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TABLE OF CONTENTS Jun 7 - 13, 2010 Volume 96 Number 16 - 0 comments

Sunridge advances in Eritrea

NEW PARTNER ANTOFAGASTA FUNDS EXPLORATION WORK

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By: Gwen Preston
2010-06-07

SITE VISIT

ASMARA, ERITREA -- Six years and $30 million into its Eritrean exploration adventure, Sunridge Gold (SGC-V) has defined four deposits lying in an arc around the capital city Asmara that together host indicated resources containing 1.3 billion lbs. copper, 2.5 billion lbs. zinc, 1 million oz. gold and 32 million oz. silver.

Given the challenges of working in an isolated east African country, it is a respectable achievement. And at the end of 2009, Antofagasta (ANTO-L, ANFGY-O) subsidiary Antofagasta Minerals acknowledged Sunridge's achievements and its potential, inking an exploration agreement for an enlarged land package and becoming Sunridge's largest shareholder.

With Nevsun Resources (NSU-T) on track to start producing gold at the country's first major mine before the end of the year and exploration companies from China and India kicking rocks throughout the land, Eritrea is slowly edging its way onto investors' radar screens. Sunridge has engineers developing processing options for its four deposits, which are not part of the joint venture with Antofagasta and one of which has already produced a positive scoping study. And the company has $7 million on hand, enough to fund its efforts in the near term.

All things considered, Sunridge is heading towards an interesting future.

Four deposits

"They have got some fabulous geology here but what really makes it is infrastructure," says Michael Hopley, Sunridge's president and CEO, during a presentation at the company's office in Asmara. While that concept may seem surprising in relation to Eritrea, a poor African country based largely on subsistence agriculture, Sunridge has positioned itself to take maximum advantage of the infrastructure that does exist and, in places, is actually underused.

The company's land package wraps around Asmara, starting 15 km north of the city and wrapping around its west side to reach 35 km to the south. Its proximity to the city means power, water and roads cross through the area repeatedly.

The 1,000-sq.-km property includes four defined deposits, which are owned by Sunridge exclusively. The rest of the area is a regional exploration joint venture with Antofagasta, which can earn a 60% interest in the ground by spending US$10 million on exploration within five years.

The largest and most advanced of Sunridge's independent projects is Emba Derho, which translates as "Chicken Hill." Chickens are a pretty common sight in Eritrea, so the name doesn't help identify the hill, but the gravity anomalies it bears do. Geologists first identified mineralization at Emba Derho in 1960 because of an exposed gossan but the gossan proved too small for much interest. It was only when Sunridge conducted a gravity survey in 2005 did anyone see the larger anomalies parallel to the gossan, stemming from mineralization hidden under a mafic flow cover 40 metres thick.

Sunridge now knows mineralization at Emba Derho is folded along northwest lines to give three rises. The first is the exposed gossan, the second is a small zone of mineralization, and the third is a layered deposit carrying almost 1 billion lbs. copper and almost 2 billion lbs. zinc as well as 575,000 oz. gold and 20.1 million oz. silver.

The top layer of the Emba Derho deposit is a gold oxide cap, comprised of 3.5 million indicated tonnes grading 0.84 gram gold per tonne and 5.14 grams silver per tonne. Below that sits a zinc-rich layer totaling 20.5 million indicated tonnes grading 2.35% zinc, 12.13 grams silver, 0.39 gram gold and 0.28% copper. The third layer is endowed in copper, providing another 38.4 million indicated tonnes averaging 1.02% copper, 9.31 grams silver, 0.18 gram gold and 0.99% zinc.

The zonation occurred 5 million years ago, when a geologic event pushed granitic dykes into the 750-million-year-old rock. The event also re-dissolved the rock's minerals, which then re-crystallized in layers. Much of the deposit fits nicely into an open-pit shell, though the copper zone extends to the northwest at depth, beyond the pit shell, creating what is known as the Northwest zone.

In mid-2009, Sunridge completed a scoping study on Emba Derho's open-pit resources, which totaled 42 million tonnes. The study found the deposit could support a 4-million- tonne-per-year operation for 10 years to produce 55,000 tonnes zinc, 25,000 tonnes copper, 20,000 oz. gold and 600,000 oz. silver annually. It should cost US$332 million to build the project and, with a 21.6% internal rate of return, the mine should pay back the capital investment in four years. The project now carries a pretax net present value of US$203.9 million, using a 10% discount rate. These base-case numbers assumed metal prices of US$2.50 per lb. copper, US$1 per lb. zinc, US$650 per oz. gold and US$11 per oz. silver.

Some aspects of the project are nice and simple. The ore creates no metallurgical difficulties -- as Hopley puts it, "The metallurgy is about as straight forward as you can get." There is no independent land ownership in Eritrea, so if the government supports an operation it will be built. And Eritreans seem generally supportive of mine development, based on an understanding that mines bring jobs and provide cash to the government.

