On Wednesday, Aug. 8, Nevsun Resources Ltd. (T:NSU) reported a loss of $0.15 earnings per share (EPS) for the second quarter of 2017 (all amounts are in U.S. dollars). Revenues were down quarter on quarter (8%) on a decline in realized zinc prices (11%) and zinc concentrate sales (35%), but benefited from copper sales (7.7 million lbs). EPS was impacted by a $70 million, write-down of long term stockpiles and mobile equipment, reflecting a revised mine plan at Bisha from 8 to 4 years. Cash increased to $171 million from $169M in the first quarter of 2017, primarily the result of positive operating cash of $13 million, reduced taxes and a working capital release of $9 million. Zinc production was down by 17% to 43 million lbs on lower throughput, grades and recoveries, and zinc and cash costs were up 1% to $0.92/lb. However, copper production, though minor (5.7 million lbs), was up 36% for the quarter, maintaining cash costs of $1.59/lb.
Management revised production guidance to 190-210 million lbs of zinc, down from 200-230m lbs, while its outlook for copper improved with a guidance of 20-30 million lbs of copper, up from 10-20 million lbs. Revised production guidance reflects the fact that Bisha no longer produces bulk zinc concentrate. In order to improve metal recovery and material movement, the company approved an additional $24 million in capital for Bisha. A larger capital investment would have been required to maintain a longer mine life and could not have been funded by the internal cash flow from Bisha. The Bisha operation now has a reserve mine life to mid-2021, down from approximately eight years at the last reserve estimate.
The company’s main focus is to bring the Timok project into production by 2021. In 2017, the company has spent $14 million on the Upper Zone and has recently started a 10,000-metre drill program to search for additional high grade zones. Milestones achieved to date in 2017 include the completion of all planned infill drilling (30,000 metres) and the advancement of key technical mining, metallurgical and environmental studies. The company noted that it will begin a decline development to reach the ore body, rather than a shaft, in the fourth quarter of 2017.
The company delayed the preliminary feasibility study to the first quarter of 2018 and plans to deliver an update preliminary economic assessment in October, 2017. After the delivery of a feasibility study on either the Upper Zone or the Lower Zone, Freeport McMoran (US:FCX) will increase its ownership in the Lower Zone to 54% and Nevsun will own 100% of the Upper Zone and the remaining 46% of the upper zone.
The negative news has sent the shares in the company down to a year low of $2.67 (CDN), from $3.39 before the second quarter financials were released on Wednesday. These are levels that have not been seen since 2010, and a far cry from its peaks in the seven dollar range back in 2010 when Bisha was moving to production and copper was cresting at $4.50/lb.
Backgrounder on Nevsun Resources CEO and President, Peter Kukielski
Nevsun Resources appointed Stanford-educated civil engineer Peter Kukielski, the former head of AcrelorMittal, as CEO and President of Nevsun in May, 2017. He ruffled feathers at ArcelorMittal by suggesting it should spin-off its mining division, joined Warburg Pincus at the beginning of 2014. He also sits on the board of Perth-based South32. At Warburg Pincus he was the executive in residence at the private equity firm, where he wanted to create not a mining fund but an operating miner with physical assets. This was back in 2014 at the bottom of the commodities downturn when several other mining executives, including former Xstrata boss Mick Davis, launched private equity funds hoping to get fire sale prices on assets as prices tumbled. Instead, they largely sat on the sidelines as prices rallied throughout 2016 according to the Global Mining Observer. Warburg Pincus pulled the plug on the $1 billion fund at the end of 2016, having failed to land any deals. One mine his fund was looking at was Rio Tinto’s IOC (Iron Ore Company of Canada) operation in Canada, but complications included a $900 million lawsuit hanging over the asset, brought by Inuit groups. Don Lindsay, the head of Vancouver-based Teck, also looked at buying the mine under Rio’s former chief executive Sam Walsh. Unphased by the closing of the fund he led, Mr. Kukielski landed at the helm of Nevsun as it is moving to its next project, Timok where he may get his wish to actually build an operating mine with assets, if he sticks around and no one pulls the plug.