RBC Research note out this morning on NSU.....April 25, 2016 Nevsun Resources Ltd. Reservoir Transaction Provides a High Quality Growth Project Impact: Potential Positive First impression Our View: We believe the proposed acquisition of Reservoir Minerals makes sense for Nevsun, as it would provide the company with its longawaited growth project and diversification from its single operating asset in Eritrea. The deal would give Nevsun a 100% interest in the Upper Zone of the high grade copper gold Timok project in Serbia and 60.4% of the Lower Zone. Reservoir recently announced a PEA for the Upper Zone with a post-tax NPV 8% of U$946MM and IRR of 84% at $1,250/oz gold and $2.20/lb copper. NSU to acquire Reservoir for total consideration of ~US$365M: NSU announced the acquisition of Reservoir Minerals for a total consideration of ~$365MM which implies a 35% premium based on the last closing prices. Details of the transaction include 2 common shares and $0.001 in cash for each Reservoir share.
Transaction pre-empts Lundin’s recent offer for Timok: Freeport currently owns 55% of the upper zone (Reservoir 45%) and Lundin Mining recently made an offer to acquire Freeport’s interest for U$262.5MM including a U$135MM upfront payment. As part of the proposed transaction Nevsun would provide funds for Reservoir to exercise its right of first offer (ROFO) on the project and fund the initial $135MM payment. We presume this would also include additional payments of $127.5MM as proposed in the Lundin offer but this was not specified in the press release. Nevsun would concurrently complete a private placement for 19.99% (12.2M) of Reservoir’s outstanding common shares at a price of C$9.40/share for total proceeds of U$90.3M and provide a U$45MM cash loan. The transaction would give NSU a 100% interest in the Upper Zone of the Cukaru Peki deposit as well as 60.4% interest in the Lower Zone, and NSU would be the operator of the project.
Timok gives NSU its long-awaited acquisition along with renewed copper exposure: The Reservoir deal gives NSU its long-awaited acquisition after years of searching for an asset to complement the Bisha mine. The upper zone of the Timok project is a high grade copper-gold deposit with the recent PEA including an indicated resource of 1.7Mt at 13.5% Cu and 10.4g/t Au and inferred resource of 35Mt at 2.9% Cu and 1.7g/t Au. With copper production from the supergene phase expected to end in mid-2016 and transition to zinc production from the primary phase, the Timok project provides NSU with renewed copper exposure and a growth project to add to the growth pipeline. The pro forma company would have $300MM cash (and no debt) to fund project development. Priced as of prior trading day's market close, EST (unless otherwise noted). For Required Non-U.S. Analyst and Conflicts Disclosures, see page 3.
Acquisition follows recent positive PEA: The acquisition follows up on the recent PEA announced by Reservoir, which highlighted the high grade and returns on the project. The PEA included an initial direct shipping ore phase at a cost of US$213M and US$182M to ramp up to the Phase 2 Main Mine, with a post-tax NPV of US$946M and post-tax IRR of 84% at current metal prices of $1,250/oz Au and $2.20/lb Cu on a 100% basis. The mine includes very high grades, with expected grades of 5.7% Cu and 3.8 g/t Au with a 12 year mine life based on annual operations of 2Mt and low C1 cash costs of $0.55/lb Cu.