Nevsun Resources gambling on a risky African venture that could produce huge dividends for itself and an impoverished African nation
By Krisendra Bisetty
For decades, foreign investors avoided a tiny African country whose struggle for independence and border war had left it damaged and dirt poor.
But one Vancouver company has set up a massive base in the Horn of Africa, as it leads a charge of global opportunity seekers into Eritrea, a country roughly a tenth of the size of B.C.
Eritrea’s 30-year fight with neighbouring Ethiopia ended in 1991 when rebels defeated government forces, and although its independence was shaken two years later by a border war that could erupt again, Cliff Davis thinks the rewards are worth the risks.
“The reason we’re in Eritrea is that there is a fabulous deposit there,” said Davis, president and CEO of Nevsun Resources Ltd. (TSX, Amex:NSU).
The company is betting a US$250 million gold mine it’s building in the impoverished country, which has no history of modern-day mining, will provide a significant payoff for shareholders and become Eritrea’s biggest revenue source.
“As we approach production, we will increase significantly in value as the market better understands the cash that will be generated from this mine,” said Davis. “Given that this would produce significant foreign currency, in terms of taxes for the government, it will have a very significant impact [on] its GDP.”
The development of the high-grade Bisha gold-copper-zinc deposit would also produce training and employment opportunities for locals.
In a country whose population is a little more than that of B.C. and where subsistence agriculture is about its only major economic activity - 80% of Eritrea’s people are involved in farming and herding - a gold mine is being viewed with awe.
“It’ll definitely be the biggest project of any sort in the country, and obviously a huge revenue source for the country,” said Stefan Ioannou, an analyst with Haywood Securities Inc. who toured the site earlier this year. “I think the government is pretty excited about it.”
Eritrea’s government took a 40% stake in the project through state-run Eritrean National Mining Corp. (Enamco).
That’s not necessarily a bad thing, Ioannou said, because it’s in the government’s best interests to get the mine operating sooner than later.
“Time and time again, in other jurisdictions where the government doesn’t have a significant interest in a project, they can care less if a project starts tomorrow or 10 years from now,” he said. “Even with a 60% ownership, the economics coming off this project are extremely robust and extremely good for Nevsun.”
Enamco has also provided US$60 million for Bisha, and Nevsun, which last month raised $32.7 million in a private-placement financing, has already raised the balance of the project capital through equity and debt financing.
Davis said concentrate and refining agreements have been finalized. The 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.
Bisha is an open-pit mine that’s about 40% built. It will be Nevsun’s second African mine and is expected to be in operation in late 2010 with staged production of approximately 900,000 ounces of gold, 700 million pounds of copper and one billion pounds of zinc.
However, Nevsun sold a small gold mine in Mali last year after encountering operating challenges.
In Eritrea, where the last and only mine - and a small one at that - operated in the early part of the last century, the challenges include sourcing skills and materials from outside the country, including from South Africa.
Those challenges could delay construction, said Ioannou. “I anticipate delays, but that’s not to say it won’t get built.”
Although mining in Eritrea has been largely overlooked amid the “ongoing war” with Ethiopia, he added Bisha’s discovery sparked a lot of interest in the country and brought in the likes of Vancouver companies Sunridge Gold Corp. (TSX-V:SGC) and NGEx Resources Inc. (TSX:NGQ), which is in the Lundin Group stable.
NG stands for “No Guts. No Glory,” a favourite motto of the group’s founder, the late Adolf Lundin.
“It’s really opened up the entire country,” Ioannou said of Bisha. “There’s no doubt about it. It’s a world-class project.”
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