Nevsun Resources Ltd. (NYSEMKT:NSU)
Q1 2016 Results Earnings Conference Call
April 22, 2016, 11:00 AM ET
Cliff Davis - President and CEO
Frazer Bourchier - COO
Tom Whelan - CFO
Scott Trebilcock - Chief Development Officer
Stefan Ioannou - Haywood Securities
Albert Sebastian - Prospect Advisors
Craig Hutchison - TD Securities
Joseph Gallucci - Dundee Capital Markets
Good morning, ladies and gentlemen and welcome to the Nevsun Resources Q1 2016 Earnings Results Conference Call.
I now would like to turn the conference over to Cliff Davis, President and CEO. Please go ahead, sir.
Good morning, everybody. Thank you, operator. I had a very nagging cough and I don't want to be hacking my way through this conference call. So I am going to hand this over to Scott Trebilcock, our Chief Development Officer. Go ahead.
Thank you, Cliff
All right. Let's get to it. I'll try and do the script to justice and then we'll move to the Q&A per usual after the script is finished.
Here with Cliff and I are Chief Operating Officer, Frazer Bourchier; and our Chief Financial Officer, Tom Whelan.
Before I begin, the usual cautionary comments. The following prepared statements and discussion contain forward-looking statements regarding production forecasts, past and future financial results, as well as the potential arising from exploration programs and potential M&A activity. Forward-looking statements are by their nature uncertain, and frequently but not always are identified by words, such as expects, anticipates, believes and similar expressions, or statements that, events, conditions or results, will, could or should occur or be achieved. Actual results or future events or conditions may differ materially from what is projected due to a variety of risks, uncertainties and other factors. We encourage all listeners to thoroughly read yesterday’s news release, as well as the quarterly financial statements and the entire MD&A. Note, all of the financial numbers referred to today are in U.S. dollars.
Okay. Let's get to the heart of it. Now I am going to provide Cliff's views of what we've accomplished over the quarter and where we're headed all in the context of our long term strategies that we've consistently communicated. We'll then open up the call to the question-and-answer period.
Nevsun had a tremendous first quarter. We continue to deliver value for our shareholders. We're profitable despite the significant downturn in the industry and we’re delivering on our objectives.
Nevsun remains strongly positioned in the sector. We have a great asset in Bisha. We have no debt and the capacity to carryout M&A. We focus on financial results and we have an aligned partner in the State of Eritrea. We take a very disciplined approach to running our business.
Q1 was no exception. Bisha mined 732,000 tons of supergene ore, 42% more than last year at 3.1% copper from the Bisha open pit. We’ve also stockpiled another 605,000 tons of primary ore as we prepare to start up our Zinc plant later this quarter.
We milled 584,000 tonnes of ore, 32% more than 2015 to produce 32 million pounds of copper, way to go Frazer. Bisha is ahead of production guidance and with our focus on cost containment and lower fuel prices, we achieved a C1 cash cost of $1.12 per pound, well ahead of budget and in the lowest quartile of the industry, way to go Tom.
We monetized 20,000 gold equivalent ounces from stockpiled material during the quarter, which contributed $11 million of operating income. With higher gold prices now then in the start of the year and another 60,000 to 80,000 gold equivalent ounces to be monetized, we expect these sales will make a healthy contribution to our bottom line in 2016.
We generated $22 million of net cash from operations from the mine. We had income before taxes of about $28 million. So we continue to generate strong operating cash flow. We continue to pay our shareholders a peer-leading quarterly dividend. We continue to invest in growth through exploration.
The balance sheet is very strong and with about $483 million in working capital including $438 million in cash. Our dividend is U.S. dollar $0.04 a share per quarter or $0.16 a share per annum, which is a yield of about 5%. Nevsun remains one of the highest yielding and most profitable companies in our peer group.
Planning for the future; our strategy is concise and straightforward. First, we plan to maximize the value of the Bisha asset and its resources. Second, we plan to grow our Eritrean assets through exploration and third, we plan to diversify our asset base through merger or acquisition to elaborate on each maximizing value from Bisha.
We continue to evaluate the underground opportunity at Bisha. We took the initial step last year to halt the way striping on Phase 8 and 9, which translated to reduced waste stripping cost of about $270 million over the next few years. We expect the decision of underground development will be taken later this year.
