Filed by Avantafile.com - Nevsun Resources Ltd. - Exhibit 99.3
MANAGEMENT’S DISCUSSION &
ANALYSIS
2018 FIRST QUARTER
This Management’s Discussion and Analysis (“MD&A”) was prepared by management as at April 25, 2018, and was reviewed and approved by the Audit Committee. The following discussion of performance, financial condition and future prospects should be read in conjunction with the unaudited condensed consolidated interim financial statements of Nevsun Resources Ltd. and notes thereto for the three months ended March 31, 2018, as well as the 2017 audited consolidated financial statements and the 2017 MD&A, dated February 28, 2018, and the 2017 Annual Information Form (“AIF”), dated March 27, 2018. All references in this MD&A to “Nevsun” or the “Company” include Nevsun Resources Ltd. and each of its wholly and partially owned subsidiaries on a consolidated basis, unless otherwise stated. The information provided herein supplements but does not form part of the financial statements. This discussion covers the three months ended March 31, 2018, and the subsequent period up to the date of issue of this MD&A. Unless otherwise noted, all dollar amounts are stated in thousands of United States dollars, except per ounce, per tonne, per pound, and per share data. Information on risks associated with investing in the Company’s securities as well as information about mineral resources and reserves under National Instrument (“NI”) 43-101 are contained in the Company’s most recently filed AIF which is available on the Company’s website at www.nevsun.com or on SEDAR at www.sedar.com. |
TABLE OF CONTENTS
BUSINESS OF THE COMPANY
Nevsun is headquartered in Vancouver, British Columbia. Nevsun’s mission is to build a strong, multi-mine, mid-tier mining company, delivering shared prosperity to all stakeholders. Nevsun’s common shares trade on the TSX and the NYSE American LLC (“NYSE American”), under the trading symbol “NSU”. The Company’s three principal assets are its ownership interest in the Timok Project, a high-grade copper-gold development project in Serbia, its Bisha zinc-copper Mine in Eritrea, and its strong balance sheet with approximately $150 million in cash and cash equivalents and no debt. The Company also holds a number of additional exploration licenses and permits in Serbia, Macedonia and in the Bisha mining district. The Company’s primary focus is to bring the Timok Project Upper Zone into production in an expedient, safe and well-designed, optimized manner.
The Timok
Project is a joint venture between the Company and Freeport-McMoRan Exploration
Corporation (“Freeport”). The Company is currently the operator of the Timok
Project and will advance the development of both the Upper Zone and the Lower
Zone. The Company will fund 100% of the Upper Zone development costs and is
funding the first $20,000 of agreed Lower Zone work. The Company and Freeport
will fund additional Lower Zone work pursuant to the terms of its joint venture
arrangement based on their respective ownership interests in the Lower Zone.
After delivery of a feasibility study on either the Upper Zone or Lower Zone,
Freeport’s ownership in the Lower Zone will increase to 54% from its current
40%. The Company will then own 100% of the Upper Zone and 46% of the Lower
Zone. The Company and Freeport will be entitled to their pro-rata share of the
economic benefits of the Lower Zone and the Company will be entitled to 100% of
the economic benefits of the Upper Zone. From the date of acquisition through March
31, 2018, the Company has incurred $19,552 of agreed Lower Zone work.
The Bisha Mine
is a Volcanogenic Massive Sulfide (“VMS”) deposit which has been in production
since February 2011. The first phase of the mine included gold production from
February 2011 to June 2013, which allowed for an early payback of
pre-production capital and funding of the supergene phase expansion.
Commissioning of the copper flotation plant at the Bisha Mine commenced in late
June 2013 and commercial production was achieved in December 2013. Mining
copper ore from the supergene phase ceased during Q2 2016. Commissioning of the
zinc plant commenced in early June 2016 and commercial production was achieved
in October 2016. The Company is now in the primary phase of the mineral deposit
at the Bisha Mine and will continue to produce both zinc and copper in
concentrate through to the end of the mine life, which is projected to the end
of 2021.
The Bisha Mine
is owned by Bisha Mining Share Company (“BMSC”), a 60% owned indirect
subsidiary of Nevsun, with the remaining 40% owned by the State-owned Eritrean
National Mining Corporation (“ENAMCO”). On December 12, 2007, BMSC was granted
a 20-year mining licence for the Bisha Mine, and on July 6, 2012, a 10-year
mining licence was granted for the Harena property, where a satellite VMS
deposit exists. In 2016, BMSC acquired additional mineral exploration licence
areas and now holds two exploration licences (Tabakin and New Mogoraib) in the
Bisha mining district which is in close proximity to the Bisha Mine. The
exploration licences, which cover 814 square kilometres, include a number of
potential satellite VMS deposits. The Company and ENAMCO continue to investigate
alternatives to extend the mine life, including potential underground
developments and a regional exploration program.
1
FIRST QUARTER HIGHLIGHTS
- Produced 71.6 million pounds of zinc and 8.9 million pounds of copper at Bisha
- Sold 53.4 million pounds of payable zinc in concentrate and 7.8 million pounds of payable copper in concentrate
- Costs below guidance with C1 cash costs(2) of $0.58 per payable pound of zinc sold on a by-product basis
- Improved both zinc and copper recoveries at Bisha:
- Zinc recovery improved by 8.5% to 81.1%
- Copper recovery improved by 34.1% to 61.5%
- Strong operating performance resulted in cash balance increasing from $125 million to $150 million during the quarter
- Released the Timok pre-feasibility study (“PFS”) which demonstrated the project’s sector-leading returns, with an after-tax NAV8% of $1.8 billion and IRR of 80% at $3.15 per pound copper
- Received the Timok exploration decline permit; all approvals now in place to begin construction in Q2 2018
- Completed all drilling related to the $20 million Timok Lower Zone work program which highlighted the deposit’s significant scale and impressive grades; resource statement to be released in mid 2018
- Discovered high sulphidation epithermal (“HSE”) mineralization approximately 500 metres to the east of the Upper Zone
| |
|
Q1 2018 |
|
|
Q4 2017 |
|
|
Q3 2017
(Restated)(1) |
|
|
Q1 2017
(Restated)(1) |
|
| Revenue (millions) |
$ |
106.7 |
|
$ |
80.6 |
|
$ |
71.0 |
|
$ |
71.6 |
|
| Impairment reversals (millions) |
|
- |
|
|
18.0 |
|
|
2.7 |
|
|
- |
|
| Earnings from mine operations (millions)(1) |
|
23.4 |
|
|
15.0 |
|
|
12.3 |
|
|
11.8 |
|
| Exploration expenses (millions)(1) |
|
(8.2 |
) |
|
(10.2 |
) |
|
(12.2 |
) |
|
(13.1 |
) |
| Net income (loss) (millions)(1) |
|
0.5 |
|
|
2.2 |
|
|
(8.4 |
) |
|
(9.1 |
) |
| Net loss attributable to Nevsun shareholders (millions)(1) |
|
(4.5 |
) |
|
(3.8 |
) |
|
(11.6 |
) |
|
(11.6 |
) |
| Basic loss per share attributable to Nevsun shareholders(1) |
$ |
(0.01 |
) |
$ |
(0.01 |
) |
$ |
(0.04 |
) |
$ |
(0.04 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash (millions) |
$ |
149.6 |
|
$ |
124.6 |
|
$ |
151.2 |
|
$ |
166.6 |
|
| Working capital (millions) |
|
187.6 |
|
|
162.3 |
|
|
179.1 |
|
|
190.3 |
|
| Total assets (millions)(1) |
|
1,093.1 |
|
|
1,086.4 |
|
|
1,101.2 |
|
|
1,193.4 |
|
| Total non-current liabilities (millions)(1) |
|
72.3 |
|
|
66.7 |
|
|
75.1 |
|
|
70.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Zinc price realized, per payable pound sold |
$ |
1.51 |
|
$ |
1.54 |
|
$ |
1.44 |
|
$ |
1.25 |
|
| C1 cash cost per payable zinc pound sold, by-product basis(2) |
|
0.58 |
|
|
1.13 |
|
|
0.75 |
|
|
0.89 |
|
| C1 cash cost per payable zinc pound sold, co-product basis(2) |
|
0.79 |
|
|
1.23 |
|
|
0.84 |
|
|
0.89 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Copper price realized, per payable pound sold |
$ |
3.01 |
|
$ |
3.26 |
|
$ |
2.99 |
|
$ |
- |
|
| C1 cash cost per payable copper pound sold, co-product basis(2) |
|
1.56 |
|
|
2.01 |
|
|
1.70 |
|
|
- |
|
| (1)
|
Effective December 31, 2017, the Company voluntarily elected to retrospectively change its accounting policy with respect to exploration and evaluation expenditures, and as such, certain financial measures have been restated. Please refer to the Company’s 2017 annual consolidated financial statements for the full accounting policy, and to the Company’s Q1 2018 interim financial statements for disclosure surrounding the effect of the change as at and for the three months ended March 31, 2017. |
| (2)
|
C1 cash cost per payable pound sold is a non-GAAP measure – see page 17 of this MD&A for discussion of non-GAAP measures and page 6 of this MD&A, Cash Costs, for explanation of per-unit costs.
