By: Matthew Keevil,
27-02-2015
IT’S pretty evident to industry observers that producer Nevsun Resources (TSX: NSU; NYSE-MKT: NSU) is sitting on a veritable cash generator at its Bisha copper-gold operation, 150 km west of Asmara, Eritrea. The company outperformed its production expectations at the mine in 2014, lowered cash costs and holds a strong balance sheet.
Nevsun also offers promising returns at the drill bit, with Bisha’s current reserve life surpassing estimates in early 2011.
The past year has been one of transition at Bisha, as Nevsun hit commercial production on a copper expansion after commissioning its flotation plant. The original US$250 million build wrapped up in 2010 and set the stage for two years of gold-silver doré production, based on Bisha’s oxide ore material.
By early 2014, the company was putting the finishing touches on a US$110-million plan to boost annual throughput to 2.4 million tonnes, with a focus on supergene ore and producing copper concentrate.
According to Nevsun’s 2014 guidance, copper production at Bisha was expected to range from 180 million to 200 million lb. copper, and the company hit the high end of that estimate when it cranked out 196 million lb. In addition, by-product cash costs were highly competitive at US$1.04 per lb. sold.
“Last year we produced an awful lot of cash, and that’s the result of strong operating margins. From a grade perspective Bisha really exceeded expectations, and we had to manage that carefully by reducing our throughput to ensure we maintained really high recoveries,” CEO Cliff Davis said during an interview.
“We had positive grade reconciliation, and we moved through the supergene part of the deposit a bit earlier than expected. We’re obviously expecting slightly lower grades this year, but our throughput can go higher and our cost structure will remain low on a per unit basis,” he added.
Through the end of the third quarter Nevsun reported net income of US$126.5 million on the back of copper in concentrates production totalling 143.5 million lb. The company reported US$442 million in cash at press time, and that’s especially impressive considering it’s essentially debt free.
Nevsun is expecting more of the same from Bisha in 2015. The mine is slated to produce between 160 million and 175 million lb. copper in concentrate this year at by-product cash costs ranging from US$1.20 to US$1.40 per lb.
Davis says the company also intends to monetize stockpiled material during the year.
Stockpiles include 6,500 tonnes of precious metals concentrate containing 7,000 oz. gold, with high silver content. Nevsun has mined and stockpiled another 130,000 tonnes of oxide ore at over 5 grams gold per tonne containing over 20,000 oz., and nearly 400,000 tonnes of pyrite sand ore with an estimated 60,000 oz. gold, plus silver content.
Nevsun has a lot of value-creation options at Bisha, including a US$89-million zinc circuit expansion. Bisha’s global probable reserves include 19.6 million tonnes grading 5.5% zinc, while indicated resources add 34.6 million tonnes averaging 4.5% zinc.
The Bisha Main deposit is a high-grade volcanogenic massive sulphide (VMS) deposit. It is configured in three layered zones, including: a 35-metre-thick surface gold-silver oxide zone, a copper-enriched supergene zone and a primary sulphide zinc-copper zone that is open at depth.
“Although the zinc plan is in its early stage, we’ve committed a large part of the capital expenditures. Our strategy there is to alleviate the price risk by getting a lot committed early,” Davis commented, noting that Nevsun has invested US$50 million in the project to date.
“It’s a strategy we used in both our gold and copper stages, and so far it has turned out well. We’re ahead of schedule and under budget, even though it’s early on. It should be up and running in the first half of next year,” he continued.
To highlight Bisha’s promising future, Nevsun completed a 27,000-metre drill program in 2014 that led to a discovery at its Aderat target and a high-grade depth extension at the previously mined Harena open pit. In early February the company unveiled an updated estimate that nearly doubles Harena’s indicated resources.
Harena now holds 3.2 million indicated tonnes grading 0.8% copper, 3.8% zinc, 0.5 gram gold and 27 grams silver. Assuming Bisha’s current operating metrics, the new resource could add four years to the mine’s operating life, which sits at 11 years.
Meanwhile, a regional exploration program at Aderat focused on a geophysical anomaly that runs over a 500-metre strike length. The company reported that hole 10 returned anomalous intervals of highly altered felsic volcanic rock, with elevated copper and zinc values. The results confirm that a base-metal enriched alteration zone is associated with the mineralization.
Follow-up hole 11 cut 10.3 metres averaging 1.4% copper, 7.8% zinc, 1.12 grams gold and 25.5 grams silver from 266 metres down hole.
“I’d say it was a huge success on the exploration front. Essentially we restarted our programs at Bisha, and had nine very good months of drilling. The drill results were so strong that we’re continuing our efforts at the target, and results remain positive,” Davis said.
“We’re also drilling other targets in the neighborhood, and heading back towards the Mogoraib River licence. What the market needs to understand is that it appears we’re looking at another Flin Flon or Noranda VMS district, all under a single company,” he said.
Another $10 million in exploration investment is planned for 2015, with objectives including: expanding and upgrading the resource at Harena through drilling and down-hole geophysics; drilling high-priority targets at depth and on strike from Bisha Main; and high-priority greenfield targets at Mogoraib River.
Davis added that the “easy picking” open-pit opportunities at VMS deposits typically come early in a mine’s life, while the operations tend to go underground later in the cycle. Nevsun is undertaking engineering studies on potential underground mining at Harena, as well as an underground extension at Bisha Main.
“It’s important to remember that we started at Bisha four years ago with a ten-year mine life, and we’re now looking at eleven years. Our reserve life has actually increased over that period, and we believe that can continue on for decades. We’ll be using the same technique we used at Harena to go back and look at down-hole geophysics for those opportunities at Bisha Main,” Davis said.
And while it might seem like Nevsun has its hands full at Bisha, Davis hints that management has been hunting for growth through mergers and acquisitions. He commented that the company is “very involved” with due diligence on a number of opportunities in the copper-gold space across Africa, Europe and the Americas.
The one caveat to Nevsun’s success include the overarching socio-political issues of operating in Eritrea. The company holds a 60% interest in Bisha alongside Eritrean National Mining Co., and has faced media scrutiny over claims of forced labour and poor working conditions.
Davis responds that the company takes social issues “very seriously,” and points to annual audits and reports.
“The project is really significant to the country,” he commented. “The government appears to understand that the industry is an important part of the future, and treat it very diligently.”
Nevsun has traded within a 52-week window of $3.59 to $5.30, and closed at $4.51 per share at press time. The company has 200 million shares outstanding for a $901-million market capitalization.
Investment bank TD Securities has a “buy” recommendation on Nevsun along with a $5.25-per-share price target, and noted in January that it models 2015 production of 172 million lb. copper at by-product cash costs of US$1.20 per lb. However, TD has a “high” risk rating on the company.
“We believe that Nevsun is well capitalized to complete the construction of the zinc circuit at Bisha in early 2016, while funding its organic pipeline of exploration targets. In our view, the company’s strong cash position also offers significant downside protection and the potential for accretive [mergers and acquisition] opportunities in the current market environment,” analysts Greg Barnes and Craig Hutchinson write in a note.