September 25th, 2015
The big resource picture is still unclear. No one knows what will turn mining around or when it will happen.
With so much uncertainty, it is easy to hesitate. Why buy now?
That rationale makes sense – for most mining stocks. But a select few offer reason to act.
The company I am thinking of has almost $600 million in the bank. That treasury backs up 80% of their market cap. Think about that: the company has 80¢ in the bank backing each dollar invested.
The other 20¢ acknowledges the company’s asset: an operating mine producing 150 million lbs. copper annually that reliably generates millions of dollars of net profits every quarter (that’s where the near-$600 million came from) and where a nearly complete expansion is set to transition the mine to zinc over the coming years, just as a global zinc deficit is expected to hit.
Oh, and you get paid to own the stock. A dividend yield of 5.6% makes the company one of the top yielding dividend stocks amongst all resource players.
The company is Nevsun Resources (TSX: NSU). The mine is Bisha, one of the best performing mines in the world.
Nevsun’s strengths are showing during these recent days of resource chaos. Base metal prices have been falling: zinc is down 40% in five month, lead is down 23% in the same time, and copper had lost 22% before regaining some ground in September.
With prices dragging, base metal miners have been hammered.
Nevsun has been hit too – but it has outperformed the index by 40%.
NSU declined in June, July, and August along with metal prices, though more moderately than its index of peers. When September rolled around the market must have realized the degree of undervaluation and investors started to move back in.
The guys at Dundee Capital Markets just put out a note on Nevsun pointing all of this out. I’ve been pointing it out for months.
This is a company that is dedicated first and foremost to making money (a near anomalous characteristic in this sector). Bisha is a very good operation, producing copper at one of the lowest cost levels in the business.
Nevsun manages its money with the utmost diligence: the company has funded two mine expansions out of cash flow while also dividending $100 million back to investors since 2011 and building a treasury that is now the envy of the mining world.
The second expansion is the $89-million zinc circuit, which is on time and on budget. The volcanogenic massive sulphide deposit at Bisha is layered; it had gold on top, copper-rich supergene material underneath, and a body of zinc-rich polymetallic mineralization below.
The first iteration of the mine only produced gold, from that upper layer. In 2011 the mine moved into the copper-rich zone. Next year Bisha will be tapping to the zinc-rich area, such that zinc will represent almost half of the mine’s payable production by 2018.
But that is not the end of the story. Back in 2005, when it had outlined enough mineralization to build a mine, Nevsun stepped away from exploration to focus on building and operating Bisha. That focus paid off, in the form of a very efficient and profitable mine.
Now, ten years later, the company is returning to exploration – and its drills are showing that Bisha is no one-trick pony. VMS deposits often occur in clusters and the Bisha district increasingly looks like it hosts many deposits. Nevsun has not yet officially outlined new resources, but exploration results suggest there will be ore to feed into all three of the circuits at Bisha – the gold, copper, and zinc facilities – for many years to come.
The overhang with Nevsun is always the ‘country question’. Bisha is in Eritrea. Eritrea is a little-known country in eastern Africa with an authoritarian government. Dissent and free speech are not well tolerated. Money movements are controlled, travel is restricted, and military service is mandatory.
However, I do not believe the people of Eritrea should be denied the benefits that flow from resource development because they are oppressed.
The Nevsun team knows Eritrea very well. I am sure they would increase freedom in that society if they could. They cannot, but they can provide hundreds of well-paying jobs and training opportunities and support local businesses.
The Eritrean government is a partner in Bisha: it was granted a 10% interest and paid fair value for another 30%. It was not easy for Nevsun to develop that relationship, but the effort now means security. The government understands Bisha inside and out, gets significant financial benefit from the mine in the form of taxes and cash flow, and has no impetus to change the ownership setup.
There is no perfect place to build a mine. Every jurisdiction has challenges, be it permitting, social opposition, nationalization risk, or taxation risk. Eritrea is no exception. For Nevsun the challenges have been establishing a respectful working relationship with a little-known government and convincing investors that Eritrea is a safe place to be.
In terms of the latter, the periodic resurfacing of allegations that Nevsun used slave labour to build the mine do not help. I have written about this many times. Because of its partnership with the Eritrean government, it is possible that Eritreans whom the government had not released upon completion of their mandatory two years of service were involved in building Bisha. This is highly unfortunate and unintentional.
What matters are the steps Nevsun has taken since realizing that might have occurred. Identity checks and background investigations are now routine for every person on site. An independent audit crafted a list of recommendations and NSU has implemented every one. I am positive that ‘slavery’ is a non-issue at Bisha today, and for many years.
Despite the challenges, Nevsun has proven beyond doubt that Eritrea works and that Bisha works. Nevsun has one of the cleanest balance sheets and lowest production costs of any base metal miner. With a 5.6% dividend Nevsun pays its investors more than any other miner. Its near-$600-million war chest backs 80% of its share price and means the miner can move on acquisition opportunities if desired. I know they are looking.
Nevsun is part of the markets, so a market correction or crash will hurt NSU. However, Nevsun’s big bank account puts a floor under its share price. Cash already backs 80% of its market capitalization, which means the entire Bisha mine is valued at just $160 million.
I know mining stocks have fallen farther than most thought possible and that has made us wary of guessing just how low things can go. But when it comes to Nevsun, even the emotional, reactive, and sometimes illogical market knows Bisha is worth more than that.
That is why Nevsun is one of the very few mining stocks that I recommend moving on today.
I own others. Some I am holding despite the risk of a correction because my cost base still makes sense; others I am keeping because gold’s reaction to a crash would limit the hurt and there is efficiency in holding versus the constant enter-and-exit game. Still others I plan to buy more of when the correction or crash hits, to average down.
But for Nevsun, I think odds are good that the bottom is in because a $600-million stack of cash creates a very strong floor, in this case beneath a mine that I expect will churn out metals and money for years to come.
