The following came from Canaccord on Nov 12, 2012:


Nevsun Resources (NSU : NYSE MKT, NSU : TSX| HOLD, Target US$4.50)

Strong Q3/12; but oxide operation nearing its end


We maintain our HOLD rating on Nevsun Resources following the release of Q3/12 results. Nevsun currently trades at 0.79x P/NAV (5%/Spot Gold) vs the junior precious metal producer average of 0.71x. We continue to view the stock as fairly valued in the context of a declining free cash flow profile, particularly in 2016 and beyond, as the Bisha mine transitions to the primary (zinc) phase. A potential acquisition may help sustain or even grow the company’s cash flow profile longer term, but in the near term, there is the risk that an acquisition could be viewed as dilutive to the company’s asset portfolio, considering the quality of the high-grade Bisha mine.


Investment highlights

Q3/12 EPS was $0.22 vs our estimate of $0.20 and consensus of $0.13. We note that the consensus EPS estimate appeared to be too low, given that strong Q3/12 production of 98,000 oz had been pre-released.


The variance from our estimate was explained by lower cash costs ($307/oz vs our $354/oz estimate) and a higher realized gold price ($1,681/oz realized vs our $1,654 estimate), partly offset by lower sales (96,700 oz vs our 98,000 oz estimate).


As previously indicated, the company expects to exceed previously announced 2012 production targets of 280,000-300,000 oz. Our estimates are currently at 328,000 oz, but do imply a sequential decline in Q4/12 production results (vs Q3/12 levels).


The company has encountered high-grade pockets of pyrite-rich transition supergene ore, which could have a favourable impact on gold production levels in the next few quarters if leachability can be confirmed (trial processing to be undertaken in Q4/12). However, we continue to see limited upside in gold production since the oxide operation is nearing the end of its life (expected Q2/13).



Our 12-month target price remains unchanged at US$4.50, based on 0.7x our blended peak NAVPS estimate (5% precious metals, 8% base metals) of US$6.22 (previously US$6.34).


Investment risks

The typical risks associated with any mining investment include commodity and exchange rate risk, and permitting and technical (development/operating) risk. In particular, investors considering an investment in Nevsun should consider the geopolitical risks associated with Eritrea, an east African country with a history of border conflict with Ethiopia. Risks to our target price and rating include but are not limited to the potential for the political situation in the country to deteriorate materially, resulting in unfavourable changes to the existing ownership structure and fiscal regime under which Bisha operates. In addition, the Bisha mine continues to ramp-up to steady state and we would not rule out the potential for operational challenges and/or cost inflation which could also be an obstacle to attaining our target price. Considering the risks associated with the company, investment in Nevsun shares is recommended only for risk-tolerant investors with a longer time horizon.


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