As the prospect of actual production grows nearer and the rules clearer, memories of early miscues will fade and the focus will shift to the enormous cash flows being earned and the vast untouched exploration potential.

 

 

 

Management

 

While I don’t have direct experience with the management team here, They have done a fine job of finding interesting deposits and extracting value from them in the form of JV’s or sales. The involvement of Anvil as a large shareholder adds much credibility.

 

The Anvil Angle

 Anvil Mining (AVM CN) owns 90mm shares, or 18% and is the company’s largest shareholder. Anvil, sports a $1B + market cap and has been a huge success story based on its early movement into the DRC in 2002.  Bill Turner, Anvil’s chairman, is well-known and respected in Australia and Canada. Given his history of investing in troubled and maligned countries on the upswing, he probably sees an opportunity in Eritrea similar to that which he found in the DRC. I think we’ll see further exploration forays in Eritrea with Anvil going forward.

 

Finances

 

With 4.4m in the bank in June, a good portion of that will likely have been spent on the Zara drilling by now. Based on published statements, the company was looking to monetize its Sunridge stake to fund accelerated drilling at the Zara project. With Sunridge having fallen more than 50% in the last year, I doubt they would blow out that stock at these prices. Ultimately, I think Sunridge gets acquired, but if it doesn’t happen soon, we may see Sub-Sahara turn to Anvil for more cash- diluting our interest.

 

 

Securities Holdings

 

Sunridge – is quite undervalued itself, in my view. The stock has declined over 50% in the last year as investors worried over Nevsun’s long overdue mining permit and junior resource stocks in general tanked. . Lundin Mining (LMC) has a significant stake acquired at higher prices and has a representative on the Board. I would not be surprised to see them make a move here.

 

Catalyst

Zara Resource update in February,
Barrick decision on Tusker,
Strategic activity with Anvil
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