Nevsun Resources' CEO Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 9.12 | About: Nevsun Resources (NSU)

Nevsun Resources, Ltd. (NYSEMKT:NSU)

Q3 2012 Earnings Call

November, 8, 2012, 11:30 a.m. ET

Executives

Clifford T. Davis – CEO, President, Director

Peter J. Hardie – CFO

Scott Trebilcock – VP of Business, IR

Frazer Bourchier – COO

Analysts

Rahul Paul – Canaccord Genuity

Andrew Mikitchook – GMP Securities

Matt Murphy – UBS

Operator

Good morning, ladies and gentlemen. Welcome to the Nevsun Resources third quarter 2012 results conference call. I would now like to turn the meeting over to Mr. Cliff Davis, President and CEO. Please go ahead, Mr. Davis.

Clifford T. Davis

Good morning from Vancouver and good afternoon to our U.K. and European participants as our Air Tran friends several time zones ahead of us.

With me today in Vancouver is our Chief Operating Officer, Frazer Bourchier, Chief Financial Officer, Peter Hardie, and Vice President Investor Relations and Business Development, Scott Trebilcock.

As always at Nevsun, we'll try to keep this simple and focus on our third quarter results.

The following prepared statements and discussion contains forward-looking statements regarding production forecasts, future financial results, the development of the copper plant, and the company's intentions regarding deployment of capital. Forward-looking statements are frequently but not always identified by words such as expects, anticipates, believes, and similar expressions. Information concerning interpretation of dual results and mineral resource and reserves also may be deemed to be forward-looking statements. We encourage all listeners to read the news release thoroughly including our cautionary statements regarding forward-looking information, and to read the company's annual information form for the year ended December 31, 2011, and the company's MD&A for the quarter ended September 30th, 2012 for a more complete discussion of the risk factors associated with the business.

Now for the company's third quarter results. The Bisha Mine had yet another strong quarter anchored on continuing to excess in processing transitional off site ores. Bisha mined 316,000 tons of ore at 5.2 grams gold per ton. And processed 465,000 tons at 7.4 grams per ton. The resulting 98,000 ounces of gold produced gave the mine a total of 267,000 ounces year-to-date. We have another quarter to go. And are now forecasting to exceed the top end of our 280 to 300,000 ounce 2012 guidance announced last quarter.

The resulting after-tax income was $44 million attributable to Nevsun shareholders representing earnings per share of $0.22 for Nevsun shareholders.

Cash cost including royalties and silver credits was $307 per ounce of gold. Cash cost increased on increases in mining costs including non-capitalized stripping and various input costs in inflation.

Bisha generated $79 million in operating cash flow in the quarter and $146 million year-to-date. Overall, we have a strong operating quarter for the mine.

The going forward, in addition to financial performance, Bisha continues to advance other elements of the business expanding our near-term production growth possibilities. Pre-stripping of Eritea is complete. And mining of oxide ore commenced in October with processing underway. We completed the low grade license acquisition adjacent to Bisha. Our new BP exploration is with working with Bisha to commence regional exploration to grow the Bisha camp and maximize the value of the Bisha mill. We wish to establish a much larger area to expand our exploration on the property neighboring Bisha.

The Northwest zone drilling is complete for now. But since the deposit remains open a long strike, we may undertake additional resource drilling in addition to geotech, hydro geologies, and the net drilling currently planned. For now, a resource reserve estimate is expected in mid-2013.

Turning to capital projects, as you're aware, Bisha is currently building its' copper plant. The project will increase ore throughput by 20% to 2.4 million tons per annum. And change Bisha's available product from a gold silver dory to copper concentrate in mid-2013. Construction work continued on pace during the quarter. And the copper flotation plant is targeted to be operational in mid-2013. Bisha's progress are maintained on our website. So I certainly suggest referencing our website to get a good handle on that.

Total capital for the copper phase expansion is expected to be about $125 million including the plant, the port facilities, and concentrate container equipment.

At September 30th, $92.5 million had been spent, order, or arranged, which means that we dealt with about 74% of the projected costs.

A topic of significant conversation in our industry is the control over capital costs. And we believe we have the controls and processes in place to manage this effectively. During the gold phase build, we were able to control costs. And we have the right attitude and the people to manage the same way during the copper phase and for that matter, any other project that we may take on. For copper phase, we also remain on track for mid-2013 commissioning.

In summary, it was a strong quarter for Nevsun and Bisha. We'd like to thank our partners that [inaudible] for its continued support. We're focused on making good money and generating profitable growth all in a responsible manner. As a mid-tiers gold producer, Nevsun continues to generate substantial after-tax earnings. Bisha expects to produce over 300,000 ounces of gold in 2012 generating significant pre-cash flow even after copper capital costs.

