Pat McKeough responds to many requests from members of his Inner Circle for specific advice on stocks as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.

This week we had a question from an Inner Circle member about a junior mining stock operating in Africa. Nevsun is one of those mining stocks that bears a good deal of political risk, with its main property located in Eritrea, in the often-troubled Horn of Africa. However, the company has a productive mine and pays a high-yielding dividend. Pat examines the chain of events that have left Eritrea one of the poorest nations on earth and looks at Nevsun’s prospects of success in this environment.

Q: Pat: What are your thoughts on Nevsun Resources? Thanks.

A: Nevsun Resources (symbol NSU on Toronto; www.nevsun.com), owns 60% of the Bisha copper/zinc/gold mine in Eritrea. This stake is the company’s main asset.

Bisha started up in February 2011. Nevsun used the gold it extracted from the deposit’s top layer to finance construction of the project’s second phase: copper mining below that level. The mine produced 112,000 ounces of gold in 2013, although the gold deposit ran out early in the year.

Nevsun transitioned to copper mining in late 2013, with full production starting up in December. Bisha will produce 180 million to 200 million pounds of copper in 2014.

The company’s revenue fell sharply in 2013, to $155.7 million from $566.0 million in 2012 (all figures except share price in U.S. dollars). Cash flow per share fell to $0.38 from $1.79. The declines were due to the end of gold mining at Bisha.

Operating in Eritrea entails considerable political risk for Nevsun—although that risk is partly mitigated by the fact that the country’s government owns the remaining 40% of Bisha. The mine is a major source of revenue for the government and a big component of the country’s economy.

Eritrea is located on the Horn of Africa, bordered by Sudan to the west, Ethiopia to the south and Djibouti to the east. A former Italian colony, Eritrea was occupied by the British in 1941. In 1952, the United Nations established it as an autonomous entity federated with Ethiopia, as a compromise between Ethiopian claims for sovereignty and the Eritrean desire for independence.

In 1962, however, the Ethiopian emperor, Haile Selassie, annexed Eritrea, starting a 32-year armed independence struggle. This conflict culminated in independence after an alliance of the Eritrean People’s Liberation Front and a coalition of Ethiopian resistance movements defeated Mengistu Haile Mariam, Selassie’s communist successor.

Copper reserves at Bisha expected to last at least 10 years

In a 1993 referendum supported by Ethiopia, Eritreans voted almost unanimously for independence, leaving Ethiopia landlocked. In 1998, border disputes erupted into fighting. This conflict ended with a peace deal in June 2000.

Eritrea and Ethiopia remain in dispute after their 1998-2000 border war. In 2009, the UN imposed sanctions on Eritrea after accusing it of backing anti-Ethiopian Islamist insurgents in Somalia. These sanctions include an arms embargo, certain travel restrictions and asset freezes.

Today, Eritrea remains very poor, with an estimated two-thirds of the population receiving food aid. The economy is very dependent on money sent home by emigrants to other countries.

Nevsun recently expanded its board of directors from five to six when it added Ian Ashby, who was the president of BHP Billiton’s iron ore division between 2006 and 2012. Prior to that, he was chief operating officer at BHP’s base metals business. BHP the world’s largest mining company, and it’s covered in our advisory on U.S. stocks, Wall Street Stock Forecaster.

Nevsun’s outlook is positive. The Bisha mine’s copper production should generate $550 million to $600 million of revenue for Nevsun this year.
Bisha’s copper reserves should last over 10 years, but there is considerable room to expand them. As well, the deposit holds a lot of zinc, which Nevsun plans to process through a new plant that will be ready to start up in mid-2016.

Nevsun has a big cash holding of $302.7 million, or $1.52 a share, and has no debt. It pays a quarterly dividend of $0.035, for a high 4.1% yield.

In the Inner Circle Q&A, Pat examines whether Nevsun’s forecast cash flow will let the company raise its dividend or buy back shares. He also looks into speculation that the company will seek to cut its political risk with further acquisitions. He concludes with his clear buy-hold-sell advice on this stock.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

When you invest in junior mining stocks, do you stick with companies in safer locations like North America? Or are you willing to go with promising juniors that operate in politically sensitive or dangerous areas? Have you had any big breakthroughs with mining stocks that had major political risk?