ERITREA : Nevsun Resources Update

Nevsun Resources (NYSEMKT:NSU)

Featured In: January 2015

Partnership Average Cost per Share: US$2.64

Current Market Price (August 2, 2017): US$2.65

Nevsun Resources has been a partnership holding since August 2013. While the company has seriously underperformed its peers since the metals bull market commenced in early 2016, NSU investors will see their patience rewarded in short order. Between the company’s producing Bisha Mine in Eritrea and its world-class Timok Project in Serbia, I think that Nevsun is the most undervalued base metal producer on the market.

Starting with Bisha, the news has been mixed over the past couple of quarters. On a positive note, the company announced in late March results from drilling conducted at Bisha and two satellite deposits (Harena and Asheli). In total, over 30k meters were drilled. This is a big program by any standard, but it was also efficient as the company “increased the Bisha district Inferred resources by over 100% to 31 million tonnes containing 667 million pounds copper, 3.3 billion pounds zinc, 780,000 ounces gold, and 30 million ounces silver.” Assuming geopolitical stability, this indicates that Nevsun shareholders can expect cash flow from Eritrea well after the original Bisha Mine has been depleted.

While it will never be a standalone operation, Harena in particular seems to have the Nevsun management team excited. In early April, a press release was dedicated exclusively to recent drill results from Harena. Some highlights can be seen below, and it is worth noting that these assays were not included in the updated Bisha district resource mentioned above.

Positive exploration results aside, the company continues to have concentrate issues as the Bisha Mine transitions to the primary sulphide zone. So far, recoveries have been lower than expected, and the company has had trouble producing a saleable copper concentrate. It is safe to say that these metallurgical struggles (in combination with the announced dividend cut) have been the cause of Nevsun’s pronounced share price weakness over the previous six months.

In mid-July, the company reported that Bisha’s operating performance is seeing improvement. On the plus side, after three quarters of effort, the company was finally able to produce a saleable copper concentrate and sold 7.7m payable pounds of copper. The company also announced that copper recoveries had jumped from 34% to 51.6% when compared to the previous quarter.

It is worrying, however, that zinc recoveries dropped from 66.6% to 62.2% when compared to Q1. The decline seems to be directly related to copper concentrate optimizations. Needless to say, the company needs to find a way to increase copper recoveries WITHOUT negatively impacting the zinc circuit.

The resolution of these processing issues remains the key catalyst at Bisha. It is my expectation that this will be largely resolved within the next 12 months. Management understands the urgency, with CEO Peter Kukielski recently stating:

“We have a strong team of world-class consultants supporting Bisha. Management remains focused on moving toward the original plant design by further enhancing recoveries and concentrate quality as quickly as possible.”

The cash flow generated by Bisha is a key part of the Nevsun story for two reasons: (1) it allows the company to pay shareholders a small dividend and (2) it enables the company to advance Timok with minimal equity dilution.

That said, it cannot be understated that the company’s future lies with the world-class Timok development project. And, news out of Timok over past months has been very encouraging.

In late February, the company announced that it would be “redeploying approximately $120 million over a four-year period from its corporate dividend toward development of the Timok”. While this resulted in some short-term pain to the NSU share price as yield hungry investors rushed to the exit, this is undoubtedly the right decision from a long-term value creation standpoint as it allows the company to fast-track development of what is an exceptionally economic project.

Shortly after this strategic decision was announced, the company released some splashy intercepts from infill drilling at Timok’s Upper Zone. As can be seen below, both the grades and widths of these assays are conducive to what will be an extremely low-cost operation.

On July 19^th, the company released the final batch of assays from the 2017 infill program. These assays confirm the exceptional continuity and high-grade nature of the Upper Zone, and also enable the development of improved geological and geotechnical models to be used in the upcoming Prefeasiblity Study.

Buried in this same news release, there is another significant development. The company seems to believe that there is potential for additional “Upper Zone type deposits” yet to be discovered on the Timok land package. CEO Kukielski commented:

“We are also excited to have exploration for additional Upper Zone type deposits underway. At the Bor operation, just five kilometres away, there were in excess of twenty separate high sulphidation epithermal “upper zone” type deposits, we believe the possibility of finding additional deposits should be high.”

If management’s belief in additional high-grade deposits is vindicated, this has the potential to double the value of what Nevsun has at Timok. First results from this 10k meter exploration program should be announced later this year. If the company comes up dry in the program, it is unlikely to have an effect on the company’s already depressed share price. Success, however, would have a profound impact on the perceived value of Timok.

The next major catalyst at Timok is a Prefeasibility Study, which is expected in September. A PEA released in April 2016 projected a post-tax NPV of US$1.3b and an IRR of 96% at current metal prices. The upcoming PFS will show similar, if not better, numbers.

Keep in mind that the PFS will only include the 100%-owned Upper Zone and will not include the project’s much larger Lower Zone. (Upon completion of a feasibility study, Nevsun will own 46% of the Lower Zone and Freeport will own 54%.)

I’ve provided below the milestones that Nevsun shareholders should expect from both Bisha and Timok over the coming years:

• Prefeasibility Study announced @ Timok Upper Zone by end Sept 2017
• Drill results from exploration program around Timok land package by end 2017
• Decline construction commences @ Timok Upper Zone by end 2017
• Feasibility level recoveries @ Bisha by end Q2 2018
• Feasibility Study announced @ Timok Upper Zone by end 2018
• Main Resource announced @ Timok Lower Zone by end 2018
• Decline reaches ore body @ Timok Upper Zone by end 2019
• Initial production @ Timok Upper Zone by end 2021

Nevsun has no debt and roughly US$170m in the bank. Considering future cash flow from Bisha, the company may be able to develop and build Timok without any equity dilution (initial capex was projected at US$213m in last year’s PEA). If management is able to execute as it has in the past, we could see a US$10 stock when Timok commences production within the next 4-5 years.