Nevsun halves Bisha mine life, revises Timok study plans

Newly appointed CEO Peter Kukielski hasn’t wasted time putting his imprint on Nevsun Resources (TSX: NSU; NYSE-MKT: NSU).

The Stanford University-educated civil engineer, who joined the company in May, is moving quickly to put his expertise to work in reassessing Nevsun’s strategic and capital allocation plans.

On a September conference call, the mining executive told analysts and investors that his decision to join the company “was an easy one,” given its “talented people” and “two great assets” — the Bisha copper-zinc mine in Eritrea and the Timok copper-gold project in Serbia.

But the CEO, whose track record includes managing global mining assets in senior positions at larger companies — such as ArcelorMittal, Teck Resources and Falconbridge — is shifting gears at Bisha and Timok so that he can allocate capital efficiently, while expanding and diversifying the company’s asset base.

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

After a strategic review that included several trips to Serbia and Eritrea, Kukielski has revised the company’s time line to complete a prefeasibility study (PFS) on Timok until the first quarter of 2018 — rather than September 2017, as previously scheduled — and is trimming capital spending on Timok this year to US$54 million from US$62 million. Nevsun will provide the market with an interim update on Timok in an updated preliminary economic assessment before the end of October, he said.

The PFS will cut the time needed for a feasibility study, he said. The company will build a decline at Timok in this year’s fourth quarter, and Nevsun targets production in 2021.

At Bisha, the company has decided it will only fund the capital for a four-year open-pit, rather than the larger, eight-year operation envisioned initially.

“The capital allocation decisions announced this quarter are evidence of our action plan being put to work,” Kukielski said on the conference call. “These include, first, the decision for the most prudent allocation of capital to proceed with a smaller open pit at Bisha, with a shorter mine life. Next, resetting the timetable to deliver a PFS for Timok in early 2018 to complete the appropriate level of front-end engineering. Each of these decisions support our most important strategic initiative, which is the development of Timok and the start of mining in 2021.”

Changes to the company’s 2017 capital expenses include increasing sustaining capital at Bisha by US$24 million to US$41 million (funded from operating cash flow) to buy heavy mining equipment.

On the exploration front, Kukielski confirmed that Nevsun “will continue prudently investing in exploration as a driver of growth across the company.”

In Serbia, he said, management is excited about exploration opportunities in its portfolio. It has seen encouraging results in Timok’s Upper Zone and allocated more capital to an expanded exploration program targeting high-grade discoveries near surface. The Lower Zone also has potential, he noted, although the mineralization depth has challenges.

Other earlier-stage and smaller-scale projects in Serbia and further south in Macedonia will be evaluated, he said, and exploration dollars allocated “in a disciplined manner.”

At Bisha, Nevsun will finish this year’s exploration program “by evaluating high-priority greenfield targets,” he said. “We have announced a large number of other targets in our large licenced area, and I expect we will fund regional exploration in 2018. Within 20 km of the mill, we have nearly 58 million tons of regional resources. Converting regional resources into reserves remains a long-term target, and with existing mill infrastructure to leverage, it makes sound business sense.”

Kukielski says regional exploration spending at Bisha will stay the same at US$9 million for 2017. At Timok, the company has completed infill drilling (30,000 metres), but started a US$4-million, 10,000-metre drill program to look for nearby, high-grade Upper Zone-type deposits, with two rigs drilling since June 30. It has spent US$9 million this year drilling in the Lower Zone. It has drilled 29,000 metres to date and is targeting 16,000 metres of Lower Zone drilling this year, with 11 rigs drilling since June 30.

Workers pour gold dor in 2010 at Nevsun Resources’ Bisha mine in Eritrea. Credit: Nevsun Resources.

The company owns 100% of Timok’s high-grade Upper Zone, a high-sulphidation, semi-massive sulphide zone containing epithermal pyrite and copper sulphide. The Upper Zone contains indicated resources of 1.7 million tonnes grading 12.5% copper and 10.4 grams gold per tonne, and inferred resources of 35 million tonnes grading 2.9% copper and 1.7 grams gold. The larger and lower-grade Lower Zone does not yet have a resource. Nevsun will own 46% of the zone once Freeport-McMoRan (NYSE: FCX) finishes its earn-in.

Nevsun’s strategic plans were unveiled in conjunction with its second-quarter results.

The debt-free company ended the quarter with cash and equivalents of US$171 million after selling 34.3 million payable lb. zinc in zinc concentrate at C1 cash costs of US92¢ per payable lb. sold, and 7.7 million payable lb. copper in copper concentrate at C1 cash costs of US$1.59 per payable lb. sold.

