Nevsun Takes Major Hit on Tabakoto Write-OffNevsun Takes Major Hit on Tabakoto Write-Off
By Ben Abelson
05 Apr 2007 at 11:00 AM GMT-04:00
CHICAGO (ResourceInvestor.com) -- After spending months under pressure following mediocre operational results, the shares of Nevsun Resources [AMEX:NSU; TSX:NSU] took another hit early this week after announcing a major impairment charge stemming from its floundering Tabakoto mine in Mali.
While the $80.9 million charge is a GAAP-required, non-cash expense, it confirms investor concerns that have kept Nevsun’s shares under pressure since last spring: Tabakoto is a marginal asset.
While Tabakoto continues to operate, given the GAAP-required impairment charge (which covered the entire amount of the mine property, plant, and equipment) it doesn’t look like investors should expect positive cash flow from the project any time soon.
It’s a stark reminder that mining (and investing in miners) is always and forever a two-stage process: finding great assets, and then actually extracting them profitably.
Tabakoto’s Unimpressive Beginnings
For those readers who’ve been around since the last mining boom just over a decade ago, they’ll remember Tabakoto as one of the properties that sent Nevsun’s stock up above C$15 (on a much lower share count) in 1996. From that speculative mania, it’s quite interesting to see how poorly the actual operational mine has shaped up.
While initially forecast to produce at grades of 5 g/t in their 2002 feasibility study, Tabakoto has struggled this year with grades averaging in the 4 g/t range. Coupled with higher than expected operational costs, the mine (which is set to produce some 80,000 ounces – likely in the $600-plus/ounce cost range – this year) isn’t likely to ever become the first stage of a one-two (with Bisha) production punch that Nevsun had hoped. Rather, Tabakoto is shaping up to be a boondoggle on the order of Queenstake’s Jerrit Canyon.
Since topping out at US$4.25 last spring, shares of Nevsun have been on a steady decline as the news of Tabakoto’s mediocre results have come out piecemeal. With news of the massive write-off last week, the shares slumped to under $1.90, near their 52-week lows.
For a company that’s currently only worth just US$250 million, the write-off of $80 million in assets is nothing to sneeze at. Without significantly higher gold prices, Tabakoto will continue to be a losing proposition.
Remaining Value Tied to Bisha
With Tabakoto now acting essentially as an option on gold, most of Nevsun’s remaining intrinsic value is tied up in Bisha, its world-class poly-metallic mine in Eritrea. While Bisha has been plagued by trouble throughout its development life, there’s no question that the mine remains a very solid asset with great production potential.
The feasibility report released last fall detailed production of 1.06 million oz gold, 747 million lb copper, 1,092 million lb zinc and 10 million oz silver. At ‘base case’ metals price, using 10% discount, the mine’s actually worth less than Nevsun’s current market cap. However, when one considers more aggressive pricing near current spot levels, Bisha’s value becomes extremely clear:
Currently, however, the final development of Bisha remains tied up with the Ertirean government. Nevsun has been in discussion with the government since mid-January to try and obtain a mining license. While the Eritrean government certainly seems committed to developing Bisha, we wouldn’t be surprised to see them try and extract a higher percentage of the project from Nevsun - either through a discount purchase option or an outright grant. Given Nevsun’s precarious current position, management would have little chance but accept.
But with metals prices at current levels, even if Nevsun ends up owning less that its current 70%-90% of Bisha (depending on how much of a share the government exercises), the mine still has the potential to become a company-making project.
Let’s just hope it doesn’t turn into another Tabakoto.