If an offer arrives, Nevsun’s shareholders could get at least $5 per share.
By Peter Arendas | for Seeking Alpha,
On Nov. 15, Lundin Mining (OTCPK:LUNMF) announced that it not only waived its right of first offer to acquire Freeport-McMoRan’s (NYSE:FCX) indirect interest in the Congolese Tenke Fungurume copper mine, but also decided to sell its own 24.8% interest to a Chinese company for $1.136 billion in cash and a contingent consideration of up to $51.4 million. According to Paul Conibear, CEO of Lundin Mining:
The sale will enable Lundin Mining to advance its strategy to incrementally grow the company with projects and operations we control, while maintaining a strong balance sheet.
In Q3 2016, the Tenke production attributable to Lundin Mining equaled 13,522 tonnes (29.81 million lb) of copper cathode and 980 tonnes (2.16 million lb) of cobalt hydroxide. It equates to approximately 120 million lbs of copper and 8.6 million lbs of cobalt per year.
According to 2016 production guidance, Tenke Fungurume is responsible for more than 20% of Lundin Mining’s copper production. The sale of Tenke will result into a notable decline in copper and cobalt production. Given the statement of Lundin Mining’s CEO, we can expect that the company will try to replace Tenke Fungurume sooner rather than later. This is where Nevsun Resources (NYSEMKT:NSU) comes into play.
Why Nevsun Resources?
The main reason why Nevsun Resources is a logical acquisition target for Lundin Mining is the Timok project in Serbia. The Timok project consists of a high-grade Upper zone and a low-grade but very large Lower zone. It was being developed by Freeport-McMoRan and Reservoir Minerals. Back in early March, Lundin Mining announced an agreement to buy 100% of Freeport-McMoRan’s stake in the Upper zone and 28% of its stake in the Lower zone for $262.5 million.
The management believed that Timok could become an important asset for Lundin Mining. According to Lundin Mining’s CEO:
The acquisition of an interest in the Timok project is consistent with our growth criteria that we have rigorously followed over the last few years. This high quality copper/gold project fits ideally within our overall asset base of operations in the Americas and Europe. This transaction enables the existing Freeport/Reservoir partnership to leverage our proven underground base metals development, construction and operating skill sets to advance the Timok project into operation in a timely manner. The Timok project is expected to enhance the Company’s long term copper growth pipeline, while preserving our strong balance sheet.
But Reservoir Minerals had the right of first offer. Only six weeks later, Reservoir Minerals announced a deal with Nevsun Mining. Nevsun Mining provided a loan that helped Reservoir to exercise the right of first offer, and on June 23, Nevsun closed the acquisition of Reservoir. As a result, Nevsun Mining owns 100% of the Timok Upper zone and 60.4% of the Timok Lower zone now. 39.6% of the Lower zone is owned by Freeport-McMoRan, but its stake will grow to 54% upon the completion of a feasibility study.
Timok is a really exciting project, and Lundin Mining probably wasn’t too happy that it was unable to close the deal. The Upper zone contains inferred and indicated resources of 2.65 billion lbs of copper and 2.5 million toz of gold. It means 3.77 billion lbs of copper equivalent or 8.42 million toz of gold equivalent, at the current metals prices of $2.65/lb copper and $1,185/toz gold. What’s even more important is that the Upper zone contains high-grade mineralization (5.3% of copper equivalent or 5.9 g/t of gold equivalent), which should lead to higher profit margins.
The April 2016 PEA has outlined two production scenarios. The first one is based on 2.5% and the second one is based on 1% copper cut-off grades. The initial capex is only $213 million in both of the cases. An initial DSO operation should be able to generate cash flow to cover the mine expansion to the full capacity of 2 million tonnes of ore per annum.
