Nevsun Resources Ltd. (NSU.NY, 2.90) has good and not-so-good news. Bisha, its mine in Eritrea, has achieved commercial zinc production, with completion of the zinc expansion, like the original mine and the copper circuit, completed within time and under budget. This is a strong record for any mining company. The bad news, however, are metallurgical problems that have reduced the value of the ore. Nevsun hopes to solve the problem by the end of the year, and in the meantime is also mining some gold from its stockpile to partially make up for the revenue shortfall. But the uncertainty has weighed on the stock price.
The company also announced continued very strong drill results from the Cukaru Peki deposit in Serbia, recently acquired with the purchase of Resource Minerals. Nevsun has strong cash flow, solid balance sheet and pays a market-beating dividend. The Reservoir addition provides diversification away from Eritrea and excellent potential. The metallurgical problems, while important, will likely be resolved with trial and error. If we did not own Nevsun, we'd be looking at buying, at least on further pullbacks.
New CEO outlines company strategy
Goldcorp Inc. (GG.NY, 15.38) said that the Eleonore deposit, acquired from Virginia, is now outperforming expectations, following its start-up issues. After several acquisitions, of which Eleonore was just one, Goldcorp is now "in harvest mode," according to new CEO David Garofalo in a recent meeting I had with him.
His goal is to maximize the value of operations and increase profitability, and is less concerned with production growth. The company no longer has a grassroots exploration team, with a focus on its operations and "brownfields" (around existing operations). He believes the company has an adequate pipeline for now and aims to improve the balance sheet, "though we would also be looking to populate the pipeline."
In the past, Goldcorp—because of its strong assets and politically secure profile, traded at a premium to its peers. The stock has underperformed over the past year—partly, I believe, on uncertainty about the new CEO's direction—but could well regain some of its previous luster in the next leg-up in the gold market.
Will spin-off pay well?
Yamana Gold Inc. (AUY.NY, 3.86) has announced a new plan for its non-core Brazilian assets in the Brio unit. Almost exactly a year ago, Yamana said it would spin off the assets in an IPO, but abandoned that plan for lack of interest. Now it intends selling the unit to its shareholders, through the issuance of "purchase rights" whereby shareholders can purchase shares in the new company, which will then trade independently.
Yamana will raise cash from the sale, which it plans to use to pay down debt, and will retain an interest in Brio. Shareholders, however, will have to pay for something they already own. Final details have not been released, but based on the press release, it appears that Yamana does not intend for the shareholder purchase price to be at a discount. It is not clear if the rights can be sold, nor whether U.S. shareholders will be able to participate. Details, along with the purchase price, will be available within a couple of weeks. In any event, we suspect many shareholders will forego the opportunity. This is one more example, unfortunately, of Yamana getting it wrong.
Otherwise, things are looking up for the company. With an improved balance sheet, the growth profile is quite strong, with a 22% increase in production through 2019 from four projects already underway. More projects are in the pipeline. Yamana was one of the very top performers in the first half of the year, though it fell back in recent months. It has strong leverage to the price of gold, and at the current price is a buy.
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
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1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Nevsun Resources, Goldcorp Inc. and Yamana Gold. I determined which companies would be included in this article based on my research and understanding of the sector.
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