Nevsun Resources Ltd (NYSEMKT:NSU)
Q2 2016 Earnings Conference Call
July 29, 2016 11:00 AM ET
Cliff Davis - President and CEO
Frazer Bourchier - COO
Tom Whelan - CFO
Stefan Ioannou - Haywood Securities
Alex Terentiew - Raymond James
Joseph Gallucci - Dundee
Good morning, ladies and gentlemen and welcome to the Nevsun Resources Q2 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, from Vancouver. With me today is our Chief Operating Officer, Frazer Bourchier and our Chief Financial Officer, Tom Whelan.
Before I begin a 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. Forward-looking statements are by their nature uncertain, and frequently but not always 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 achievements 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. all of the financial numbers referred to today are in United States dollars.
Now, I am going to provide my views on what we have accomplished over the last quarter and where we are headed. Then, we will open up the call to question-and-answer period. Nevsun had a transformational quarter. It was the most significant quarter for the Company in the past five years since we reached commercial production at Bisha in early 2011. We continued to deliver returns for our shareholders from our operation in Bisha and we expect to deliver future returns through the acquisition of Reservoir Minerals, which we announced and closed during the second quarter of 2016.
We have created the platform for significant production and earnings growth for the Company. We also significantly expanded our land position in Eritrea to take advantage of our success and acceleration in and around Bisha where we see likely additional mineral deposits near our existing Bisha mine. We are profitable. We are rebuilding cash from operations and we have accomplished one of our key objectives through the acquisition of the Serbian assets to diversify the Company and put our hard earned cash to work. We are delivering on our objectives and believe the downturn in the copper commodity sector was the right time to complete the acquisition.
Nevsun remains strongly positioned in the base metal sector with production growth and resource growth. We’ve a great producing asset in Bisha and we have added very perspective additional exploration ground in Eritrea. The high grade copper-gold Timok development asset in Serbia, as well as other perspective Serbian exploration assets gives us the diversification and leads us with one of the strongest balance sheets in our peer group with no debt.
We focus on financial results and we have an aligned part in the State of Eritrea and we’re pleased to have added two strong partners in Freeport‑McMoRan and Rio Tinto on the two significant Serbian assets. We take a very disciplined approach to running our business. Q2 was no exception in delivering results.
The zinc flotation plant expansion was finished on time and well under budget. The budget was $100 million and actual cost to build the plant was $77 million. This is the third capital project brought in on time and under budget. After completing the supergene copper phase we began pre-commercial operating phase of the primary ore on June 2nd and turned on the newly configured flotation plant for the primary phase.
We will be producing both copper and zinc concentrates from the primary ore. Also referred to as hot commissioning, the process has gone very well from a mechanical and electrical perspective with the plant operating capacity approaching our intended daily throughput rate. The new flotation plant has already been successfully producing a high quality zinc concentrate with concentrate grades approaching 50%. Our first zinc con tender will be happening very soon.
As with all startups there’re many challenges which are leading to lower levels of copper concentrate grades and zinc recoveries. The updated copper flotation plant with the new IsaMill has recently restarted as is in the commissioning phase as well. At this early stage of commissioning, the plant has not yet produced a copper only salable concentrate with expected recoveries. The key challenges are driven by the new ore type. There is a lot of work to be done including additional calibration analysis to stabilize and optimize the flotation characteristics to consistently make two good quality concentrates.
Quite frankly, it's too early to predict with certainty when we will expect to be in commercial production. Nevertheless, we remain optimistic as it is a work in progress. However, due to the extended supergene processing into early June and to be conservative in our forecast, we now expect commercial production to be declared some time in Q4 2016. In the two months of operations, we delivered, during the quarter Bisha mined 133,000 tons of supergene ore at 2.5% copper and another 831,000 tons of primary ore at 5.9% zinc as we prepare to startup our new plant in June.
In the first two months of the quarter, we milled 471,000 tons of ore to produce 22 million pounds of copper. Bisha completed the supergene processing, exceeding our production guidance with our focus on cost containment and lower fuel prices we achieved C1 cash cost of $0.92 per pound, well ahead of budget, well ahead of guidance and in the lowest cortile of the industry.
We also monetized 30,000 gold equivalent ounces from direct shipped ore during the quarter, which contributed a further $28 million of revenue and $22 million to the bottom line. With higher gold prices now than at the start of the year, we expect these continuing gold sales will continue to make a healthy contribution to our bottom line for 2016. We still expect to see 80,000 to 100,000 gold equivalent ounces for the full year.
