I’m going in for an eye treatment today that will keep me from being able to type for most of the day, so… expecting that I won’t get a new article written for you during the day, I’m opening up this Friday File commentary that I originally shared with the Irregulars on September 26.
There isn’t any huge news since then, the company did release earnings late last week, with their development and expansion plans more or less on track, but the stock isn’t really moving on the fundamentals of their specific mines — it’s moving right in line with other miners, gold is down 5% and most of the gold miners are down an average of about 10% in the five weeks since this article originally appeared, and this “secret” junior mining company is also down about 10%. So if you’re enthused about this one, I guess the good news is “you haven’t missed anything yet.” What follows has not been updated, edited or revised since it was first published on September 26.> Thanks for reading!
After the wild move that gold stocks have had this year, everyone is once again intrigued by junior miners — the 500-1,000% moves of some of the most promotional and headline-generating little gold stocks during the first six months or so of 2016 has created another frenzy. A frenzy of investment newsletters pitching mining stocks.
But this one is a little different… it’s not about gold. Well, it’s a little about gold, but it’s mostly about two much more boring commodities that have not had huge recoveries this year (not yet, at least): Copper and zinc.
And it’s from a newsletter I’ve never heard of before, and haven’t written about.
So that’s two little points of interest, which is enough to tip the balance and get my attention.
The ad we’re looking at today is from a service called Retirement Revival, published by Investiv and written by Thomas Moore. I’ve seen some options-related pitches from them in the past, and they also are responsible for the Market Trend Signal charting/alert system, but this is the first time I’ve noticed them teasing a specific stock.
So what is Moore saying that caught our attention? Here’s a taste:
“The Copper Jewel…
“Is This Junior Mining Company Your Next 10-Bagger?
“It provides a blue-chip like safety – a 5% dividend – and the last time this happened it turned every $10,000 into
$267,000…and it’s about to do it again.”
What’s not to like, right? Blue chip safety, big dividend, junior miner, has generated huge gains in the past? Well, what’s not to like other than the obvious “that’s too good to be true” response that should be our knee-jerk reaction to these kinds of promises.
What else do we learn about this “junior miner?”
“… the best time to buy junior mining companies is right after a major bear market low, before the next bull market begins….
“… you can still buy this company near the bottom, but it is urgent. Once it begins to move it will happen very quickly.
“After the last bear market low in 2008, the share price of this small cap miner rose from $0.27 to $7.50 in just over two years.”
“Right now the share price is down -62% from its old high and is trading “dirt cheap.” However, all indicators are pointing to a possible 300% rise… which could happen in as little as 12 months.
“But it won’t stop there. Ultimately, I believe the share price of this particular junior miner will rise by 1,000% and possibly as much as 4,000% from today’s price. Here’s why:
“The two metals this company specializes in are two of the most important economic metals in the world and both have gaping supply deficits over the next 20 years – unlike anything we’ve ever seen in modern history.”
So why hasn’t this stock already been on fire this year, like those super-hot gold juniors?
Mostly, it appears, because it’s not primarily a precious metals stock. Here’s a bit from the ad:
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“… this junior miner specializes in copper and zinc with some gold too. And even though investors haven’t yet recognized it, I believe investing in copper and zinc right now could prove to be the trade of the decade.
“You see, just like gold and silver, the price of copper has been clobbered over the last 5 years. Down -55% from the 2011 high.
“And while the price of gold and silver have already started to recover, in large part because of all the monetary easing the world over, the price of copper hasn’t yet started its new uptrend.”
“… it has no debt, is among the lowest cost producers in the world, and is flush with cash on its balance sheet.
“In other words, as far as junior mining companies go, this company is blue-chip grade. It even pays a 5% dividend, which the company grew by 100% during this last devastating bear market.”
OK, so we add copper and zinc to our cauldron of clueishness, stir it all up with a dividend and a good balance sheet and a low-cost operator with strong management, and what company do we get? Once we pour that mixture into the Thinkolator, the answer comes pretty quickly out the other end: This is Nevsun Resources (NSU in both Toronto and New York).
Nevsun, which is really a midtier miner (not a junior, at least not in my book) has been prospecting in Africa for 20 years or so, they sold a couple of their earlier discoveries and for the past decade they have mostly been focused on developing and operating the Bisha mine, the gold/copper/zinc mine that they control and operate in Eritrea (Nevsun has 60% ownership, the remainder is owned by the Eritrean government). Bisha has been in operation for about five years now, and production has moved in phases to some degree — they went after a layer of gold mineralization first, then copper, and now they’ve put a zinc mill into operation and are working on the copper/zinc parts of the mine. This mine is low cost, it has produced positive cash flow for years even with copper prices not being all that exciting, and it’s the reason Nevsun has been able to pay a pretty nice dividend.
