Nevsun Resources Ltd. NSU
December 20, 2007 - 6:29pm EST by
2007 2008
Price: 2.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 256 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

Sign up for free guest access to view investment idea with a 45 days delay.


Nevsun could be taken over as soon as it gets the final mine permit. A premium in the range of 40-50% is feasible. Its Bisha mine project is very attractive, because it has a pay back of less than 2 years.
Nevsun owns the Bisha mine, which will be Eretria’s first new mine in decades and the local government  wants to get it right , therefore they have hired outside experts to review NSU’s plans. The mine will be an Open Pit operation that has a layer-cake mineralization. It will be a 450K oz/yr gold and silver mine for 2 years, then primarily a copper mine next 5 years, then primarily a zinc mine the next 5 and beyond as deposit’s bottom not found and other nearby sites (Harena and Bisha NW) will be processed, however they are not considered in the released mine plan.
Those two additional satellite deposits were discovered within the Bisha Concession; The Northwest Zone, located approximately 1.5 km northwest of the Bisha Main Zone, and the Harena Deposit, located approximately 9.5 km along strike, to the southwest of the Bisha Main Zone. These two satellite deposits are viewed as potential sources of supplemental feed for the proposed processing facility at Bisha.
NSU is waiting the final mine permit to finish project financing arrangements (US$ 200 million) with the help of Endeavour Financial. The plan is to start production in 2010.
We expect some costs escalation, therefore Capex around US$ 250 million, and in the other hand there are higher prices (December 2007) for gold ($ 800.00), silver ($ 14.00) and lower for copper ($ 2.90) and zinc ($ 1.00).
On October 26 – 2007, ENAMCO announced that an ownership agreement for the advanced-stage Bisha gold-copper-zinc project in Eritrea had been reached with Nevsun. Under the terms of the agreement, ENAMCO will purchase a 30% contributing interest in Bisha from Nevsun, which with the Government of Eritrea’s 10% free carried interest, will bring ENAMCO’s total ownership to 40%. An initial payment  of US$ 25 million (to be paid in Jan-2008) and the remaining balance paid when production starts. The final payment will be based on independent valuation of the operating mine using metal prices / metrics that are deemed ‘reasonable’ by North American engineering standards at the time. This agreement sets the stage for the final mine permit approval.
Recently Eritrea’s Ministry of Commerce released that the China Import-Export Bank will lend US$60 million to Eritrea for helping to fund the country's 30% purchased interest in the Bisha mine project. We view positively China’s involvement in Eritrea because it could dissuade Ethiopia to create problem in the border. Besides that, China’s interest stems from an initiative to establish a presence in Eritrea given the country’s potentially rich metal endowment, noting China has been actively pursuing current and future base metal concentrate supply from mining operations globally. Chinese copper producers have purchased mines in Peru (Monterrico Metals Ltd.) and Chile.
The estimated production based on the NI 43-101 / feasibility study are as follow:
Production LOM
      (10 years)
Qty 000
Gold (oz)
Copper (lb)
Zinc (lb)
Silver (oz)
According to the Feasibility study, a Lerch Grossmann optimization was run at higher metal prices (US$600/oz Au, US$10/oz Ag, US$2.0/lb Cu and US$1.0/lb Zn) to assess the potential extent of the pit. The results of the analysis indicate that should these metal prices be sustained a pit containing 27 million tonnes of Measured and Indicated mineralization plus an additional 11 million tonnes of Inferred mineralization may eventually be realized. Additional drilling would be required to bring the Inferred mineralization to an Indicated or Measured category to allow them to be converted to Probable or Proven mineral reserves, respectively.
M&A Activity
The sector is being engulfed by a wave of M&A in the last three years.  It is reaching all mine regions of the world. Some buyers are coming from Emerging Markets (Brazil, China, India etc.) A preliminary analysis of M&A (base metals related) events indicates that the market is willing to pay a 40% to 50% premium for assets of good quality. Lunding Mining paid a premium of 32% for acquiring Tenke Mining Corp. which owns a stake of 24,75% in the Tenke Fungurume (copper) project located in DRC – Democratic Republic of Congo (Africa), and the mine’s operator is Freeport McMoran (ticker: FCX).
Eritrea’s world-class potential as a VMS (volcanogenic massive sulphide) mining district has not gone unnoticed by the majors, as is evidenced by the Lundin Mining Corporation (LUN–T) 19.6% interest in Sunridge Gold Corp. (SGC–V), with three base metals discoveries and 13.4% interest in Sanu Resources Ltd. (SNU–V), which has discovered a massive sulphide deposit and its concession is not far from Bisha. Besides that, Anvil Mining Limited (AVM–T) has 18% interest in Sub-Sahara Resources NL (SBS–A), which is exploring gold and other metals in the region. Bisha mine is the most advanced mineral project in Eritrea, and will set the stage for subsequent development over time.