In the quarter, we generated 44 million of net cash from operations from the mine. We had net income before taxes of 31 million. So, we continue to generate strong operating cash flow. We continue to pay our shareholders a leading quarterly dividend. We continue to invest in growth through exploration. The balance sheet is very strong with $240 million in cash, $238 million in working capital. Our dividend is $0.04 per share per quarter, or $0.16 which is a yield of over 5%.
A common question I received for the past few months is about our dividend, and whether we plan on continuing to pay dividends. I believe the question arises really because we have issued 100 million additional shares on the acquisition of Reservoir because many people believe we have significant capital program going forward to develop Timok.
At the last quarterly call, I made is very clear that we believe return on investment by way of dividends is an important part of our culture. This differentiates us in the second, both on how we have always paid returns to our shareholders and how we incorporate dividends to shareholders as part of our approach to business. I do not expect any change to our dividend policy this year. As we look forward to evaluating our capital needs to Timok, we will need to consider our dividend rate. Our timeline and more deep tailed development plan will become apparent as we move Timok from PEA status to prefeasibility. And similarly our overall capital requirements will be better defined.
Based on everything we understand about the project, the cash flow, the very quick predicted payback, we are very comfortable the project can be financed by more traditional project debt. I’ve already been approached by appropriate banks who are positioning themselves in the queue. So the bottom line is we believe our future capital needs to not threaten payment of dividends in the near term. We look forward to good cash flow from the zinc copper and gold coming from Bisha.
Nevsun remains one of the highest yielding and most profitable companies in our peer group. So let's talk a bit about planning for the future. Our strategy has been concise and straight forward. We plan to maximize the value of the Bisha asset and its resources. We are doing this through the expansion of production. Second, we plan to grow our Eritrean assets through exploration. We’ve taken a very big step this past month through the acquisition of a much larger land package of exploration licenses, which we expect will extend our mineral resources for the future.
Third, we have plans to diversify our asset base through merger or acquisition, and clearly, we have executed on this through the acquisition of Reservoir Minerals. I’d like to extend a bit on exploration and then diversification. On the exploration front, as I discussed last quarter, we are very bullish on exploration success. Our discoveries in the past two years will continue to increase resources. We have no plans to reduce our spending on exploration. Our recently announced additional land package provides the team with a number of significant targets, some of which will be worked on this fall.
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. Between Bisha, Ariana, Asheli and other targets, this VMS district could rival some of the more famous VMS districts in Canada. We expect the resources and reserves to increase to a very long lived mining camp addition.
We are at the very early stages of evaluating the additional exploration opportunities that have been acquired on the Reservoir transaction. There’re several properties in addition to Timok. The most significant other exploration target is covered by joint venture agreement with Rio Tinto. I met with Rio a few months ago and our VP Exploration has very recently met with them again in London.
The ground is adjacent to the Timok project and is fully funded by Rio. For the time being, we are the operator of that JV. The Timok project itself has very significant exploration upside that will be tapped over the coming year. Our first priority on Timok is to advance the upper zone to feasibility stages, that is a prefeasibility, no later than the end of 2017, followed by a bankable feasibility study. At the same time, we will be spending $20 million on the lower zone over the next two years to see if this copper gold portray might be the Tier 1 asset that many people believe it could be. This could be the biggest upside of the whole acquisition, and drilling has already commenced and drill results will be released over the next 18 to 24 months.
I’d like to just talk a bit about this diversification that we have just accomplished. We announced the Reservoir transaction on April 24th and closed it on June 23rd. Our shareholders voted overwhelmingly for the transaction at a 99% approval. Our acquisition cost was approximately $500 million in cash and shares. The Reservoir shareholders got a very good deal and ended up owning about one-third of Nevsun’s outstanding shares. They get to continue to participate in the success in Serbia, as well as our success in Eritrea.
Our due diligence suggested a very strong return to Nevsun shareholders. If you can invest $500 million to purchase $1.5 billion net present value of cash flow, then I think you have a very good investment. Over the past few years, we had a very disciplined approach to M&A. We lifted lot of frogs before moving on Reservoir. We need to work hard and fast in a responsible manner to de-risk the copper gold project, so as to realize growth in value. We’re confident the underlying asset value is highly accretive to Nevsun shareholders and all of this is without attributing any significant value to the lower zone copper gold portray which is the potential gem that has drawn so much interest into the region from the large company such as Freeport and Rio Tinto.