|
2
OPERATING REVIEW
TIMOK PROJECT UPDATE
During Q1 2018,
extensive work was performed on the project implementation schedule in collaboration
with the Republic of Serbia to better understand the permitting process and
requirements. As a result of this work, the Company gained valuable insights
into the permitting regimen in Serbia under the terms of its mining law, and on
February 27, 2018 the Company received the exploration decline permit. The
permitting process was extremely valuable, and the Company acquired knowledge
and relationships that will serve the Company well as it moves towards securing
additional permits for the Timok Project. The Company is in the process of
finalizing the contract tendering process to commence the decline construction
activities in Q2 2018. The Company has also conducted a tendering process for
the selection of the engineering firm to complete the Timok Project feasibility
study (“FS”). The award of this contract and the commencement of the FS is
expected in Q2 2018.
The Company
completed the PFS in Q1 2018 and the NI 43-101 Technical Report that summarizes
the results of the PFS and incorporates an initial reserve statement for the
Timok Upper Zone will be filed in early Q2 2018. The PFS has reconfirmed the
mining method, overall process design and robust economics of the Timok
Project. During Q1 2018, test work conducted at a second metallurgical laboratory
confirmed that a single, bulk copper concentrate can be achieved using the
proposed flowsheet. This work showed that close control of the concentrate
production rate can significantly improve concentrate grade without loss of
copper recovery. The test work also confirmed the PFS design that high-grade
ore from the earliest years of mine production will require only a single
rougher stage of flotation to produce the final concentrate. A first cleaning
stage will be required after several years as ore grades decline with mining
depth and, in the final years, a second cleaning stage will be required to
treat the lowest grades of ore. The program also addressed the earlier concept
of simultaneously producing two copper concentrates with low- and high-arsenic
contents, respectively; this work is continuing.
The Company has
spent $5.6 million in Q1 2018 on Upper Zone activities, including land
acquisition (cumulative $40.3 million since the acquisition of Reservoir
Minerals Inc., “Reservoir”), and the PFS was completed within the $40 million
budget. The Company has acquired 53% of the required private land for
construction of the project and 100% of the land required for development of
the exploration decline as at March 31, 2018.
KEY OPERATING INFORMATION – BISHA MINE
Bisha maintained
total quarterly material movement above 5 million tonnes for the second
consecutive quarter in Q1 2018. This sustained improvement in mine performance
reflects the deployment of new heavy mining equipment (“HME”), improving HME
availability, and the implementation of a plan for in-pit waste dumping with
favourable impacts on hauling distance. The mine is expected to continue to
benefit from the in-pit waste dumping for the next 12
months. Exceptions to the mine plan required in 2017 to alleviate processing
difficulties for certain ore types have now been largely corrected. This resulted
in a decrease in the stripping ratio from Q4 2017 and will ensure adequate primary
ore supply in support of achieving 2018 mine production targets.
3
On processing,
Bisha achieved breakthrough results on the key metallurgical challenge that the
mine has faced since the commencement of the zinc phase – copper-zinc
selectivity – during a 31-day plant trial using alternate reagent schemes. The
Company is currently installing upgrades on the plant that, once completed in
Q2 2018, will allow for consistent application of the revised reagent scheme
which is expected to significantly improve both copper recovery and copper
concentrate grades going forward. Both copper and zinc recoveries in Q1 2018
exceeded expectations at 61.5% and 81.1%, respectively.
| |
|
Q1 2018
|
|
|
Q4 2017
|
|
|
Q3 2017
|
|
|
Q1 2017
|
|
|
Mining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ore mined, tonnes(1)
|
|
640,000 |
|
|
362,000 |
|
|
383,000 |
|
|
651,000 |
|
|
Waste mined, tonnes
|
|
4,525,000 |
|
|
4,981,000 |
|
|
4,126,000 |
|
|
3,114,000 |
|
|
Strip ratio, using tonnes
|
|
7.1 |
|
|
13.8 |
|
|
10.8 |
|
|
4.8 |
|
|
Processing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ore milled, tonnes
|
|
563,000 |
|
|
520,000 |
|
|
524,000 |
|
|
599,000 |
|
|
Zinc feed grade, %
|
|
7.1 |
|
|
6.9 |
|
|
6.8 |
|
|
5.5 |
|
|
Copper feed grade, %
|
|
1.2 |
|
|
1.2 |
|
|
1.0 |
|
|
0.9 |
|
|
Recovery, % of zinc
|
|
81.1 |
|
|
72.6 |
|
|
74.0 |
|
|
71.0 |
|
|
Recovery, % of copper(2)
|
|
61.5 |
|
|
27.4 |
|
|
33.4 |
|
|
26.8 |
|
|
Zinc concentrate grade, %
|
|
47.8 |
|
|
45.6 |
|
|
42.0 |
|
|
39.4 |
|
|
Copper concentrate grade, %(2)
|
|
20.9 |
|
|
18.7 |
|
|
17.8 |
|
|
21.6 |
|
|
Zinc in concentrate produced, millions of pounds
|
|
71.6 |
|
|
57.7 |
|
|
57.8 |
|
|
51.9 |
|
|
Zinc in concentrate produced, tonnes
|
|
32,500 |
|
|
26,100 |
|
|
26,300 |
|
|
23,500 |
|
|
Copper in concentrate produced, millions of pounds
|
|
8.9 |
|
|
3.6 |
|
|
4.0 |
|
|
3.3 |
|
|
Copper in concentrate produced, tonnes
|
|
4,100 |
|
|
1,600 |
|
|
1,800 |
|
|
1,500 |
|
|
Payable zinc in concentrate sold, millions of pounds
|
|
53.4 |
|
|
44.6 |
|
|
43.4 |
|
|
52.9 |
|
|
Payable zinc in concentrate sold, tonnes
|
|
24,700 |
|
|
20,200 |
|
|
19,800 |
|
|
24,000 |
|
|
Payable copper in concentrate sold, millions of
pounds
|
|
7.8 |
|
|
3.6 |
|
|
3.1 |
|
|
- |
|
|
Payable copper in concentrate sold, tonnes
|
|
3,500 |
|
|
1,600 |
|
|
1,400 |
|
|
- |
|
| (1)
|
Ore tonnes mined for the three months ended March 31, 2018 consisted of 640,000 tonnes of primary ore (Q1 2017 – 594,000 tonnes of primary ore and 57,000 tonnes of supergene ore).
|
| (2)
|
This represents the copper recovery to copper concentrate from the copper flotation circuit only, and excludes copper recovered to zinc concentrates. |
4
RESULTS OF OPERATIONS FOR THE FIRST QUARTER 2018
EARNINGS FROM MINE OPERATIONS AND CASH FLOW PROVIDED
BY OPERATING ACTIVITIES
The Company
generated earnings from mine operations of $23.4 million during Q1 2018, a 98%
increase over $11.8 million generated during Q1 2017. Q1 2018 earnings from
mine operations are higher over the comparative period largely as a result of
higher revenues, which were significantly impacted by the sale of 7.8 million
payable pounds of copper in concentrate at an average realized price per pound
of $3.01, which did not occur in the comparative period as the mine had not yet
produced saleable copper in concentrate during the primary phase. Higher
realized selling prices for zinc ($1.51 per pound in Q1 2018 vs. $1.25 per
pound in Q1 2017) also contributed to the higher earnings from mine operations.
