Nevsun Resources: short-term outlook questionable, long-term outlook positive
Aug. 11, 2017 8:10 AM ET|71 comments| About: Nevsun Resources Ltd. (NSU)
Long only, commodities, research analyst
The life of the Bisha mine was cut to 4 years.
The Timok PFS was delayed by 2 quarters.
There were some negative changes in the production and cost guidance.
Nevsun's share price has collapsed.
Despite the bad news, the long term potential is still huge.
The share price of Nevsun Resources (NSU) declined by more than 20% early after the market opened on Thursday, as the company announced several negative news items. This time, the negative news was related not only to the Bisha mine that has issues with its recoveries since the start-up of mining of the primary ore. The company has also announced that the Timok pre-feasibility study (PFS) will be delayed by 2 quarters.
According to Peter Kukielski, the new CEO of Nevsun Resources:
To ensure we properly evaluate optimization opportunities and increase the level of front end engineering at Timok, we will now complete the Preliminary Feasibility Study ("PFS") in Q1 2018. We will provide the market with an interim update via an updated Preliminary Economic Assessment ("PEA") in October 2017.
This news is a huge surprise, as the results of the PFS were expected to be released next month. According to the CEO:
We have started introducing more of a project management focus on the project now as opposed to the prior focus which was more definition of the ore body. So we are putting a team into place that is able now to focus on the project management aspects of the project as opposed to the early stage economic assessments. We have put a project controls manager into place.
It is hard to tell whether the delay is a good or a bad signal. Right now, I see three most probable explanations:
The company has identified some major issues that will damage the economics of the project by pushing the CAPEX or AISC higher, or by pushing the production volumes lower. The PFS was postponed in order to buy some more time for finding a solution.
The company has identified some opportunities to improve the economics of the project, but it will take more time, as some parts of the PFS must be changed. The aim of the updated PEA is to mitigate the damages caused by the PFS delay.
There were no major issues or opportunities identified. The management decided to prepare the PFS more precisely so that it can be used as a guide during the early phases of mine development that is expected to start in Q4.
The situation should get a little clearer in October after the updated PEA is released. For now, the management claims that the Timok mine decline development should start in Q4 and that the production is still scheduled for 2021, as the additional time spent on the PFS should lead to shortening of the time needed to complete the FS.
Other negative news is related to the Bisha mine. Only last month, Nevsun reported some improvements in the Bisha operations. However, the things are still worse than expected and the company had to revise its 2017 production guidance. The zinc production guidance was lowered from 200-230,000 lb to 190-210,000 lb or by 7%, while the copper production guidance was risen from 10-20,000 lb to 20-30 million lb or by 66%. The zinc cash cost guidance remained unchanged at $0.7-0.9 but the copper cash cost guidance has worsened notably. It was revised from $0.9-1.1 to $1.55-1.75.
What is even worse, Nevsun has also revised the Bisha mine reserves and mining plan. The management has decided to mine a smaller pit at Bisha. It should lead to some CAPEX cost savings, however, the mine life has decreased by 50%, from 8 years to 4 years. It indicates that the management is not sure whether the metallurgical issues at the Bisha mine can be fully solved. As a result, they decided to cut the capital expenditures, as the saved resources should be more efficiently used at Timok. However, it is possible to speculate, that if the issues are solved sufficiently, or if the copper and zinc prices increase notably, the mine plan could be revised again. Moreover, according to the conference call, the management believes that some of the resources close to the Bisha mine facilities could be converted into reserves and extracted.
The actual Q2 financial results were a little lost in the flood of negative news. Nevsun recorded revenues of $66.1 million, which is 7.7% less than in Q1 2017. The net loss climbed to $70.2 million, compared to net income of $2.9 million recorded in Q1. The loss was caused by a $70 million non-cash write-down of long term stockpiles and mobile equipment. Without this item, Nevsun would record net earnings of $0.2 million. The company ended Q2 with cash & cash equivalents worth $171 million and no debt.
On Thursday, shortly after the markets opened, the share price declined by more than $0.6, hitting a new 7-year low at $2. Shares of the copper-zinc miner are down by more than 30% year-to-date. The market value of the company declined to $640 million and the enterprise value to $470 million. Although the news was disappointing and several important questions have arisen, the company became even more undervalued. The world-class Timok Upper Zone deposit is worth more than the current enterprise value, not to talk about the Timok Lower Zone, the exploration potential in Serbia, the exploration potential in Eritrea and the Bisha mine alone. The series of negative news has damaged the share price notably over the last quarters. However, the potential is still huge and although it may take some time, it will get realized. Although my investment in Nevsun Resources is deep in red numbers, I have no intention to sell my shares. Quite the contrary, I will consider adding to my position, should the share price dip below $2.
Disclosure: I am/we are long NSU.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.