Other aspects, while not complicated, need more work. A prefeasibility study would have to investigate whether the Northwest zone, home to an additional 20 million tonnes of copper-rich mill feed, could be included in the mine plan. The scoping study also considered the oxide gold cap as waste, because alone it is not large enough to support development of a heap leach. However, the material could potentially be processed in conjunction with gold-bearing rock from another project.

The granite dikes that reorganized Emba Derho's mineralization also, unfortunately, increase the costs to process its ore by increasing dilution. Sunridge is investigating options to upgrade the ore prior to processing, either through dense media separation or perhaps through simple hand sorting according to colour on the conveyor belt.

And as with any scoping study-level project, other logistical details would require attention prior to a development decision. A water supply has not been officially sourced, but the Asmara water supply pipeline runs right past the project and the dam is oversupplied. Similarly, Sunridge would need to secure a power source able to provide 15 megawatts (MW) to run a mine, but a seemingly easy answer sits nearby. The Beleza power plant 4 km away currently generates 5 MW but, before decay took hold, it generated 20 MW. The vision is to restore and possibly upgrade the existing plant, thereby providing a benefit to the project and the country.

More generally, Eritrea is not short of power. The main power station at the port of Massawa is capable of generating 80 MW but demand currently sits at just 40 MW.

The challenges ahead may not be for Sunridge alone. Hopley is open about the fact the company is seeking a joint-venture partner for Emba Derho. He says they are in "advanced talks" with a Saudi Arabian group and several other companies -- one Korean, two Chinese, and one Indian -- have expressed interest. The Saudi company is related to a US$25-billion smelter project currently under construction just across the Red Sea from Eritrea, which should be ready for commissioning in 2013. According to Hopley, the biggest challenge for the smelter project at present is securing sufficient concentrate supply.

The other possibility for Emba Derho is development in conjunction with one or more of Sunridge's other projects. The two top contenders for that role are the Adi Nefas and Gupo Gold projects, which are just 6 km to the east.

Adi Nefas is a high-grade zinc-copper- gold volcanogenic massive sulphide (VMS) deposit. The deposit actually runs underneath a village but Sunridge does not see that as a problem, since the best mining method would be underground regardless.

The top of the deposit is only 40 metres below the surface but the zone is only 7 to 8 metres wide. Thus far, Sunridge has traced the deposit along 450 metres strike and 300 metres vertical extent. It remains completely open to the south along strike, partially open to the north where the zone seems to drop down along a fault, and open at depth.

The indicated resource at Adi Nefas currently stands at 2.73 million tonnes grading 2.85 grams gold, 99.3 grams silver, 1.39% copper and 8.38% zinc.

"It is high-grade stuff," says Hopley. "It can hopefully act as a great match for the lower grade ore from Emba Derho -- we're doing net mixing studies now to test the compatibility.

"If this was in Canada it would have been mined a long time ago," he adds.

This summer Sunridge plans to drill more holes at Adi Nefas, with one goal of extending the strike to the south. But the holes will also test another theory. The Adi Nefas deposit is hosted in one limb of an anticline. Geophysics indicates the presence of a second full limb to the west that, if it exists and is mineralized, would significantly increase the project's resources. As such, Sunridge is planning to drill its southern extension holes from the west; if the second limb exists the drills will hit it first.

So ore from Adi Nefas could potentially be mixed with copper and zinc ore from Emba Derho for processing. Interestingly, that is not the only potential synergy -- the Gupo gold deposit just south of Adi Nefas offers a possible venue for heap leaching the gold-bearing oxide cap at Emba Derho, which is currently considered waste.

Sunridge has not devoted much time to Gupo as yet but the presence of gold is clear to the passerby. The Italians, who colonized Eritrea from the late 1800s until 1941, mined out a series of pits to tap into vein-hosted gold at the site. The project hosts an inferred resource of 1.97 million tonnes grading 2.99 grams gold. It is a modest resource but Hopley sees potential to grow the zone to the west and south, creating sufficient tonnes to justify a small heap-leach operation.

Sunridge's fourth deposit within its Asmara property is known as Debarwa. Unlike Emba Derho, Adi Nefas and Gupo, which are grouped together to the north of Asmara, Debarwa is roughly 25 km southwest of the city.

Like Adi Nefas, Debarwa is a VMS deposit. The copper, zinc and gold mineralization at Debarwa is contained in a steeply dipping zone 10 to 30 metres thick. The upper part of the deposit has been oxidized and leached of its base metals, leaving behind 2.44 million indicated tonnes grading 1.71 grams gold and 13.79 grams silver.

The real meat of the Debarwa deposit, though, comes in the underlying supergene enrichment zone. At present the defined part of the supergene zone contains only 1.34 million tonnes, but those tonnes carry 1.54 grams gold, 33.87 grams silver, and 5.36% copper.

