Nevsun Transitioning From Gold To Copper Producer

Nevsun transition is on plan to start copper production mid this year
Nevsun transition is on plan to start copper production mid this year

By Gary Bourgeault,

Nevsun Resources (NSU) has had a fascinating history, and for investors getting in the latter part of 2008 and early part of 2009 (when it was trading under $1.00), they enjoyed some huge gains, as the share price soared to as high as $7.53 per share in the latter part of 2010.

Alas it wasn’t the fate of the stock to continue on with that performance, as it has steadily fallen from those highs to trade at just over $3.00 per share as I write.

The challenge at this time for Nevsun, now that its best gold years are now behind it, is in transitioning from gold production to a low cost copper concentrate producer, with gold becoming a byproduct of copper production. Depending on the price movement of gold, this could be considered a huge positive or a significant negative for the company. 

In the second half of 2013 copper production guidance is in a range of 30 million to 50 million pounds in concentrate (downwardly revised from 60 million to 80 million). In 2014 the company projects a full year of copper production of about 200 million pounds at under $1 in cost per pound. This is preliminary guidance and not final guidance, which won’t come until the latter part of 2013 or early 2014. Nonetheless, COO Frazer Bourchier said the official guidance won’t be far off from those numbers.

Even with the loss of gold revenue the company sees 2014 being a record year for revenue, earnings and cash flows.


If the company can pull this off in a timely manner, the share price could double by the end of 2014, possibly going higher depending on the final guidance and how the company performs in relationship to that guidance. Assuming Nevsun continues to generate significant copper earnings over the next several years, it could test the $9.00 per share mark and higher.

For the rest of 2013 it could be a challenge. If the company can seamlessly transition from gold to copper production with no major stoppages outside of the transitioning process itself, it should reach the copper production levels it has guided for. Lower gold production costs could also help the company, but it’s unlikely that will happen.

Investors should consider Nevsun a short-term risk during the next couple of quarters as the stock may drop below the $3.00 per share mark during that time. If it does, it could fall as low as $2.50 per share until copper is in full production.

Latest Earnings

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Revenue in the first quarter of 2013 dropped to $71 million, plunging from $149 million in the first quarter of 2012. This is the result of the ongoing depletion of gold at the mine and ore grades.

Since the average realized price of gold during the first quarter was $1,592 an ounce, the fact prices have fallen significantly in the second quarter points to not only a continuing fall in gold produced, but at far less of a profit.

Nevsun has confirmed costs in the first half of 2013 will be higher than in 2012. That’s attributed to an increase in drill and blast consumables, lower feed grades and longer haul distances. That should improve with the focus going to copper.

The company produced 41,500 ounces of gold in the first quarter, and has just released results saying it has produced 34,900 ounces in the second quarter. Final production costs won’t be released until August.

Another short-term concern is the price of silver. As a by-product the company sold 180,000 ounces in the first quarter at an average price of $28.56 per ounce, down from $33.00 per ounce in the first quarter of 2012. Since then the price of silver has plummeted to under $20.00 per ounce. This will have a strong impact on earnings for the second quarter and onward. Combined with the transition from gold to copper, this could be a negative catalyst in the near term which could drive the price to about the $2.50 per share level mentioned earlier. If anything happens to delay the copper transition, we could see the share price drop even lower.

At this point in time the company says the copper expansion project is completed and under budget, so unless there is a production delay, that shouldn’t be a factor; although I want to see the production numbers to confirm the project is on time. Nevsun continues to maintain its downwardly revised copper production guidance of 30 million to 50 million pounds for 2013.

Copper Production

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Nevsun owns a 60 percent share in its flagship Bisha mine, with the East African country of Eritrea owning the remaining 40 percent. So when talking production numbers hat must be taken into consideration to see what Nevsun gets out of the deal.

As mentioned earlier, preliminary guidance is for copper production in 2014 to come in at about 200 million pounds at a cost of under $1 per pound.

Assuming copper at about $3.00 per pound, Nevsun’s share of that will be somewhere in the range of $210 million annually. I added higher costs per pound into the mix to ensure a number that isn’t inflated. With copper is trading at $3.13 right now, that also makes the $210 million a low estimate, and allows for a downward move in copper price and higher production costs.

The bottom line is for the next several years Nevsun will generate a predictable revenue stream with its copper resource.

As for Bisha, the mine will undergo another transition in 2017, when Nevsun begins to mine its primary zone. That will bring a huge amount of zinc online. It may not seem too exciting or positive at this time, but there are large zinc mines scheduled to be shuttered over the next several years, and that could provide support for zinc at the time Nevsun starts to produce it in significant amounts.

New Acquistions

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Nevsun owns a good project with its stake in Bisha, but it is slowly aging and the 12 years left of mine life will go by quickly. That means it must think in terms of acquiring a new project in order to guarantee future revenue and earnings.

