Thursday, June 30, 2016

Nevsun Resources writeup

The other day I said that I was adding Nevsun Resources (NSU) to my portfolio. I have finally gotten time to do a writeup about why I like this company.

Nevsun Resources is a miner of copper, gold, and zinc from its single mine in Eritrea. The Bisha mine is a long life primary copper and zinc mine with minor by-products of gold and silver.

Nevsun Resources has been pretty much dead money over the past several years because of the general decline and malaise in the natural resource sector. In addition it is a single mine company which increases risk.

There is also a discount applied to the shares due to the mines location in Eritrea which I am sure most people cannot find on a map.

Nevertheless, the company management has done a superb job managing the mine at Bisha and the company has consistently been profitable and a fountain of cash flow. In fact, the company ended quarter on of 2016 with $483 million in working capital including $438 million in cash. The company actually pays a quarterly dividend of $.04 per quarter which is nearly a 5% yield based on the current share price.

There have been several news items and developments at the company and within the industry as a whole that lead me to believe the company prospects and share price are about to change for the better.

The first potential upside catalyst is a general turnaround in the resource sector. We have been through a five year bear market in the resource sector with some resource company shares down 90%. From a contrarian perspective we like markets that are down this much especially resource markets which are predictably cyclical in nature.

Nevsun Resources itself has found itself in a giant sweet spot. Earlier in its life the mine's primary product was copper with a lesser mix of zinc and gold/silver. As mining has continued over the years Nevsun is now encountering a larger amount of zinc relative to copper. The company prepared for this by installing a zinc recovery circuit.

This is great news for Nevsun Resources as we are facing a zinc deficit and rising zinc prices just as the company plans on ramping zinc production.

Zinc prices were at their highest level in nearly a year on Thursday as expectations of tight markets and potential shortages fuelled buying, but an inventory overhang means metal is readily available for consumers.
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However, analysts say there is a very real shortage of zinc concentrate because of mine closures, which is reflected in treatment charges that CRU says have now dropped to $110 a tonne from $140 at the start of the year.

As stated earlier the company has just one mine. the Bisha mine. Investors are apt to discount a company if it has only one mine. However Nevsun is rectifying this issue also as it bought a controlling interest in the upper zone of the Timok copper project in Serbia. Details can be found here:

Nevsun Resources and Reservoir Minerals Combine and Consolidate Timok Copper Project Ownership

Transaction Highlights

  • Strategic US$1.1 billion combination creates a diversified mid-tier base metals company
  • Transaction consolidates a 100% ownership of the high grade upper zone of the Timok Copper Project
  • Timok development is underpinned by Nevsun's strong balance sheet and operating cash flow
  • Combined company has significant exploration exposure in two prolific mining districts

Nevsun can now use its substantial cash hoard and cashflow from the Bisha mine to develop the Timok project. This is occurring near the bottom of the cycle. If I am correct and this is in fact the beginning of a recovery in the resource sector we could see a revaluation of all resource stocks higher. 

I have been watching this company for a while and the price has dropped substantially. The management has demonstrated that they can build and run mines profitably and we are now nearing the end of a terrible bear market in resource stocks.

The company is diversifying with another mine and will producing two commodities, zinc and copper, that are forecasted to go into deficit over the next few years. 

I think the probabilities are in our favor. 


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