The Zinc plant continues to charge ahead. Cold commissioning on most of the zinc plant is almost finished. The next step will be hot ore commissioning after we process the remaining Supergene copper ore. Once the zinc plant is running, we expect the total Bisha revenue will be approximately 50% copper and 50% zinc with continued gold and silver credits in the concentrates.
As described in our MD&A, the zinc plant expansion is progressing very well and we’re ahead of schedule and well below budget. Recall, we've not committed any of our zinc off take, which means we have the opportunity to maximize value during future sales negotiations as we take advantage of what we believe will be a seller’s market for zinc and zinc prices appear to have some long awaited momentum with prices trending higher for most of 2016.
Expiration, unlike other mining companies, we have no plans to reduce our spending on expiration. Both Nevsun and the Government of Eritrea are very optimistic about the future of the Bisha District. Our exploration efforts continue to be very successful.
Earlier this week, we released some new drill results that suggest we should continue to drill out the newest Shelly discovery. Shelly looks to be another copper, zinc rich deposit that could feed our Bisha mill in the years ahead.
We’ve just started looking at its four kilometers strike length. Between Bisha, Harena, Shelly and other targets, the VMS district could grow to rival some of the most famous campus in Canada.
Diversification and business development. We believe the declining commodities price provides a great opportunity to acquire assets and naturally we continue to be very active in M&A. We're currently looking at several opportunities and will move forward when we see the clear path to generate a good return for our shareholders.
Finally I’d like to sum up with the few key messages. First we had a great quarter with positive financial results and we're financially very healthy. Second, our exploration program continues to be very successful, which should translate into further mine life extension and value.
Third, our zinc expansion is ahead of schedule, under budget and we should be processing zinc concentrate in late Q2. Fourth, our M&A strategy is based on capital discipline with total shareholder return at the fundamental driving principle. All in all, we have a proven Management Team that's looking out for the interest of all our stakeholders.
With that, I'll pass the call back to the operator to manage the question-and-answer period. Operator?
Thank you, sir. [Operator Instructions] One moment please for your first question, which will be coming from the line of Stefan Ioannou at Haywood Securities. Please go ahead.
Great. Thanks very much guys. Great looking quarter, congratulations. Just a couple of quick questions, just on the precious metal stockpile stuff that you sold in Q1, it was great to see that.
Would it be fair to say that you probably sold the highest best allotment of that material in Q1 or is it going to be similar to the rest of the year in terms of just kind of anticipating roughly what kind of revenues we might see through the remainder of this year?
Thanks Stefan, its Scott. I'll hand that one over to Tom Whelan, Chief Financial Officer.
Hi Stefan. Good question. No, we didn’t sell the highest grade stuff this quarter. Actually I think the grades will be a little bit higher going forward and as we’ve mentioned in the MD&A, a couple other things to tweak towards.
One is that we're expecting better commercial terms going forward for the rest of the year in terms of the amount of payable copper will get from those equivalent analysis and then secondly, obviously gold and silver prices are -- and we've got some tailwinds there.
So that $11 million for 20,000 equivalent in Q1 is probably the lowest we'll get in any quarter going forward.
Okay. Great. And then just in the MD&A there is a little bit of a discussion, you mined 1.6 million tons of primary ore now and some of that's obviously transitional and I guess the plan going forward is to over time blend that with I guess deeper fresher material from the pit.
Is that -- is that plan to blend at 25% rate, is that reflect the fact that it's has been oxidized on the surface or just that the transitional nature of the ore to begin with or the combination of both?
I'll hand that one over to Frazer Bourchier, Chief Operating Officer.
Hi Stefan. No, it’s more to do with the latter, i.e. the transitional nature of the material, the mineralogy, secondary copper, sulfide minerals that exist in it. So we’ve done a fair bit of test work to let us know what blend we think may work. But at the end of the day that's what it is.
It's test work until you actually really put it through the mill and experiment a bit. So that's why we've created that flexibility of probably what might be considered in already large stockpile or a lot of this material is there when we mine the pit anyway. So we have to move it.
So that's why we've accumulated about 1.6 million tons and for now, probably about 400,000 of that will go through the remainder of this year, but we'll see how that blend ratio works.