I believe the decline in the baqse metals commodities market will be relatively short lived, and has provided us with a chance to get a Tier 1 asset in Timok. It was a unique opportunity for Nevsun. Our focus is now moving Timok forward. Drills are already turning again with additional drills commencing next week. And we wish to get to prefeasibility before the end of next year.
I’d like to sum up with a few key messages. First, we had another good quarter with very positive financial results. We are financially very healthy. Second, our exploration program, which has been very successful should translate to further mine life extension at Bisha and translate to more value. Third, our copper-zinc expansion is progressing in a thorough diligent manner. It's under budget and we should be in commercial production in Q4. Fourth, our M&A strategy has been successful. It was based on capital discipline with total shareholder return as the fundamental driving principal. We have this in Timok.
All-in-all we have a proven management team that is looking out for the interest of all of our shareholders. With that, I will pass the call back to the operator to manage the question-and-answer period, operator?
Thank you, Sir. [Operator Instructions] Please stand-by while we wait for our first question, which will be from Stefan Ioannou at Haywood Securities. Please go ahead.
Just curious on the primary ore stockpile at Bisha, just obviously it sounds like you’re going to processing less of the stuff you’ve already mined this year and focusing on fresh ore. Can you just give us a bit of color as to how much of the 2.3 million tons you’ve mined already is conical boundary mineralization versus stuff that actually is primary mineralization that may have oxidized.
Stefan it's Cliff. I'm going to pass that over to our Chief Operating Officer Frazer Bourchier.
Hi Stefan, Frazer here. Yes, just with respect to the 2.3 million tons, probably about 1.6-1.8 million tons of that is what we would call boundary material. You used the term oxidation by the way, oxidation is not really an issue for us on that, there are other minerals that we're looking at to control. But yes I'd say about 1.6 to 1.8 million tons so, and again we're stockpiling that for processing later once we conduct the various tests later this year to assess how we'll do that. So we still have ample material to put through in the plant.
Okay, so that, I mean so are there any concerns about processing the residuals caught 500,000 tons of non-boundary material or are there minerals in that that you're concerned about.
Not really, that's what we're working on now. If there's a little bit of bleeding or contamination of boundary material in there, that's what's giving us some of the challenges in the plant, we're working through that pretty well we think.
Okay, so in general, generally speaking it's sort of just typical growing pains of getting something like this up and running and it's something you can work through with no major sort of hurdles in the foreseeable and the longer term picture of Bisha primary.
Yes, that's the plan and I should remind everyone that you know I think it's five months to commission the phase 2 thing so even though initially optimistically we hope two to three months, we just think it's going to spill over into the fourth quarter as you work through some of these issues.
Sure, sure, and maybe just one more, one other question just focusing on the exploration in Eritrea, it was great to see you guys sort of secure such a significant land package now, I mean I'm just curious the underlying through the notional value that's being paid or I guess relinquished, it was only through key metric that sort of underpins that valuation or how did that number come about roughly.
Stefan it's Cliff. I'm going to pass that over to Tom Whelan our Chief Financial Officer.
Hi Stefan. Because ended up being a non monetary transaction and when you look at the way one values that, there's two options. One could look at the fair value of the exploration property to what 800 plus kilometers of exploration property works or what would one look towards in terms of the fair value given up in terms of the future receivable and the accounting rules which says you go with the value that's more measurably reliable which was the fair value of the receivable. That was the basis for the amount.
Okay, okay, great, great and then just obviously congratulations on securing the whole reservoir and intimate project, just in terms of maybe obviously you're looking to do a PSS sometime in you know later 2017, have it done by then. In the meantime at some point will you start to get an idea of the sort of the scope that you guys are considering for that project development?
Yes Stefan, Frazer here. Look we'll keep the market informed when appropriate in terms of our milestones through our quarterly or considered appropriate specific news related but your question is really, you're going to have to wait for a surprise until the end of 2017 to see the numbers, there's a process for [indiscernible] to keep the market informed, there'll be a resource update at the right time. And then we’ll complete the PSS later at the end of next year.
Okay, okay, great, thanks very much guys appreciate it.
Thank you, next question will from Alex Terentiew at Raymond James, please go ahead.
Hey, good morning guys, Cliff I think you may have mentioned, I apologize if I missed this, some of the operating parameters that you snoozing so far, think you may have said something about throughput rate and recoveries but if you could just repeat those for me, or let me know [indiscernible] that'd be great.
