Another reason for the selling. Brent Cook issued sell Nevsun Resources (NSU.T and NSU.NYSE MKT)—Selling, previous close was C$4.06 We are selling our entire position in Nevsun Resources due to three points of uncertainty that have led to the company’s underperformance versus the benchmark since we acquired it in January 2015:
· Issues with treating the transition material between the supergene and primary ores at Bisha. The metallurgical issues were discussed in detail in our October 9 letter (link
here).
· Timok copper-gold project’s pre-feasibility study may have more upfront capital expenditures than the market is anticipating due in part to changes in the preliminary economic assessment filed by Reservoir Minerals.
· Mr. Cliff Davis has been with the company for 22 years and has molded it from an explorer to a dividend paying producer in the less than hospitable jurisdiction of Eritrea. He will be stepping down in 2017, and the company is currently looking for a successor externally.
Our sale represents a potential loss of ~4% as NSU has underperformed its benchmark by 12% over this period. The opportunity for those that would prefer to hold Nevsun includes the development of the Bisha District into a major polymetallic camp and the advance to production of the high-grade copper-gold Upper Zone of the Timok project in Serbia. The exploration potential of both camps provides additional upside.
Summary—
Nevsun Resources In our opinion, the risk of owning Nevsun exceeds the reward over the next few months. Nevsun is covered by 8-10 analysts with an average 12-month target price of C$5.50, ranging between C$4.50 and C$7.70. The average target price represents a potential return of 35-40% over the next year, which is not bad for a company of its market capitalization (C$1.2 billion) and liquidity (C$2.5-3.0 million traded a day), but if prices for copper and zinc continue to improve, we hope to do better.
Our sale is not a reflection of the management team or the asset portfolio as we still believe that both Bisha and Timok are unique for their grade and prospectivity, but the previously highlighted points of uncertainty. The company’s strategy may change with a new CEO, and the dividend policy, which is a
sacred cow for the current CEO, may not be for his successor. Looking forward, we will continue to look for base metals exposure but seek it with a junior this time.