Nevsun Resources Ltd (NSU)

[geodan]

Overreaction on Divvy, it is neutral financially, means less divvy now but more money later. Best take on this is by Gold Mining Bull on Alpha.
http://seekingalpha.com/article/4049816-nevsun-disappointed-predict?v=1488134403&commenter=1&comments=show

Summary (note charts at link)

Nevsun recently announced its Q4 and full-year 2016 financial results.

The big news is the company has slashed its dividend to preserve cash and will re-direct the funds to develop its Timok project.

Shares plunged on the news. I'm disappointed I didn't predict this event, but I'll explain why this is an opportunity for investors.

Nevsun: Disappointed By The News But Still Buying

NSU Chart

NSU data by YCharts

I'm usually the first to admit when I'm wrong. I think I have a pretty decent track record here on Seeking Alpha, but I certainly am not perfect - sometimes, my timing on buy recommendations just plain stinks.

I'm disappointed in myself following the news that Nevsun Resources (NYSEMKT:NSU) will slash its dividend by 75%, from $.04 per share quarterly to $.01 per share. Honestly, looking back, I should have seen this news coming from a mile away and I should have predicted this development in my previous coverage. I also should have predicted the sell-off that occurred following the dividend cut announcement (although I'm a bit surprised at the severity of the sell-off).

So, readers should know that when I said that it was time to buy Nevsun back on Jan. 20, it was clearly not the best timing. I also said Nevsun paid a sustainable 5%+ dividend, and looking back, this was not a completely accurate statement. While I still feel the dividend is sustainable - Nevsun has the cash on hand and the operating cash flow to pay this dividend in my opinion - it doesn't mean the company will continue to pay it as it has other priorities.

The company has announced that it will cut the dividend 75% and redeploy $120 million from the dividend savings over a four-year period to develop its Timok project in Serbia. By cutting the dividend from $.16 to $.04 per share annually, Nevsun will save approximately $30 million per year or $120 million over that 4-year span.

Upon further review, I think this is the right move by Nevsun as the company needs to ensure Timok gets to production by 2020-21. This is by far the company's top priority and how it will create long-term value for shareholders. The stock continues to trade at an absurd valuation, and paying a substantial dividend has not helped this.



(With Timok in production, Nevsun would produce as much copper as peer Oz Minerals (OTCPK:OZMLF), which currently carries a $2.32 billion market cap. Credit: Nevsun corporate presentation)

Between its cash on hand of $200 million (and no debt), savings from the dividend cut, and its regular operating cash flow, Nevsun is more than likely to have all the funds it needs to bring Timok's Upper Zone to production, as it carries initial capital requirements of just $213 million (based on the preliminary economic assessment released by the previous owner, Reservoir Minerals). Sustaining capital costs over the first six years are estimated at just $226 million, although these costs will be funded through operating cash flow generated at the mine.

Of course, readers should note that these initial capital costs and the overall economics of the Upper Zone at Timok are based on estimates from the PEA, and will likely change upon release of the more advanced pre-feasibility and feasibility studies. But it's important to note that the $946 million net present value of this project (from the PEA) is based on gold prices of $1,250 an ounce and copper prices of $2.20 per pound (gold is just over that price, while copper currently trades at $2.71 per pound).

The pre-feasibility to be released by Nevsun will include an initial reserve based on its past drilling results (which were quite exceptional). I am expecting a very positive pre-feasibility report as the resource base should be expanded and carry higher average grades, and since copper has rallied a bit since the release of the PEA.

Timok really is the key for Nevsun going forward. As I pointed out in past articles, it gives the company huge upside potential as it's expected to more than triple copper production by 2021. It will also transform Nevsun into a multi-mine, multi-country copper/zinc producer, which should lead to a higher valuation. Please take a look at past drill results at Timok's Upper Zone to get an idea of the kind of upside potential at this project, and keep in mind that the aforementioned PEA does not include any of these outstanding drill results.

The next steps and potential catalysts for Nevsun include completion of the pre-feasibility study (its targeted for September 2017 completion), and new drilling results from 100,000+ meters of drilling in 2017 at both the Upper and Lower Zone of Timok. A positive pre-feasibility or more high-grade drill results at Timok could propel shares higher.

Nevsun also reported Q4 and full-year 2016 results which weren't that impressive, but 2017 should be a bounce-back year. The company reported full-year operating income of $80.5 million (down from $92.7 million in 2015) and net income attributable to Nevsun shareholders of $11.4 million ($22.8 million in 2015). Nevsun did not make a lot of progress in late-2016 on its issues with its copper concentrate, but says that it has had more recent success after "various plant modifications and procedural changes, and progressive learnings from the recent geo-metallurgy program."

For 2017, investors can expect much higher zinc output of between 200-230 million pounds (compared to 90.2 million pounds in 2016), with cash costs to range between $.70 - $.90 per pound; zinc prices have been rallying over the past six months and now trade close to $1.30 per pound. With operating margins of $.40 per pound ($1.30 zinc prices and $.90 cash costs), Nevsun could produce $100 million in operating cash flow from zinc production alone. For copper production, Nevsun expects to produce 10-20 million pounds of copper at cash costs between $.90 - $1.10 per pound. Nevsun will also monetize 10,000 gold equivalent ounces from stockpiles, and at gold prices of $1,250 per ounce, this would add another $12.5 million in annual cash flow.

I understand long-term shareholder's frustration here. I have owned Nevsun stock for over a year and a half now and don't have much to show for it. I re-invested all dividends. But I think the strong sell-off in shares is not warranted. The stock still yields 1.3%, and Nevsun shares trade at an even bigger discount than before. It will be profitable in 2017 and continue advancing Timok.

With a current market cap of $818 million and an enterprise value of approximately $617 million, shares are trading at a ridiculous valuation. Over the past year, Nevsun has produced $71.13 million in operating cash flow, so the stock is trading at less than 10X its trailing cash flow. With operating income of $80.4 million in 2016, Nevsun trades at 7.6X its 2016 operating income. It trades at an EV/EBITDA of 6.06 and carries a book value per share of $3.15, according to Yahoo Finance, which is well above the current stock price.

Here's another way to look at it: the Timok project's net present value (based on the PEA) currently exceeds Nevsun's current market cap. The project was valued at $946 million and is partly based on copper prices of $2.20 per pound (again, prices currently trade at $2.70 per pound)! Buying shares here means you are essentially getting the Bisha mine for free and still buying the Timok project at a big discount. And with a larger reserve and resource base, higher grades and higher copper prices, I'm actually expecting the pre-feasibility study to show Timok as a more economical project with a higher net present value.

So, I'll admit I was pretty off on my timing with my last bullish article on Nevsun. But, I'm also somewhat glad shares have sold off, as I plan on buying more shares at these low levels. The long-term upside of this company is huge and the stock is ridiculously undervalued here. Ultimately, I think the dividend will come back after Timok is producing. But for now, this is a growth stock - not a dividend stock.

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.