Eritrea’s Pragmatic Approach made Mining Industry a Reality: Haywood Analyst

“The Eritrean government recognized early on that it had to work with foreign investment to make a mining industry a reality”

Strong fundamentals underpin the copper price going into 2013."(Photo: Primary Copper Float Cell Installations)
Strong fundamentals underpin the copper price going into 2013.”
(Photo: Primary Copper Float Cell Installations at Bisha Mine – Eritrea)

By The Gold Report,

Here’s an excerpt of an interview with Haywood Analyst Stefan Ioannou published in the Gold Report (TGR) about the development of the mining industry in Eritrea. 

TGR: Let’s move on to the companies you cover. You have a Sector Perform rating on Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT), despite the fact that it is expected to halt production for perhaps as long as six months at its 60%-owned Bisha gold, copper and zinc mine in Eritrea. Why did you revise your target upward after this news?

Stefan Ioannou: The recent target price revision was fairly modest, from $4.75 to $5. It was little more than some model tweaking based on the company’s Q3/12 financial and operating results. The overall thesis remains intact. Bisha is a world-class volcanogenic mass of sulfide deposit (VMS). It is quite high-grade, open-pittable and has been in production since 2011. The initial focus was on a very rich oxide gold cap. That is scheduled to be completely mined out in Q1/13 or Q2/13.

From there, Nevsun will move to processing supergene copper and, eventually, primary copper and zinc sulfide material. During the transition, there will likely be a production hiatus of at least three months. There are several moving parts, including construction of a port facility to ship concentrate. The key thing to be aware of is that, on paper, 2013 will be a lackluster year for Nevsun. The company will likely have at least one quarter without any significant positive cash flow from Bisha.

TGR: Does Nevsun have the cash to withstand the hiatus?

Stefan Ioannou: Yes. The company’s strong balance sheet included almost $380M in cash and no long-term debt at the end of September. As we get into 2014, Nevsun will have a pretty rich base metals mine. Our $5 target will require patience next year, and is more a reflection of the company’s anticipated position going into 2014, namely as an established base metals producer.

TGR: Why do we hear so little about the geological and mining potential in Eritrea?

SI: People are not familiar with Eritrea, and red flags typically go up when anything related to Northeast Africa is mentioned. Nevsun was basically the first publicly traded company to get into Eritrea. It made the Bisha discovery and over 10 years, took it through exploration, permitting, development, construction and into production. Along the way skeptics pointed to the risk of the government taking more than its fair share of the project.

I give the Eritrean government a lot of credit. It has been very pragmatic. The government recognized early on that it had to work with foreign investment to make a mining industry a reality, and not just with Nevsun. The last time I checked there were about 15 exploration companies active in Eritrea. I have been to Eritrea twice now and had very good experiences both times. The common sentiment among visitors is that it was safer than they expected.

Sunridge Gold Corp. (SGC:TSX.V) is also active in Eritrea, as is Chalice Gold Mines Ltd. (CXN:TSX; CHN:ASX). The latter is exploring for VMS deposits along the same belt that hosts Bisha, and recently announced a discovery.

TGR: Sunridge just published a resource estimate for its Adi Rassi discovery. Given the size and scope of the deposit and Sunridge’s lack of cash, could this be a takeover target?

Stefan Ioannou:  I think the Eritrean government would like to see more than one foreign player developing the mining industry in Eritrea.

With respect to takeover potential, I think the completion of a feasibility study, expected in Q2/13, on the company’s Asmara project will be key. The feasibility study will not include Adi Rassi. It is based on four other projects, the Emba Derho, Debarwa and Adi Nefas copper-zinc-gold and silver deposits and the Gupo gold deposit. That said, Adi Rassi is located near Debarwa and could ultimately develop into the Asmara project’s fifth deposit.

Also important for Sunridge is the Eritrean government’s intention to buy upwards of a 30% interest in the project, similar to what it did with Nevsun at Bisha. The price still needs to be determined. That may happen before the feasibility comes out or the government may use the feasibility study as the basis of the valuation.

The government paid fair value to Nevsun and we expect the same to happen with Sunridge. Once the government does that, it will signal a vote of confidence to the investment community that things are moving in the right direction.

The feasibility study, of course, will give us a better handle on the project’s economics and what it should be worth. The big questions include what it will cost to build it, how much money Sunridge will have to raise, and what that means from a dilution point of view.


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