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Canadian miner Nevsun Resouces Ltd. has emerged as a potential takeover target, but any bidder is going to have to overcome a major deterrent: Eritrea.
The Vancouver-based miner revealed Thursday it recently received inquiries from “various parties” about a potential transaction. The announcement came after Bloomberg News reported that a Qatar-backed private equity fund called QKR Corp. is eyeing a US$1-billion bid for the company. Nevsun shares jumped 11%, giving the firm a market value of $942-million.
There are good reasons for the interest. Nevsun’s Bisha mine is extremely rich, with high-grade copper output that will transition into high-grade zinc output in a couple of years, when many analysts are forecasting shortages in the zinc market. The company has promising exploration ground in the area that could yield more mines. It also has close to US$400-million of cash, which means a takeover would largely pay for itself.
But the downside is that Bisha is in Eritrea, which is ruled by one of the world’s most repressive governments. The country is facing international sanctions, and Western governments may not look kindly at any company looking to do business there.
The Eritrean government has caused major problems for Nevsun. When the company started building the Bisha mine in 2008, it was ordered to enlist a state-owned contractor called Segen Construction for some of the work. Early last year, Human Rights Watch claimed Segen employed slave labour at the site. Nevsun could not say for certain that there was never any forced labour at Bisha, though it took measures to prevent it in 2009 after the concerns first surfaced.
The forced labour issue continues to dog Nevsun. On Thursday, three Eritrean men filed suit against the company in the B.C. Supreme Court, claiming it “expressly or implicitly” approved the use of slave labour at Bisha.
Dennis da Silva, a portfolio manager at Middlefield Capital, said the potential offer of US$1-billion for Nevsun is reasonable for the base metal sector. But if the Bisha mine was in a Western country, he thinks the asset would be worth 20% or 30% more because the quality is so high.
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