Okay. Great and then maybe just one last question, just forecasting ahead, obviously Q2 is going to be dominated by supergene, commercial supergene copper production, but then Q3 I guess, the supergene will be largely done and the primary won’t really be commercially yet per se. So I guess we should anticipate a strange quarter if you will in terms of the way the financials look?
Another good question. The current thinking is, start the zinc plant and turn our attention to monetizing as much of the precious metal stockpiles during the third quarter.
So we’re anticipating still having plenty of sales dedicating the trucking capacity to monetizing all of those gold equivalent ounces and again we will be in that commercial production, pre-commercial production period for accounting purposes.
So all of our costs will be capitalized at that stage and again we’re -- our best estimate at this stage is that we'll start selling our first zinc concentrate late Q3, early Q4.
So hope that helps to answer your question.
That's perfect. Thanks very much guys. Great. Thanks again.
[Operator Instructions] And your next question will be from Albert Sebastian at Prospect Advisors. Please go ahead.
Good morning, gentlemen and congratulations on a great quarter.
Thank you very much.
My question is just a quick question on the stock piles, I guess the revenue associated with those, the 20,000 gold equivalent ounces was $16 million. Did I hear correctly that the operating income was $11 million? Is that correct?
Yes correct. Again pretty astute reader of the financial statement, Note 6 gives you that the revenues for -- related to that gold stock pile material and operating income was $11.1 million as we talked about in the MD&A.
Thank you. Next question will be coming from the line of Craig Hutchison at TD Securities. Please go ahead.
Good morning, guys. Just a quick question for me. Just in terms of your shipping capacity, do you guys have enough capacity if you had wanted to, to ship all your stock piles of precious metal concentrates and in zinc and copper for this year or is there some constraints there and that's why you're delaying some of the shipments for the zinc?
Again we've -- our trucking capacity has not been an issue at all. We're currently averaging Craig, 25 trucks. We've demonstrated over time, we can up that to 35 and 40 as is. So no, it's not a constraint Craig.
So potentially you could sell zinc sooner in Q3 possibly/
Potentially, again just where as Frazer mentioned when you set up the zinc plants, you have the expectations of how it's going to go. Again we're being conservative. We think it's wiser to focus on monetizing the gold material first.
But if things are going well, absolutely again the phone is ringing off the hook from potential zinc smelters and traders who would like to get their hands on our materials. But at this stage, late Q3, early Q4 is our guidance.
Yes, Craig, it's Frazer. I'll just add, when you start up a plant, you want the ability to stock pile a little bit and blend and optimize to just not a 100% clear on what the [color] will look like initially in transition. So we're building in net flexibility as well rather than sending stuff off right away that drops on the concrete.
Makes sense. Okay. Thanks guys.
Thank you. [Operator Instructions] And at this time, we have a question from Joseph Gallucci at Dundee. Please go ahead.
Hi guys. Congrats. Great quarter. Just a question on the M&A, just can you give us an update where you guys are out, as much as you can tell us. Obviously still a buyer's market, but just reading sort of what you're going through here, is it fair to say that the focus this year is get the zinc plant up and running and maybe M&A will be something you focus on Q4 in 2017?
Thanks Joe. Short answer to your question, no. We continue to aggressively pursue M&A situations regardless of the activities at Bisha. Certainly part of the team Frazer and Tom and the guys down at the site at Bisha are focused on zinc and the transition this year.
However, that hasn’t distracted us from up here in Vancouver focusing on trying to get some of these M&A opportunities across the line. We're having some very good conversations as we have over the past several quarters as the market has gotten tough for others.
So no, there is no specific timeline or plans to delay. If we can get a party to the line where we think we can deliver a strong return for our shareholders, we're willing to pull the trigger in the near term.
Perfect. Thanks guys.
Thank you. And at this time gentlemen, we have no other questions. I would like to turn the call back over to you.
Thanks very much operator. I'll make a few closing comments. Nevsun pays a dividend that yields 5%. The company is backed by cash and operations that generate cash. We're very disciplined in how we run the company and how we'll grow shareholder value.
Thank you everyone for participating in this call. Have a great day and a great weekend.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. We would like to thank you again for participating and ask that you please disconnect your lines. Have yourselves a great weekend.
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