For zinc, the company expects to produce 190 million to 210 million lb. zinc (previously 200 million to 230 million lb.) at zinc cash costs of between US70¢ and US90¢ per payable lb. sold (no change). For copper, Nevsun says it will produce 20 million to 30 million lb. (previously 10 million to 20 million lb.) at copper cash costs of US$1.55 to US$1.75 per payable lb. sold (previously US90¢ to US$1.10).

Nevsun recorded a US$70-million, non-cash, pre-tax writedown of Bisha in the second quarter. The impairment included long-term stockpiles of US$59 million and mobile equipment of US$11 million.

Mining a smaller pit over four years means that proven and probable reserves at Bisha and a satellite pit called Harena have declined from 22.2 million tonnes to 9.6 million tonnes, grading 6.16% zinc, 1.05% copper, 0.69 gram gold and 44.9 grams silver. At a 2.4-million-tonne annual processing rate, the Bisha operation has a reserve mine life to mid-2021 (before the plan in 2025).

In the new technical report, the company forecasts 70% copper recovery to copper concentrate and 77% zinc recovery to zinc concentrate, down from the previous reserve estimate of 85% and 80%.

Bisha, 40% of which is owned by the State of Eritrea, has 28 million tonnes of measured and indicated resources and 31 million tonnes of inferred within 20 km of the existing mill, the company noted, adding that while results of both the Harena and Bisha underground scoping studies were marginal, “converting regional resources into reserves remains a long-term objective.”

The large, high-grade volcanogenic massive sulphide (VMS) deposit at Bisha, 150 km west of Asmara, was built from 2008 to 2010 for US$250 million. Until mid-2013, the mine produced low-cost, gold-silver doré from processing oxide ore. Through a US$110-million copper expansion project, throughput expanded to 2.4 million tonnes per year of supergene ore and the product switched to copper concentrate. Nevsun started commissioning Bisha’s zinc expansion plant, built for US$77 million, in June 2016. In addition to the main deposit, a satellite deposit called Harena lies 6 km to Bisha’s south.

Analyst reactions to the news was mixed. Matt Murphy of Macquarie said that “while the update negatively impacted our valuation, the new plan is more achievable and appears superior for near-term free cash flow, versus our previous model.

“Timok remains financeable without raising new equity under our assumed [$550 million] capex and [50% project] financing structure. Bisha needs to continue to improve to meet our expectations, however.”

Murphy lowered his target price 16% to $3.60 per share, but kept his “neutral” rating.

Alex Terentiew of BMO Capital Markets downgraded Nevsun to “market perform” and cut his target price from $4 per share to $3.25.

“Management reduced Bisha’s mine life based on the decision to no longer consider mining the larger, phase-nine open pit, primarily due to increased operational risk associated with increased capital spending, reduced recoveries and the operational complexity of nearly doubling the ore and waste movement to meet feed and stripping requirements,” he says in a research note.

“Management, it seems, may be taking a more conservative approach. Given the elevated risks and significant capex spending that would have been required for the previously considered open-pit expansion, it seems management is taking a more disciplined, risk-focused approach to ensure that the Timok project, its priority, is being executed appropriately.”

Haywood Securities’ Pierre Vaillancourt kept his “hold” rating on the stock, and noted that Timok, one of the highest-grade, copper-gold development projects in the world, is a major part of the company’s future, and would “add 280 million lb. in annual copper production within five years and bring more of the company’s focus to Serbia.”

He also pointed to political risk and human rights abuses in Eritrea.

“We rate Eritrea as one of the most sociopolitically sensitive countries in the world for a mining company to operate in: the country is a one-party state in which national legislative elections have been repeatedly postponed, according to Human Rights Watch, and the Eritrean government’s human rights record is considered among the worst in the world.”

Vaillancourt pointed to a June 2016 report by the United Nations Human Rights Council that “accused Eritrea’s government of extrajudicial executions, torture, indefinitely prolonged national service and forced labour, and indicated that incidents of sexual harassment, rape and sexual servitude by state officials are also widespread.”

The mining analyst noted that although Eritrea’s conflict with neighbouring Ethiopia “appears to have subsided since the border war ended in 2011, tensions remain high, and the potential for renewed aggression remains.”

Vaillancourt added that “many investors have avoided Nevsun and will not invest in the stock for ethical reasons.”

After news on Aug. 9 of Nevsun’s quarterly results, the cut to Bisha’s mine life and the delay to the Timok PFS, the company’s shares slipped 3% to $3.29, followed by a 16.41% — or 54¢ drop — to $2.75 per share, after the conference call.

At press time, Nevsun’s shares traded at $2.67, within a 52-week range that touched a $4.63 high on Jan. 13, 2017, and a 52-week low of $2.49 on Aug. 10, 2017.