Nevsun Resources Ltd. (NSU, Financial) popped 1.09% to $3.69 per share in Tuesday trading but downsides are likely to follow after the company reported a decline in the volume of produced copper and zinc.
Even though the company says that it is on the right path to meet the guidance on production for 2018, the quarterly output of zinc went down 28.4% year-over-year to 51.3 million pounds and the quarterly output of copper decreased by 3.4% year-over-year to 8.6 million pounds in the second three months of 2018.
The company is still trading above the 200, 100 and 50-SMA lines. The current share price is only 20 cents below the 52-week high of $3.86 per share and 46.4% off the 52-week low of $1.96 per share.
The market capitalization is $1.114 billion, the price-book ratio is 1.39 times versus an industry median of 2.06 times and the EV-to-Ebitda ratio is 52.11 times versus an industry median of 9.9 times.
Improvements in the ore grade of the material that the company will process during the third and fourth quarter of 2018 should drive up the base metal production and share price. But for the time being, I would avoid increasing the holding of Nevsun Resources, because over the coming days we should still see the negative effect of lower second quarter production working on the market value of the stock.
The upgrading of mineral resources to the category of reserves at the Bisha deposit in Eritrea will underpin the delivery of about 30 million pounds of copper in 2018, which is the higher end of the guidance and increase the company’s confidence in still supplying the commodity market with an output of 210 million to 240 million pounds of zinc.
Cash flows should also benefit from Bisha, where the life of the mine has been economically prolonged to 2022, and from a lower financial need for the development of Timok. Timok is a copper and gold project that Nevsun is advancing in Serbia and expected to finalize in 2019.
The company thinks that the cash cost per payable pound of zinc sold on a by-product basis will not exceed 80 cents in 2018.
In addition, lower zinc prices in June caused the quarterly revenue of $76.4 million to decline nearly 16% on a year-over-year basis. Nevsun Resources closed the second trimester of 2018 with a loss of 3 cents per share.
Shareholders of Nevsun can rely on a liquidity available on hand and securities of about $110.8 million. The amount of unrestricted cash is $125.1 million as of June 30.
The average target price of $3.25 per share is lower than the current share price.
(Disclosure: I have no positions in any stock mentioned in this article.)
