http://finance.yahoo.com/news/miner-lots-cash-profitable-mine-154700854.html
A Miner With Lots of Cash, A Profitable Mine, and a Healthy Dividend. Really
11 hours ago
VANCOUVER, BC / ACCESSWIRE / October 5, 2015 / With almost $600
million in the bank, NSU has cash to back 80% of its share price. And
it pays a dividend. And it's expanding its profitable mine. Investors
are taking note: Nevsun has outperformed the S&P/TSX Capped
Diversified Metals & Mining Index by 40% since June.
The big resource picture is still unclear. No one knows what will turn
mining around or when it will happen.
With so much uncertainty, it is easy to hesitate. Why buy now?
That rationale makes sense - for most mining stocks. But a select few
offer reason to act now.
The company I am thinking of has almost $600 million in the bank. That
treasury backs up 80% of their market cap. Think about that: the
company has 80¢ in the bank backing each dollar invested.
The other 20¢ acknowledges the company's asset: an operating mine
producing 150 million lbs. copper annually that reliably generates
millions of dollars of net profits every quarter (that's where the
near-$600 million came from) and where a nearly complete expansion is
set to transition the mine to zinc over the coming years, just as a
global zinc deficit is expected to hit.
Oh, and you get paid to own the stock. A dividend yield of 5.6% makes
the company one of the top yielding dividend stocks amongst all
resource players.
The company is Nevsun Resources (NSU.TO). The mine is Bisha, one of
the best performing mines in the world.
Nevsun's strengths are showing during these recent days of resource
chaos. Base metal prices have been falling: zinc is down 40% in five
month, lead is down 23% in the same time, and copper had lost 22%
before regaining some ground in September.
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With prices dragging, base metal miners have been hammered.
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Nevsun has been hit too – but it has outperformed the index by 40%.
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NSU declined in June, July, and August along with metal prices, though
more moderately than its index of peers. When September rolled around
the market must have realized the degree of undervaluation and
investors started to move back in.
The guys at Dundee Capital Markets just put out a note on Nevsun
pointing all of this out. I've been pointing it out for months.
This is a company that is dedicated first and foremost to making money
(a near anomalous characteristic in this sector). Bisha is a very good
operation, producing copper at one of the lowest cost levels in the
business.
Nevsun manages its money with the utmost diligence: the company has
funded two mine expansions out of cash flow while also dividending
$100 million back to investors since 2011 and building a treasury that
is now the envy of the mining world.
The second expansion is the $89-million zinc circuit, which is on time
and on budget. The volcanogenic massive sulphide deposit at Bisha is
layered; it had gold on top, copper-rich supergene material
underneath, and a body of zinc-rich polymetallic mineralization below.
The first iteration of the mine only produced gold, from that upper
layer. In 2011 the mine moved into the copper-rich zone. Next year
Bisha will be tapping to the zinc-rich area, such that zinc will
represent almost half of the mine's payable production by 2018.
But that is not the end of the story. Back in 2005, when it had
outlined enough mineralization to build a mine, Nevsun stepped away
from exploration to focus on building and operating Bisha. That focus
paid off, in the form of a very efficient and profitable mine.
Now, ten years later, the company is returning to exploration – and
its drills are showing that Bisha is no one-trick pony. VMS deposits
often occur in clusters and the Bisha district increasingly looks like
it hosts many deposits. Nevsun has not yet officially outlined new
resources, but exploration results suggest there will be ore to feed
into all three of the circuits at Bisha – the gold, copper, and zinc
facilities – for many years to come.
The overhang with Nevsun is always the "country question." Bisha is in
Eritrea. Eritrea is a little-known country in eastern Africa with an
authoritarian government. Dissent and free speech are not well
tolerated. Money movements are controlled, travel is restricted, and
military service is mandatory.
However, I do not believe the people of Eritrea should be denied the
benefits that flow from resource development because they are
oppressed.
The Nevsun team knows Eritrea very well. I am sure they would increase
freedom in that society if they could. They cannot, but they can
provide hundreds of well-paying jobs and training opportunities and
support local businesses.
The Eritrean government is a partner in Bisha: it was granted a 10%
interest and paid fair value for another 30%. It was not easy for
Nevsun to develop that relationship, but the effort now means
security. The government understands Bisha inside and out, gets
significant financial benefit from the mine in the form of taxes and
cash flow, and has no impetus to change the ownership setup.
There is no perfect place to build a mine. Every jurisdiction has
challenges, be it permitting, social opposition, nationalization risk,
or taxation risk. Eritrea is no exception. For Nevsun the challenges
have been establishing a respectful working relationship with a
little-known government and convincing investors that Eritrea is a
safe place to be.
In terms of the latter, the periodic resurfacing of allegations that
Nevsun used slave labour to build the mine do not help. I have written
about this many times. Because of its partnership with the Eritrean
government, it is possible that Eritreans whom the government had not
released upon completion of their mandatory two years of service were
involved in building Bisha. This is highly unfortunate and
unintentional.
What matters are the steps Nevsun has taken since realizing that might
have occurred. Identity checks and background investigations are now
routine for every person on site. An independent audit crafted a list
of recommendations and NSU has implemented every one. I am positive
that "slavery" is a non-issue at Bisha today, and for many years.
Despite the challenges, Nevsun has proven beyond doubt that Eritrea
works and that Bisha works. Nevsun has one of the cleanest balance
sheets and lowest production costs of any base metal miner. With a
5.6% dividend Nevsun pays its investors more than any other miner. Its
near $600-million war chest backs 80% of its share price and means the
miner can move on acquisition opportunities if desired. I know they
are looking.
Nevsun is part of the markets, so a market correction or crash will
hurt NSU. However, Nevsun's big bank account puts a floor under its
share price. Cash already backs 80% of its market capitalization,
which means the entire Bisha mine is valued at just $160 million.
I know mining stocks have fallen farther than most thought possible
and that has made us wary of guessing just how low things can go. But
when it comes to Nevsun, even the emotional, reactive, and sometimes
illogical market knows Bisha is worth more than that.
That is why Nevsun is one of the very few mining stocks that I
recommend moving on today.
I own others. Some I am holding despite the risk of a correction
because my cost base still makes sense; others I am keeping because
gold's reaction to a crash would limit the hurt and there is
efficiency in holding versus playing the enter-and-exit game. Still
others I plan to buy more of when the correction or crash hits, to
average down.
But for Nevsun, I think odds are good that the bottom is in because a
$600-million stack of cash creates a very strong floor, in this case
beneath a mine that I expect will churn out metals and money for years
to come.
SOURCE: Resource Reports
Received on Mon Oct 05 2015 - 23:13:28 EDT