With the run-up in gold prices the mineral has and continues to look very attractive. There is little doubt that investors continue to believe that the mineral has upside and provides safety in economically uncertain times. However, like all commodities gold has volatility and that volatility can be rather significant at times. Be it the up-and-down price movements of the metal itself or the price movements of those that mine and/or sell it. Just like how the price of orange juice can be affected significantly by unforeseen factors like the weather so to can gold and in particular gold miners be affected by factors not always within their control. A labor strike at a mine can bring production to a standstill for days or even longer thus having the potential to impact the production totals for an entire quarter or worse, for the year. Machinery breakdowns, poltical instability and a whole host of other variables can all do the same. Then there is always the potential of the psychological impact on investors when a production disruption occurs or when a miner simply falls short in delivering what they promised or hoped to deliver.
Production Falls Short - The Market Reacts
Nevsun Resources (NYSEMKT:NSU) had a stellar 2011. The miner, which is Canadian based, brought on-line its first mine last year. The mine was built under budget and without any delays. Further, the company stated in its 2011 results that it has recouped all of its investment costs in bringing the Bisha mine on-line. The mining operation at the Bisha mine is located in the East African country of Eritrea. The deposit is one of the highest-grade open-pit mines in the world and has a projected lifespan of 12 years. Production numbers for last year from the mine were an impressive 379,000 oz and a cash cost/oz of less than $300/oz. All this has left the company with $347 million dollars in cash and moving forward with plans to bring on-line copper production at the Bisha site in 1H 2013 and finalize a mining license for the nearby (1.5km away from Bisha) Harena deposit, which the company hopes to begin mining some time in 2012.
So with a healthy 2011, a good amount of cash and clearly defined plans for 2012-2013 what is going on with the share price? One of those unforeseen events that investors do not like very much. On February 7, the company announced that production for 2012 would fall significantly - down from 379,000 ounces last year to between 190,000-210,000 ounces this year. Further, the company hired an independent engineering firm to conduct additional surveys - the results of which Nevsun will disclose in Q2 or early Q3. At this point the company has revised-down total reserves at the Bisha mine by 4%. Not surprisingly after the announcement the stock has fallen rather significantly. Which leads one to the question - are we at a buying opportunity? I would venture that if one has the trading intestinal fortitude to handle the volatility that we are no doubt in store for with NSU then this might be a good time to buy. I will be adding this one to my watch list as at this point I frankly do not have the moxie to ride the volatility on this.
However, much more than providing some level of insight on Nevsun the announcement on Tuesday provides a reality check for those of us who enjoy investing in the mining sector. Frankly with the level of volatility in the commodity sector and mining stocks (which are so closely tied to the pure commodity market) one would have to have a penchant for pain or enjoy this higher-risk potentially higher-reward sector. Miners, particularly junior miners, can make mistakes and projections can always be revised. The revision in production goals for this year along with the revision of reserve numbers show us that there are indeed a great many variables that can affect a company's share performance - even if that company is mining and selling gold. It also underscores that oft used disclosure that past performance is not an indicator of future performance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.