Nevsun CEO Cliff Davis

The following article is written by Peter Caufield in the February issue of Resource World.

Vancouver-based Nevsun Resources Ltd. [NSU-TSX] recently poured its first gold at the Bisha Gold Mine in Eritrea, northeast Africa. The first pour was part of the plant commissioning process and rendered two doré bars totaling 26 kilograms (approximately 920 ounces).

In an announcement, Nevsun President and CEO Cliff Davis said, “Nevsun’s first gold pour is a tremendous achievement that has been accomplished by a team of outstanding professionals on the ground in Eritrea and with the continued support of the Eritrean government.

It gives me great pleasure to say we are on time, under budget, and will considerably further the country’s development with the realization of Eritrea’s first modern-day mine. In the face of difficult capital markets in 2008 and 2009 and other obstacles overcome in 2010, we are proud of this significant accomplishment. We look forward to substantially growing Bisha in the coming months, in terms of reserves and throughput. This success should be a good indicator of our strategic capability in the future.”

Nevsun is a single-country, single-project, gold and base metal developer focused on the Bisha Project. Bisha is a fullyfinanced and permitted high-grade gold, copper and zinc deposit. Nevsun expects the mine to be fully commissioned and in full production by the end of Q1 2011.

The first mine to come into production in Eritrea in many years, Bisha is projected to produce 1.06 million ounces of gold, 9.4 million ounces of silver, 734 million pounds of copper and 1,075 million pounds of zinc. Davis says the milestone event shows that the persistence of Nevsun and its supporters in the Eritrean government is paying off.

“When we started, the financial community was doubtful about the project,” Davis said. “So we put together the financing ourselves, with the Eritrean government putting in cash. Their financial contribution distinguishes Bisha from other mining projects.”

THE BISHA PROJECT

The Bisha Project is a large volcanogenic massive sulphide (VMS) deposit located 150 km west of Asmara, the capital of Eritrea. Bisha’s mining and exploration licenses cover a contiguous area of 110 square km. The Bisha Main and North West zones are both located within the 16.5 square km mining license.

The Bisha Main Zone is a 1.2 km-long section characterized by precious metalrich (gold and silver) oxides and base metal-rich (copper and zinc) massive sulphides. The deposit is configured in three distinct layers. The Oxide Zone (0-35m) is a near-surface gold-silver rich bearing oxide. It has reserves of 4.02 million tons of 7.99 grams gold/tonne and 33 grams silver/ tonne. This zone will be mined in the first two years of production.

The Supergene Zone (35m-65m) is a copper-enriched massive sulphide horizon that also contains gold and silver. It has reserves of 6.35 million tons of 4.4% copper. The Supergene Zone will be mined in the next three years of production. The third zone (65m-+450m.) is an underlying primary massive sulphide containing significant copper and high-grade zinc zones with appreciable gold and silver. It has reserves of 9.71 million tonnes of 7.21% zinc and 1.14% copper.

The third zone will be mined from year six to the end of the mine’s life. Bisha’s feasibility study estimates a 10-year mine life with metal prices based on US $435/oz gold, US $1.44/lb copper for the first five years (US $1.28/lb thereafter), US $0.57/lb zinc and US $6.50/oz silver. The mine is expected to produce gold at an operating cost of less than US $250/ oz, with copper operating costs ranging from $0.54-$0.67/lb, and zinc operating costs at $0.50/lb (including all royalties and credits).

The construction budget for the project was $260 million but the actual cost was 5% lower than that figure. “We had a good mine construction contractor, a Southern African company called SENET,” Davis said. “Plus the mine was built during a time of low construction costs.” At the peak of construction, in July 2010, about 1,700 people were working on the project.

RECENT EXPLORATION AT BISHA

Recent exploration by Nevsun focused on the Harena deposit, which is one of the other two VMS deposits that have been identified, and lies 9.5 km southwest of the Bisha Main deposit. Harena is contained within Nevsun’s exploration licence, contiguous to the mining licence. In late 2009, 17 infill diamond drill holes were completed to confirm the previously identified discovery. Harena was originally chosen as a potential exploration target based on an alteration anomaly defined from Landsat imagery. A subsequent airborne electromagnetic survey defined a moderate conductor over a limited strike length on what was interpreted as the same stratigraphic horizon as the Bisha Main deposit.

