- Sumatra Copper and Gold exploring for gold and silver in Indonesia - Tembang project more advanced than previously thought - Share price implies significant upside to valuation, says DJ Carmichael

By Chris Shaw

When a conservative valuation for a company is about four times above the current share price the stock appears worthy of greater attention, which is what DJ Carmichael has done in initiating coverage on Sumatra Copper and Gold ((SUM)) with a Speculative Buy rating.

Sumatra is exploring for gold, silver and base metals on Sumatra island in Indonesia, holding seven IUPs or exploration Business Permits covering total land holdings of 3,219 square kilometres. The company has 100% economic interest in all its projects except for Tandai, where Newcrest ((NCM)) can earn up to a 70% stake.

Most advanced of Sumatra's projects, according to DJ Carmichael, is the Tembang gold-silver project, with a current mineral resource estimated at 1.64 million ounces of gold and 19.8 million ounces of silver.

The Tembang grounds covers an old mine site and DJ Carmichael notes Sumatra has rights to about 800 square kilometres of ground around the old mine, offering scope for resource upside from successful exploration. Drilling is currently being performed and the broker suggests the project is more advanced than it had previously thought.

Production is currently expected to commence early in 2013 and given shallow mineralisation depths and very good silver credits, DJ Carmichael sees the project as having low operating costs.

Other prospects include the Belinau underground gold project, which is shaping up as a high grade operation, the Beranai open pit project and the high grade Tandai project. Drilling is to commence at Tandai in coming months and here Newcrest can earn a stake by investing US$12 million over five years.

With no earnings at present DJ Carmichael has used a combination of methods to value Sumatra, these including discounted cash flow analysis and comparisons to peers also operating in Indonesia. Such an approach generates a base case valuation of just over $0.90, with the addition of silver credits adding a further $0.15 to the broker's valuation.

Applying an average enterprise value gold ounce method to only Sumatra's gold ounces would generate a valuation of $0.81, so DJ Carmichael sees a low $0.90s valuation as conservative. Given the current share price for the company is just above $0.20, the potential upside supports the broker's Speculative Buy rating.

There is little with which to compare DJ Carmichael's positive view, as with a market capitalisation of around $29 million Sumatra is too small for coverage by most brokers. As evidence of this, the stock is presently not researched by any of the brokers in the FNArena database.

Shares in Sumatra have ranged over the past year between $0.16 and $0.40.

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