Nevsun: More Downside Ahead Or Is A Bottom In?

Summary

• Nevsun has reported its Q1 financial results.
• The stock has continued to decline leading up to earnings and hit a fresh 52-week low.
• However, Nevsun's Q1 results were positive and I think the stock may have bottomed. I explain below.

Nevsun: On The Road to Recovery?

NSU data by YCharts

It certainly hasn't been a pleasant few months for shareholders of Nevsun Resources (NYSEMKT:NSU-OLD). Since my last article in February, shares have only continues to plummet, falling from $2.72 to under $2.40 per share. Between a 75% dividend cut and copper production issues at its Bisha mine, some shareholders have had enough.

It looks like things have begun to turn around for the company following its first-quarter 2017 earnings, however, and I think a bottom could be in. I thought it was a bounce-back quarter for Nevsun and it paves the way for a continued strong performance in 2017, as I'll point out below.

Nevsun says it sold 66.5 million pounds of zinc in Q1 at cash costs of $.89 per pound, plus it produced 3.3 million pounds of copper (no copper sales in Q1). One notable win for Nevsun: it improved zinc recoveries from 63.6% to 71%. With realized zinc prices of $1.28 per pound, Nevsun was profitable in Q1; it produced positive operating income of $11.7 million (much better than the $4.9 million loss reported last quarter), and $2.9 million in net income. It achieved this result without selling any copper in Q1.

The company is making progress at Bisha. Q1 zinc and copper production was higher than expected, and copper sales are expected in Q2. Nevsun says it's on track to meet its annual guidance, which calls for production of between 200-230 million pounds of zinc and 10-20 million pounds of copper.

Nevsun's balance sheet did not improve since the last quarter due to the required spending at Timok. Remember, Nevsun cut its dividend and has decided to redeploy $120 million over a 4-year period to fund Timok. If it does not produce enough cash flow, it has to tap into its cash balance.

The company ended the quarter with $167 million cash and cash equivalents and $190 million in working capital (with no debt); last quarter, it had $200 million in cash and $201.1 million in working capital. This was one negative item I'll note from the earnings.

However, production and earnings should improve next quarter; for one, copper sales are expected and copper prices currently trade at $2.58 per pound (guidance calls for cash costs between $.90 - $1.10 for the full-year). Zinc prices have continued to show signs of strength and forecasts for prices are quite bullish over the next few years.

As I pointed out in my last article, Timok is really key for Nevsun going forward. It has the potential to transform this company. The upside is huge, as the mine is expected to more than triple copper production by 2021. Nevsun will be a multi-mine, multi-country producer of copper, zinc and gold, and I think this could lead to a higher valuation.

As a reminder, Timok carries a $946 million net present value (based on the preliminary economic assessment), which is based on gold prices of $1,250 an ounce and copper prices of $2.20 per pound. This is more than Nevsun's current market cap, and doesn't count any value on its 60% owned Bisha mine.

Besides stronger operating results in Q2, investors should look forward to continued progress made at Timok, and the future release of a pre-feasibility study, which is a more advanced technical study than a PEA. The pre-feasibility with include an initial reserve based on strong drilling results at the project, and is scheduled to be released in September. A infill drilling program was also recently completed, with the goal of converting more resources to reserves.

Shares are up by $.08, or 3.51% as of writing, and trade at $2.36. This is the lowest price seen since January of 2016 (at the time, copper prices were very weak, trading near $2 per pound, and have since rallied). Before that, Nevsun hadn't traded this low since early 2010.

So, what's the best course of action for long-term shareholders who still believe in the company? I think a good strategy is to buy shares in increments on a monthly or quarterly basis, dollar-cost averaging your position. This quarter could be the start of a turnaround for the company and its share price. Besides improved production at Bisha in Q2, other potential catalysts include a positive pre-feasibility study in September, strong drilling results at Timok, and possible takeover interest from a larger miner. I remain long Nevsun.

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.