Q1 2018 earnings from mine operations were offset in part by higher operating
costs, which include higher reagent, fuel and mining costs. Q1 2017 earnings
from mine operations include a non-recurring credit of $9.8 million related to
the recovery of withholding taxes paid in prior years with respect to a
contractor (recorded to accounts receivable, net of income taxes).
Cash flows
generated by operating activities before income taxes were $36.2 million in Q1
2018 as compared to $0.4 million in Q1 2017. Q1 2018 cash flows benefitted
largely from higher sales volumes during the period as compared to Q1 2017, as
zinc sales of 53.4 million payable pounds were 1% higher than the 52.9 million
payable pounds sold in Q1 2017, and the 7.8 million payable pounds of copper
sold had no comparable in Q1 2017 as no sales occurred in that period.
Additionally, cash generation in Q1 2018 benefitted from the drawdown of all
concentrate inventory stockpiles from December 31, 2017, collection of all provisional
payments during the period (no provisional sales receivables outstanding as at
March 31, 2018), lower treatment charges incurred on zinc sales as a result of
continued zinc market tightness and an increasing quality of zinc concentrate,
which attracts better terms ($0.02 per payable zinc pound sold in Q1 2018
compared to $0.11 per payable pound sold in Q1 2017), and sales of material of
significantly higher grade. Zinc concentrate grades averaged 47.8% in Q1 2018
as compared to 39.4% in Q1 2017, and copper concentrate grades of 20.9% in Q1
2018, while marginally lower than the 21.6% produced in Q1 2017, were produced
much more consistently and in higher quantities, as evidenced in the 170% increase
in copper production from 3.3 million pounds in Q1 2017 to 8.9 million pounds
in Q1 2018, which allowed for the sale of two copper concentrate parcels during
Q1 2018.
PRODUCTION AND SALES
The Company
produced 71.6 million pounds of zinc in zinc concentrate and 8.9 million pounds
of copper in copper concentrate during Q1 2018 by processing of 563,000 tonnes
of primary ore, with a feed grade of 7.1% zinc and 1.2% copper. Both zinc and copper recoveries in Q1 2018 improved upon
Q4 2017 results at 81.1% and 61.5%, respectively, compared to 72.6% and 27.4%
in the Q4 2017 period.
During Q1 2018
both ore production and waste movement in the mine performed well, reflecting
the deployment of new heavy mining equipment (“HME”), improved HME availability
and the implementation of a plan for in-pit waste dumping with favorable
impacts on hauling distance. Exceptions to the mine plan in 2017, which were
required to alleviate processing difficulties associated with certain ore
types, have now been largely corrected. This resulted in a decrease in the
stripping ratio from 13.8 during Q4 2017 to 7.1 during Q1 2018 as the campaign
to rework the mining benches, walls and faces in the Bisha main pit was
completed in 2017. This work has ensured that the mine was fed solely with
primary ore feed through the entire quarter.
5
The continued
improvement in mining capability and the resulting increase in availability of
run of mine (“ROM”) ore meant that no zinc-only stockpiles were processed in
the quarter, which benefitted copper recoveries. Additionally, considerable
progress was made in addressing metallurgical issues related to the recovery of
copper from primary ore. A 31-day plant trial was completed to assess the impact
of the depressant Sodium Meta BiSulfate (“SMBS”) on copper vs. zinc selectivity
in the copper flotation circuit. The results of the trial indicated that the
use of SMBS could significantly improve copper recovery and copper concentrate
grade for primary ore. The use of SMBS will re-commence in late Q2 2018.
During Q1 2018,
the Company sold 53.4 million pounds of payable zinc in zinc concentrate and
7.8 million pounds of payable copper in copper concentrate, compared to 52.9
million pounds of payable zinc and no copper, respectively, in Q1 2017. Concentrate
grades averaged 47.8% for zinc (Q1 2017 – 39.4%) and 20.9% for copper (Q1 2017
– 21.6%).
CASH COSTS
C1 cash costs
have been calculated on a by-product cost basis for zinc, treating copper sales
as a by-product credit to reported zinc sales. C1 costs are also presented on
co-product bases for zinc and copper, which allocates joint costs based on
expected revenue from actual production in order to provide consistency with reporting
from previous periods.
On a by-product
basis, C1 cash costs per payable pound of zinc sold for Q1 2018 totalled $0.58,
comprised of operating expenses and selling costs of $0.80 and treatment
charges of $0.02, offset by by-product credits of $0.24. By-product credits are
comprised of gold and silver credits ($0.03), as well as the net margin
realized on copper sales ($0.21). There are no comparable Q1 2017 copper
by-product costs for zinc sales as there were no copper sales in Q1 2017. C1
cash costs benefitted from improved zinc and copper recoveries which resulted
in increases in zinc and copper production. Additionally, mining costs
benefitted from shorter hauling distances due to in-pit waste dumping. These
benefits were partially offset by continued higher maintenance costs.
C1 cash costs
per payable pound of zinc sold on a co-product basis for Q1 2018 totalled $0.79
(Q1 2017 – $0.89), comprised of operating expenses and selling costs of $0.80
(Q1 2017 – $0.73) and treatment charges of $0.02 (Q1 2017 – $0.11), offset by
by-product credits of $0.03 (Q1 2017 – $0.13).
C1 cash costs
per payable pound of copper sold on a co-product basis for Q1 2018 totalled $1.56,
comprised of operating expenses and selling costs of $1.83 and treatment and
refining charges of $0.41, offset by by-product credits of $0.68. No comparable
costs are available for copper during Q1 2017 as there were no sales of copper
in concentrate during that period.
6
STOCKPILED MATERIALS
The composition
of stockpiled materials (tonnes) as at March 31, 2018, is as follows:
| |
|
Total
|
|
|
Current
|
|
|
Non-current
|
|
|
Written-down(1)
|
|
|
Primary ore
|
|
1,995,000 |
|
|
130,000 |
|
|
600,000 |
|
|
1,265,000(2
|
) |
|
Supergene ore
|
|
80,000 |
|
|
- |
|
|
80,000 |
|
|
- |
|
|
Oxide ore
|
|
106,000 |
|
|
- |
|
|
- |
|
|
106,000 |
|
|
Pyrite sand ore
|
|
395,000 |
|
|
- |
|
|
- |
|
|
395,000 |
|
| (1)
|
The carrying values of these stockpiled materials remain fully impaired for accounting purposes as at March 31, 2018.
|
| (2)
|
The quantity of written-down primary ore stockpiles has decreased from 1,500,000 as at December 31, 2017 due to a change to the specific gravity factor used during the month-end survey process. This decrease has had no effect on the financial results of the Company during the period.
|
At March 31,
2018, there were four distinct types of stockpiled material – 1,995,000 tonnes
of primary ore, which is predominantly “zinc-only” ore material, 80,000 tonnes
of supergene ore, 106,000 tonnes of oxide ore, and 395,000 tonnes of pyrite
sand material.