I'm not sure that, not yet. Perhaps to happy to talk through that in the longer term and Frazer's probably better able to talk about throughput rates at least our objectives.
Alex it's Frazer, again it's premature to get into specific recoveries and grades we're achieving right now as we're still in the commissioning phase, I think Cliff had mentioned 50% is in zinc which we're really happy about terms of producing that but the recoveries that we plan to achieve, we're not there yet in terms of the you know north of 75-80% in terms of zinc recovery and likewise in copper recovery. So that's what we're working through now, throughput rate you know at 6500 tons per day, that's not an issue as we stated in the past and I'll say it again. Throughput that's not a bottleneck in terms of our [indiscernible] process plant.
Sure, and I thought Cliff maybe you said something about the 3.9% zinc going through the mill or something like that, that’s great hearing.
It's 5.9% all zinc mined in the past quarter.
Okay, alright, I know that you guys made a comment on the copper, given the copper, lower copper recoverage and you're just mentioning here that in your MD&A you can see that copper, you may produce less copper than previously guided. Any change right now in thoughts to your zinc ions I know you gave of range of 70 to 100 and given that you said it's still early days so it sounds like there's potential to hit that but just trying to get a sense of where you guys view that number.
It's Cliff, actually when you read that in the MD&A you would have also read the following sentences that we're going to provide guidance after we reached commercial production. Think it's premature to try to make those kinds of estimates at this time. What we're doing is working through the whole commissioning phase and it's important to make sure that we provide good information to the market when we’ve got good and better accurate estimates.
Okay, that's good and last question, on the exploration property that was acquired. Has there been any historic stuff that has been done even you know years gone by, just curious if you guys are kind of starting with a blank slate, I know you've clearly identified through your own package that there is definitely lot of press around but I'm just curious any high level geophysics, anything like that that's been done in the past.
It's Cliff, and Frazer could answer this as well. Yes there is some historical work that, through some of that historical work, it's really airborne geophysics that has lit up the area with a bunch of targets we walk the ground, our guys walk the ground, they've identified a number of targets, that they'd like to follow up on. So it’s not, we're not going in blind at all. Actually one of the more significant things and obvious things is to do further airborne on the ground that has not been flown in past. So we're very optimistic about this thing, this deal sort of capturing all over the ground that is within truckable distance.
Okay, great, thank you.
Thank you, [Operator Instructions] and your next question will be from Joseph Gallucci at Dundee, please go ahead.
Morning guys, congrats on the quarter, well done. Question on the zinc offtake or if there's going to be a zinc offtake I should say, would you look at you even given the deficit in the market and everybody is going crazy for zinc doing a long term off tick agreement to get some you know cash injection into the company to help I suppose future requirements at [indiscernible].
Joe, it's Tom Whelan, one of the largest thing that we have on our balance sheet, or don’t have on our balance sheet is that the zinc is completely unspoken for. At this stage we have no plans to enter into any long term offtake we did that on the copper phase for a whole variety of reasons. We like the flexibility of having no commitment at this stage and we're using 2016 as a way to test relationships with future zinc smelters and others who have expressed tremendous interest in it to determine who are going to be our best long term customers. So the plan is to sell everything on a short term basis for 2016 to test the markets and then develop longer term contracts after that.
Okay, thanks for that, any maybe just one question on sort of the reservoir transaction now that it’s all completed, I suppose from a personal perspective did you keep who you wanted to keep I suppose from the operational side that I know there's a lot of quality, three-four guys that were working for some company, did they stay on board.
Joe, Frazer here. Yes we haven't made changes, if anything we're complementing and looking at the key positions in the project team, we're in the process of hiring, searching for and hiring those people now. So we obviously are adding skills, but for the employees call the [indiscernible] employees that Freeport has they remain and likewise with the reservoir employees we have.
That's it from me guys, thank you.
Thank you, and at this time Mr. Davis I'd like to turn the call back over to you sir.
Alright, thank you operator. Just a few closing comments to sum it up, Nevsun pays a dividend with a good yield, the company is backed up with a strong balance sheet. We are very disciplined in how we run the company and how we will grow shareholder value. Thank you everyone for participating in this call, have a great day and have a great weekend, cheers.
Thank you sir, ladies and gentlemen this does indeed conclude the conference call for today, once again thank you for participating and at this time we ask that you please disconnect your lines, have yourselves a great weekend.
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