The move gives Nevsun ownership of the upper zone of Reservoir’s flagship Timok copper project in Serbia, and with a strong balance sheet and operating cash flow from the Bisha zinc mine in Eritrea, the new company will be well-positioned to bring Timok forward.
“This transaction diversifies Nevsun’s asset base, putting our cash balance to work in a strategic and high return investment that will deliver significant value to our shareholders,” said Nevsun president and CEO Cliff Davis in a statement. “The Upper Zone, with its high grade copper-gold resource and nearby infrastructure in a mining friendly jurisdiction, adds significant growth to Nevsun. With ongoing cash flow generation from our Bisha mine, we have the financial strength and proven technical ability to move the Timok project forward in a timely manner.”
For his part, Joseph Gallucci of Dundee Securities views the move as a positive for Nevsun, stating in a note to clients stating that the company has “put [its] cash balance to work (finally) to acquire a world class development project.”
More specifically, Dundee believes that the Timok project is a good fit for Nevsun. “Although it’s not in production, it’s only 5 years away from cash flow and is arguably similar to Bisha in terms of grade profile,” Gallucci added. Overall, Dundee reiterated its “buy, top pick” rating and $6.25 price target for Nevsun.
Under the terms of the deal, Nevsun will pay two common shares plus $0.001 in cash for each Reservoir common share. Following the transaction, Nevsun shareholders would own roughly 67 percent of the combined company, while Reservoir shareholders would own approximately 33 percent.
Nevsun and Reservoir have also entered an agreement for a funding transaction, made up of a private placement for 19.99 percent of Reservoir’s shares and a loan transaction, for a total of $135 million. The transaction will allow Reservoir to exercise its right of first offer (ROFO) regarding its joint venture on the project with Freeport International Holdings, part of Freeport McMoRan (NYSE:FCX).
As Reuters explains, Lundin Mining (TSX:LUN) announced in early March that it would buy part of Freeport’s stake in the Timok project. However, Reservoir’s ROFO puts it first in line to buy that stake, and with $135 million in financial backing from Nevsun, it can now do so. “Reservoir’s Board of Directors determined that this transaction is the best funding alternative for our shareholders to fund the Timok ROFO,” said Reservoir president and CEO Simon Ingram in Monday’s release.
At close of day on Monday, shares of Reservoir Minerals were up just under 20 percent to $8.35 per share. Roughly 1.76 million shares of Reservoir traded hands, compared to an average daily trading volume of 68,197 for the company. Shares of Nevsun were down 10.21 percent to $4.22. The company’s share price is up 12.53 percent year-to-date.
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Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.