Eritrean trials and tribulations for Nevsun

Doing business in East Africa comes with its challenges, but Nevsun Resources has a robust outlook for its Bisha mine in Eritrea despite dealing with matters that miners closer to home would never encounter.

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Doing business in East Africa comes with its challenges, but Nevsun Resources has a robust outlook for its Bisha mine in Eritrea despite dealing with matters that miners closer to home would never encounter.

In mid-January, Human Rights Watch accused the company of having forced labour present during the construction of Bisha some four years ago.

As reported in The Northern Miner earlier this month, the report says that the Eritrean government conscripts locals into forced labour and while most are forced into the country's military, some are forced to work for state owned companies, such as the Segen Construction Company.

And that is where the Nevsun connection is made as the government insisted on the Vancouver-based miner using Segen for the construction of its Bisha mine. For its part, Nevsun says it became aware of the possibility that Segen could be using forced labour in 2009 and immediately took steps to ensure that it wasn't happening.

Adding to the dark social aspect of doing business in Eritrea is increasing political risk. Reports surfaced this week that a small coup broke out on Jan. 21. The official word is that a group of breakaway soldiers took complaints about their officers to a government building in the capital of Asmara, but other report say the renegade soldiers laid siege on the building.

Travelling 150 km west of the capital, Nevsun says operations at the mine are humming along better than expected.

The company boosted production guidance for the year at its 60% owned gold-copper-zinc mine, just as it prepares to transition from the oxide gold zone of the deposit to the supergene zone which is predominantly copper.

Oxide gold production is expect to continue until the end of the second quarter, and the company expects to turn out between 80,000 and 90,000 oz of gold during that time.

If it does, those ounces will far best Haywood Securities analyst Stefan Ioannou's forecast as he had been expecting just 41,000 oz of gold for the entire year.

"We do not plan to adjust our modelled oxide gold production profile until initial 2013 production data becomes available given the company's guidance includes more oxide tonnage than is remaining in Bisha's reserve," the analyst wrote in his report.

As of May 31, probable reserves at Bisha stood at 900,000 tonnes grading 5.79 g/t Au and 35 g/t Ag for 167,000 oz of gold and 1.02 million oz of silver.

In the last half of 2012, the company produced 144,000 oz of gold, and that does not include production from June, so the company will have to outline more ounces if it is to meet its own guidance.

Ioannou also points out that Nevsun has had a poor track record predicting the deposit's oxide gold head grade profile over the last 12 months, as evidenced by production guidance being changed three times last year.

The difficulty in predicting grades had to do with the deposit's variable gold and silver grades in both the acid domain and in the supergene transition zone.

Another thing to watch out for according to the Haywood report is the economic viability of that supergene transition zone. Nevsun started metallurgical work on the zone in the fourth quarter of last year, and while results from the study have yet to be released, Ioannou worries that a high pyrite content could translate into high reagent consumption and, consequently, higher operating costs.

If the rock turns out to be ore, Nevsun expects that the transitional material could add 20 to 30,000 oz of gold production to the deposits oxide profile.

With cash costs expected to increase significantly over last year's numbers, the additional ounces would be a welcome addition to the company's bottom line.

In the first half of 2012, cash costs came in at just US$265 per oz. The number had climbed to US$307 per oz by the third quarter of last year due to lower head grades and a longer trucking distances from the Harena zone to the plant.

Haywood is expecting gold cash cost of US$850 per oz for the first half of this year and also expects a hiatus from "meaningful metal production" of over three months this year due to the move from oxide gold to supergene copper.

Nevsun expects to move into supergene copper production in the middle of the year and says construction of the necessary facility to produce copper concentrate is on schedule and on budget.

The capex for copper phase is US$125 million.

Nevsun shares enjoyed a strong run through the latter half of last year, climbing from a summer low of $2.82 in July to a high of $4.77 in early October. In Toronto on January 24th, the company's shares were off 5%, or 22 cents, to $4.26 on roughly 250,000 shares traded.

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