Gold/copper miner Nevsun may be a 'bottom fishing opportunity' - says
analyst
Eritrean gold/copper miner Nevsun Resources' shares have fallen to nearly
half what they were in recent months, leading some to speculate there may be
a bargain to be had.
Author: Kip Keen
Posted: Thursday , 12 Apr 2012
HALIFAX, NS (MINEWEB) -
In recent months, market players have beat down Nevsun Resources's (
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http://www.mineweb.com/mineweb/view/mineweb/en/page139659?idNotation=34024>
TSX: NSU) shareprice by some 40-odd percent after the junior miner cut gold
production guidance for the year by about as much at its Bisha mine in
Eritrea. Nevsun did so because modelled gold grades - if still stellar by
any account for an open pit mine - have turned out to be far less than
expected. That has precipitated analyst and market frustration.
And perhaps a buying opportunity. Stefan Oannou, a Haywood Securities
analyst, has called Nevsun a potential bargain. In a recent note to clients
Ioannou acknowledges these frustrations - which he shares - but nonetheless
maintained an sector outperform rating on Nevsun shares with a 12-month
target of C$4.50 (C$5.50 two months ago).
It will take Nevsun a while to regain market confidence, Ioannou writes, and
so: "In the interim, we believe Nevsun's current market valuation provides a
potential bottom fishing opportunity for investors with patience."
One thing Ioannou is looking out for is Nevsun's upcoming reserve
restatement. That should help answer questions about how smooth the
transition to copper-dominant operations will unfold. Bisha has been a gold
machine in its first year of operation - 2011 - churning out 379,000 ounces
gold and underpinning Nevsun's burgeoning cash pile - $347 million at the
end of the last quarter, and now presumably higher.
(In the latest quarter Nevsun said it produced 82,000 ounces gold. That was
more than expected - at the new lower grades - though Nevsun still held to
its 2012 guidance between 190,000 ounces and 210,000 ounces. Either way, it
surely generated significant cash.)
Major gold production will come to an end sometime in the next year or so,
and meanwhile Nevsun has started preparing for copper days ahead as it gets
deeper into the Bisha Main deposit. Copper production is slated to begin
mid-2013 and, as such, Ioannou and other analysts are waiting to see what
kind of gap there will be between the end of gold-rich mining operations and
the beginning of copper-rich mining operations.
As planned, Nevsun will produce about 179 million pounds copper, 90,000
ounces gold and 3.4 million ounces silver a year starting in 2013 until
about 2016, after which zinc ore will dominate. During those copper years -
a note to those patient investors perhaps - Nevsun is again expected to
generate heady amounts of cash flow. At $3 copper, $1,600 gold, $1 zinc and
$24 silver, Nevsun has estimated as much between $250 million and $300
million in operational cashflow each year in 2014 and 2015 (after royalties
and taxes). Then, cash flow falls off somewhat through to the end of Bisha's
current mine life in 2023 as Nevsun starts mining a zinc rich lower zone.
But then,
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as recently noted in these pages, some leading analysts also see a bright
future for zinc in a few years time with a looming gap between supply and
demand. How that - possibly higher zinc prices - could change the picture at
Bisha will also be worth keeping an eye on in the coming years.
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Received on Thu Apr 12 2012 - 10:14:22 EDT
