Nevsun reports Q2 loss amidst Lundin takeover bid

Nevsun Resources (TSX: NSU; NYSE: NSU) reported a US$10.8 million loss in the second quarter of 2018, an US$11.3 million decline from the first quarter. Lower zinc prices and mined grades were primarily responsible for the US$30.6 million decrease in revenue to US$76.1 million. Nevsun’s 60%-owned Bisha mine in Eritrea, a joint venture with the Eritrean government and Nevsun’s sole producing asset, produced 51 million lb. zinc and 9 million lb. copper in the second quarter.

Nevsun reported numerous milestones with its development asset, the Timok copper-gold project in Serbia. In March, Nevsun released a prefeasibility study on the Timok Upper Zone with an after-tax net asset value of US$1.82 billion. In May, the company started construction on its recently permitted Upper Zone exploration decline. In June, it completed an initial inferred resource on the Timok Lower Zone containing 1.7 billion tonnes grading 0.86% copper and 0.18 gram gold per tonne. The next steps for Nevsun at Timok are the completion of a drilling program aimed at identifying additional high-grade Upper Zone-style mineralization. Nevsun will also release a technical report with an initial resource estimate for the Lower Zone in the third quarter of 2018.

Nevsun owns 100% of the Timok Upper Zone and 60.4% of the Timok Lower Zone, the balance held by its partner Freeport-McMoRan (NYSE: FCX). (After the two companies complete a feasibility study, Nevsun’s stake declines to 46% and Freeport’s rises to 54%.)

At Bisha, Nevsun has extended the mine life by 18 months through 2022 — adding 3.3 million tonnes of high-grade ore to the mill for additional payable production of 470 million lb. zinc and 52 million lb. copper. That partially reverses last year’s decision to cut the remaining mine life in half to four years.

The Bisha announcement came a month after Nevsun’s board unanimously rejected an unsolicited takeover bid from Lundin Mining (TSX: LUN; US-OTC: LUNMF) and its bidding partner Euro Sun Mining (TSX: ESM; US-OTC: CPNFF), citing inadequate value and a problematic structure. That deal was reportedly Lundin’s fourth attempt at purchasing Nevsun or its Timok project.

On July 25, Lundin took its fifth proposal straight to Nevsun’s shareholders.

In a conference call that day, Lundin president and CEO Paul Conibear said, “Since October 2017, we have been trying to constructively engage and progress a deal with the management and board of directors of Nevsun. Each of five successive proposals made since early February were rejected by Nevsun despite multiple moves by us to address their concerns regarding structure, bidding partner and price. Each time we presented a proposal, the goal post changed. This morning, we formally took our premium $4.75 all-cash offer for Nevsun directly to its shareholders.”

Nevsun’s shares closed at $4.78 on July 30, indicating investors are pricing in the possibility of a “white knight” rescuing Nevsun from the hostile takeover.

Nevsun CEO Peter Kukielski said Lundin’s latest proposal “continues to ignore the fundamental value of Nevsun and its assets” and called the unsolicited takeover bid a “distraction”.

Nevsun declined a request from The Northern Miner for comment, but in a statement said that since Lundin Mining first expressed interest in the company, it has reached a number of milestones at Timok and Bisha.

Nevsun reminded shareholders that Lundin Mining had previously made “highly conditional confidential non-binding offers to Nevsun but has never presented a binding offer.”

It also pointed out that in Lundin Mining’s last “expression of interest” on July 3, it had “re-affirmed its interest in pursuing a transaction at $5.00 per Nevsun share, funded in cash and Lundin shares,” and that the offer in the latest proposal is 25¢ per share (5%) less than “this latest formal communication.”

For its part, Lundin rejected the claim its offer fails to reflect Nevsun’s fundamental value and recent accomplishments.

“Our most recent offer represents full value for Nevsun and its assets. The offer takes into account and reflects the most recent results reported by Nevsun, including the latest disclosure on the Timok upper zone, the Timok lower zone, Timok concession exploration potential and the Bisha mine,” Conibear said.

Nevsun Resources’ Timok copper-gold project near Bor, Serbia. Credit: Nevsun Resources.

Lundin noted its $1.4 billion (US$1.1 billion) offer for Nevsun represents an 82% premium to Nevsun’s closing price of $2.61 on Feb. 6 (the date of its first offer to Nevsun related to its interest in acquiring Timok), and a 33% premium to Nevsun’s $3.58 per share closing price on April 30 (the date of Lundin Mining’s previously announced prior proposal to Nevsun).

Lundin implored Nevsun shareholders to accept the offer, arguing it is better positioned – financially and operationally – to develop Timok and Bisha.

“We believe there is a risk of substantial Nevsun shareholder dilution if our offer is not accepted as Nevsun needs significant financing in the near term in the form of equity, stream royalty and/or debt. Further, there is a notable risk that both Timok and Bisha are not developed optimally due to lack of Nevsun’s financial capability not only now but in the years ahead,” Conibear said.

Lundin’s original offer excluded the Bisha mine. Explaining its inclusion in the company’s most recent proposal, Conibear said, “Our prime interest is Timok. We do have background in Eritrea, but as currently stated [Bisha] has a four-year mine life… We realized we need to come in over the top, keep this deal as simple as possible and that’s what we’ve done.”

Lundin made no mention of any potential contingent liabilities it would assume as a result of Nevsun’s ongoing legal troubles. The company is facing a lawsuit in British Columbia’s Supreme Court alleging it was complicit in the use of forced labour by local contractors at Bisha. The three plaintiffs – Gize Yebeyo Araya, Kesete Tekle Fshazion and Mihretab Yemane Tekle – allege they were held against their will and subjected to physical abuse and torture.

Nevsun has denied the plaintiffs’ claims and argued it isn’t legally liable for their treatment anyway since it was not their direct employer. Its bid to block the lawsuit – which centred on the claim that Eritrean courts should have jurisdiction over the case – was rejected by the British Columbia Court of Appeal in 2017.

This June, however, the Supreme Court of Canada agreed to hear Nevsun’s appeal. That hearing is tentatively scheduled for Jan. 23, 2019.

With additional reporting by Trish Saywell.