Tuesday, October 7, 2008

Eritrea breaks new ground with Nevsun

TORONTO-listed Nevsun's Bisha copper, gold and zinc mine now under construction in Eritrea and scheduled to start production in 2010 is going to break new ground in terms of private-public partnerships.

This is because of the innovative agreement between Nevsun and the Eritrean National Mining Corporation (Enamco) over the funding of Bisha, which will be the first mine to be developed in the country.

If all goes according to plan, Enamco will make a payment to Nevsun equivalent to 30% of the net present value (NPV) of Bisha at the time the mine ships its first consignment of gold concentrates.

Nevsun deputy chairman John Clarke told the Nedbank African Investment Conference held in Sandton at the beginning of October that this payment would amount to "a multiple" of Nevsun's present market capitalisation.

At current metal prices ($800 per ounce of gold, $3.40 per pound of copper, $0.60 per pound of zinc and $10/oz silver) Clarke said Bisha’s NPV ranged from $1.49bn at a zero discount rate to $712m at a 10% discount rate.

That places Enamco’s payment at between $447m and $214m, less the $25m that Enamco had already paid across to Nevsun after raising initial funds from a Chinese bank. In addition, Enamco will pay its 33.3% share of the capital expenditure required to build the mine.

Nevsun's share price on the Toronto Stock Exchange is 0.96 Canadian dollars, which gives a market cap for the company of just C$123m.

The reasons for the rock-bottom share price lie in a combination of grim market conditions for mining juniors generally and Nevsun’s unfortunate experience with the Eritrean government in 2004.

The government forced Nevsun to suspend its Bisha exploration drilling programme for several months but did not provide a reason for its action. That hammered the share price as investors assumed the worst.

Clarke said: "It was an unfortunate experience, particularly as government kept reassuring us we would get our exploration rights back but would provide no explanation at the time for their actions. "In the end, it turned out to be a win-win situation because the government reviewed its mining code to allow it to increase the stake it could buy in the mine from 20% to 30%. “But they will pay market value for it and that’s fine by me, particularly as we are going to get one-third of the value of project paid to us upfront.

"The way that will work is that Nevsun and Enamco will decide on an independent valuator acceptable to both of us to do the NPV calculation.”

The 30% stake will be in addition to the 10% “free carry” that Enamco already had in the mine, taking the government’s total stake to 40%.

Construction of the mine is now under way under the supervision of South African contracting firm Senet, which has been awarded the EPCM (engineering, procurement and construction management) contract.

Bisha consists of a high-grade, layered gold,copper, zinc and silver deposit, with the gold and silver closest to surface.

Metal production over the life of the mine is estimated at 1 million oz of gold, 747m lbs of copper, 1 bn lbs of zinc and 9.4m oz of silver.

Plans are to mine the gold and silver first, recovering an average of 431,000oz of gold and 702,000oz of silver in each of the first two years of operation.

According to Clarke, the estimated payback period on the project is just 1.3 years at a gold price of $800/oz and assuming working costs calculated at May 2008 levels.

Capital expenditure to get the mine into production is estimated at $250m with subsequent expansion forecast to cost a further $115m spent in two phases.

Plans are to fund the initial $250m through bank loans and project finance, while the subsequent expenditure will be funded from operational cash flows.

Clarke said he was looking to source some of the initial funding from South African banks.

In a statement issued in September, Nevsun CEO Cliff Davis said: "Nevsun is very encouraged by the consistent and clear message from government in its support for the industry.

“Bisha is a significant beneficiary to the government’s commercial approach whereby Enamco has been contributing its proportionate share to fund the project. "Nevsun looks forward to the continued support of the government and advancing project finance with the consortium of bankers.”