Nevsun Resources Update

| About: Nevsun Resources (NSU)

Summary

Lower-than-expected zinc concentrate grades at Bisha continue to weigh on share price.

Prefeasibility Study expected at Timok's Upper Zone in Q3 2017.

Opportunity to bring Timok to production by 2020 without equity dilution.

Nevsun Resources (NYSEMKT:NSU)

Featured In: January 2015

Partnership Average Cost per Share: US$3.07

Current Market Price (February 9, 2017): US$3.12

Nevsun was our featured investment in January 2015. The company remains the most undervalued mid-tier base metal producer on the market. While there is near-term downside risk due to metallurgical issues at the company's Bisha Mine, the market has yet to grasp the immense value of the company's recently purchased Timok Project in Serbia. For those with a three-year time horizon, NSU shares are a steal at these levels.

In an otherwise excellent year, Nevsun announced in October 2016 that recoveries of zinc and copper from the concentrate circuit at Bisha are well below expectations. An announcement in early January confirmed that these issues have not been fully resolved, and a more comprehensive update is expected in late February when the company releases its financials.

Nevsun commenced zinc production less than six months ago, and these types of start-up difficulties are common. However, the issue will continue to weigh on the NSU share price until the company can announce concentrate grades of ~55%. (The company's average concentrate grade was 40% in 2016.) This will be a key catalyst for 2017.

While Bisha will remain a cash flow machine, the majority of future value creation will come from the company's Timok Project. Just last month, the company reported the following infill results from Timok's "Upper Zone":

These results remind us how special this deposit really is. Keep in mind that the average grade for producing copper mines globally is below 0.5%. Timok has the potential to be an exceptionally economic mine.

The next major milestone at Timok is a Prefeasibility Study, which is expected in Q3 2017. A PEA released in April 2016 projected a post-tax NPV of US$1.3B and an IRR of 96% at current metal prices. The upcoming PFS will show similar, if not better, numbers. Keep in mind that the PFS will only include the 100%-owned Upper Zone, as Nevsun also owns ~50% of the project's much larger Lower Zone.

Nevsun management has provided the following milestone expectations in recent news releases:

Maiden resource at Asheli deposit (located near Bisha Mine) by end of Q1 2017

Completion of 30k meter drill program at Timok's Upper Zone by end of Q2 2017

Prefeasibility Study announced at Timok's Upper Zone by end of Q3 2017

Company announces new CEO by end of 2017

Maiden Resource at Timok's Lower Zone by end of 2017

Completion of underground exploration decline at Bisha by end of 2017

Completion of underground exploration decline at Timok by end of Q1 2018

Feasibility Study announced at Timok's Upper Zone by end of 2018

2017 is set to be a busy year - with news flow expected from Bisha, Timok's Upper Zone, and Timok's Lower Zone. I believe that the Prefeasibility Study at Timok's Upper Zone will prove to be the most significant catalyst in 2017, assuming the company can replicate the stunning economics seen in the April 2016 PEA.

Nevsun currently has no debt and roughly US$200M in the bank. Considering future cash flow from Bisha, the company should be able to finance initial capex at Timok (expected to be US$213M) without any equity dilution. If management is able to execute as they have in the past, we'll have a US$10 stock when Timok commences production in late 2019.

Disclosure: I am/we are long NSU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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