According to the first scenario, an average annual production of 128 million lbs of copper and 62,000 toz gold at a total cash cost of $0.97/lbs of copper (after gold credits) is expected over the 12-year mine life. The resulting after-tax NPV (8%) is $1.28 billion and the IRR is 96%, using a copper price of $2.6/lb and a gold price of $1,250/toz. According to the second scenario, the life of mine should be 20 years and have an average annual production of 104 million lbs of copper and 43,000 toz of gold at a total cash cost of $1.24/lbs copper (after gold credits) is expected. The after-tax NPV (8%) and IRR should be around $1.3 billion and 96%, respectively.
There is also the Lower zone that hasn’t had an resource estimate yet, but the drill results indicate that the volume of contained metals is really significant. For example, drill hole TC 150060 intersected 835.8 meters of mineralization grading 0.92% copper and 0.22 g/t gold, or 1.05% of copper equivalent. Drill hole TC 140054/54a intersected 705.8 meters grading 0.91% copper and 0.26 g/t gold (1.07% of copper equivalent). Only last week, Nevsun announced that drill hole TC 150073 intersected 686 meters grading 0.89% copper and 0.16 g/t gold. The mineralization has been identified over an area of approximately 1,200 x 600 meters (see map below), and it is still open to west, north and northeast.
The Upper zone should get into production by 2020/21, and the Lower zone perhaps some time around 2025. But the Nevsun acquisition could provide Lundin Mining with an instant production boost. On Oct. 4, commercial production on its 60%-owned Bisha Zinc expansion was announced. It means that the process of Nevsun’s transformation from an almost pure copper producer to a more diversified zinc-copper producer is about to be finished. It hasn’t been finished yet, as the company experienced some issues with separating zinc and copper concentrates, but this problem should be solved in the coming months.
The Bisha mine is expected to produce approximately 50 million lbs of copper and 150 million lbs of zinc, along with some smaller amounts of gold and silver in 2017 (30 million lbs of copper and 90 million lbs of zinc should be attributable to Nevsun). It is enough to boost Lundin Mining’s zinc production by almost 60% and its post-Tenke Fungurume sale copper production by 15%. As a bonus, the Bisha region is highly prospective as well. Nevsun’s land package covers an area of 814 km2 and several high priority exploration targets, along with the Harena and Asheli deposits have been identified.
Lundin Mining’s Financial Situation
As of Sept. 30, Lundin Mining held cash and cash equivalents worth $691 million. It also had an undrawn credit facility worth more than $350 million. The net debt was only $309 million. After the Tenke Fungurume sale is completed, Lundin Mining should have approximately $2.2 billion at its disposal. Approximately $210 million is needed to complete the Los Digues tailings facility at the Candelaria mine, which leaves approximately $2 billion to play with. The senior secured notes are due only in 2020 ($550 million) and 2022 ($445 million). This means that it’s probable that Lundin Mining is about to go hunting.
Nevsun’s fully diluted market capitalization is approximately $1 billion. The company has no debt and it held cash and cash equivalents worth $218 million as of Sept. 30. It means that the enterprise value is less than $800 million. In April, Nevsun offered Reservoir shareholders a 35% premium to the 20-day volume weighted average price. The offer was later sweetened by further $75 million, which resulted in a premium of approximately 60%. Using the same metrics, Lundin Mining should offer $4.8 per one Nevsun share, as the 20-day volume weighted average price of Nevsun is $2.9987 per share. However, that’s only a guesstimate, and if an offer really comes to fruition, it can realistically range from $4 to $6 per share. I believe that more than $5 will be needed to persuade the Nevsun shareholders.
After the Tenke Fungurume sale is completed, Lundin Mining will have approximately $2 billion to play with. Nevsun Resources is a logical target. Lundin was interested in the Timok project several months ago, just before it got acquired by Nevsun. Moreover, Nevsun’s producing Bisha mine could replace Tenke Fungurume immediately. Bisha is interesting also for its production mix, as it produces copper as well as zinc. Both of the metals are red hot right now. If an offer comes, Nevsun shareholders could get at least $5 per share.