The zinc-only primary
ore stockpiles, consisting of 1,865,000 tonnes of material, are not homogenous,
with known variations in grades and mineralogy, and have been segregated into
different stockpiles based on these characteristics. Of the total amount, approximately
600,000 tonnes contain high and medium zinc grades, and are demonstrably
economic when assuming metallurgical recovery rates and zinc concentrate
qualities consistent with those achieved during zinc-only plant trials in late 2017,
and using current estimates for zinc metal prices, commercial terms and
operating costs. The 600,000 tonnes, which are recognized in inventory at their
original carrying amount, have been included in the updated Bisha reserve
statement as of December 31, 2017, and are classified as non-current inventory
as no quantities of this stockpile are expected to be processed within the next
twelve months. The remaining 1,265,000 tonnes of zinc-only material, which are
either low grade or possess challenging metallurgical characteristics, are not
currently expected to be processed and are fully impaired for accounting
purposes.
The stockpiled
quantities of oxide ore and pyrite sand ore are also fully impaired for
accounting purposes as of March 31, 2018.
The Company
continues to periodically mine small pockets of supergene ore in the main Bisha
ore body during the primary phase. The Company has no plans to process this stockpile
within the next 12 months, and as such the supergene ore has been classified as
non-current.
7
EXPLORATION
Bisha
In Q1 2018, the
Company spent $2.2 million to fund 7,710 metres of exploration diamond drilling
(30 holes), 1,249 metres of reverse circulation drilling (12 holes), ground and
borehole geophysical surveying, soil and rock geochemistry and other geological
work. The primary area of focus was the continuation of drilling in the Asheli
area on the Mogoraib River exploration license.
Timok Project
In Q1 2018,
exploration drilling on the Timok Project consisted of the continuation and
completion of the drilling of the Lower Zone deposit as part of the agreed
Lower Zone work commitment under the joint venture with Freeport (1,934 metres
in 6 holes). The Company has spent $0.9 million in Q1 2018 (cumulative $19.6
million from June 2016) on the Lower Zone drilling program. Since the start of
the program, the Company has drilled 50,432 metres, and 49 holes have been
completed as at March 31, 2018.
Additional
regional exploration drilling was done on the Brestovac Metovnica property to
search for a new deposit with similar properties to the Upper Zone deposit (583
metres in 2 holes). In addition, a total of 1,112 metres of condemnation
drilling in 4 holes was completed over proposed infrastructure locations. The
results indicate that there is no evidence of significant mineralized rock in
the areas of the Decline Portal, the Mill Site and the Underground
Infrastructure.
Drilling
contracts are currently going through a re-bidding process, and drilling
operations are expected to restart in late Q2 2018.
Lower Zone
drilling continued to demonstrate the copper grade, continuity and thickness of
mineralization in the Lower Zone. To date, 84 drill holes have been drilled
within the Lower Zone footprint, of which 78 drill holes comprising
approximately 90,571 meters have intersected the deposit or its margins. The
geometry of the Lower Zone remains to be fully defined, however current
dimensions of the mineralized zone are approximately 2,000 metres long by 1,100
metres wide by 1,400 metres high. The mineralization comes to within 700 metres
of surface at its south-eastern margin and extends to over 2,200 metres depth
to the northwest, where it remains open. Highlighted assays from the final
drill holes included 1.00% Cu and 0.20g/t Au (1.14% Cu equivalent) over 556.8
metres starting at 1,310 metres in TC170177, which included 1.45% Cu, 0.32g/t
Au (1.67% Cu equivalent) over 177.0 metres.
Regional
drilling focused on searching for new high grade Upper Zone-style
mineralization. As released on January 16, 2018, significant intersections of
high sulphidation epithermal mineralization were made approximately 500 metres
to the east of the Upper Zone in a 250 by 250 metre area, including hole
TC170189 which returned 2.93% copper and 2.54 g/t gold over 27.0 metres at a
depth of 396 metres.
Tilva, BEM
and Macedonia
During Q1 2018,
no significant exploration activities took place at the Company’s other wholly-owned
mineral licenses and permits in Serbia and Macedonia on account of winter
conditions. Activities are expected to resume in Q2 2018.
8
Additionally, no
activities took place at the Tilva Joint Venture with Rio Tinto, where efforts
in future months in 2018 will focus on large porphyry copper targets on the
Tilva Njara, Kraljevica and Nikolecevo exploration licenses in Serbia.
RESERVES AND RESOURCES
The Company
published an updated mineral reserve for the Bisha mine on March 27, 2018. Please
refer to the Company’s 2017 AIF for more information.
The Company will
publish details of the preliminary Timok Project reserve in Q2 2018. After
publishing the reserve, the Company expects to commence the capitalization of
exploration and evaluation costs at the Timok Upper Zone incurred in order to
expand the reserve and its associated value.
CORPORATE SOCIAL RESPONSIBILITY
On May 4, 2017,
the Company issued its 2016 annual CSR report. The Company continues with its
transparent approach to operations and contributions to the communities in
which it operates, including the reporting of funds paid to the State of
Eritrea in the form of taxes and royalties. The Company plans to issue its 2017
annual CSR report during Q2 2018.
DIVIDENDS
The Company
announced in January 2018 that it would be suspending declarations of
dividends, and as such no dividends were declared by the Company during the
three months ended March 31, 2018. During the three months ended March 31,
2017, the Company declared a dividend of $0.01 per share for a total
declaration of $3,019.
Prior to the
suspension of the dividend, the Company had in place a Dividend Reinvestment
Plan (“DRIP”) which allowed shareholders to purchase additional common shares
of the Company at a 3% discount to fair market value by reinvesting their cash
dividends. For the Q4 2017 dividend, approximately 9% of shareholders elected
to participate in the DRIP. Accordingly, the Company paid dividends of $2,762
in cash and $260 in common shares (109,190 shares) in January 2018. For the Q4
2016 dividend, approximately 12% of common shareholders elected to participate
in the DRIP. Accordingly, the Company paid dividends of $10,562 in cash and
$1,537 in common shares (465,369 shares) in January 2017. For the Q1 2017
dividend, approximately 8% of common shareholders elected to participate in the
DRIP. Accordingly, the Company paid dividends of $2,763 in cash and $256 in
common shares (104,609 shares) in April 2017.
9
SELECTED QUARTERLY FINANCIAL INFORMATION
Selected
consolidated financial information from continuing operations for the most
recent eight quarters (unaudited) are presented below. The financial results
from Q2 2016 reflect a period in which the Bisha Mine was engaged in full
commercial copper concentrate production through the processing of supergene
ore. Starting at the end of Q2 2016, the commissioning phase of the zinc
flotation plant began. Costs directly attributable to the production of zinc
concentrate incurred during this phase, which is defined by the processing of
primary ore, were capitalized until commercial production was declared and
sales of commercially produced material commenced in Q4 2017.
All figures in
this table from Q2 2016 through Q3 2017 have been restated to reflect the
Company’s voluntary change in accounting policy with respect to exploration and
evaluation expenditures. Please refer to note 27 in the Company’s 2017 annual
consolidated financial statements for more information.
