Money manager Adrian Day discusses two resource companies in his portfolio that he finds are buys at current levels.
Nevsun Resources (NYSE:NSU) continues to make progress on advancing the Timok property in Serbia, as well as turning around Bisha in Eritrea. Earlier in the month, Nevsun started construction of the exploration decline, a necessary development for the development and eventual construction of a mine at the site. This project will take approximately 24 months.
An alternative development plan is being studied, to de-risk the project by reducing the initial capex and production in the early years. If the company adopts this scenario, an updated pre-feasibility study will be released in the fall, with a full feasibility by the middle of next year, on schedule. Concurrently, an initial resource estimate for the Lower Zone, a joint venture with Freeport (NYSE:FCX), is expected in coming months.
The company is looking at various alternatives for project capex, including strategic partners who could provide political, technical, or offtake support in addition to the capital.
In Eritrea, the company is proceeding with an expansion of mining at Bisha, with an incremental capital cost of around $40 million. This reflects confidence that the metallurgical problems that bedevilled recoveries at the end of last year and early this. The expansion is estimated to generate an additional $104 million in cash flow over the next five years, which will go towards development at Timok.
The lawsuit against Nevsun for alleged mistreatment of workers in Eritrea will now move to the Supreme Court of Canada. Nevsun argues that the case should be heard in Eritrea not in Canada, but lost its argument in lower courts.
Bidders
Separately, Euro Sun said it would pay half its share of the joint proposal with Lundin to buy the company in cash; earlier, the proposal included C$1 in Euro Sun shares. (The cash would come from Nevsun's war chest, if the bid were successful.) This came in response to investor reluctance to take Euro Sun stock. Significantly, this revised offer was made by Euro Sun alone. We surmise this indicates that Lundin may have heard the market message that Euro Sun is not regarded as a serious partner. We could also infer that Lundin may be talking with Nevsun.
Is Another Offer Coming?
We would not be surprised to see an improved offer—perhaps for a joint venture—from Lundin, or from some other company, though any such offers are slow in coming. Nevsun has stated, however, that after the Lundin proposal was made public, it received interest from several other companies. Given the long-term value of the Lower Timok as well as the significant, if largely ignored, regional exploration potential, we think the current offer undervalues Timok and its long-term potential. It is possible that a formula whereby Lundin buys the Upper Timok and shares with Nevsun in the Lower Zone and exploration could be found, increasing the overall value to shareholders without meaningfully increasing what Lundin has to put up.
This is clearly a story to be continued. In the meantime, Nevsun is good value at the current price level, notwithstanding that the stock could fall back in the near term if it became clear that no offer would be forthcoming.
A Quality Company With Lots Of Activity
Midland Exploration (V:MD) continues to advance work on several projects. At the prospective Vortex zone, a new high-grade discovery at a joint venture with Soquem near the Detour Lake mine, a follow-up drill campaign of eight holes has been completed. Once the assays have been received, which should be shortly, the next drill campaign, to target the best zones identified, will be planned and perhaps commenced later this month.
In the James Bay region, there has been work with partner Osisko in the Éléonore area, work on several gold and base metals projects in the joint venture with Altius, and on its wholly owned James Bay Gold project owned property.
In all, Midland has 11 active projects at varying stages, in joint venture, under option, and some 100% owned, with a total of $6.7 million of exploration spending budgeted, of which Midland is responsible for a little over $4 million. Of course, these numbers can change depending on results, but we can expect a continued steady news flow throughout the rest of the year.
With nearly $15 million in cash—including some $1.75 million from the exercise of expiring warrants in May—Midland is well funded to continue its program. Top management, a solid balance sheet, and multiple active projects add up to a company that is well positioned for success. At the current price, Midland is a buy.
Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Midland Exploration. 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: Midland Exploration and Nevsun Resources. I determined which companies would be included in this article based on my research and understanding of the sector.
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