Nevsun Feasibility Study Erases DiscountNevsun Feasibility Study Erases Discount
By Ben Abelson
15 Oct 2006 at 07:17 PM EDT
CHICAGO (ResourceInvestor.com) -- Last year, we recommended investors take a look at Nevsun Resources [TSX:NSU; AMEX:NSU] as one of the most undervalued mining stocks trading on the market.
But with the company’s recent Bisha feasibility study showing escalating development costs, and the company’s shares up more than 100% in less than 52 weeks, it appears that the company’s Eritrea discount has been more than erased.
While the feasibility study more or less confirmed the metal content and production results laid out in last year’s scoping study, one glaring change is the significant rise in operating costs. Total capital and operating costs are set to increase by some $174 million, or 29%, to $728 million. For a company with a current market cap of about C$350 million, this isn’t an insignificant cost creep.
Just Another Highly-Levered Mining Stock
Using very optimistic long-term metals prices of $600/ounce gold, $3.40/lb. copper, $1.50/lb zinc, and $11/ounce silver, Nevsun estimates the mine’s net present value (using a 10% discount) at $857 million. However, when one uses a more conservative estimate of $435/ounce gold, $1.44/lb copper, $0.57/lb. zinc, and $6.50/ounce silver, the mine’s value at the same discount plummets to $135 million.
While Bisha’s true value probably rests somewhere between these two numbers, what’s become increasingly clear over the past few months is that Nevsun no longer is the same value proposition it was last year. Depending on what metal price assumptions one uses, and how one values the existing operations at Tabakoto and the developing mine at Bisha, Nevsun’s likely currently trading around 0.75 to 1 times its NAV. The most senior gold producers typically are valued at a P/NAV multiple of 1.5-1.7. When one considers that Nevsun is still very much a junior company, and that its developing assets contain very high levels of base metal content (which typically ascribe much lower multiples) in politically unstable regions, it’s clear that Nevsun’s no longer the bargain-shopper’s dream it once was.
Market Focuses on Bisha Progress, Rewards Shareholders
This isn’t to say that Nevsun is a poor investment for current shareholders, or that the company’s anywhere near extreme overvaluation. In fact, the market appeared to applaud management’s progress on Bisha, sending the company’s shares up 7.33% to $2.93 on Friday, the day after the study was released.
In the near term, it’s clear that this trend could continue, especially given the market’s proclivity for rewarding companies for making operational progress. In fact, the company’s multiples could even expand further, perhaps to as high as 1.1 or 1.2 times NAV. The next milestones to watch for are the issuance of a mining license (which could occur as early as the fourth quarter), and the completion of mine financing expected for March 2007. Current shareholders could look to see further appreciation leading up to those key dates, assuming that the company is successful in both endeavours.
Conclusion
But although it’s still a solid operating company, with good operational prospects, in the longer term Nevsun Resources has simply become another mining company highly leveraged to commodity prices. As a value conscious investor, this correspondent always prefers to buy solid assets with good operational prospects at a hefty discount to their underlying valuation. This was the case when we targeted Nevsun last November, when it trade in the neighborhood of $1.30. While I wouldn’t necessarily recommend current shareholders sell the stock, it’s clear that Nevsun no longer represents a superior risk/reward proposition. Barring any new discoveries, current shareholders should feel comfortable lightening their positions as the company approaches Bisha’s development.