Nevsun Resources: Significantly Undervalued Mining Corporation

Nevsun Resources continues to generate significant cash flow while exploring its Timok Project,
Nevsun has had an incredibly difficult time over the past year. Despite this, the company continues to generate significant cash flow while exploring its Timok Project, which has significant growth potential. The project’s indicated resources alone have the potential to provide Nevsun Resources with a more than doubling in annual profits.

BY THE VALUE PORTFOLIO | SEEKING ALPHA

Nevsun Resources (NYSEMKT: NSU) is a mining company with a market cap of $0.7 billion that has had a difficult time recently. However, as we will see throughout this article, strong market fundamentals, along with the company’s impressive distribution of assets and growth potential from its Timok Project, make the company a strong investment at the present time.

Copper and Zinc Market Overview

Copper and zinc markets have both had an incredibly difficult time since the start of the commodity crisis in 2011.

Copper prices dropped from a peak of more than $4 per pound in 2011 to less than $2 per pound at year-end 2015. However, starting in late-2016, the market’s copper price began to recover to present prices of more than $2.5 per pound.



Given that a significant portion of Nevsun Resources’ income comes from the 10-20 million pounds of annual copper it produces at roughly $1 per pound, a 50% increase in copper prices means an additional $7.5 million in profits annually, a lot for $0.7 billion company.

On top of that, scrap, or recycled copper, a major source of new production, has decreased in 1Q 2017. This can be attributed to more efficient copper usage in modern electronics which is harder to recycle and reuse. This, combined with continued strong demand in China and increasing demand in Europe / North America, means that prices should continue to recover.

This recovery in copper prices will continue to support Nevsun Resources’ profits.

Along with a recovery in copper markets, the zinc markets have begun to tighten which has supported prices recently. Zinc prices also have been increasing rapidly from less than $1 per pound to more than $1.2 per pound recently as the markets have tightened.

Given that Nevsun Resources anticipates 2017 production of 200 – 230 million pounds of Zinc, that should provide an additional $40 million or so of revenue for Nevsun Resources.

More importantly, both copper and zinc prices can be expected to continue increasing. Copper prices can be expected to continue increasing as a result of continued modest demand growth and the depletion of existing mines. Zinc demand is anticipated to continue increasing rapidly over the past decade while existing production and approved projects are declining. That means that there is a substantial zinc supply gap. That should support zinc prices and Nevsun Resources’ long-term profits.

As we can see, zinc and copper markets remain strong and should support the long-term profits of Nevsun Resources.

Nevsun Resources’ Impressive Asset Distribution

Now that we have discussed the zinc and the copper markets, it is now time to continue discussing Nevsun Resources’ impressive distribution of assets, the next part of my thesis for Nevsun Resources.

Nevsun Resources has deployed $0.42 billion in capital on its only asset that is currently producing, the Bisha Mine. The company has developed the Bisha Mine on-time and under-budget over three phases with the most recent being the company’s recent Zinc plan. That has allowed this mine to generate an astounding $1 billion in cash over six years, incredibly impressive for a $0.7 billion company.

Now that the development phase is over, the profits from the Bisha Mine should begin to increasingly reward Nevsun Resources’ shareholders.

More importantly, Nevsun Resources has consistently increased resources in the Bisha Mine. Resources in this region have increased from 2010, with the feasibility study, by more than 125% to December 2016. This more than doubling of resources, on top of production from the mine, means that Nevsun Resources Bisha Mine should continue producing for much longer than its mine life without costing it additional capital. This should help long-term profits.

Nevsun Resources’ Timok Project Growth Potential

We have discussed the impressive market fundamentals along with Nevsun Resources’ impressive asset potential through the Bisha Mine. We will now continue by discussing Nevsun Resources’ new Timok Project and its growth potential.

Nevsun Resources originally acquired the Timok Project by acquiring Reservoir Minerals roughly a year ago. The acquisition, which cost Nevsun Resources several hundred million dollars, was dismissed by some at first as being too expensive. However, despite the cost, Nevsun Resources got a significant asset with the Timok Project that has the chance to generate the company significant long-term cash flow.



For starters, the Timok Project is centered in Serbia, a country that will provide Nevsun Resources with strong federal support. Serbia is committed to increasing the GDP contribution of mining from 2% to 5% by 2020, and this will require new projects. The company’s low 15% corporate tax rate and inexpensive energy costs along with its relative stability show the strong fundamental location of the Timok Project.

The Timok Project Upper Zone is the second-highest grade copper project behind Black Butte. The Upper Zone is made out of a semi massive sulphide deposition with 35 million tons of resources at 2.9% copper and 1.7 grams / ton gold along with a further 1.7 million tons of resources at 13.5% copper and 10.4 grams / ton gold. These resources have a NPV of $1.5 billion and a 12-year mine life from when production starts in mid 2021.

That means that once production starts, Nevsun Resources will be producing roughly 140 kilotons of resources at 13.5% copper and 10.4 grams / ton gold. That means that this production, from the company’s indicated resources alone, should provide the company with $153 million in annual revenue. Assuming a 50% profit margin, similar to Nevsun Resources’ profit margin at the Bisha Mine, that would mean more than $75 million in annual profits.

That means the company’s profits alone, from just the Timok Project, in four years, should give the company an incredibly low P/E ratio of 10. That does not count any continued earnings from the Bisha Mine, the Timok Project Lower Zone, nor any success with the inferred resources. Not bad, in terms of profits, for holding onto the company’s stock for a few years.

The Timok Project also has the massive Lower Zone which Freeport-McMoRan (NYSE: FCX) has a 54% stake in after the completion of the Upper Zone feasibility study. The Lower Zone is a zone several times the size of the massive Upper Zone with extensive copper-gold mineralization and the potential to be a world scale project.

Nevsun Resources is undergoing $20 million of drilling in early 2018 to further investigate mineralization. I will update you guys with the results of this drilling which should provide a much better estimate of the value of these assets of Nevsun Resources.

Conclusion

Nevsun Resources has had a difficult time over the past year. We have watched the company’s stock price drop from a high of more than $3.5 per share to present prices of less than $2.5 per share. The company cut its dividend to save cash for drilling and spent a significant portion of its capital strength and diluted its share count to acquire Reservoir Minerals.

Despite this, for three key reasons, I still feel that Nevsun Resources is an impressive investment at the present time.

First, the commodities market crashed heavily after 2011. However, the market is well on its way to recovery, and growing demand, especially for copper, should help this recovery to continue.

Second, Nevsun Resources’ impressive Bisha Mine has been the source of significant production that is likely to continue. This will provide a strong basis for Nevsun Resources’ profits.

Lastly, Nevsun Resources’ new Timok Project has incredibly impressive resources. This should provide the company with long-term growth in cash flow and enable it to grow its dividends significantly.

As a result of these three reasons, I recommend investors purchase Nevsun Resources stock immediately with the intention of holding it until 2020 onwards.