|
In US $000s (except per
share data)
|
|
2018
1st
|
|
|
2017
4th
|
|
|
2017
3rd
(Restated)
|
|
|
2017
2nd
(Restated)
|
|
|
Revenues
|
$ |
106,746 |
|
$ |
80,623 |
|
$ |
71,036 |
|
$ |
66,091 |
|
|
Earnings (loss) from mine
operations
|
|
23,384 |
|
|
14,990 |
|
|
12,285 |
|
|
(64,896 |
) |
|
Net income (loss) for the
period
|
|
513 |
|
|
2,117 |
|
|
(8,389 |
) |
|
(84,198 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to
Nevsun shareholders
|
|
(4,502 |
) |
|
(3,724 |
) |
|
(11,564 |
) |
|
(57,863 |
) |
|
Loss per share attributable
to Nevsun shareholders – basic
|
|
(0.01 |
) |
|
(0.01 |
) |
|
(0.04 |
) |
|
(0.19 |
) |
|
Loss per share attributable
to Nevsun shareholders – diluted
|
|
(0.01 |
) |
|
(0.01 |
) |
|
(0.04 |
) |
|
(0.19 |
) |
|
In US $000s (except per
share data)
|
|
2017
1st
(Restated)
|
|
|
2016
4th
(Restated)
|
|
|
2016
3rd
(Restated)
|
|
|
2016
2nd
(Restated)
|
|
|
Revenues
|
$ |
71,647 |
|
$ |
36,187 |
|
$ |
22,920 |
|
$ |
79,165 |
|
|
Earnings (loss) from mine
operations
|
|
11,848 |
|
|
(4,715 |
) |
|
17,728 |
|
|
35,561 |
|
|
Net income (loss) for the
period
|
|
(9,131 |
) |
|
(17,936 |
) |
|
1,271 |
|
|
16,801 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
attributable to Nevsun shareholders
|
|
(11,574 |
) |
|
(16,498 |
) |
|
(2,874 |
) |
|
8,907 |
|
|
Earnings (loss) per share
attributable to Nevsun shareholders – basic
|
|
(0.04 |
) |
|
(0.08 |
) |
|
(0.01 |
) |
|
0.04 |
|
|
Earnings (loss) per share
attributable to Nevsun shareholders – diluted
|
|
(0.04 |
) |
|
(0.08 |
) |
|
(0.01 |
) |
|
0.04 |
|
FINANCIAL RESULTS – THREE MONTHS ENDED MARCH 31, 2018
The following variances result
when comparing operations for the three-month period ended March 31, 2018, with
the same period of the prior year (in US $000’s, expect per ounce and per pound
data):
10
REVENUES
The Company’s Q1
2018 revenues of $106,746 (Q1 2017 - $71,647) are comprised of zinc concentrate
sales of $80,666 (Q1 2076 – $67,852), zinc concentrate by-product sales of
$1,594 (Q1 2017 – $7,114), copper concentrate sales of $23,504 (Q1 2017 –
$nil), copper concentrate by-product sales of $5,323 (Q1 2017 – $nil) and other
revenue of $nil (Q1 2017 – $2,664), offset by zinc concentrate treatment and
refining charges of $1,161 (Q1 2017 – $5,983) and copper concentrate treatment
and refining charges of $3,180 (Q1 2017 – $nil).
Zinc revenues
include sales of 53.4 million payable pounds of zinc (Q1 2017 – 52.9) at an
average realized price per pound of $1.51 (Q1 2017 – $1.28). Zinc sales are net
of downward provisional and final pricing and physical quantity adjustments of
$2,652 (Q1 2017 – positive adjustments of $1,572). Copper revenues include
sales of 7.8 million payable pounds of copper (Q1 2017 – nil) at an average
realized price per pound of $3.01 (Q1 2017 – nil). Copper sales are net of
downward provisional and final pricing and physical quantity adjustments of
$535 (Q1 2017 – $nil). Sales in Q1 2018 increased over those realized in Q1
2017 largely as a result of improved production of both zinc and copper, higher
metals prices, and the drawdown of concentrate stockpiles through Q1 2018 from
December 31, 2017.
The Company did
not complete any additional sales of direct shipped ore (“DSO”) in Q1 2018. In
Q1 2017, the Company completed DSO sales which contained approximately 4,800
gold equivalent ounces from stockpiled material that resulted in other revenue
of $2,664. The gold equivalent ounces were calculated based on a ratio of 71:1
silver to gold.
OPERATING EXPENSES
The Company
recorded operating expenses of $55,182 in Q1 2018 (Q1 2017 - $40,557). Q1 2017
operating expenses were net of a non-recurring credit related to the recovery
of withholding taxes on contractor payments overpaid in prior years ($9,780,
recorded in accounts receivable, net of income taxes). After removing the
non-recurring credit, Q1 2018 operating expenses of $55,182 are 10% higher than
adjusted Q1 2017 operating expenses of $50,337. Operating expenses incurred
during Q1 2018 have increased over the comparative period as a result of
several factors. Firstly, maintenance of HME continues as the mining department
works towards continual improvement of availabilities and usage rates. The new
HME that arrived on site in late 2017 and early 2018 are now fully operational,
which has allowed for a sustained focus on maintenance of older assets. Additionally,
Q1 2018 operating expenses reflect increased reagent usage (namely, SMBS),
which has had a positive impact on copper recoveries and copper concentrate
grades. Fuel costs are also higher as the cost of fuel on a per-litre basis has
increased over the Q1 2017 period. Lastly, as a result of increased sales
volumes during Q1 2018, higher transport and shipping costs were incurred.
ROYALTIES
The Company
incurs a 3.5% royalty on the sale of base metals and a 5.0% precious metals
royalty on the sale of gold and silver. For Q1 2018, royalty expense of $5,486
(Q1 2017 – $6,303) was recorded. Royalties are payable at the time concentrate
shipments leave the mine, which precedes the revenue recognition point.
11
The Company is
required to remit royalties on metals within concentrate on a contained, rather
than payable, basis. The Company has held discussions with the Eritrean
Ministry of Energy & Mines (“MEM”) in order to obtain relief from the payment
of royalties on such a basis as it effectively increases the royalty rates
beyond the existing 3.5% for base metals and 5.0% for precious metals, however
the MEM has not altered its position. Despite higher revenue in Q1 2018, the Q1
2018 royalty expense is lower than the Q1 2017 expense as the Q1 2017 amount
includes $1,583 related to 2016 production that had originally been accrued on
a payable, rather than contained, basis.
DEPRECIATION AND DEPLETION (RESTATED)
During Q1 2018,
depreciation and depletion of $22,694 (Q1 2017 – $12,939) was recorded.
Depreciation is calculated primarily using the units-of-production method with
metal pounds produced and ore tonnes mined as the basis for the calculation.
Fixed assets such as mobile equipment and buildings are amortized using the
declining balance method. Depreciation recorded during Q1 2018 was higher than
Q1 2017 as a result of a shorter mine life announced in Q2 2017, which
increased the per-unit rate of depreciation for assets depreciated using the
units of production method. Additionally, in Q2 2017, the Company increased the
declining balance amortization rates of its remaining fixed assets in order to
ensure sufficient amortization is taken through to the end of the mine life.
The Company expects that depreciation and amortization will be higher than in
past years for the remainder of the mine life. In addition to higher rates of
depreciation, depreciation in Q1 2018 has also increased as new assets have been
brought into use, namely the Phase III tailings management facility lift and new
HME additions.
EXPLORATION EXPENSES (RESTATED)
As disclosed in the Company’s 2017 annual consolidated
financial statements, the Company has voluntarily changed its accounting policy
for expenditures on exploration and evaluation, with all such expenditures now
expensed until proven and probable mineral reserves have been declared, and the
Company believes that further work will add economic value to those reserves.
Exploration expense consists of activities such as drilling, assaying, sampling,
technical studies and related administrative expenditures.
During Q1 2018, the Company incurred exploration expense of $8,156
(Q1 2017 – $13,143) comprised of $1,992 incurred at the Bisha Mine (Q1 2017 – $2,710),
$4,620 incurred on the Timok Project Upper Zone (Q1 2017 – $7,325), $940
incurred on the Timok Project Lower Zone (Q1 2017 – $2,914) and $604 incurred
on the Company’s other properties in Serbia and Macedonia (Q1 2017 – $194).
ADMINISTRATIVE
Administrative
costs for Q1 2018, comprising head office costs including salaries and employee
benefits, share-based payments, business development and other general
administrative expenses were $5,431, up from $4,694 in Q1 2017. Salaries and
employment benefits, including share-based payments and long-term incentive
compensation, decreased from $3,376 for Q1 2017 to $2,529 for Q1 2018. The
decrease is predominantly the result of a decrease in the valuation of long-term
incentives, the fair value of which is based on the Company’s share price.
Other administrative expenses increased from $1,318 during Q1 2017 to $2,902
during Q1 2018, which reflects higher travel, consulting, office and business
development costs.
12
FINANCE COSTS
Finance costs in
Q1 2018 of $519 (Q1 2017 – $486) are comprised entirely of accretion expense on
the Company's reclamation liability.
FINANCE INCOME
Finance income
for Q1 2018 of $317 (Q1 2017 – $309) is comprised of interest earned on cash
and cash equivalent balances.