There is already a shaft at Debarwa that reaches down almost 100 metres parallel to the zone, as well as two underground adits reaching from the shaft towards the deposit. An Eritrean-Japanese partnership in the 1970s developed the underground workings but Eritrea's long, bloody independence battle with Ethiopia soon forced the Japanese out, leaving the deposit almost untapped.

"We believe we can find some really nice, high-grade ore here that we can mine underground and then ship direct," says Hopley. "We want to start a scoping study soon."

Drill results from the supergene zone certainly indicate that Debarwa is home to some high-grade ore. Some of the best drill results include 17 metres of 12.33% copper with 1.85 grams gold, 16.7 metres of 8.02% copper, 1.61 grams gold, and 35.81 grams silver, and 20.1 metres of 15.3% copper with 9.69 grams gold.

At 100 metres below surface the supergene zone starts transitioning into a zone of primary sulphide mineralization wherein the copper grades fall but the zinc grades pick up dramatically. Sunridge's deeper drills at Debarwa have returned such intercepts as 15.1 metres of 4.42% copper, 8.23% zinc, and 2 grams gold, and 18 metres of 3.96% copper, 5.48% zinc and 1.37 grams gold.

With four projects on its hands, all at different stages but exhibiting some obvious opportunities for joint development, in March, Sunridge kicked off a production study that will assess the mining and processing options for its property as a whole. As the company explained in a news release, "The study will serve as a road map for future engineering studies and will initially focus on the possibility of fast-tracking mining and direct shipping of a small, high-grade section of the Debarwa copper supergene zone."

The study will also investigate the impact of including ore from Adi Nefas, Gupo, and possibly Debarwa on the economics of an operation at Emba Derho.

The joint venture

In 2009, Antofagasta came to Eritrea to look at Sunridge's Emba Derho project. Hopley says the major miner went through all the data in excruciating detail and then decided the project was too small.

"But instead of leaving, they then came to us and said, 'Here's this $10-million proposal on your exploration ground,'" says Hopley. It took months for the companies to work through the due diligence work on the deal. By the time they were done, Sunridge's share price had doubled.

"So we had to say sorry but we don't want to do the deal anymore," says Hopley. "Again, instead of leaving, they offered to change the terms of the agreement, added a $5-million investment into Sunridge, and increased their exploration commitment in the first year. We think it shows just how interested they are in this area."

The new deal, signed in October, allows Antofagasta to earn a 60% stake in the exploration areas of the Asmara property, which cover all of the 1,000-sq.-km property except the land packages around Sunridge's four deposits, by spending US$10 million on exploration within five years. The major has to spend at least US$2 million in the first two years of the deal, or pay Sunridge any shortfall.

The deal also saw Antofagasta buy 14 million Sunridge shares at 40¢ apiece, for proceeds to the junior of US$5 million. The private placement gave Antofagasta an 18% interest in Sunridge, making it the company's largest shareholder. Lundin Mining (LUN-T) is the second- largest shareholder, with a 13% stake.

Sunridge officially operates the exploration effort for the joint venture, though Hopley says it is in reality very much a joint effort. He says combining the two companies' different ideas about exploration are making for a better program.

More generally, the program is being guided by gravity anomalies.

"We've found gravity surveys to be the best way to find blind VMS deposits here," says Hopley. "We spent half a million dollars covering the whole property with a regional gravity survey, for the first time, and the work revealed some very impressive gravity highs that have never been drilled."

In May the partners started drills turning at one of those targets, called Adi Rassi. The prospect is near the southern end of the property, 8 km southeast of Debarwa, and the partners plan to complete four holes totaling 1,200 metres at the site before moving on to another target.

An Ethiopian company evaluated Adi Rassi in the early 1970s, identifying copper and gold mineralization associated with quartz veins and breccia zones along a major shear zone that trends northeast and dips steeply to the west. The alteration of interest has been traced on surface along 500 metres strike and averages 80 metres in width.

The first target area drilled in the joint venture, the Daero Paulos area in the centre of Sunridge's land package, did not return significant mineralization.

Sunridge and Antofagasta are also advancing a regional target generation program, including stream sampling, satellite imagery analysis and local geological mapping.

At presstime, Sunridge's shares were near 40¢. The company has a 52-week trading range of 21.5¢ to 85¢ and 76 million shares outstanding (82 million fully diluted).



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Photos

A visiting mining analyst looks out over Sunridge Gold's Adi Nefas project in Eritrea.
A visiting mining analyst looks out over Sunridge Gold'...
Stacks of core samples at Sunridge Gold's Debarwa volcanogenic massive sulphide project in Eritrea.
Stacks of core samples at Sunridge Gold's Debarwa volca...
The core shed and office building at Sunridge Gold's Debarwa project in Eritrea. An Eritrean-Japanese partnership developed the underground mine workings at the project in the 1970s.
The core shed and office building at Sunridge Gold's De...


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