http://seekingalpha.com/article/363761-2-mining-companies-with-operations-in-eritrea-are-undervalued
2 Mining Companies With Operations In Eritrea Are Undervalued
February 14, 2012
Part of my strategy for investing in the coming boom in mining/resource
stocks is to focus on areas that I believe will be particularly prosperous.
Such areas are characterized by favorable geology (i.e. an abundance of
valuable minerals, and faults in the earth that make mineral extraction
cost-efficient) sufficient infrastructure (roads, power plants), and a
jurisdiction that is sufficiently pro-mining and with enough geopolitical
allies to allow for opportunities via imports and exports. Ideally, we also
want to see a sufficiently developed value network that allows for
specialization -- whereby some companies can focus on drilling, others on
the prospector model, setting the stage for M&A opportunities.
>From this perspective, I believe Eritrea is increasingly well-positioned.
And when we consider that Eritrea is still not on the map and disliked,
irrationally in my opinion, by many investors because of UN sanctions, I
think the story becomes even more compelling -- and thus one I plan to
invest in and incorporate in my portfolio.
To understand the opportunity in Eritrea, I'd like to focus on the two
publicly listed companies operating primarily out of there at the moment:
Nevsun Resources (NSU) and Sunridge Gold (SGCNF.PK).
I've already blogged about Nevsun Resources before, although that was
before its recent 30%+ sell-off (which still may be underway, as we have
not had a upday since the sell-off started). I view Nevsun as a success
story that is breaking the market open; they are already in production,
complete with positive earnings and dividends. They did have to revise
their production estimates down by 50% this year, which some analysts
regard as an unforgivable error and one that will cast doubts on the
company's ability in the future.
While I agree this is a rather large mistake, I don't think it changes what
we've seen out of the Bisha mine, which has been Nevsun's main focus, thus
far. It has historically yielded very low cash cost per ounce and is a mine
with multiple layers of mineralization that suggest the best is yet to
come. The most critical thing I can say about downward revision is that the
future of the mine seems more about base metals, rather than gold -- and so
this downward revision in gold production is especially unfortunate for
those who are focused on gold and are not interested in base metals. I
sympathize largely with that perspective and have a strong bias towards
operations that are focused on gold, although I do believe that base metals
and all "stuff in the ground" in general are in secular bull markets where
the best is yet to come.
Moreover, while I previously found Nevsun to be a bit overpriced prior to
its sell-off, I think it's a great buy now -- and will get better if prices
fall. Its P/E ratio is below 9 at the time of this writing, and moreover,
the company has announced it will most likely not cut dividends in spite of
the downward production revision. I believe this is an attempt to retain
shareholder trust and allay fears that they will have cash problems, and if
they live up to the promise and keep dividends intact, I think it is a
smart move that will reward shareholders in the long run.
Now let's move on to another emerging player in Eritrea, one that I believe
will benefit from the work that Nevsun has done in helping to open up the
market: Sunridge Gold Corp. Sunridge has some projects in the works that I
think will be especially favorable low-cost opportunities. Specifically,
there is a DSO Zone in the firm's Debarwa Deposit that yields gold, copper,
and zinc. DSO is an acronym for "direct shipping ore", and it means the ore
can be shipped directly to smelter. For shareholders, this means revenue
comes in faster at a lower cost.
The resource estimate on Debarwa suggests 180,000 ounces of gold at 3.0
grams per tonne, as well as 200 million ounces of copper. In terms of
price, it's currently trading at 0.60 with a 52 week range of 0.30 - 1.32.
About 75% of shares are outstanding. The company had 14 million in the bank
as of October and its market cap is about 70 million. The company also has
members of B2Gold and Lundin Mining as members of its board of directors. I
recommend checking out the investor presentation for those looking for a
deeper look, but at this point, I like what I see very much, and think
Sunridge is well-positioned to be an acquisition target.
Of course, there is one main reason why I believe both these stocks are
underpriced: They're in Eritrea. As noted earlier in this article, the
country has been sanctioned by the UN, and so there is fear that it is
economically cut off from the world at large. But, I believe these fears
are unfounded; China is a major supporter of Eritrea, and so I think from a
geopolitical perspective, Eritrea is part of the value network that China
runs. As I've noted numerous times in my Seeking Alpha articles, I believe
China is the smart money of the global economy at large, and particularly
the resource sector; it is China who corners 97% of rare earth production,
who is aggressively buying gold, who is striking uranium import deals with
Canada, farmland in Africa, and basically playing the resource game to the
max. Accordingly, it is particularly important to note the following:
1. The current Eriterian president, Isaias Afewerki, received military
training in China
2. China has provided much in the form of economic support to Eritrea,
including debt cancellations
3. China has spoke out against the sanctions placed on Eritrea and even
continued to provide Eritrea with arms
To put it simply: the major customer, China, likes buying from Eritrea. So,
I think many of these geopolitical fears are unfounded, and that there is
value opportunity created by irrational sentiment. That's a particularly
strong buy sign for me.
Of course, nationalization risk is always a concern -- particularly if you
are an emerging economy and are deeply influenced by China -- but as Nevsun
is proving, Eritrea is creating some opportunities for mining firms to
prosper and to help the country as a whole enjoy prosperity.
For these reasons, these two are some of my favorite buys -- especially
now, as both of them are well off their 52 week highs. They are higher up
on the watch list.
Disclosure: I have no positions in any stocks mentioned, but may initiate a
long position in NSU, SGCNF.PK over the next 72 hours.
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Received on Tue Feb 14 2012 - 10:29:58 EST
