The New Timok Looks Good, But I Liked The Old One More
Oct. 27, 2017 12:48 PM ET|3 comments| About: Nevsun Resources Ltd. (NSU), Includes: FCX
Peter Arendas
Peter Arendas
Long only, commodities, research analyst
(1,647 followers)
Summary
Nevsun Resources has released an updated PEA for its Serbian high-grade copper-gold Timok project.
The initial CAPEX has increased to $630 million.
The projected average annual copper production has increased, however, the projected average annual gold production has decreased.
The copper cash costs have increased due to lower gold by-product credits.
The after-tax NPV (8%) declined to $1.47 billion, while the after-tax IRR declined to 50%.
Nevsun Resources (NSU) finally released the long-awaited results of the Timok Project Upper Zone updated PEA. Although the original plan was to release the Timok PFS in September, back in July, the new management announced that the PFS will be postponed to Q1 2018 and there will be only an updated PEA released in October. The market reaction wasn't too positive and as the today's news release shows, the nervousness was legitimate. The Timok Project has experienced some significant changes and some of them are not too positive. Although the average projected annual copper production has increased, the annual gold production should decrease compared to the original PEA. But the worst thing is that the initial CAPEX has increased from $213 million to $630 million.
The main reason for the increased CAPEX is that Nevsun seems to refuse the idea of a staged development. The original PEA prepared in early 2016, when the project was owned by Reservoir Minerals, assumed that there will be a starter mine producing high-grade direct-shipping ore (DSO). The initial CAPEX for the starter mine was estimated at $213 million. The cash-flow generated by the starter mine was meant to be sufficient to fund the development of the main mine with a throughput rate of 2 Mtpa, that was projected to cost $182 million. But there is no mention of a starter mine in the updated PEA. Moreover, the mill should process 42.1 million tonnes of ore over the 15-year mine life, which means that the mill throughput rate must be at least 2.8 Mtpa.
Source: own processing, using data of Nevsun Resources
Due to the higher throughput rate and a bigger volume of resources (as shown in the table below, the volume of resources has increased approximately by 10% (copper) and 5% (gold)), the average annual copper production should increase to 140 million lb. On the other hand, the volume of gold production should be only 38,000 toz per year, mainly due to the lower gold recoveries.
Source: own processing, using data of Nevsun Resources
The lower volume of gold production should have a negative impact on copper production costs. While the C1 cash costs were originally estimated at $0.55 and $0.87 respectively and the C3 cash costs were originally estimated at $0.97 and $1.24 respectively, according to the updated PEA, the C1 and C3 cash costs should be approximately $1.02 and $1.59 respectively. This increase was caused also by the reduced gold production because lower gold production means lower gold by-product credits.
The changes in the development plan have negatively affected also the after-tax NPV and IRR. At a gold price of $1,300/toz and copper price of $3/lb, the after-tax NPV(8%) equals $1.473 billion and the after-tax IRR equals 50%. Although the NPV experienced only a mild decline compared to the original PEA (it is important to note that the original PEA used a gold price of $1,200/toz while the new one uses a gold price of $1,300/toz), the IRR has declined rapidly, from 106% to 50%. But although the decline was very negative, it is important to note that an after-tax IRR of 50% is still a great number that can be reached only by a handful of projects.
Despite the fact that the updated PEA isn't as exceptional as the old one, Timok is still a great project and even the significantly increased CAPEX shouldn't be too hard to finance, as Nevsun holds cash and cash equivalents worth $151 million, it is debt-free and the Bisha mine is still able to generate some cash-flow, despite the prevailing problems with the concentrates quality and copper recoveries. Given the economics of Timok, it shouldn't be a problem to secure a debt financing worth $400-500 million. Thanks to the high-grade zone of ore grading around 8% copper, the Timok mine should be able to generate a lot of cash in the early years, as indicated also by the payback time that is estimated at only 1.4 years. It means that Nevsun should be able to get rid of the future debt pretty quickly.
Moreover, it is possible that the PFS will provide a little better numbers, as there is a lot of space to improve. As Nevsun's CEO has stated:
For now, we remain focused on further defining the project capital cost and execution plan through robust front-end engineering. Additional detailed design and metallurgical test work is ongoing ahead of the pre-feasibility study and we now plan to break ground on the exploration decline in Q1 2018.
Especially the gold recoveries are very low. According to the updated PEA, the gold recoveries are estimated at 31%, which is a very low number. As a result, only 569,000 toz gold should be produced over the 15-year mine life. It is a significant decline compared to the original PEA that projected life of mine gold production of 744,00 and 824,000 toz gold respectively.
It is also important not to forget that Timok Upper Zone is only the beginning. There is also the large Timok Lower Zone, that is being explored in cooperation with Freeport-McMoRan (FCX). And the management has stated several times, that there is a real potential to discover more Timok-like deposits on the property.
Conclusion
Although I liked the old Timok more than the new one, the project is still very promising. The after-tax NPV(8%) is almost $1.5 billion, which compares very favorably to the current market capitalization of Nevsun Resources that stands at $625 million. Moreover, Nevsun still owns a substantial part of the Eritrean Bisha mine, the Timok Lower Zone, and several interesting exploration targets both in Eritrea and in Serbia. The company is debt-free and it holds cash of $151 million. Financing the Timok mine shouldn't be a too big problem. Moreover, it is quite possible that the PFS (expected in Q1 2018) or FS (expected in H1 2019) will be able to improve the economics of the Timok Upper Zone mine.
What may be a little worrying is the near-term share price development. Nevsun's share price has declined almost by 20% over the last 2 weeks and it is hard to expect that the today's news will be able to reverse this trend. I will definitely keep on holding my position. However, although the current share price seems to be cheap, I will not add more shares before the share price bottoms clearly.
Disclosure: I am/we are long NSU.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.