Shift In Nevsun Resources (USA) (NSU) Commodity Could Mean Opportunity
By <
http://www.insidermonkey.com/blog/author/motleyfool/> The Motley Fool
in <
http://www.insidermonkey.com/blog/category/news/> News
Published: February 13, 2013 at 2:59 pm
Nevsun Resources (USA) (NYSEMKT:
<
http://www.insidermonkey.com/insider-trading/company/nevsun+resources+ltd/9
19991/> NSU) is going through a transition and investors with patience could
benefit. NSU will shift from gold production to copper production in
mid-2013 which is a headwind for earnings and cash flow. That said, the
copper rich ore body should lead to strong free cash flow and earnings in
2014.
Nevsun Resources
Nevsun Resources is the operator of its 60% owned Bisha Mine located in
Eritrea, East Africa. The open pit mine is unique in that it will produce
high grades of copper, gold and silver at different points in its life
cycle. The Eritrean government purchased a 30% interest in the mine in
addition to its 10% carried interest. Nevsun has a strong balance sheet and
did not use debt or hedge any production contracts to finance the
development of the mine. Earnings benefit since metal prices are currently
at relatively high levels. The firm pays a $0.05 semi-annual dividend, a
2.4% yield. Also noteworthy, Nevsun is an industry leader in FCF yield and
EBITDA margin.
The shift from gold to copper production requires a $125 million investment
80% of which has been spent. The project is within budget and expects to
start on schedule. In 2012, Bisha produced 313,000 oz of gold; management
issued a 2013 forecast of 80-90Koz. of gold and 60-80Mlbs of copper. The
decline in gold is the result of a mid-year shift to copper production.
Management has exceeded production forecasts before, most recently in 2012.
Copper and Zinc Fundamentals
For the next three years, copper will account for a majority of production
at Bisha and drive earnings and cash flows for the firm. The global supply
of copper remains tight driven largely by increasing Chinese demand. In
addition, demand levels could increase further if the recovery in US housing
continues. Analysts have modeled copper prices in the $3.50-$4.00 range
over the next few years for Nevsun, but are often using a $2.50-$2.75
estimate over the long-term. Supply disruptions and stronger demand due to
a recovery in US housing and eventually in Europe could push prices higher.
This would translate directly to earnings and cash flows for NSU and upside
to current earnings and cash flow estimates that use the previously noted
ranges.
Zinc will come into focus in 2015 for NSU when it will ramp up its
production. The bull case for zinc assumes the surplus in zinc will
decrease behind depleted mines over the next 2-3 years. Analysts estimate
zinc production will contract by 10% through 2016 due to depletion at mines.
NSU is positioned to take advantage.
Nevsun Risks
There are a few risks for NSU. The first is the transition to copper and
then zinc production does not go smoothly. Second, the global economy and
supply/demand dynamic could get worse hurting the net asset value for NSU.
Last, NSU owns and operates one mine in one African country so geopolitical
risk is much higher than at a mine like Escondida, majority owned by Rio
Tinto (RIO) and BHP Billiton (BHP) located in Chile and Argentina.
Look to Other Miners for Market Knowledge
Nevsun is a bit different versus other miners since it has one mine that
produces three minerals but at different points in time. Comparison to
gold miners such as Barrick Bold Corp (ABX) or smaller producers like Banro
Corp (BAA) are no longer a good fit given the shift to copper, followed by
the shift to zinc production. Freeport-McMoRan Copper & Gold Inc. (NYSE:
<
http://www.insidermonkey.com/insider-trading/company/freeport+mcmoran+coppe
r+%26+gold+inc/831259/> FCX) and Southern Copper Corp (NYSE:
<
http://www.insidermonkey.com/insider-trading/company/southern+copper+corp/1
001838/> SCCO) both are both copper producers and act as a good gauge for
that market. FCX has a lower PE at 7.4, but return on assets of 10.6 versus
NSU's 44%. SCCO is in the middle of the two with a PE of 14.4 and an ROA of
23%. In terms of market cap, FCX and SCCO are much larger each valued
around $ 34 billion.
Conclusion
Nevsun and mining companies with few assets and no acquisitions trade off of
estimate net asset value (NAV) discounted for the risk level and time.
Nevsun has cash and equivalents of $1.83 per share and the remainder of the
valuation is the value of the assets. If prices of copper, gold, or zinc
push higher or cash mining cost is lower than expected, the value of Nevsun
increases. Buying the shares at this point assumes management can execute
on the production shift in 2013 and increases efficiency at the mine.
The article
<
http://www.fool.com/news/xt/themotleyfoolblognetwork/beta.fool.com/mthiesse
n/2013/02/12/shift-commodity-could-mean-opportunity/24247/.aspx> Shift In
Commodity Could Mean Opportunity originally appeared on Fool.com and is
written by Mike Thiessen.
Received on Wed Feb 13 2013 - 15:47:19 EST
