By Value Sniper,
NEVSUN Resource (NYSEMKT:NSU) is operator of the Bisha mine. It is one of the highest grade open pit copper mines in the world. The Bisha mine is located in Eritrea.
Due to its high grade, it has one of the lowest operating cash cost in the entire industry. In fact, the mine produces 196 million pounds of copper at a cash cost of only $1.05. Based on the current price of $2.8, it is possible to calculate a profit margin of almost 63%. Clearly, Nevsun will continue to stay largely profitable even if the copper price continue its downtrend.
With this incredible margin, the company has a trailing twelve months earnings per share of $0.47. It is important to mention that the firm pays a dividend of $0.16 per year. It represents an annual yield of 4.4%.
Moreover, based on the actual share price of $4.52, it is possible to calculate a price to earning ratio of only 9.6. The majority of the copper miners are currently underwater. So, it is really interesting to see this low price to earning despite the current conditions. Briefly, with the incredible margin and the quality of its deposit, Nevsun Resources is clearly a cash cow.
Furthermore, the company has a top notch balance sheet. With current assets of $677 million and current liabilities of $73 million, the firm has a working capital of $604 million. Likewise, it has a huge current ratio of 9. It is also extremely interesting to calculate the net current asset value of the firm. This metric is calculated by subtracting total liabilities form current assets.
With total liabilities of $360 million, Nevsun has a net current asset value of $317 million. Based on a market capitalization of $900, it is possible to conclude that the firm is truly undervalued. I want to mention that the current assets are mainly composed of cash and cash equivalent. In fact, the corporation has $514 million in cash.
Few months ago, the firm revealed that it recently received inquiries from various parties about a potential takeover transaction. At the same time, Bloomberg reported that a Qatar equity fund called QKR Corp was eying a US$1 billion bid. With more than $500 million in cash, the potential takeover would largely pay for itself. Due to the downtrend in the commodity prices, the industry is clearly in a consolidation process. On the other hand, absolutely no official offer came along.
Finally, the company has a huge upside potential with the zinc expansion project. In 2016, the flotation capacity will be expanded to produce zinc concentrates. A supply deficit in the zinc market is expected as soon as 2016. It is mainly due to the closure of large zinc mines. This factor will reduce the supply by approximately 10%.
The following statement from an analyst is particularly interesting:
“Momentum is building in the zinc market during 2015 as stocks of the metal decease and the space is further impacted by major mine closures and limited supply from new mines.“
Based on the London Metal Exchange warehouse, the inventory is near of its 5 years low. Clearly, Nevsun Resources is well positioned to enjoy a future rally in the zinc price. In my opinion, it is an important catalyst for the stock price in the medium term.
In conclusion, Nevsun Resource has exceptional profit margin. The firm generates $94 million in net profit in 2014. It is an incredible number based on the slump in the copper prices. With its wonderful balance sheet, the firm seem to have a lot of growth opportunity. Moreover, the takeover thesis is not wacky at all.
Finally, the firm is well positioned to capitalize on the possible rally in the zinc prices. On the other hand, it is important to do your own due diligence before buying the stock. Please consult your financial advisor before taking any decision.