Nevsun arranges US$89M debt for Bisha (October 30, 2008)

Vancouver The Industrial Development Corporation of South Africa (IDC) must have liked what it saw at Nevsun Resources‘ (NSU-T, NSU-X) Bisha project when it visited the Eritrean site in August of this year. The IDC has since decided to ante up US$89 million in senior and subordinate debt for Nevsun’s gold, copper, zinc and silver project.

In so doing the IDC, a state-owned financial institution, will also become Nevsun’s lead banker on Bisha, a project with a pre-production capital cost of about US$250 million. Nevsun president and CEO Cliff Davis says that what largely attracted the investment was the robustness of the Bisha project “even at very low metal prices.”

“The economics just prove themselves,” he says.

Nevsun’s bare-bones model, based on US$435-per-oz. gold, US$1.44-per-lb. copper (for the first five years after which it drops to US$1.28 per lb.), US57-per-lb. zinc and US$6.50 per-oz. silver, translates into an internal rate of return (IRR) of 26%, a net present value of US$135 million and a payback period of 2.6 years.

A slightly rosier model, setting gold at US$600 per oz., copper at US$1.50 per lb., zinc at US$0.50 per lb. and silver at US$8 per oz, equates with a 42% IRR and a payback period of 1.6 years. As set out in its 2006 feasibility study Nevsun plans on a three-phase, ten-year, open-pit mine.

Phase I targets Bisha’s silver-gold oxide zone, 4 million proven and probable tonnes grading 7.99 grams gold per tonne and 32.85 grams silver per tonne. Phase II targets the copper- gold supergene zone, 6.4 million proven and probable tonnes grading 4.4% copper, 0.83 gram gold and 35.98 grams silver. And phase III targets the zinc-copper primary zone, 9.7 million proven and probable tonnes grading 7.21% zinc, 1.14% copper, 0.76 gram gold and 54 grams silver.

The project is a 60/40 joint venture between Nevsun and the Eritrean National Mining Company (ENAMCO). By law ENAMCO gets a 10%-free-carried interest and is allowed to buy up to a 30% equity position in mining projects. Having opted for the full 40% in Bisha ENAMCO is responsible for a third of project costs and has so far paid Nevsun US$35 million for its stake.

Davis expects to gain additional sources of funding in the near future. In the press release announcing the agreement with the IDC, Nevsun says “other potential debt providers (are) in the midst of their approval processes.”

To advance Bisha, located about 230 km west of Asmara by road, Nevsun ordered ball and SAG mills earlier this year. To make way for plant construction it cleared the site and began heavy-earth moving during the summer. And this fall it started building town infrastructure to house 400 people.

If all goes according to plan Nevsun expects to go to production in the second quarter of 2010.

As for the market response Davis doesn’t put much weight on how it has (or hasn’t) moved on the news of the debt financing. At presstime Nevsun’s share price had dropped 2 to 63.

“It’s not a real market,” Davis says.