With that, I'd like to pass the call back to the operator to manage the Q&A period. Mary.

Question-and-Answer Session

Operator

Thank you, we will now take questions from the telephone lines. (Operator instructions).

The first question is from Rahul Paul from Canaccord Genuity. You may now proceed.

Rahul Paul – Canaccord Genuity

Hi, everyone. Have you completely stopped mining the [inaudible]?

Frazer Bourchier

Hello, Rahul. Frazer, I'll answer that question. No, we've not completely stopped, but it's just about at the end. There's some left in the pit to our best estimates. So that will be blended pretty small amount, 10% to 15% maybe with our (Horena) oxide ore that we’re processing now. So we might see a little bit of that on and off for the next month I would say, probably maximum.

Rahul Paul – Canaccord Genuity

Okay, and then just moving on, you spoke a little bit about encountering high trade pockets of transition super gene ores, and you say the mineralogy is a little different from the acid domain material. Could you talk a little more about that?

Clifford T. Davis

Sure, it has similar high grades than the transition oxide ore had, i.e. the acid. But it's got a lot more pyrites. It's likely going to consume a lot more re-agents in the mill meaning a higher cost. But of course, it looks like it could still be economic. So we're going to trial that. Right now this month, we're trialing that to see how that pans out. And that's why we have talked about the gold production going through in the Q2 next year.

Rahul Paul – Canaccord Genuity

Okay, that's helpful and then just moving on question for Peter, just looking at your cash flow statements, dividends still non-controlling interest about $38 million in Q3 and about $64 million year-to-date. I'm just wondering how do you calculate that number taking into account the receivable outstanding?

Peter J. Hardie

Peter, here. That number is really based on free-cash flow. It's difficult to model. Maybe you can clarify a little bit more when you reference as compared to the PPA.

Rahul Paul – Canaccord Genuity

Okay. No, I'm just wanting, it's $62, $52 million receivable outstanding, but then you also started paying dividends. Is it safe to sort of assume that 50% of the free-cash flow that's available to Namco comes to you and the remaining 50% goes to them?

Peter J. Hardie

We're not going to get into the specifics of the mechanics of it because that's between Nevsun and Namco. But it's a substantial portion of amounts that are paid to through Namco that comes back through to Nevsun.

Rahul Paul – Canaccord Genuity

Okay, and just moving onto depreciation, do you expect depreciation to continue at similar levels going forward for say the next two or three quarters?

Peter J. Hardie

Peter here, the depreciation for the next two quarters will probably taper a little because our gold production will taper. And then it will increase as we move into copper phase.

Rahul Paul – Canaccord Genuity

Okay, that's it for me. Thanks.

Operator

Thank you. The next question is from Andrew Mikitchook from GMP Securities. You may now proceed.

Andrew Mikitchook – GMP Securities

Good morning, gentlemen. Can you give us any guidance as to what kind of mill throughput you're kind of expecting now that the majority of the Bisha oxide is mined out? Are you able to keep kind of the 400,000 plus tons going? Or is this just going to be kind of a reduced throughput into Q2 of next year?

Frazer Bourchier

Hi, Andrew, it's Frazer. I can't speak all the way through to Q2 of next year as that's a bit premature as we're still going through our internal budgeting phase. But essentially, we don’t expect the mill throughput to change that much. It may come down a bit. It's really more the grave that will come down mining (Horena) and also blending some of this remaining asset ore and possible transition if that works out with lower grade materials. So it really probably has more impact to grade and to a certain extent recoveries as opposed to throughput.

Andrew Mikitchook – GMP Securities

Okay, and I might have missed it in some other press release or some footnote here, but I'm sure you can remind me. In the last quarterly release, there was discussion of the underlying exploration license around the existing mining licenses needing to be I guess reissued to renew, whatever you want to call it. What is that current situation?

Frazer Bourchier

Yes, so we will be in discussion with the government in terms of an application for a new and larger exploration license in light of our recent Mogorib, closing of the Mogorib acquisition. So that's in process and we hope to be able to announce that in the new year.

Andrew Mikitchook – GMP Securities

Okay, that's it for my questions at this point. Thank you.

Operator

Thank you. [Operator Instructions]. The next question is from Matt Murphy from UBS. You may now proceed.

Matt Murphy – UBS

Hi, just a couple more questions on the super gene transition material. If any pyrite or copper material on through the gold circuit to date?

Clifford T. Davis

I guess two different parts of that. The short answer is very little has gone through the gold plant. It was very short trial that was done and then we reverted to doing some more bench scale test in the laboratory on this transition super gene. The copper is pretty low. We're talking 0.2%, 0.3%. But the issue is there's a lot of pyrite in that, which could consume a lot of reagents. So the short answer is very little, but were trying that out now. But it's got very high gold grades as well as even silver grades. And that's why it looks like you could be quite economic to put it through there if it works in the CIL plant.

