http://seekingalpha.com/article/2874626-nevsun-resources-substantial-upside-in-eritrea-with-a-huge-margin-of-safety?page=2
Matt Geiger, MJG Capita
Nevsun Resources: Substantial Upside In Eritrea With A Huge Margin Of Safety
Feb. 2, 2015 11:39 AM ET | About: Nevsun Resources Ltd.
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Disclosure: The author is long NSU. (More...)
Summary
Bisha is one of the most profitable base metal mines in the world.
~$520M in working cap compared to a mkt cap of ~$660M.
Management expertise in Eritrea provides additional opportunities for
value creation.
Nevsun Resources (NYSEMKT:NSU) is a mining company with both a
producing mine and exploration interests, all in the country of
Eritrea. At its current valuation, Nevsun shares present significant
potential upside with a large margin of safety - characteristics seen
in classic value investments. Nevsun is exceptional for three
principal reasons: (1) it operates the Bisha Mine, one of the most
profitable base metal mines in the world, (2) it has significant
working capital, particularly compared to its current market cap, and
(3) it is the only company actively exploring Eritrea, an extremely
promising jurisdiction for future mineral discoveries. My partnership
has held NSU since February 2013, with an average cost of $3.58 per
share. As of January 15th, Nevsun was trading at $3.50.
In this Featured Investment piece, I start by providing the investment
theses for copper and zinc. While the Bisha Mine contains economic
quantities of four different metals (copper, zinc, gold, silver),
these two metals produce the vast majority of Bisha's revenues for at
least the next ten years. Additionally, copper and zinc are the
primary metals being drilled in Nevsun's exploration activities
(particularly at the Harena license).
I next profile the African country of Eritrea - the sole jurisdiction
in which NSU operates (though the company does have its corporate
offices in Vancouver). The stability of Eritrea both geopolitically
and as a viable mining destination is essential to the success of this
investment.
I conclude with my investment thesis for Nevsun, covering the
company's background, management team, current operations, and
ultimate upside as an investment. I then comment on Nevsun's Margin of
Safety - with a particular focus on the company's abnormally high
working capital to market capitalization ratio.
Copper
Copper is one of the world's most widely used industrial metals,
valued for its conductivity and malleability. Copper has hundreds of
use cases, including: electrical power cables, data cables, electrical
equipment, automobile radiators, cooling and refrigeration tubing,
heat exchangers, artillery shellcasings, small arms ammunition, water
pipes, and jewelry.
While copper is a key component of many high-tech applications, for
simplicity's sake I think of copper as an "infrastructure metal". This
means that if a building is being constructed, new electricity access
is being provided, or new water infrastructure is being installed, you
can be sure that a significant amount of copper is being used.
The below chart (courtesy of BHP Billiton) views copper consumption in
terms of GDP per capita. You'll notice that copper consumption per
capita increases exponentially in developing nations, before leveling
off when GDP per capita reaches between $20,000 and $30,000. (Note
that neither China nor India is remotely close to this threshold).
According to Rick Mills, "One billion people will enter the global
consuming class by 2025. That's 83 million people per year. Demand is
not going to go down. China will have to increase its average urban
per-capita copper stock by seven or eight times just to achieve the
same level of services we in the West enjoy." Demand is growing
exponentially and, even if emerging economies only grow modestly in
the coming decades, this is mathematically set to continue. Further
confidence in future copper demand projections stems from the low
substitutability of the metal. The International Copper Association
states that "substitution has accounted for losses of about 2 percent
a year in copper usage globally over the past three years". For some
perspective, Chinese copper demand has grown 15% per year since 2000.
Received on Tue Feb 03 2015 - 21:03:50 EST