Diamond drilling, in 2005, intersected various widths of oxide and sulphide mineralization over a strike length of 400 metres, which confirmed the presence of a satellite VMS deposit. As a result of the company’s efforts to advance the Bisha Main Zone through feasibility and development, the Harena area was left until late 2009 for further exploration. The company sees the Harena deposit as a likely source of supplemental feed for the processing plant at Bisha, and it will probably provide valuable cash flow as an extension to the life of mine, without requiring startup capital expenses.

Davis says the company intends to have re-stated reserves by end of Q1 2011. “We expect to extend the mine life and to increase reserves substantially,” he said. “The plan is to significantly grow our asset.”

BISHA MINING SHARE COMPANY (BMSC)

The Bisha Project was and is being operated by Bisha Mining Share Company (BMSC), a joint-venture company owned by Eritrea’s National Mining Corp. (ENAMCO) and Canada’s Nevsun Resources Ltd. The Bisha mining licence was granted to BMSC in January 2008. ENAMCO is paying one-third of the cost of the project (in cash) and Nevsun is contributing the other two-thirds (by an issue of equity). ENAMCO owns 40% of the project and Nevsun owns 60%. In addition, Nevsun will receive payments from the Eritrean government related to the latter’s purchase of its share of the project.

BMSC decided, in early 2010, to fund the project by equity instead of debt financing. The company says the move has increased the estimated cash flow by eliminating finance costs and debt repayment. BMSC expects the project will have positive cash flow by Q1 2011. BMSC has entered into metal sales contracts for its future gold and copper production. The prices for all metals will be fixed at spot rates at the time of delivery. Gold will be refined in Switzerland and Canada by two major international companies; the copper concentrate will be shipped to major smelters in Europe and India. Davis called the Bisha Mining Share Company “a model for future mining companies in Eritrea.”

HOW ERITREA BENEFITS

Eritrea benefits in a number of significant ways from the Bisha Project. The country’s largely untrained work force receives employment and training, and the government receives royalties (5% for precious metals, 3.5% for base metals) and income taxes (maximum rate of 38%). Davis says that when the project is running at full capacity, it will employ a total of about 700 workers, the majority of whom will be Eritrean. Between 60 and 70 will be expatriates.

Davis says the Eritrean government has been very supportive of the Bisha Project. “Unlike some other jurisdictions in Africa, there is no government corruption in Eritrea,” he said. “The Bisha Project has received continuous support from the Eritrean government. They see mining as a significant, positive boost for their economy, which has historically been mainly agricultural.”

He says the Bisha Project represents the start of the Eritrean mining industry. “Before we began development, all the details had to be sorted out on how a mining company would work with the Eritrean government,” Davis said. “This was the first mining license to be granted and first environmental impact assessment to be carried out in Eritrea.”

Davis, who has worked with governments in Ghana and Mali, which are well-established mining jurisdictions, says it likely took an extra year and a half to two years to bring the project in Eritrea into development. “We had to sort out the license and a mining agreement with the state, as well as work through a difficult time in capital markets,” he said.

The genesis of the Bisha Project was a letter Nevsun received from a prospector from eastern Canada in 1997. “He told us that Eritrea was the place to be,” Davis said. “He said there were lots of excellent opportunities there that were being overlooked by the rest of the world.” In 1998, Nevsun sent its senior geologist to Eritrea to investigate and in 1999 Nevsun acquired several exploration licenses. In late 2002, the company discovered Bisha.

To bring the project to fruition, Davis said he has made at least 30 trips from Nevsun’s head office in Vancouver to Eritrea, with each trip lasting from a few days to a few weeks. He met regularly with officials from the Eritrean government’s Ministry of Energy and Mines, Ministry of Finance and ENAMCO.