This is a positive for Nevsun because so many junior miners are struggling. It has a pick of some decent mines at a low price.

It’s also positive because the company has over $400 million in working capital. Not only could it acquire a quality property, but easily finance the project from the strength of its Bisha project.

Nevson is also debt free.

Next is a problem as far as analyzing the long-term prospects of Nevsun goes. All that can be done now is base it on the known resources at Bisha. But there is no doubt Nevsun will have to acquire a property soon, and that will completely change the future outlook of the company.

While it has decent management in place, it’s still never a guarantee that what was thought to be acquired is in fact what it really is. I believe Nevsun will get a quality project, but until they secure it and it can be examined, the long-term future of the company is an unknown.

It has stated it will look primarily for assets with strong exposure to gold and copper.

The miner has also recently acquired a Mogoraib exploration license. Located approximately 15 kilometers from Bisha, it has the potential to extend the life of the Bisha mill if significant resources are found there. It is now drilling in the area.

Lawsuits

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One thing I’ve found out concerning Nevsun bulls is they never talk about the numerous putative class action lawsuits filed against the company. Another putative class action lawsuit has also been filed in Ontario Superior Court of Justice.

If you look at the two-year chart below, you can see in early February of 2012 how the market responded when it learned of the issues surrounding the lawsuits.

What triggered the lawsuits was the company “knew but failed to disclose that its efforts at the Bisha mine were producing a material amount of waste rock instead of gold ore. The lawsuit further alleges that Nevsun failed to timely disclose that the gold ore extracted from the Bisha Mine was materially less than the amount estimated by its models.” You can see here the initial comments by Scott Trebilcock, Nevsun’s Vice President of Business Development & Investor Relations in regard to the goal of doubling the reserves at the mine, which led to the alleged infractions.

Nevsun filed a motion to have all claims against it dismissed in September 20, 2012. The company continues to wait for a ruling on the matter. It asserts the allegations are without merit and will vigorously defend itself.

This isn’t a small matter, and at best it looks like incompetence.

If the company remains true to its word, this could end up being a prolonged battle which would portray the company in a negative light for the duration of it. There is also the very real possibility it could lose the battle and pay out millions.

One positive there is Nevsun operates under the radar of the mainstream financial press, and the narrative would probably only be heard about from those already following the company. But that is still enough to be a strong headwind, as it appears it may have mostly been smaller, individual investors that got hurt from the lack of gold ore at the mine that the company seems to have said was there.

Conclusion

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Overall I like Nevsun, but when reading some of the positive comments on the company, it looks like a lot of the negatives are left out of the story.

For example, the huge drop in the price of gold and silver in conjunction with rising mine costs. There is no indication there will be a big upward move with either of these precious metals, although with gold there could be a nice move if the price can stay around $1,300 an ounce. If it holds I anticipate a breakout in the gold price, which will be the tide that raises all ships, including Nevsun.

In the short term another factor is the transitional period from gold to copper. While it has been stated by the company it is ready to go on that front, it has downwardly revised its copper production in 2013 since its first quarter report. That suggests they were too ambitious with their guidance there as well.

As for the lawsuits, what it does is cause you to question the competence of some in the company, even though it appears the top level of management is sound. Nonetheless, the buck stops there and under their watch the class action lawsuits were triggered.

If the lawsuits are allowed to go forward, Nevsun is going to take a huge hit. Taking into account its existing Bisha project, there isn’t a lot to prevent the company from being cut to half of its share price. My earlier estimates don’t take into account the lawsuits, as I wanted to reveal where I see the company performing at based on its fundamentals.

Lawsuit aside, the firm faces a challenge over the next couple of quarters as it transitions from gold to copper. Not only will there be less gold and copper during that period, but it’s likely costs will be much higher for the next couple of quarters. I don’t see how the share price of the company can go up during that time, unless the lawsuits are dismissed or there is an announcement of an acquisition.

Nevsun does have a strong financial position, along with no debt. Its cash flow is also good, and it has a decent valuation level. Weaknesses include the stock being rangebound in the $3.00 per share to under $5.00 per share range since taking the hit after the lawsuits. It looks like one reason it didn’t suffer even further damage was those who got in early at prices below $1 per share have chosen to hold onto their shares. It also has had its earnings per share plunge from its first quarter in 2012. Net income has also been dropping.

I like Nevsun in general, but there are a lot more holes in the company than bulls are seeing or talking about; although they aren’t holes that can’t be fixed. It looks like 2014 will be a very good year for the miner, and so getting in at this entry point, while risky because of the lawsuits, higher costs and lower production, should still pay off well in the long term.

Bisha in Eritrea is a world class gold-copper-zinc open-pit mine
Bisha in Eritrea is a world class gold-copper-zinc open-pit mine