PSB Monthly Issue June 2014

That was then.

These days, commodities have mostly taken a backseat to equities (and to some extent bonds).  Sure, gold and oil are still in the news plenty, but not like it used to be.

And it’s even rarer to see news on the less popular commodities.

Despite the lack of coverage, one of the most important commodities to track and understand is copper.

Even though copper has dropped from its 2011 peak price of around $4.50 a pound to just above $3.00, it doesn’t change the industrial metal’s importance.  In fact, copper remains one the most useful leading indicators for economic growth.

Copper is such an important metal because of its diversity.  It conducts heat and electricity, is used as a building material, and is a component of various metal alloys.

The most popular uses of copper are for electrical wiring, roofing, plumbing, and industrial machinery.  Basically, if something is being built or manufactured, chances are copper is going to be needed.

That’s what makes it a good leading indicator.  The more demand for copper, the more economic activity is going to be taking place.

While the global economy is sluggish, it’s still showing signs of growth.  That means, there’s a good chance demand for copper is going to be on the rise.  As such, we want to take this opportunity to jump into an overlooked copper mining company with a bright future.

That company is Nevsun Resources (AMEX: NSU)…

THE COPPER BUSINESS

NSU explores for, develops, and produces mineral resource properties, but by far its primary metal in production is copper.  The company also produces gold, silver, and zinc.

The company’s principal project is the Bisha Property in Eritrea, a country in North-East Africa.  NSU also has licenses to explore additional regions of Eritrea, which could provide significant internal growth opportunities.

Some of the best reasons to invest in NSU are its strong financial position and consistent dividend.  We’ll get back to that later.  Meanwhile, there are good qualitative reasons to like the company.

First off, unlike some mining companies in emerging/frontier nations, NSU is in a very stable situation.  Eritrea has a reliable government that’s committed to the mining industry.  Taxation has been stable for over 20 years.  And, the local workforce is productive and bilingual.

Perhaps more importantly, NSU’s Bisha mine is one of the top, high quality copper producers in the world.  In fact, Bisha has the fourth highest grade copper of any open-pit mine in the world.

Moreover, the mine produces a significant amount of zinc, which provides opportunity for a diversified revenue source in the future. The Bisha mine even contains a non-trivial amount of gold and silver to boot.

THE NUMBERS

Nevsun’s biggest strengths are its impressive financials, especially in regard to the balance sheet.

First off, the company produced 39.7 million pounds of copper in the most recent quarter.  That compares to 36 million pounds a year ago.  During the quarter, NSU sold 34 million pounds of copper versus 30.6 last year.  Even more impressive, the company’s cash cost per pound of copper produced dropped to $0.98 – in the lowest quartile in the industry (compared to an average price sold of $301 per pound).

Nevsun’s cash flow increased from $419 million to $462 million year-over year.  That led to profits of $15.4 million, or $0.08 per share compared to a loss of $4.2 million or -$0.03 per share in the prior year.  Clearly, the company is improving over time.

And that’s not even the best part…

The company’s sitting on a cash hoard of $338 million and has zero debt.  Plus, current assets are 12.5x current liabilities.  Now that’s what I call a strong balance sheet!

NSU’s excellent balance sheet means they’ll continue to offer a healthy dividend. Currently, the dividend is yielding 4.1%.  Not too shabby.

INVESTMENT RISKS

As with any small cap investment, NSU does have a few risks.

A slowdown in global economic growth could lower demand for copper which could lower the metal’s price and impact revenue generation.

Further exploration may not result in as much or the desired grade of metal as the company projects.

Finally, higher shipping and transportation costs could cut into margins and lower profits over time.

POTENTIAL RETURN OF 104% OR MORE

On top of everything else making NSU a solid investment, the stock is also trading at a very attractive valuation.

Compared to its copper producing peers, NSU has the second highest dividend yield, second lowest forward price/earnings, and second lowest forward price/cash flow. That’s an impressive trio of data points.

With NSU trading at just 6.4x projected earnings, the stock could be in for a substantial rally.  Given the industry trades at a significantly higher 16.8x earnings, that means NSU would have to appreciate by roughly 165% just to reach average levels.

Our projection is for NSU to return to its 5-year high of right around $7.00.

Based on our analysis, we see NSU climbing to $7.00 a share or more.  Buy the shares now for potential gains of 104% or higher!

ACTION RECOMMENDATION

BUY Nevsun Resources (AMEX: NSU) up to $3.85 per share.

Don’t forget your position sizing and stop-loss rules.