INCOME TAXES (RESTATED)
Income tax
expense for Q1 2018 of $9,082 (Q1 2017 – $2,965) relates to the BMSC mining
operations where the statutory tax rate is 38%, and has increased as a result
of improved financial results and higher taxable income.
LIQUIDITY AND CAPITAL RESOURCES (RESTATED)
The Company’s
cash and cash equivalents at March 31, 2018, were $149,623 (December 31, 2017 –
$124,598). Working capital, including cash and cash equivalents, was $187,595
(December 31, 2017 – $162,319.)
During Q1 2018,
cash generated from operating activities before changes in non-cash operating
working capital and income taxes paid was $33,083, compared to $7,152 during Q1
2017. As of March 31, 2018, the Company had not yet remitted income taxes for
the 2018 fiscal year (Q1 2017 – $18,794).
The Company used
$8,472 in investing activities in Q1 2018 (Q1 2017 – $4,029), comprised of $5,809
on sustaining capital and land acquisition (Q1 2017 – $1,280) and $167 on
mineral properties (Q1 2017 – $1,025). These expenditures were net of changes
in non-cash working capital of $2,496 (Q1 2017 – $1,724).
The Company used
$2,724 in its financing activities in Q1 2018, compared to $10,317 in Q1 2017.
During Q1 2018, the Company paid dividends to Nevsun shareholders of $2,724 (Q1
2017 – $10,562).
OFF-BALANCE SHEET ARRANGEMENTS
The Company has
not entered into any specialized financial arrangements to minimize its
commodity price risk, investment risk or currency risk. There are no
off-balance sheet arrangements.
CONTINGENCIES
LEGAL CLAIMS
The Company is
involved in various claims, litigation and other matters in the ordinary course
and conduct of business. Some of these pending matters will take a number of
years to resolve. While it is not possible to determine the ultimate outcome of
such actions at this time, and inherent uncertainties exist in predicting such
outcomes, it is the Company’s belief that the ultimate resolution of such
actions is not reasonably likely to have a material adverse effect on its
consolidated financial position or results of operations. As a result, no
contingent liabilities have been recorded in these interim financial
statements.
13
CONTRACTUAL DISPUTE WITH CANACCORD
Canaccord
Genuity Corp. (“Canaccord”) was an advisor to Reservoir in connection with the
Company’s transaction (the “Transaction”) to acquire Reservoir and all of its
assets, including the Timok Project.
In March 2016,
Canaccord and Reservoir entered into an advisory agreement to evaluate third
party funding arrangements which related to the potential exercise by Reservoir
of a right of first refusal (“ROFO”) under its joint venture agreement with
Freeport. Canaccord was paid a fee of $1,000 for providing financial advisory
services in connection with Reservoir’s exercise of the ROFO.
In early April
2016, Canaccord and Reservoir entered into a new advisory agreement regarding a
potential acquisition of control of Reservoir (the “April Advisory Agreement”).
Canaccord has filed a Notice of Claim in the British Columbia Supreme Court
regarding the fees under the April Advisory Agreement. Canaccord initially
demanded an advisory fee of CAD$11,658 (the “Transaction Fee”) and has
subsequently increased its claim for a Transaction Fee to CAD$14,670, which
would represent approximately 3.0% of the overall transaction value of
approximately CAD$482,000 based on the closing price of the Company’s shares
(CAD$4.70), the last trading day prior to the date of announcement of the
Transaction.
On September 12,
2016, Reservoir filed a Reply to the Notice of Claim to dispute the Transaction
Fee demanded by Canaccord on the basis that, among other things, it is not
determined in accordance with the terms of the April Advisory Agreement.
Reservoir has paid to Canaccord the sum of CAD$6,047 (which includes a
transaction fee of CAD$5,617 and a second fairness opinion fee of $100, taxes
and expenses). Reservoir believes that this constitutes all fees that Canaccord
is entitled under the April Advisory Agreement.
The claim was
heard in the British Columbia Supreme Court on January 25 and 26, 2018. The
decision of the Court on the claim was reserved and is pending. No provision
has been recorded in these interim financial statements as the outcome of this
claim is not determinable.
OUTSTANDING SHARE DATA
As of April 25,
2018, the Company had 302,321,670 shares and 7,550,233
options issued and outstanding.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
A description of
financial instruments and types of risks that the Company is exposed to and its
objectives and policies for managing such risks is included in the Company’s
Annual Information Form for the year ended December 31, 2017, dated March 27,
2018, which is available on SEDAR at www.sedar.com.
The Company’s
zinc and copper concentrates sales receivables are carried at fair value as the
receivables are derivatives due to the provisional pricing of these sales
contracts. The receivables are measured using quoted forward market prices that
correspond to the settlement date of the provisional pricing period for the
estimated metals contained within the zinc and copper concentrates or direct
shipment sales. There were no changes to the method of fair value measurement
during the period. Except for the Company’s zinc and copper concentrate trade
receivables, the fair values of the Company’s financial assets and financial
liabilities approximate their carrying amounts in the condensed consolidated
interim balance sheet.
14
PROPOSED TRANSACTIONS
The Company
continually reviews opportunities for growth, however, there are no proposed
asset or business acquisitions or dispositions currently under offer.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's
consolidated annual financial statements are prepared in accordance with IFRS
as issued by the International Accounting Standards Board (IASB). The
significant accounting policies applied and recent accounting pronouncements
are described in Note 3 and Note 4 to the Company's 2017 annual consolidated
financial statements, respectively, except as discussed below.
In preparing the
condensed consolidated interim financial statements in accordance with the IAS
34, management is required to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. These estimates
involve considerable judgment and are, or could be, affected by significant
factors that are out of the Company’s control. Actual results could differ from
those estimates. Management reviews its estimates and assumptions on an ongoing
basis using the most current information available. Revisions to estimates and
the resulting effects on the carrying values of the Company’s assets and
liabilities are accounted for prospectively. For a description of the critical
judgements in application of accounting policies and information about
assumptions and estimation uncertainties, refer to the Company’s MD&A for
the year ended December 31, 2017, which is available on SEDAR at www.sedar.com.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s
management, with the participation of the Chief Executive Officer and Chief
Financial Officer, is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with IFRS. The
Company’s internal control over financial reporting includes those policies and
procedures that:
- pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of assets of
the Company;
- provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
IFRS, and that the Company’s receipts and expenditures are being made only in
accordance with authorizations of management and the Company’s directors; and
15
- provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the Company’s consolidated
financial statements.
The Company’s
management, with the participation of the Chief Executive Officer and Chief
Financial Officer, assessed the effectiveness of the Company’s internal control
over financial reporting using the criteria set forth in the Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
concluded that the Company’s internal control over financial reporting was
effective as of December 31, 2017.
CHANGES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been
no changes in the Company’s internal control over financial reporting during
the period ended March 31, 2018, that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
LIMITATIONS OF
CONTROLS AND PROCEDURES
The Company’s
management, including the Chief Executive Officer and the Chief Financial
Officer, believe that any disclosure controls and procedures or internal
controls over financial reporting, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all control systems, they cannot provide absolute assurance that all control
issues and instances of fraud, if any, within the Company have been prevented
or detected. These inherent limitations include the realities that judgements
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
unauthorized override of the control. The design of any systems of controls is
also based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Accordingly, because of
the inherent limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.
ACCOUNTING CHANGES
AND RECENT ACCOUNTING PRONOUNCEMENTS
IFRS 9 – Financial
Instruments
Effective
January 1, 2018, the Company has adopted IFRS 9 – Financial Instruments. IFRS 9
provides three different measurement categories for non-derivative financial
assets – subsequently measured at amortized cost, fair value through profit or
loss or fair value through other comprehensive income – while all
non-derivative financial liabilities are classified as subsequently measured at
amortized cost. The category into which a financial asset is placed and the
resultant accounting treatment is largely dependent on the nature of the
business of the entity holding the financial asset. All financial instruments
are initially recognized at fair value.
