Nevsun Attracts Analyst Upgrades
Source: Midas Letter, James West (12/4/09)
"investors can still participate in the substantial upside still remaining in the share price"
Highly respected Canadian investment banks Haywood Securities based in Vancouver, British Columbia, and Toronto-based GMP Securities raised their target prices to CA$3.50 and CA$3.80 per share respectively, based on the timely progress of plant construction, and the apparent ready availability of capital to see the project completed. First gold ounces from production are expected in late 2010.
According to GMP Securities analyst Mark Smith: "The construction of the project is 40% complete with the remaining $153m of capital to be spent over the next 12 months as the company draws down from its debt facility. The 1.4Moz of gold reserves were calculated at $400/oz and 2/g/t cut-off. There is resource (1.86Moz): reserve conversion with the possibility of increasing the gold production.
This ore body is financially robust given the high grade. The project is expected to provide an 8-year optionality (16mt ore) as the pit shells were modeled at Cu $1.05/lb, $0.50/lb Zn. The mill throughput rates can be increased by 40% due to the softer nature of the sulphide ore. This increases the NAV (@ 12%) to C$4.42/shr up from C$3.79/shr. If we include the mining of the additional 16Mt of sulphide at $2.00/lb Cu pit shell the NAV (@12%) further increases to C$5.02/shr.
We value Nevsun using a 1.0x P/NAV to our NAV of C$3.79/shr (at 12%), up from C$3.51/shr, to derive a 12 month target of C$3.80, up from C$3.60. We rate the stock a BUY. Our 24 month view NAV is C$4.66shr."
Haywood mining analyst Stefan Ioannou was only slightly less bullish in his assessment:
"At the end of Q3/09, Nevsun had a cash balance of US$26.8 million. The company recently closed a $32.8 million non-brokered private placement consisting of 11.5 million common shares priced at $2.85 per share. Net proceeds will be used for general working-capital purposes, including exploration and development at Nevsun's 60% owned Bisha gold-copper-zinc project in Eritrea."
As of September 30, 2009, Bisha Mining Share Company (BMSC), which owns 100% of the Bisha project and is in turn owned 60% by Nevsun (67% contributing) and 40% by ENAMCO (the State mining Company; 33% contributing), had spent or committed approximately US$123M on capital-cost-related items at the project. Of this amount, approximately US$95M had actually been spent; US$59M by Nevsun and US$36M by ENAMCO.
However, we note that our fully financed after-tax corporate NAV3% to 10%, and hence implied target price, would increase by approximately $0.75 per share, to $4.25 per share, with modeled production start-up in 'late' 2010. We plan to closely monitor construction progress at Bisha over the coming months and will adjust our modeled production start-up timeline accordingly.
With a feasibility study complete, a mining license in hand, and project financing essentially arranged, we believe that Bisha is 'ripe for the picking' in a marketplace characterized by ongoing consolidation. Corporate activity aside, Nevsun is well positioned to advance Bisha given the company's strong balance sheet and the project's robust economics.
With such well-heeled companies as these investment analysts, investors can still participate in the substantial upside still remaining in the share price. It doesn't take a rocket scientist to see that the numbers being tossed around are extremely conservative in nature, and a much rosier picture could emerge sooner rather than later.