Nevsun trumps Lundin bid for Reservoir

VANCOUVER — There had been ample speculation on when Nevsun Resources (TSX: NSU; NYSE-MKT: NSU) would mobilize its substantial capital position in the mergers and acquisitions arena, and on April 24, the company finally pulled the trigger on a US$365-million deal for prospect-generator Reservoir Minerals (TSXV: RMC) and its high-grade Timok copper discovery in eastern Serbia.

Location of the Cukaru Peki, within the Timok project, in Serbia. Credit: Reservoir Minerals.

With the deal, Nevsun is essentially quashing a US$262-million agreement Lundin Mining (TSX: LUN; US-OTC: LUNMF) cut in early March with Timok joint-venture partner Freeport-McMoRan (NYSE: FCX).

Lundin had hoped to secure a 75% interest — and development rights — in Timok’s high-grade Cukaru Peki Upper Zone.

There was always a wrinkle in the deal, however, courtesy of a right of first offer (ROFO) Reservoir has under a joint-venture agreement with Freeport.

Cukaru Peki is subdivided into an Upper Zone of high-sulphidation epithermal mineralization and an underlying Lower Zone of porphyry-type mineralization, which has bulk-tonnage potential and is not included in current resource estimates.

Drilling at the Timok project. Credlt: Reservoir Minerals.

Massive sulfide in core from drill hole 1223 at Timok, which graded nearly 22% copper equivalent. Credit: Reservoir Minerals.

Reservoir’s board has now opted to join forces with Nevsun, which would end up with a 100% stake in the Upper Zone after the transaction closes. The agreement includes financial conditions that would help the companies meet a May 3 deadline on the ROFO, and match Lundin’s offer.

Under the new deal Reservoir investors will receive two Nevsun shares and 0.1¢ in cash for each share held.

The offer represents a 35% premium on Reservoir’s 20-day, volume-weighted average trading price and values it at US$365 million, or $9.40 per share. Nevsun shareholders would hold a 67% equity stake in the combined entity.

The companies also agreed on a funding transaction wherein Nevsun would provide US$135 million via a private placement and loan, so Reservoir can exercise its ROFO.

“The premium represents an all-time high for our shares, and the deal will increase investor’s long-term exposure to the Timok project,” Reservoir president and CEO Simon Ingram said during a conference call.

“We have major appreciation for Nevsun and its operating team, and the combined company will have the financial capacity and expertise to advance the asset quickly. There are no longer any rights for another party to come in with an increased offer, or anything like that,” he added.

Nevsun would become operator at Timok after the deal. The company would have full ownership of the Upper Zone, and advance the bulk-tonnage Lower Zone porphyry until Freeport takes over when its stake hits 54%, after a feasibility study.

The companies will pay Freeport US$135 million upon closing, and another US$20 million in exploration and study work on the Lower Zone. After a construction decision Nevsun would pay US$45 million, with another US$50 million due upon commercial production, and up to US$12.5 million owed in recouped project expenses.

Reservoir released a preliminary economic assessment (PEA) on a two-stage build at the Upper Zone in April that would require US$213 million in capital expenses.

The base case contemplates a “starter mine” using twin declines to access higher-grade direct shipping ore, beginning in 2019.

The second phase would ramp up to produce 2 million tonnes per year, and process mineralization at diluted grades in excess of 2.5% copper from 2022 to 2030. The mine would crank out 58,000 tonnes copper and 62,000 oz. gold annually. Metallurgy requires more testing.

Upper Zone resources total 1.7 million indicated tonnes above a 0.8% copper cut-off grade, with grades of 13.5% copper, 10.4 grams gold per tonne and 0.2% arsenic. Inferred resources include 35 million tonnes above a 0.8% copper cut-off grade, with grades of 2.9% copper, 1.7 grams gold and 0.2% arsenic. Contained metals total 1.2 million tonnes copper and 2.5 million oz. gold.

Cross-section though the Upper Zone showing grade distribution. Credit: Reservoir Minerals.

The base-case project features a US$946-million post-tax net present value at an 8% discount rate and an 84% post-tax internal rate of return, assuming US$1,250 per oz. gold and US$2.20 per lb. copper.

“We’re creating a truly exceptional and diversified mid-tier base metal company. We have been looking for opportunities and deploy our capital and operating skills so as to diversify our story, and deliver substantial value-creation opportunities,” Nevsun president and CEO Clifford Davis said. “We will stand back and take a broader view at the full opportunity. The PEA is a fantastic, comprehensive start, but we’ll look at the two-stage development in more depth.”

Nevsun operates the Bisha volcanogenic massive sulphide mine, 150 km west of Asmara, Eritrea. The company produced 34 million lb. copper in the first quarter at cash costs of US$1.12 per lb., and generated a US$15.6-million net income.

Nevsun reported US$438-million cash in its treasury to end April.

The Bisha mine main pit in Eritrea. Dated September 2015. Credit: Nevsun Resources.

RBC Capital Markets analyst Fraser Phillips wrote that the deal “makes sense for Nevsun,” and gives it a “long-awaited growth project and diversification from its single operating asset in Eritrea.”

RBC Capital has a “sector perform” rating on the company, along with a $4.70-per-share target price.

“With copper production from [Bisha’s] supergene phase expected to end in mid-2016 and transition to zinc production from the primary phase, the Timok project provides Nevsun with renewed copper exposure and a growth project to add to the pipeline,” Phillips added.

Nevsun shares have traded within a 52-week range of $3.27 to $5.35, and closed at $4.22 per share at press time.

The company has 200 million shares outstanding for an $860-million market capitalization.

Meanwhile, Reservoir shares have moved within an annual range of $3.26 to $8.95, and jumped nearly 20% on the news en route to an $8.35-per-share close.

The company has 49 million shares outstanding for a $406-million market capitalization.

Meanwhile, Reservoir has moved within an annual range of $3.26 and $8.95, and jumped nearly 20% on the news en route to an $8.35 per share close at press time. The company has 49 million shares outstanding for a $406 million market capitalization.