Portfolio Update: Reshuffling the Deck (August 11, 2017)

by FI Fighter on August 12, 2017

in Copper, Copper Update, Lithium, Lithium Updates

Not many moves to report this week! I hope that’s a good thing, and I’m doing my best to cut down on the number of transactions I make; those extra expenses certainly add up.

Here’s what we got for the week ending on August 11, 2017.

  • Sold 14,000 shares of Critical Elements (CRECF) @ $1.14/share (~C$1.45/share)
  • Bought 7,600 shares of Nevsun Resources (NSU) @ $2.14/share

Critical Elements and Nevsun Resources

Critical Elements (CRE.V/CRECF) has been on an absolute tear this year, up 186% year-to-date (YTD). On the flipside, Nevsun Resources (NSU) continues to struggle with operations and shares are down 31.4% YTD.

Buy low and sell high.

So, I did.

I’m a big believer in letting your winners run, which I’m still doing with Critical Elements (I own 71,000 shares) despite the latest sale; CRE.V + CRECF make up 8.47% of my current portfolio, which for me is a lot to allocate to just one stock (that has already re-rated). Since I can’t predict the future and don’t know how to pick out market tops, my own strategy is pretty simple:

Sell in tranches.

I booked some gains ~C$0.89/share range, and did so again ~C$1.45/share.

Next stop, ~C$2.00/share?

We’ll see…

In any case, it’s been a spectacular run for this lithium developer, and honestly, this stock has already well exceeded my expectations and I look at anything above these levels as gravy… I’ve been free-carried for awhile now with Critical Elements…

I used the proceeds to add some more exposure to copper, which I’m bullish on in the medium/long-term, due to the impending paradigm shift to clean energy/electric vehicles.

Coincidentally, shares of Critical Elements just so happen to be peaking at a time when Nevsun Resources is struggling mightily! Nevsun’s Q2 earnings report was a total bombshell unleashed on the market when the company announced that their sole producing mine, Bisha (located in Eritrea), would have its life of mine slashed to just 4 years… In most recent times, Nevsun has had immense difficulty in producing copper/zinc concentrate due to metallurgical/recovery issues with the ore.

Here were the key highlights (I’ve highlighted in bold red all the bad stuff).

  • Peter Kukielski appointed President and CEO on May 12, 2017
  • Decided to publish an updated Timok PEA in October 2017
  • Revised Timok PFS timeline to Q1 2018
  • Timok remains on-track for 2021 production with decline construction commencing in Q4 2017
  • Decided to invest $24 million in capital in a four year open pit at Bisha (all funded from operating cash flow)
  • Ended period with cash and cash equivalents of $171 million
  • Sold 34.3 million payable pounds of zinc in zinc concentrate at C1 cash costs(1) of $0.92 per payable pound sold
  • Sold 7.7 million payable pounds of copper in copper concentrate at C1 cash costs(1) of $1.59 per payable pound sold
  • Recorded a $70 million non-cash, pre-tax write-down of long term stockpiles and mobile equipment

Shares of NSU dropped ~18% after the market was made aware of the earnings report (and all the bad news contained within it).

Why did I add shares?

In short, although Nevsun has a producing mine in Bisha, most investors who are into the story are here for the high-grade Timok Upper Zone (UZ) project (located in Serbia), which was acquired from Reservoir Minerals last year and is the company’s flagship asset.

From Nevsun Resources.

Those copper grades are absolutely insane!

We are talking about a potential world class tier 1 asset… You know, my favorite type of asset to own!

Just look how Timok UZ stands out from the pack across all commodities…

From NexGen Energy.

Yeah, I know, it’s just based off a very early Preliminary Economic Assessment (PEA), but the current after-tax IRR of 100% and NPV of $1.405 billion (at $2.80/lb copper and $1,200/oz gold) combination are in a league of its own…

Nevsun has got a lot of cash in the bank, zero debt, and on the surface it looks like the market is prescribing near zero value to Bisha now…

Let’s see…

Market cap = $636 million.

Cash on hand = $171 million.

Enterprise Value = $465 million.

For proper context, here were the terms of the Nevsun and Reservoir Minerals deal for Timok…

From Nevsun Presentation.

And please keep in mind that the spot price of copper is now hovering around ~$3.00/lb and gold is at ~$1,290/oz, so the project economics of Timok UZ only look that much better today than at the time the project was acquired…

Timok UZ is still early stage with just a PEA out, but it’s obviously a very high quality asset since even the legendary Lukas Lundin got in on the bidding action last year to try and snatch it up…

From Market Wired.

So, even if you want to prescribe ZERO value to Bisha (which is more or less what I’m doing), the floor for the value of Nevsun shares should be worth at least $350 million ($262.5 million was what Lundin Mining offered to pay to acquire 75% stake of Timok UZ from Freeport)…

Yes, Bisha has become a total train wreck recently, and the management team has alienated a lot of shareholders (for many reasons, such as the dividend cut), but like always, if everything was a-ok and smooth sailing here, shares of NSU wouldn’t be trading at these low levels, right?

