Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT, US$3.45) has rejected a notional C$5 joint-bid for the company from Lundin and EuroSun. Under the bid, shareholders would receive C$2 in cash; C$2 in Lundin shares; and C$1 in EuroSun shares. Lundin would get Timok (and other Serbian properties), while EuroSun would get the Bisha mine and other assets in Eritrea, plus Nevsun's cash hoard of $150 million.
Lundin clearly wants what is arguably the best undeveloped copper project in the world. It was Lundin that, in trying to buy part of Timok in 2016, set off Reservoir's right-of-first-offer which saw that company sold to Nevsun. Now it has gone public with its offer for Nevsun after Nevsun apparently rejected the offer after talks throughout this year.
Eritrea complicates issues
The fact that Lundin teamed up with EuroSun, a small Vancouver company, and is prepared to give them all of Nevsun's cash, shows how eager Lundin is for Timok. It also shows how few companies want the Eritrean assets, whether for legal, PR, or human rights concerns. (Technically, the bid for Nevsun comes from EuroSun, but clearly it is Lundin that is leading the charge.)
Nevsun, saying that the Lundin bid undervalued the company, also said any bid would have to be for the whole company. This sounds very much as though the Eritrean assets are being used as a poison pill to prevent someone taking over Nevsun.
We think the bid undervalues Nevsun (particularly Timok), especially since we do not put much value on the EuroSun shares. However, it is by no means derisory. Clearly, Lundin did not go public with its offer just to annoy Nevsun, and we suspect it will come forward with an improved offer. But if Nevsun rejects the offer structure as well as the price, Lundin will have to go hostile, more expensive, time-consuming and problematic.
There could also be another bid for the company, perhaps from Freeport, which is Nevsun's partner on the deep Timok. A company might bid to buy all of Nevsun with a plan to spin off the toxic Eritrean assets.
No doubt, if there is not an improved offer, Nevsun shares will fall back; it was at $2.70 before the bid, after moving up from $2 at the beginning of the year. It wouldn't fall back that far, given the strong PFS released in March, and more recent improvements at the Bisha mine. Worst case would be that Nevsun brings in a partner of some type that reduces the value of Timok to Lundin or a third party. A higher successful bid is not certain, but the risk-reward indicates holding (or even buying) at this level.
Wheaton to get its day in court
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, US$21.67), notwithstanding somewhat mixed results—slightly lower-than-expected sales but also lower-than-anticipated costs—the outlook is improving. There is forecast 31% growth in "gold equivalent ounces" by 2020, over last year, with additional growth beyond that from the start of Rosemont in 2021 and a possible expansion at Salobo. (Wheaton would have to make an additional capital contribution to maintain its gold stream at the later mine, but in a good market, no doubt would do so.) Near-term growth includes the re-start of the San Dimas mine with its revised streaming deal, and the new pyrite leach project at Peñasquito.
Barrick's decision to shelve the massive Pascua-Lama project is a blow to Wheaton's leverage. It has already written down nearly 50% of its investment. And it has the option to end the agreement in mid-2020 and receive $225 million back from Barrick.
The Canadian tax challenge continues to weight on the stock, but a trial date is now set for September, 2019. If Wheaton wins this case, the stock could rally significantly, and we expect it will move steadily higher as we approach this date. A loss, of course, would hurt, though the stock already discounts this to a large extent.
The balance sheet is not as strong as that of the other major royalty and streaming companies, but strong enough with nearly $800 million of available liquidity. The stock has rallied almost 15% since the beginning of March, and we would wait for a pullback to buy more.
Raising more funds to move closer to production…or sale
Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE, US$0.76) announced an equity raise of C$7 million, although it already has a strong balance sheet (C$12 million cash as of March 31). This raise should carry the company through to a production decision on Ixtaca a year from now. Funds will be used to make the final payment on a mill purchase; complete and file an environment report, in June; complete the feasibility study by the third quarter of this year; and complete land purchases and other ongoing work on developing the project.
Of course, we are hoping that another company will acquire this gold-silver project, once the feasibility is released and permits received. In the meantime, Almaden is a buy at these prices.
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: Nevsun Resources. 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, Wheaton Precious Metals and Almaden Minerals. I determined which companies would be included in this article based on my research and understanding of the sector.
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