16
The
implementation of the new standard has not had a material impact on the
measurement of the Company’s reported financial results; however it has
resulted in additional disclosures.
IFRS 15 – Revenue
from Contracts with Customers
Effective
January 1, 2018, the Company has adopted IFRS 15 – Revenue from Contracts with
Customers. The new standard requires a methodology of recognizing revenue in
line with the transfer of control of promised goods or services, and allocating
revenue to separately identifiable goods or services identified within a
contract, based on their relative stand-alone selling price. In order to
facilitate this identification and allocation process, the new standard employs
a five-step model with prescriptive steps and decision-making criteria.
The
implementation of the new standard has not had a material impact on the
Company’s reported financial results, however it has resulted in additional
disclosures.
Voluntary change
in accounting policy – Exploration and evaluation expenditures
Effective
December 31, 2017, the Company implemented a voluntary change in accounting
policy with respect to exploration and evaluation expenditures. As such,
certain prior period amounts within this management’s discussion and analysis
have been restated in accordance with the new policy. Refer to note 12 of the
Company’s interim financial statements for the three months ended March 31,
2018 for additional disclosure regarding the effects of the change.
QUALITY
ASSURANCE
Mr. Peter
Manojlovic, PGeo, and Vice President Exploration of Nevsun Resources Ltd. is a
Qualified Person under the terms of NI 43-101 and has reviewed the exploration
and mineral resource and reserve statements of this MD&A and approved its
dissemination.
NON-GAAP
PERFORMANCE MEASURES
This document
includes non-GAAP performance measures, discussed below, that do not have a
standardized meaning prescribed by IFRS. The performance measures may differ
from those used by, and may not be comparable to such measures as reported by,
other issuers. The Company believes that these performance measures are
commonly used by certain investors, in conjunction with conventional GAAP
measures, to enhance their understanding of the Company's performance. The
Company uses these performance measures extensively in internal decision-making
processes, including to assess how well the Bisha Mine is performing and to
assist in the assessment of the overall efficiency and effectiveness of the
mine site management team. The table below provides a reconciliation of these
non-GAAP measures to the most directly comparable IFRS measures as contained
within the Company's issued financial statements.
C1 CASH COST
PER PAYABLE POUND SOLD
C1 cash cost per
payable pound sold is a non-GAAP measure and represents the cash cost incurred
at each processing stage, from mining through to recoverable metal delivered to
customers, less by-product credits. Royalties, depreciation, and depletion are
excluded from the calculation of C1 cash cost per payable pound sold. The costs
included in this definition comprise mine site operating and general and
administrative costs, freight, treatment and refining charges, less by-product
credits.
17
By-product credits
are an important factor in determining the C1 cash costs per pound. The Company
produces by-product metals, gold and silver, incidentally to zinc and copper
production activities. Gold and silver are considered to be by-products as they
generally represent less than 20% of revenues from concentrate.
Additionally,
copper metal may also be considered a by-product in relation to zinc sales
given that revenue from sales of copper concentrate may range from 20% to 30%
of total revenue. Therefore, the Company has presented its C1 cash cost per
payable pound sold of zinc on both a by-product basis (with gold, silver and
copper as by-products), and on a co-product basis (with gold and silver as
by-products). The presentation of both methods is intended to provide another
illustrative representation of the net cost of zinc production at the Bisha
Mine. Copper by-product credits are expected to vary period to period as sales
quantities of copper concentrate may differ between quarters based on
production quantities and the timing of shipments, and from metal prices
movements.
The cash cost
per payable pound sold will vary depending on the volume of by-product credits
and the relative price of the by-products. The C1 cash cost per payable pound
sold is calculated by dividing the total costs, net of the by-product credits,
by payable pounds of metal sold. The calculation method is consistent on a
period to period basis for purposes of meaningful comparison.
18
| |
|
Zinc (co-product) |
|
Copper (co-product) |
| |
|
Q1 2018 |
|
Q1 2017 |
|
Q1 2018 |
|
Q1 2017 |
|
C1 cash cost per payable
pound (U.S. $000s, except per pound amounts)
|
|
Total
|
|
Per
pound
|
|
Total
|
|
Per
pound
|
|
Total
|
|
Per
pound
|
|
Total
|
|
Per
pound
|
|
Pounds of payable metal sold
(millions)
|
|
|
|
53.4 |
|
|
|
52.9 |
|
|
|
7.8 |
|
|
|
- |
|
Operating expenses and
selling costs
|
$ |
42,818 |
$ |
0.80 |
$ |
38,427 |
$ |
0.73 |
$ |
14,308 |
$ |
1.83 |
$ |
- |
$ |
- |
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrate treatment and
refining charges
|
|
1,161 |
|
0.02 |
|
5,983 |
|
0.11 |
|
3,180 |
|
0.41 |
|
- |
|
- |
|
One-time recovery of
withholding tax overpayment
|
|
- |
|
- |
|
9,780 |
|
0.18 |
|
- |
|
- |
|
- |
|
- |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrate by-product
credits
|
|
(1,594) |
|
(0.03) |
|
(7,114) |
|
(0.13) |
|
(5,323) |
|
(0.68) |
|
- |
|
- |
|
Total C1 cash cost
|
$ |
42,385 |
$ |
0.79 |
$ |
47,076 |
$ |
0.89 |
$ |
12,165 |
$ |
1.56 |
$ |
- |
$ |
- |
| |
|
Zinc (copper as by-product) |
| |
|
Q1 2018 |
|
Q1 2017 |
|
C1 cash cost per payable
pound (U.S. $000s, except per pound amounts)
|
|
Total
|
|
Per
pound
|
|
Total
|
|
Per
pound
|
|
Pounds of payable metal sold
(millions)
|
|
|
|
53.4 |
|
|
|
52.9 |
|
Operating expenses and
selling costs
|
$ |
42,818 |
$ |
0.80 |
$ |
38,427 |
$ |
0.73 |
|
Add:
|
|
|
|
|
|
|
|
|
|
Concentrate treatment and
refining charges
|
|
1,161 |
|
0.02 |
|
5,983 |
|
0.11 |
|
One-time recovery of
withholding tax overpayment
|
|
- |
|
- |
|
9,780 |
|
0.18 |
|
Less:
|
|
|
|
|
|
|
|
|
|
Concentrate by-product
credits
|
|
(1,594) |
|
(0.03) |
|
(7,114) |
|
(0.13) |
|
Net margin on sales of
copper concentrate
|
|
(11,339) |
|
(0.21) |
|
- |
|
- |
|
Total C1 cash cost
|
$ |
31,046 |
$ |
0.58 |
$ |
47,076 |
$ |
0.89 |
19
RECONCILIATION
OF REALIZED METAL PRICES
| |
|
Zinc |
|
Copper |
|
In U.S. $000s (except pounds
of payable metal and per payable pound data)
|
|
Q1 2018 |
|
Q1 2017 |
|
Q1 2018 |
|
Q1 2017 |
|
Total concentrate sales
|
$ |
80,666 |
$ |
67,852 |
$ |
23,504 |
$ |
- |
|
Add (less):
|
|
|
|
|
|
|
|
|
|
Provisional and final
pricing and quantity losses (gains) on concentrate sales
|
|
2,652 |
|
(1,572) |
|
535 |
|
- |
|
Concentrate sales, before pricing
adjustments
|
$ |
83,318 |
$ |
66,280 |
$ |
24,039 |
$ |
- |
|
Pound of payable metal sold
(millions)
|
|
53.4 |
|
52.9 |
|
7.8 |
|
- |
|
Realized price per payable
pound sold, before pricing adjustments
|
$ |
1.56 |
$ |
1.25 |
$ |
3.08 |
$ |
- |
|
Provisional and final
pricing and quantity adjustments per payable pound sold
|
$ |
(0.05) |
$ |
0.03 |
$ |
(0.07) |
$ |
- |
|
Realized price per payable
pound sold
|
$ |
1.51 |
$ |
1.28 |
$ |
3.01 |
$ |
- |
|
LME average price per pound
|
$ |
1.55 |
$ |
1.26 |
$ |
3.16 |
$ |
- |
20
FORWARD LOOKING
STATEMENTS
This
management’s discussion and analysis contains forward-looking statements or
forward-looking information within the meaning of the United States Private
Securities Litigation Reform Act of 1995, and applicable Canadian securities
laws. All statements, other than statements of historical facts, are forward
looking statements including statements with respect to the Company’s Bisha
Mine in Eritrea and its intentions for its Timok Upper Zone Project in Serbia
(the “Timok Project”). The Company also cautions the reader that the PEA
previously released in September 2017 and the PFS released in March 2018 on the
Timok Project that support the technical feasibility or economic viability of
the Timok Project, including the marketability of the concentrate, mining
method, costs, processing, metal recoveries and any other technical aspects
related to the Timok Project, are preliminary in nature and there is no
certainty that the PEA or the PFS will be realized.
