VANCOUVER — It’s been a busy year for Nevsun Resources (TSX: NSU; NYSE-MKT: NSU) headlined by the US$440-million cash-and-share purchase of junior Reservoir Minerals and its stake in the emerging Timok high-grade copper-gold discovery in Serbia. The company also completed a US$77-million zinc expansion at its Bisha polymetallic mine in Eritrea. Nevsun announced its maiden concentrate sale from Bisha in September, while the copper circuit — coupled with the new zinc circuit — has produced 40,000 tonnes of commercially saleable zinc concentrate since June.
The twin achievements mark Nevsun’s move towards becoming a mid-tier base metal producer. The company’s primary cash driver during Bisha’s early years was gold-silver doré produced from a high-grade layer of a volcanogenic massive sulphide deposit with base metal zones beneath.
The new zinc and existing copper flotation plants could produce 225 million lb. zinc-in-concentrate and 53 million lb. copper-in-concentrate every year through 2025. The company’s annual production estimates for 2016 total 70 to 100 million lb. zinc-in-concentrate and between 40 and 60 million lb. copper-in-concentrate.
Nevsun envisions its presence in Eritrea running far beyond that 2025 cut-off date, however, and in late July it expanded its exploration licences in Eritrea to 814 sq. km. The company will spend US$10 million this year on regional and near-mine exploration.
“We have had promising drill results regionally, and we’re following up on these additions. We’re also doing more airborne geophysics because that land position is highly prospective. There are a number of deposits, and it’s simply a question of delineating resources,” Nevsun president and CEO Cliff Davis said during an interview in the company’s Vancouver offices.
“The ramp-up for zinc concentrate will continue over the rest of the year, and we expect to increase recoveries and the quality of the product,” Davis said. “One of the difficulties we’ve had is producing a saleable copper product. We’re producing a concentrate, but it’s a bulk product right now, which means it’s off specification. That said it’s still saleable, but has lower payables.”
Nevsun has enjoyed success in Eritrea, but it’s also come under fire from non-governmental organizations and media that say it has partnered with a human rights-abusing authoritarian regime. In early October, the B.C. Supreme Court approved a civil lawsuit filed by three Eritrean refugees who claim the company may have been complicit in using forced labour provided by the Eritrean government while building Bisha. The case will be the first instance where a Canadian company faces allegations domestically over claims of international human rights abuses. None of the claims have been proven in court.
“I obviously can’t comment on outstanding legal proceedings,” Davis said when asked about the civil suit and related media coverage. “I can say that we’ve been in Eritrea for over 18 years and we know our community. It’s important to understand the deep poverty there, and the good being done in terms of training and supply lines. When it comes to some of the media attention, we are comfortable with who we are and how we operate. We’ve had an international lawyer complete independent human rights assessments. There are certain international groups focused on regime change, and that plays a role in terms of the broader issue.”
Last year Nevsun decided to deploy its growing capital in a merger or acquisition.
Davis said “80%” of management’s time was dedicated to finding the company’s next mine. The focus remained on base metals with a tilt towards copper due to management’s belief in the red metal’s positive long-term supply-demand fundamentals.
In April, Nevsun waded into a bidding war for Reservoir and its interest in Timok after a US$262-million starting offer from mid-tier Lundin Mining (TSX: LUN; US-OTC: LUNMF). Nevsun upped the stakes with its own US$365-million bid which was eventually boosted by US$75 million in cash to entice two holdout Reservoir shareholders: Jing Bao Ltd. and Shandong Xiangguang Group.
“The gauntlet was dropped with the Lundin bid, but we reacted quickly because we were already well into due diligence with Reservoir. We didn’t need to worry about valuations, because we had already established a benchmark that allowed us to be opportunistic,” Davis said.
“We were quite prepared to pay the cash. We had the deal proxies a couple days before and we knew that we were just going to miss the approval vote. It came down to negotiating with a few shareholders of Reservoir that were grinding us. We came to an agreement with a couple of parties to get the deal over the line right at the deadline.”
The current crown jewel at Timok is the Cukaru Peki deposit, which is subdivided into an Upper Zone of high-sulphidation epithermal mineralization, and an underlying Lower Zone of porphyry-type mineralization, which has bulk-tonnage potential and is not included in current resource estimates.
Nevsun acquired full ownership of the Upper Zone, while U.S. major Freeport-McMoRan (NYSE: FCX) has a right to back into a 54% stake in the Lower Zone after a feasibility study.
Upper Zone resources include 1.7 million indicated tonnes above a 0.8% copper cut-off grade, with grades of 13.5% copper, 10.4 grams gold per tonne and 0.2% arsenic. Inferred resources include 35 million tonnes above a 0.8% copper cut-off grade, with grades of 2.9% copper, 1.7 grams gold and 0.2% arsenic. Contained metals total 1.2 million tonnes copper and 2.5 million oz. gold.
Nevsun has six drills completing a 50,000-metre program on the Upper Zone, while it will spend US$20 million on a 67,000-metre program on the Lower Zone in accordance with the Freeport joint venture. The plan involves releasing a prefeasibility study within 12 months leading into production by 2021.
“It’s beneficial to have major mining companies like Freeport involved in assets like Timok’s Lower Zone, and similarly our arrangements with Rio Tinto (NYSE: RIO) on the neighbouring Tilva project. They not only bring more skills, but also a longer-term ability to develop larger projects,” Davis added.
“The Serbian state is supportive and understands the long-term implications of the project. We recently received an endorsement, and there are economic reasons to advance the development. Given that support and our experience in mine development, we have fairly aggressive targets for Timok.”
On Oct. 17, Nevsun unveiled assays from the Upper Zone that formed part of a resource upgrade program last year. The results reflect the deposit’s impressive grades, with highlights of: 248 metres of 6.4% copper and 3.19 grams gold per tonne in hole 150099; 300 metres of 5.5% copper and 3.32 grams gold in hole 150078; and 188 metres of 4% copper and 4.24 grams gold in hole 150094.
Davis points out that the Upper Zone’s rich gold credits will drive profit in the early years, reminiscent of Nevsun’s strategy at Bisha. Reservoir released a preliminary economic assessment on a two-stage build on the Upper Zone that would cost US$213 million to develop. The mine would have produced 58,000 tonnes copper and 62,000 oz. gold annually, but Nevsun will instead look at direct-shipping options for high-grade material, as well as other mine plan adjustments.
Nevsun CEO Cliff Davis was a partner in the international accounting firm KPMG before joining the company in 1994. Credit: Nevsun Resources.
“We just finished a major strategic review and our story right now is Timok and Bisha. That doesn’t mean we close our eyes to opportunity, but we won’t be allocating nearly as much of our time to external opportunities as we were before the Reservoir acquisition,” Davis said.
Nevsun had US$220 million in cash and no debt at the end of September. Shares have traded in a 52-week range of $3.27 to $4.81 per share, and closed at $3.69 at press time. Nevsun has 299.7 million shares outstanding for a $1.1-billion market capitalization.
Davis argues that the market perhaps hasn’t “fully valued” Timok since the deal, but he expects this to change as more drilling and scoping results are released over the coming year.