Matt Murphy – UBS

And I know in your MB&A you talk about small tonnages, but is there any sort of – are you talking like 40,000 ounces or like 5,000 ounces in sort of order magnitude?

Clifford T. Davis

Probably more the former, closer to the former, but again, until we conduct that work this quarter, I would temper that somewhat. But we're talking just 4,000 or 5,000 ounces here. It could be 20,000 to 30,000. We'll see how it goes and what we find also still remaining in the pit.

Matt Murphy – UBS

Okay, and also just a question, I saw an article on House of Commons subcommittee on Eritrea. Just wondering what brought that discussion on and do you anticipate anything further following that from the Canadian government?

Clifford T. Davis

Thanks, Matt, it's Cliff. Yes, I was asked to attend the subcommittee. We became aware of the sub-committee earlier in the year through events and testimony at our subcommittee for international human rights at the House of Commons. And we became aware of that earlier this year, and there was a negative comments about the country, our operations, and we took actions to try to better inform the subcommittee. And we're pleased they actually asked us to attend. We had the opportunity to present ourselves. And quite frankly, we run a very good operation in Eritrea. It's the highest international standards, full respect for human rights, and the people that had been previously testifying simply had been to site, had not contacted us, and let's just say we had the opportunity to better inform the subcommittee.

Matt Murphy – UBS

Okay, thanks for that color. And then just lastly, on M&A front, just wondering how you see the valuation vote their progressing and whether thoughts are towards something in the near term or just kind of wait-and-see?

Scott Trebilcock

Hi, Matt, it's Scott Trebilcock. Fundamentally, our strategy remains unchanged. We continue to actively pursue various opportunities to bring new assets to the company. Ultimately, you want to deploy the surplus cash on this balance sheet to build another copper gold operation, bring more value to shareholders. As far as how we see valuations going, I think recent call it light at the end of the tunnel for some of the developers that can see access to small amounts of capital perhaps has changed expectations a little bit. But we still see a significant number of opportunities in the market currently with management teams that have advanced assets as far as they can, or are willing to, or simply can't finance them. I'm not going to make any specific comments on individual opportunities or potential timing. We'll buy something when we see good creative value to the shareholders.

Matt Murphy – UBS

Okay, thanks, Scott.

Operator

Thank you, the following questions if from Andrew Mikitchook from GMP Securities. You may now proceed.

Andrew Mikitchook – GMP Securities

Just a follow-up question and again, it might have been answered. What should be our expectations as to when you'll provide updated guidance for the remaining oxide or CIL plants operations transitioned to the copper and then operating parameters that you're expecting for the copper beyond say what was in the last tactical report.

Frazer Bourchier

Hi Andrew, it's Frazer again. I'll answer that.

Not trying to avoid the question. The reality is right at this point, it's a bit premature as we go through our budgeting process firstly. And secondly, a lot of questions, a bit of uncertainty possibly on the positive side with this gold. And that has an impact in terms of how long that runs next year, the impact that it has copper. So I'm not able to give you any answer on that yet. And I know in light of that, all you have to go on is a technical reports. We're still working through that ourselves and trying to get further clarity.

Andrew Mikitchook – GMP Securities

So all else being equal, it will be kind of early'13 or sometime in the new year that we should expect updated guidance maybe on an annual basis or something like that? Is that fair?

Frazier Bourchier

Well again, we need to work through some more of this ourselves and get certainty on terms, or at least as certain as one can be in this industry in terms of what we think next year will look like before we make that decision, Andrew.

Andrew Mikitchook – GMP Securities

Okay, and then just one more question if you still have the patience for me. How was this concentrate sales going actually working in terms of somebody writing new people at [inaudible]? At what point does the concentrate become someone else's responsibility? And then should we assume kind of industry standards anywhere from 30 to 90 day delay for payment?

Peter J. Hardie

Andrew, Peter here. I would say for your modeling, again, we're not going to get into specifics of contracts that we have in place with respect to timing of payment, et cetera. But you can assume industry standards.

Andrew Mikitchook – GMP Securities

And when do you hand off responsibility for the concentrate? You have to physically load it on someone's barge or do they just take it from you at the port in your fancy containers?

Peter J. Hardie

It's at the port of discharge, so we have to get it to its destination.

Andrew Mikitchook – GMP Securities

So you're responsible for shipping as well then to the last port?

Peter J. Hardie

That's right.

Andrew Mikitchook – GMP Securities

Okay, thank you very much.

Operator

Thank you, there are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Davis.

Clifford T. Davis

All right everybody, thank you very much for participating in the call and have a very good day. Cheers.

Operator

Thank you, the conference has now ended.

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