You just gotta ask yourself if the risk vs. reward makes adding shares at this time a good consideration…

Quite frankly, I can’t really see shares of NSU recovering anytime soon (outside of a major new discovery being made which I’ll discuss shortly below)… There’s been too much destruction and there are too many pissed off shareholders to stage any kind of meaningful recovery in the imminent future, IMHO…

Nevertheless, my investment thesis with this play here is that I’m willing to wait out a few years for the turnaround to occur…

I’m not looking for a quick flip here, otherwise I wouldn’t have bothered adding shares of NSU at this time… However, with that said, the current dividend yield is ~1.90%, which is actually pretty darn good if you ask me, to wait around for the story to improve!

Timok UZ isn’t slated to enter commercial production until sometime in 2021, so it’s still ways away…

So why add shares of NSU now?

Because with world class tier 1s, these gifts oftentimes just keep on giving!

Nevsun CEO, Peter Kukielski, recently commented:

“The high-grade assays reported today are the final holes from the infill drill program for the Timok Upper Zone.  This drilling is enabling development of improved geological and geotechnical models and we expect an upgrade to a high percentage of the resources. We are also excited to have exploration for additional Upper Zone type deposits underway.  At the Bor operation, just five kilometres away, there were in excess of twenty separate high sulphidation epithermal “upper zone” type deposits, we believe the possibility of finding additional deposits should be high.

If a new discovery happens, it could happen at any given moment… Of course, I don’t want to miss out on that!

Shares of NSU are “cheap” enough where I’m comfortable to get positioned now…

As for Bisha, I’m hoping that it can “survive” until 2021 and generate just enough decent cash flow to help fund most/all the development work over at Timok UZ…

And let’s not forget Timok Lower Zone (LZ) exploration potential either!

From Nevsun Resources.

Lots of money being spent on drilling here, and Freeport-McMoRan (FCX) is involved so you know they are no doubt looking for elephants!

Yeah, so if Bisha can just stay marginally functional until Timok UZ is ready to go in 2021, investors will probably have a ton of upside to look forward to… However, if Bisha completely crumbles apart and ends up not producing any cash flow and further requires the injection of massive capital just to keep it going, shares of NSU will probably get sliced up even more…

And although I would fully support a dividend cut to help the company bolster its treasury, I’m sure that my viewpoint isn’t shared by a lot of investors; I could foresee the possibility of another 20% smackdown, should a decision to get rid of the dividend entirely ever come to pass…

Despite the risks, I still thought enough of the value proposition here to add some shares of NSU (call it a first tranche). I’ll be watching closely to see how this story plays out over the months/years, and be on the look out for buying opportunities (should they arise).

Conclusion

Buy low and sell high.

The timing just so happened to work out well for me this week as I was able to book some good profits on Critical Elements at 52-week highs and transfer the proceeds into acquiring shares of Nevsun Resources at essentially 52-week lows.

 

Timok UZ is still early days, but it already has the look of being a world class tier 1 copper/gold discovery.

 

World class tier 1s…

 

My favorite type of assets to accumulate!

 

 

Fight On!

{ 6 comments… read them below or add one }

1 BSRNo Gravatar August 13, 2017 at 8:52 am

It is quite amazing to see you are still performing very well with your thorough research based gold and resources stock investing. $1M portfolio! Wow!

Reply

2 FI FighterNo Gravatar August 14, 2017 at 11:30 am

BSR,

Thanks! It’s been one crazy ride for sure!

Cheers!

Reply

3 VinNo Gravatar August 14, 2017 at 5:10 am

Good call Jay.. I was too early with this one. Bought in 2 weeks when I thought prices were cheap then… If it falls even lower then I’ll definitely buy some more

Reply

4 FI FighterNo Gravatar August 14, 2017 at 11:31 am

Vin,

No worries, looks like I was early too! If NSU hits $2.00 and below, it will be a great time to add more shares. 2% dividend yield, who would have thought?

Take care!

Reply

5 RiadaNo Gravatar August 14, 2017 at 7:30 am

Good call taking some profits with Critical Elements. Any thoughts or insight regarding the pull back with Teranga Gold? It’s currently getting slaughtered…

Reply

6 FI FighterNo Gravatar August 14, 2017 at 11:32 am

Riada,

Teranga has gotten crushed. I see great value here, but am curious to see how the Banfora DFS looks… It’s due in August, so I’d wait for that before looking to add any shares. Right now, I think shareholders are concerned an equity raise will be needed to fully fund Banfora. Perhaps that is helping to explain the share price drop?

All the best!

Reply

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