They’ve also continued their exploratory work in the neighborhood, they bought a bigger license area and have a second significant deposit nearby called Harena that has been incorporated into Bisha’s reserves, along with expansion potential at the original Bisha site and in other target areas that could extend production beyond the current estimated mine life of eight years.
But the big change for Nevsun didn’t come from Eritrea, it came from their acquisition of Reservoir Minerals a few months ago.
You might remember Reservoir Minerals — they were teased a few times in 2011 because of their gold discoveries in Serbia, and it’s one of those assets, the Timok Copper-Gold project, that now becomes the growth focus for Nevsun. Reservoir’s assets get a bit confusing once you start to look through the details, partly because some of their properties were subject to joint venture and “right of first refusal” deals, but apparently they’ve now consolidated ownership of the upper tier of the Timok project.
So that’s the compelling logic of the story here — Bisha is generating cash flow, which may improve a bit when the zinc production comes online and begins to improve the economics at Bisha over the next few months (first zinc shipments have already been made)… and the cash from Bisha, as well as the large cash position on the combined Reservoir/Nevsun balance sheet, will be enough to push forward with development of a large mine at Timok.
From Bisha, Nevsun expects eight years of pretty steady production that will gradually become more zinc-heavy — but as of now the revenue mix is anticipated to be roughly 40% copper, 40% zinc, 15% gold and 5% silver.
The Timok project is not built yet, but the preliminary economic assessment (PEA) released by Reservoir earlier this year put a $1.5 billion valuation on just the upper zone (the part they’ll mine first) based on $3 copper and $1,200 gold and a 12-year mine life. We should take that with a giant grain of salt, since copper prices are struggling to hold $2 a pound and those PEA’s tend to use very low discount rates to get to the current value, but it does have the potential to be a large and meaningful copper and gold mine.
They’re drilling to firm up the reserves, continuing to work with Newmont (which has a JV on the lower zone at Timok), and buying up the farmland in the area to prepare for the possibility that they might be able to start mine construction over the next couple years and begin production within five years. So this is not immediate, but it’s getting closer — they say they’ll have another PEA to release in the second half of next year (usually with miners, when you say “second half of the year” you mean “late December” … nothing ever works as smoothly or quickly as you would hope, and mining executives are usually steeped in optimism).
So while it’s true that they do have the cash to maintain the current dividend for several years even if they don’t increase profits, it’s also true that they have a potentially large capital project in the Timok mine that will call on their resources… so if things go poorly for a couple years there’s no guarantee they’ll keep the dividend going.
This does look like an interesting mid-tier miner, and these kinds of companies often don’t get a lot of love (they’re not as fun as the explorers that can go up 500% on big news, or as stable as the giants who own a dozen operating mines), so it’s possible that the projects are more valuable than they’re getting credit for. This is very much a play on copper prices recovering over the long term, with zinc also an important driver and gold coming in as a “someday” bonus, largely from Timok which has some high-grade gold in parts of the potential mine.
That copper focus makes them a bit contrarian these days, though there are other folks who are also seeing potential in copper projects — the ad makes note of the expected supply/demand imbalance for both copper and zinc, and the folks at Altius Minerals (ALS.TO, ATUSF), which I’ve owned for a long time, also tried to be opportunistic in predicting a long-term rebound for copper earlier this year when they bought a stream on one of Yamana’s major mines (as Sandstorm Gold also did last year).
So copper may not recover, of course, that depends both on future global demand and on the cost to develop all the new copper mines that are in the planning stages… but there are other smart people also betting on copper in the long term (including Carl Icahn, who is cited in the ad as a reason to invest in copper now — he bought up about 8% of Freeport McMoran starting last year).
I found the Altius presentation on copper to be useful, you can see that here (make sure to scroll all the way through the Chapada deal economics to look at their appendix, that’s where they provide some analysis of the incentives for copper production), and I expect copper will probably work out well in the long run… but I’m pretty happy keeping my metals exposure mostly in the streaming companies, so although Nevsun does look like a reasonably valued midtier miner, with some attractive growth potential both in Eritrea and in Serbia, I think I’ll stick with Altius and Sandstorm and let them find copper potential for me.
See a brighter future for copper? Any thoughts on Eritrea, Serbia, or Nevsun’s potential? Other copper miners that you might prefer over Nevsun? Let us know with a comment below.