A gold related newsletter says that Lundin Mining already owns 2.5 million shares, including 22.8 million warrants at C$3.00 to $10.00. We tried to confirm this with Lundin’s IR people, but I don’t get an answer yet.
The project is attractive because its initial construction Capex ($ 250 million) has a low payback period, less than 2 years; therefore the base metal mine (Cu & Zn) comes almost free!
The Bankable Feasibility Study released in October of last year estimates a Capex of US$196 million for building a 6K t/day facility to produce 447K Au oz/yr in the first 2 years of operation, then an additional Capex of US$61 million to modify process in order to handle 173 million lbs Cu/yr for each of next 3 years (including precious metals credits), then more US$31 million Capex to modify the process for producing 218 million lbs Zn + 39 million lbs Cu average/yr (including precious metals credits) for next 5 years. Base case on prices of $435 Au, $1.44 Cu, $0.57 Zn and $6.50 Ag shows 26% after tax return and 2.6 year payback. At current prices - around July/2007  (Au$ 650/oz.; Cu $3.0/lb Zn $1.50/lb and Ag $13/oz) over life of mine, Bisha returns 65% after tax, with a Capex payback in 1.2 years, after that – the base metals mine is almost free! Under this higher prices scenario the NPV (10%) is closed to US$ 900 million, and it is based on all equity, and it includes 10% ENAMCO participation.
Assuming that NSU, after getting final permits, issues 100 million shares at $ 2.50, which is enough to fund the project, therefore NSU will have the following capitalization:
New Common shares                     100 million
Existing Common shares                128 million
Options                                           5 million
Fully Diluted Total Shares               233 million shares
The share value based on this capitalization will be around $ 3.50 ($ 810 million divided by 233 million shares), and it is based only on Bisha project.
There are warrants, but they are out-of-money and have a short maturity, therefore we do not consider them:
Unlisted, strike price $ 10.00 (Dec/2008)                  5 million
Unlisted, strike price $ 4.00 (Oct/2009)                    5 million
Listed, strike price $ 3.25 (Jun/2008) – NSU.wt       4 million    
Listed, strike price $ 3.00 (Oct/2008) – NSU.wt.a      9 million
We valued NSU considering that they own 90% of Bisha, because later on they will receive proceeds from selling 30% of it to ENAMCO (Eritrea’s state mining company) at prevailing metal prices when operations start.
Another way to view NSU’s attractiveness is to calculate the ITC – Investor Total Cost, which is a useful tool to assess the attractiveness of a gold company or mine, from a takeover perspective. This approach is based upon several estimates, including mineable ounces of gold, capex to develop and sustain, and operating costs. In brief, the ITC is an estimate of the total cost – the cost to buy the shares of the company, then build, operate, and maintain the mine – from an investor, or acquiring company point of view. Subtract the ITC figure from an assumption of gold price and that gives a (pre-tax) margin or pre-tax profit per ounce.
ITC - Calculation
US$ Million
Per Oz
Nr of Shares+Options
Market Cap
Takeover Premium (50%)
Acquisition Price (A)
Construction Capex
Maintenance Capex
Operating Costs (gold phase)
Sum (B)
ITC - Investor Total Cost per Oz.
Gold Price per Oz.
Gold Operation Pre-Tax Negative Margin per Oz.(C)
Cost of the Base Metal Mine (= C x D)
Qty K oz.
1st year
2nd year
Ag Equiv Au
Total Au Equivalent
Attributable Au to NSU = 90% (D)
Based on the table above, the acquirer will get the base metal mine for a cost of US$ 87 million (900 k Oz Au x Negative Margin per Oz of Au $ 97). The base metal mine will generate sales of US$ 3 billion for the next 8 (eight) years, and not counting on the satellite deposits nearby Bisha.
According to Times Publications, they said the following about Eritrea and DRC – Democratic Republic of Congo. I mention DRC for comparison purpose, because the Tenke Fungurume (copper) project is located there.
“Extensive and sustained drought and border conflicts with Ethiopia between 1998 and 2000 have had large-scale effects on agriculture, and the country's infrastructure. Not only has Eritrea experienced severe famine, but also in 2002 grain production was 75 per cent below the previous years. However, more recently Eritrea's drive towards establishing stability within the economy and the government's demobilization process involving 130,000 combatants, will hopefully fulfill the country's immediate work force requirements (2007)”.
“The Democratic Republic of the Congo has experienced a severe downturn in national output and revenue generation. This has led to an extremely unstable environment for potential investment and has led to corruption, inflation, and insecure governmental and financial operations. An extremely high political risk to both personal safety and to do business is due to recent political upheavals. Corruption is rife, and this poses immediate problems with awarding contracts as well as with the granting of licenses. But, progress has been made with the resumption of normal budgetary procedures, including the centralization of revenue and expenditure, which has assisted in strengthening public finances (2007)”.


1)Final mine permit approval. 2) Take out by a mining company that already operates in Africa.
    show   sort by    
      Back to top