ERITREA BACKGROUNDER

Eritrea became an independent state in 1993, following a 30-year war for liberation that ended in 1991. Since independence, the government of Eritrea has been rehabilitating the economy and improving the Eritreans’ standard of living. The annual growth rate of the economy returned to 7% until it was curtailed by the border dispute with neighboring Ethiopia in May 1998. In the northeast Africa, Eritrea is bounded by Sudan to the west and north, and Ethiopia and Djibouti to the south, with the Red Sea on its east coast. Eritrea covers a land surface area of about 125,000 square km and has a population of about 4 million people.

The country is home to nine ethnic groups, all with a strong sense of national unity. Tigrinya and Tigre are the most widely spoken indigenous languages. English is commonly used in the business community, while Arabic and Italian are also frequently encountered. The topography of Eritrea is exceptionally varied: a long coastal plain; an escarpment, which rises steeply to the central highlands; the low-lying western and southwestern parts of the country; and rugged mountain chains that run from the central plateau to the extreme north of the country.

Eritrea’s infrastructure is centred on a well-developed communications network that links the capital city, Asmara, to other regions of the country, including the two main sea ports of Massawa and Assab, and to neighboring countries. Asmara and Massawa have international airports, which also serve internal flights.

War destroyed much of the infrastructure and its reconstruction has been a high priority of the government. Part of the railway has been rebuilt and it is now functional from Asmara to the port of Massawa. Telecommunications facilities have also been renovated and developed and mobile phones are now widely used in and around the major towns.

ERITREA’S MINERAL POTENTIAL

Eritrea is not well explored and it is widely expected that there are many economic mineral deposits still to be discovered. The country possesses a geological setting that is favourable for both precious and base metal mineralization. Industrial minerals are also found in various locales as well as construction materials, including marble and granite. Recent exploration has shown that gold occurrences are widespread in many parts of the F E B R U A R Y 2 0 11 www.resourceworld.com 63 country. Exploration activity in the last decade has shown the presence of potentially economic gold deposits in the western lowlands and in the northern part of the country.

The average head grades in most of the historic vein gold mines active up to the late 1950s were reported to be as high as 25-45 grams/tonne, with reasonably good recoveries. Eritrea’s gold mineralization is usually hosted in quartz veins and stockworks (a network of veins), and in particular in shear zones associated with felsic volcanic rocks, dioritic intrusions and in schists (a type of metamorphosed rock) that are frequently sub-parallel to the strike of the pronounced cleavage of the host rocks. A major belt of massive sulphide deposits with gold and base-metal mineralization passes through Asmara. It includes, as well as the historically known Debarwa, the newly discovered Adi Nefas, Emba Derho and many other localities. They lie within a roughly 50 km-wide belt over a strike length of 250 km, extending for over 50 km north of Asmara to the Ethiopian border to the south.

With regard to industrial minerals, evaporite sequences outcrop, containing potash, sylvite and gypsum, have been found at Colluli, south of Bada in the Danakil Depression. Substantial deposits of the latter are also found in the Desset area, north-west of Massawa. Large deposits of common salt occur at several places along the Red Sea coast. Considerable quantities of high-quality silica are found at Merbet, already exploited for glass manufacture. In addition, deposits of silica sand with feldspar occur in various wadis.

EXPLORATION AND MINING

Exploration started in liberated Eritrea in 1996. The level of participation by foreign companies has increased significantly following the discovery of the high-grade VMS deposit at Bisha. There are 16 mining and exploration companies operating in Eritrea from Australia, Bermuda, Canada, China, Libya, the United Arab Emirates and the UK.

The companies collectively operate 34 projects. They include some advanced exploration sites (where mineral resources have been established, and, in some cases, where scoping level and feasibility studies are completed) to early-stage prospecting projects (where reconnaissance mapping is being carried out). The total area, covered by exploration and mining activities is approximately 14,000 square km. Exploration during the past 10 years has identified 3 million ounces of gold, 41 million ounces of silver, 1,600 million pounds of copper and 4,200 million pounds of zinc.

