Nevsun Resources Ltd. (NSU, NY, 2.12) fell sharply after it announced a decision to operate a smaller, short-life open-pit at the troubled Bisha mine in Eritrea, cutting the mine-life by 50% to four years. In addition, a Prefeasibility Study (PFS) on Timok in Serbia was pushed back from September to "first quarter." Though it appeared that there was no good news—one analyst called it a "kitchen sink" strategic update—each decision had a sound basis, leaving Nevsun, in time, a better company.
Eritrean operations scaled back, but still good cash flow
The metal recoveries at Bisha, which have caused the company and the stock difficulties since the start-up of the third phase last fall, are now apparently improving and the company called its new plan at "highly executable and arguably somewhat conservative." Although it continues to look at ways of extending the mine life, the small mine size is unlikely to change; the "point of no return" on reversing the decision is the end of this year. Bisha is expected to continue to generate free cash flow for the rest of its mine life, after an investment this year of $24 million.
Timok is a priority
On Timok, acquired when it bought Reservoir Minerals, there are several milestones ahead, including the updated Preliminary Economic Assessment in October; commencement of the decline construction by the end of the year; and a PFS in the first quarter of 2018. The PEA is at a high level, the company said, so completing the feasibility should come quickly after that with production on track for 2021. This is for the upper zone. Underground work with Freeport, the company conceded, is progressing more slowly than hoped.
Although the company with its objective of building a strong multi-mine company is on the lookout for opportunistic acquisitions, and it is undertaking brown- and green-fields exploration in both Serbia and Eritrea, the priority is on preserving its cash—currently $171 million with no debt—for the construction of the mine in Serbia. "Timok is absolutely our top priority," said new CEO Peter Kukielski.
Nevsun is a buy here if you do not own it (or perhaps add to your position, and sell some after 31 days to capture a loss on your other holdings.)
Give with one hand, take away with the other
Yamana Gold Inc. (AUY, NY, 2.69) had a strong second-quarter with production up and cash costs staying under $700/ounce. However, as we have come to expect with this company, every piece of good news is offset by bad. This time, the company announced it would paying $75 million to settle a dispute with the Brazilian tax authorities. Though the decision to settle is probably a good one, it will likely have to tap it credit line to make the payment, given its anticipated high capital program. It is also accelerating its sale of non-core assets to raise cash for this program.
We are frustrated with Yamana, which can never seem to fulfill its potential, and seems to have a cupboard full of cockroaches to continually set back any progress. This, plus the rally in the last two months from a low of $2.23, makes us reluctant to buy. But the valuation—20% discount to its peers on a price-to-NAV basis—with Yamana the cheapest of the large miners make us reluctant to sell. We are holding.
Another strong quarter for Franco
Franco-Nevada Corp. (FNV, NY, 77.65) had a strong quarter. Though "gold equivalent ounces" were slightly down on the quarter, they were up 9% from the corresponding quarter a year ago, and the quarter set new records on many financial metrics, including revenue and net income. Precious metals continue to dominate, at 92% of revenues, with 71% from gold.
Following exercise of expiring warrants, the company has $600 million cash, is debt free, and has about $100 million in securities plus over $1 billion available on its line of credit, putting it in an unrivalled position for new acquisitions. $200 million of the cash will go towards development of Cobre Panama, as agreed, for a start-up in 2018/2019. Franco said it is on the lookout equally for minerals, including gold, and oil & gas.
Growth bump ahead, followed by decade of no decline
With the start-up of Cobre Panama, Franco should see a strong boost in revenue growth. Once that mine is fully operational, around 2021, Franco would see 10 years ahead of stable business without any new assets, putting it in a very strong position
Franco management noted that the company would be subject to the same offshore tax issue that Wheaton Precious Metals is fighting, with about 44% of its EBITDA generated offshore. Most of its offshore streams are recent, however, so any back taxes would be relatively low; the larger impact would be on its future business.
Franco is more expensive than its peers on a valuation basis, but given the diversified portfolio, the decade-long stability, and the balance sheet, this is justified. Franco is a core holding for us, and we buy again on any pullback.
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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Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Franco-Nevada and 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, Franco-Nevada and Yamana Gold. I determined which companies would be included in this article based on my research and understanding of the sector.
2) The following companies mentioned in this article are sponsors of Streetwise Reports: Wheaton Precious Metals Corp. Streetwise Reports does not accept stock in exchange for its services. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
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