Forward-looking
statements are frequently, but not always, identified by words such as
“expects”, “anticipates”, “believes”, “hopes”, “intends”, “estimated”,
“potential”, “possible” and similar expressions, or statements that events,
conditions or results “will”, “may”, “could” or “should” occur or be achieved.
Forward-looking statements are statements concerning the Company’s current
beliefs, plans, objectives and expectations about the future, including but not
limited to statements and information made concerning: statements relating to the
business, prospects and future activities of, and development plans related to
the Company, exploration activities, the adequacy of financial resources,
anticipated production, processing and recoveries of zinc and copper, mineral
reserve and resource estimates, mining efficiencies and access to mineral
reserves, goals, strategies, future growth, planned future acquisitions,
anticipated C1 cash costs to produce zinc or copper, resolution of
metallurgical challenges from variable ore materials to produce concentrate and
the ability to increase processing and recovery rates of zinc and copper,
achievement of and timing for achievement of any key milestones including,
planned mineral movement at the Bisha Mine and other events or conditions that
may occur in the future regarding the Company or its projects.
The actual
achievements of the Company or other future events or conditions may differ
materially from those reflected in the forward-looking statements due to a
variety of risks, uncertainties and other factors. These risks, uncertainties
and factors include general business, legal, economic, competitive, political,
regulatory and social uncertainties; actual results of exploration activities
and economic evaluations; fluctuations in currency exchange rates; changes in
project parameters; changes in costs, including labour, infrastructure,
operating and production costs; future prices of copper, gold, zinc, silver and
other minerals; resource estimates and variations of mineral grade or recovery
rates; metallurgical challenges on the variable ore materials being processed
and if the significant improvements in recovery rates of zinc and copper will
be maintained or that recoveries to initial design levels will be achieved; the
ability to extend mine life beyond the current mine plans; operating or
technical difficulties in connection with exploration; land acquisition; mining
method, production profile and mine plan; other development or mining
activities, including the failure of plant, equipment or processes to operate
as anticipated; performance on ore production and waste movement and
improvement in mining capability; delays in exploration, development and
construction activities including commencement of the decline construction as
planned; changes in government legislation and regulation; the ability to
maintain and renew existing licenses and permits and the ability to obtain
other required licences and permits in a timely manner or at all; the ability
to obtain financing on acceptable terms and in a timely manner or at all;
contests over title to properties; employee relations and shortages of skilled
personnel and contractors; the ultimate outcome of various claims and
litigation, the speculative nature of, and the risks involved in, the
exploration, development and mining business including, without limitation,
other risks that are more fully described in the Company’s Annual Information
Form for the fiscal year ended December 31, 2017 (the “AIF”) and the Company’s
management discussion and analysis for the fiscal year ended December 31, 2017
(the “MD&A”), which are incorporated herein by reference.
21
The Company’s
forward-looking statements are based on the beliefs, expectations and opinions
of management on the date the statements are made and the Company assumes no
obligation to update such forward-looking statements in the future, except as
required by law. For the reasons set forth above, investors should not place
undue reliance on the Company’s forward-looking statements.
Further
information concerning risks and uncertainties associated with these
forward-looking statements and our business can be found in our AIF and
MD&A, which is available on the Company’s website (www.nevsun.com), filed
under our profile on SEDAR (www.sedar.com) and on EDGAR (www.sec.gov) under
cover of Form 40-F.
NYSE AMERICAN
CORPORATE GOVERNANCE
The Company’s
common shares are listed on NYSE American. Section 110 of the NYSE American
company guide permits NYSE American to consider the laws, customs and practices
of foreign issuers in relaxing certain NYSE American listing criteria, and to
grant exemptions from NYSE American listing criteria based on these
considerations. A company seeking relief under these provisions is required to
provide written certification from independent local counsel that the
non-complying practice is not prohibited by home country law. A description of
the significant ways in which the Company’s governance practices differ from
those followed by U.S. domestic companies pursuant to NYSE American standards
is posted on the Company’s website at http://www.nevsun.com/corporate/governance/nyse/
and a copy of such description is available by written request made to the
Company.
CAUTIONARY NOTE REGARDING PREPARATION OF MINERAL AND
RESERVES AND RESOURCES
The disclosure
in this Management’s Discussion and Analysis uses mineral resource and mineral
reserve classification terms that comply with Canadian securities laws that
differ in certain material respects from the requirements of United States
securities laws. Disclosure has been made in accordance with Canadian National
Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”)
and the Canadian Institute of Mining, Metallurgy and Petroleum’s Classification
System. The NI 43-101 is a rule developed by the Canadian Securities
Administrators that establishes standards for all public disclosure an issuer
makes of scientific and technical information concerning mineral projects.
These standards differ significantly from the disclosure requirements of the
SEC.
The SEC’s
disclosure standards normally do not permit the inclusion of information
concerning “measured mineral resources”, “indicated mineral resources” or
“inferred mineral resources” in documents filed with the SEC, unless such
information is required to be disclosed by the law of the Company’s
jurisdiction of incorporation or of a jurisdiction in which its securities are
traded. Consequently, mineral resource and mineral reserve information
contained in this AIF is not comparable to similar information that would
generally be disclosed by U.S. companies in accordance with the rules of the
SEC.
22
The SEC’s
Industry Guide 7 applies different standards in order to classify
mineralization as a reserve. As a result, the definitions of proven and
probable reserves used in NI 43-101 differ from the definitions in Industry
Guide 7. Under SEC standards, mineralization may not be classified as a
“reserve” unless the determination has been made that the mineralization could
be economically and legally produced or extracted at the time the reserve
determination is made. Accordingly, mineral reserve estimates contained in this
AIF may not qualify as “reserves” under SEC standards.
This
Management’s Discussion and Analysis uses the terms “measured mineral
resources”, “indicated mineral resources” and “inferred mineral resources” to
comply with the reporting standards in Canada. The SEC’s Industry Guide 7 does
not recognize these terms and U.S. companies are generally not permitted to use
these terms in documents they file with the SEC. Investors are cautioned not to
assume that any part or all of the mineral deposits in these categories will
ever be converted into SEC defined mineral “reserves.” Further, “inferred
mineral resources” have a great amount of uncertainty as to their existence and
as to whether they can be mined legally or economically.
Therefore,
investors are also cautioned not to assume that all or any part of an inferred mineral
resource exists. In accordance with reporting standards in Canada, estimates of
“inferred mineral resources” cannot form the basis of feasibility or other
economic studies, except in rare cases. In addition, disclosure of “contained
ounces” or “contained pounds” in a mineral resource estimate is permitted
disclosure under NI 43-101 provided that the grade or quality and the quantity
of each category is stated; however, the SEC normally only permits issuers to
report mineralization that does not constitute “reserves” by SEC standards as
in place tonnage and grade without reference to unit measures. Accordingly,
information concerning descriptions of mineralization and resources contained
in this Management’s Discussion and Analysis may not be comparable to
information made public by US domestic companies subject to the reporting and
disclosure requirements of the SEC.
23
