Nevsun is in the Zinc Sweet Spot

Nevsun Bisha zinc mine
Due to mine closures, zinc supply has been constrained since the beginning of the year and prices have soared nearly 50%. Nevsun is in the zinc sweet spot as it has just commissioned the zinc circuit at its Bisha mine.

By John Polomny | for Seeking Alpha,

The rise in the zinc price is a perfect example of what happens when supply becomes constrained in a commodity market. Because of two large zinc mine closures 60,000 tons of annual zinc supply was removed from the market earlier this year.

In addition Glencore took the decision in late 2015 to cutback zinc production due to low prices.

“The main reason for the reduction is to preserve the value of Glencore’s reserves in the ground at a time of low zinc and lead prices, which do not correctly value the scarce nature of our resources,” the Switzerland-based company explained.

Several analysts expect this supply shortage to carry on into 2017 with prices extending to $1.25/lb.

Scotiabank and CRU see the current market imbalance eroding both the known and less visible stockpiles of zinc.

Deller said, “The key question in the zinc market is no longer whether, but is now when will the market run out of metal?”

Scotiabank sees this depletion of stocks happening sooner rather than later.

In its annual Global Outlook report published in early July, the bank forecast zinc prices to average US$1.25/lb. in 2017.

“Prices are expected to rise over the coming years until sufficient supply can be incentivized back onto a starved market,” the bank penned in the comprehensive economic report.

Into this constrained zinc supply market steps Nevsun Resources (NYSEMKT:NSU). Nevsun issued a press release on 9/8/2016 announcing the first shipment of zinc concentrate from their Bisha mine in Eritrea.

Nevsun announces that it has sold and shipped the first zinc concentrate product from the Bisha mine in Eritrea. The ten thousand tonne lot was loaded at the Port of Massawa and sailed on September 7, 2016. The concentrate was sold on the spot market, attracting multiple offers and highly competitive treatment charges.

The Bisha mine completed the zinc flotation plant expansion earlier in 2016 on-time and under-budget. The plant allows Bisha to produce separate copper and zinc concentrates simultaneously from processing primary ore from the Bisha open pit mine.

Cliff Davis, Nevsun CEO commented,

“We are pleased to have a high quality zinc product coming to market in an environment of rising zinc prices. Bisha is the only significant new zinc concentrate coming to market in 2016 and we are being aggressively courted for offtake by various customers. We would like to congratulate our partner, the State of Eritrea, for adding another export product to the economy and thank them for their support.”

Nevsun is scheduled to load additional shipments in the coming weeks and is ramping up to commercial production which is forecast for Q4 2016.

Nevsun operates the Bisha mine in Eritrea. The Bisha mine is a high grade copper-zinc mine. Below is a breakdown of the anticipated production at the mine going forward.


Bisha Mine Production Chart
Bisha Mine Payable Production Chart for Gold, Copper and Zinc through out the mine life

In addition to current production and cash flow, the company recently purchased Reservoir Minerals which gives Nevsun 100% control of the upper zone of the Timok Copper Project in Serbia.

In my view this is really great news for the stock longer term. Not just because the project itself has decent economics but because it allows Nevsun to not be reliant on just one mine in a jurisdiction that some consider less than ideal.

Typically investors will discount a mining company that only has one mine in operation. The company’s only mine is in Eritrea but the company has been operating there for 18 years and has an excellent relationship with the government.

Readers of any of my articles or my blog know I like optionality. Nevsun has loads of it and will be working to identify further mineralization at its Bisha mine. The company has potential for district level discovery as they continue to find mineralization at depth and on-strike. On 7/26/2016 th company announced that it had increased its Bisha exploration license twenty-fold.

Nevsun announces that its 60%-owned subsidiary Bisha Mining Share Company (“BMSC”) will be increasing its total land package of exploration licenses to 814 square kilometers, up 1,891% from 41 square kilometers in Eritrea’s Bisha Volcanogenic Massive Sulfide (VMS) District.

“The Bisha VMS District remains vastly under-explored. Expanding our exploration land package has been a high priority that required a negotiation with the Ministry of Energy and Mines for extended and improved license terms. BMSC now has ownership of all of the exploration land in the Bisha district”, stated Cliff Davis, President and CEO of Nevsun. “With greater access to additional high-priority targets and increased time to evaluate results, we have added another key element to our strategy to deliver shareholder value through exploration in this prolific mining district. We are proud leaders in the Eritrean mining industry and believe BMSC’s exploration efforts will deliver mining for decades to come in the Bisha District.”

Pierre Lassonde, the CEO of Franco-Nevada, says that if you control enough land at some point don’t you get lucky. The great thing about this land package is that it is right next to already producing property. This land package has the potential to become a huge mining district and is completely under-explored. That is optionality.

I have owned this stock for a couple of years. I like the management and the project in Eritrea. I was waiting patiently for the company to use its huge cash reserves to diversify and buy another property and they finally did with the Reservoir acquisition.

Obviously there is risk here operationally, jurisdictionally, and execution wise as the mining business is notoriously difficult. However, the management has demonstrated, on a consistent basis, that they are up to the task and I expect they will continue to execute going forward. I believe the five year bear market in resources is ending and Nevsun looks to be one of the emerging winners from that bear market.

Sit back and collect a 5% dividend as the company continues to perform along with enjoying the possibility of blue sky upside as the company continues to expand their resource at Bisha.