Nevsun Resources (January 2016 Update)

Development News

By Matt Geiger | for Seeking Alpha,

Nevsun was the Partnership’s featured investment in January 2015. The company remains one of the lowest risk base metal plays available, despite the painful share performance over the trailing 6 months. I met with management in mid-November and remain very positive on this story. We have lowered our average cost per share from $3.55 USD to $3.07 USD since I last wrote about the name.

Over the past 6 months, the company has reported the following milestones of note: (1) positive cash flow in Q3 despite the plunging copper price, (2) continued distribution of NSU’s $0.04 quarterly dividend, and (3) the best results at Harena to date.

Nevsun reported its Q3 results in late October. Despite major weakness in the copper price and the company’s continued zinc expansion (it’s likely that NSU spent at least $10m in sustaining capital expenditures in Q3), the company reported positive free cash flow of $2.8m. While this number pales in comparison to previous results ($19.2m in free cash flow in Q2 2015 for instance), it speaks to the company’s “lowest quartile” opex – thanks to Bisha’s extremely high copper grades. The company reported a head grade of 3.8% copper in Q3, which is one of the highest globally among copper producers.

As expected, Nevsun distributed a total of $0.08 USD to shareholders in H2 2015. The company has now paid a dividend of at least $0.04 for the previous nine quarters. As the company has nearly $500m in working capital and is still making money, I fully expect the company to maintain this dividend for the foreseeable future. At current share prices, NSU is yielding a whopping 7% on an annual basis. I expect non-mining, dividend-focused investors to begin snapping up NSU shares due to this outsized yield.

Nevsun continued to report positive results at its Harena satellite deposit. In early December, the company released its most impressive individual intersection to date – Hole HX-069 yielding 0.79% copper, 4.95% zinc, 0.45 g/t gold, and 14 g/t silver over 115.2m. This massive hit got me excited enough to ask management if Harena could become a standalone operation.

Alas, this will not be the case – instead, this satellite deposit will be used as high grade feed for the existing operations at Bisha. These results confirm that Harena is substantial enough to add years and years to Bisha’s mine life.

Looking forward to 2016, I’m expecting two major events. The first is the commissioning of Nevsun’s zinc circuit by the end of Q2 2016. Once the operation gets going at full capacity, just over half of Bisha’s cash flow will come from zinc production. This will be a major milestone for the company as the expansion is an $80m project that has spanned over the past two years.

The second event involves Nevsun’s treasure trove of $430m in cash. While there is no hard deadline for the company, I fully expect one of the following two outcomes in the next 12 months – (1) an opportunistic acquisition of a low-cost copper operation to complement Bisha or (2) the distribution of a large special dividend. Either of these events would be a welcome development for shareholders, as it’s time for the company to put this outsized cash position to work in one form or another.

Nevsun has very minimal downside at current share prices. Sure enough, the company’s market capitalization of ~$485m USD is now below its working capital balance of $489m (last reported in October 2015)!

This means that you get Bisha, Harena, and management’s operational expertise in Eritrea all for free. It is clear that this stock is drastically mispriced, as Bisha is a fantastic asset that will continue to generate free cash flow even with depressed metal prices. Nevsun remains one of the best value investments currently available in the mining space.