Can Uncertainty Over Sovereign Risk Create a Buying Opportunity for Nevsun Resources?

Development News
Eritrea is a mysterious economic zone
“Eritrea is a mysterious economic zone but companies operating in the country are simply overlooked by the market. Almost all reports on sovereign risk label it a “no go.” But what we found out is that idea is a bit exaggerated. That is why frontier markets like Nevsun are there to take full advantage of the growth” – Nicholas Bhandari, Head of Quantitative Research at

By Joel Anderson |,

The research team looked into Nevsun Resources (NSU) with its most recent research report. The Canadian resource company, which is active in Eritrea, presented an intriguing challenge in terms of valuation, so we talked with Nicholas Bhandari, Head of Quantitative Research at, about the approach they took in digging into this mining company.

You can download the entire research report in the research section at

EQ: So with Nevsun Resources, you’ve delved into new territory a bit in trying to assess the risk associated with operating a mine in a country with uncertain political and economic futures. How did you approach this challenge, as your other reports to this point haven’t included this sort of risk? 

Nicholas Bhandari: It did require a bit of a different strategy. We take sovereign risk for granted a bit in the United States – the standard by which all else are judged when it comes to the idea of a “risk free environment.” But smaller frontier markets can offer tremendous opportunities if you research them enough.

We started by going over the history of Eritrea. I even spoke with a friend that had traveled there for an extended period of time. Since there wasn’t a tremendous amount of data about risk premiums, we had to then estimate a few in order to calculate a proper discount rate for the earnings. Lastly, we went over the government and political environment, with special focus being given to currency policy and defense spending. Ultimately, we came to the conclusion that the risks the country bears are palatable enough for the right kind of investor.

EQ: Another important factor was exposure to commodities risks, particularly in the copper and zinc markets. What’s your approach to valuing firms like mining companies where there’s a lot of capex, and then a lot of exposure to something as unpredictable as commodities prices?

Nicholas Bhandari: The structure is a bit different, but the ideology is the same. Mines require a tremendous amount of initial investment in the expectation that they will provide a continuous cash flow for the life of the property. Once the mine is up and running, this can be valued using traditional cash flow analysis. Determining the discount rate is a little tricky and should be done on an asset to asset basis, unlike more traditional valuations, but the logic is the same. Since we had a few exploration properties though, we did need to adjust our strategy a bit. We ended up using a form of comparable analysis for the properties that weren’t yet producing. Since all the prospective mines are in the same area, we could make general assumptions that we wouldn’t be able to make in other situations.

As for the commodity exposure, we were careful to pick companies that had exposure to minerals we were bullish on. Both zinc and copper are industrial materials, so they should follow the economic cycle more closely than a precious metal. In addition, copper is widely used in renewable energy due to its conductivity. Overall, a bit of volatility was taken into account during our simulations, but commodity prices were treated like any other exogenous variables.

EQ: So, why do you think retail investors should be interested in this report?

Nicholas Bhandari: A company operating in a country like Eritrea would be ignored in most situations. It is a mysterious economic zone, and almost all reports on sovereign risk label it a “no go.” We dug in and found that idea to be a bit exaggerated.

Eritrea is a new country with a checkered past. Although they still have severe restrictions on human freedom and the press, they are very interested in economic development. In addition, Nevsun really understands the environment they’re working in and are the most likely to take advantage of the growth there. A company like Nevsun is why we have research on– it provides an opportunity that has simply been overlooked by the market.