Related posts:

1. Nevsun Pours First Gold at Bisha – The Northern Miner
2. Canada’s Nevsun Gets its Eritrean Gold Mine Under Way with First Gold Pour
3. Nevsun Resources Ltd.: Bisha Commissioning and Resource Expansion on Track
4. IDC Remains Committed to Funding Eritrea Project Despite UN Sanctions
5. Nevsun Pushes Towards Production in Eritrea

By James West
MidasLetter.com
Friday, December 4, 2009

Nevsun Resources Inc. (TSX, AMEX: NSU), currently 40% through construction on their Bisha Gold Project in Eritrea, Africa, has seen its future target share price steadily increasing, according to the reports of analysts who have visited the project.

Highly respected Canadian investment banks Haywood Securities based in Vancouver, British Columbia, and Toronto-based GMP Securities raised their target prices to CA$3.50 and CA$3.80 per share respectively, based on the timely progress of plant construction, and the apparent ready availability of capital to see the project completed. First gold ounces from production are expected in late 2010.

According to GMP Securities analyst Mark Smith:

“The construction of the project is 40% complete with the remaining $153m of capital to be spent over the next 12 months as the company draws down from its debt facility. The 1.4Moz of gold reserves were calculated at $400/oz and 2/g/t cut-off. There is resource (1.86Moz) : reserve conversion with the possibility of increasing the gold production.

This orebody is financially robust given the high grade. The project is expected to provide an 8 year optionality (16mt ore) as the pit shells were modeled at Cu $1.05/lb, $0.50/lb Zn. The mill throughput rates can be increased by 40% due to the softer nature of the sulphide ore. This increases the NAV (@ 12%) to C$4.42/shr up from C$3.79/shr. If we include the mining of the additional 16Mt of sulphide at $2.00/lb Cu pit shell the NAV (@12%) further increases to C$5.02/shr.

We value Nevsun using a 1.0x P/NAV to our NAV of C$3.79/shr (at 12%), up from C$3.51/shr, to derive a 12 month target of C$3.80, up from C$3.60. We rate the stock a BUY. Our 24 month view NAV is C$4.66shr.”

Haywood mining analyst Stefan Ioannou was only slightly less bullish in his assessment:

“At the end of Q3/09, Nevsun had a cash balance of US$26.8 million. The company recently closed a $32.8 million non-brokered private placement consisting of 11.5 million common shares priced at $2.85 per share. Net proceeds will be used for general working-capital purposes, including exploration and development at Nevsun’s 60% owned Bisha gold-copper-zinc project in Eritrea. \

As of September 30, 2009, Bisha Mining Share Company (BMSC), which owns 100% of the Bisha project and is in turn owned 60% by Nevsun (67% contributing) and 40% by ENAMCO (the State mining Company; 33% contributing), had spent or committed approximately US$123M on capital-cost-related items at the project. Of this amount, approximately US$95M had actually been spent; US$59M by Nevsun and US$36M by ENAMCO.

However, we note that our fully financed after-tax corporate NAV3% to 10%, and hence implied target price, would increase by approximately $0.75 per share, to $4.25 per share, with modeled production start-up in ‘late’ 2010. We plan to closely monitor construction progress at Bisha over the coming months and will adjust our modeled production start-up timeline accordingly.

With a feasibility study complete, a mining licence in hand, and project financing essentially arranged, we believe that Bisha is ‘ripe for the picking’ in a marketplace characterized by ongoing consolidation. Corporate activity aside, Nevsun is well positioned to advance Bisha given the Company’s strong balance sheet and the project’s robust economics.

With such well-heeled company as theses investment analysts, investors can still participate in the substantial upside still remaining in the share price. It doesn’t take a rocket scientist to see that the numbers being tossed around are extremely conservative in nature, and a much rosier picture could emerge sooner rather than later. Source: (Midas Letter)

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3. Eritrea: Analyst Says Nevsun Resources Future Prime Takeover Candidate
4. Nevsun Hits Commercial Production at Bisha, Eyes Other Opportunities
5. Eritrea: Nevsun Announces Cdn $32.8 Million Financing