Never Fall in Love with Your Stocks

(Nevsun Resources (NSU.T))

I usually give my views only on what I am buying. I leave it to my readers to decide when to sell.

It is extremely important to know when to sell.

Most people not only buy high, but they fail to sell, hoping what they bought would keep going up forever.

Some people like to sell half of what they own after doubling their money, thinking this gives them a free-ride on what they are left with. I find this horrible, horrible math... What if one of your stocks goes up 100% and nine other fall 50%? Do you really think as a portfolio you get a free ride this way? Are you really de-risking your portfolio? What if what you are selling is likely to keep going up—based on value and market recognition—while what you are avoiding selling is likely to keep falling?

Every equity I look at, I like to have a buy price and a sell price. In junior mining, I like to invest only if I am hoping to make at least 100% upside—the risks of the unknown are just too many. I sell based on valuation. If I think something is worth keeping for 500% upside, I will stay with it until I have realized my target price. The key here is that I stay completely open to any changes in information—hubris is a death warrant. And I never fall in love with what I invest in.

For the last few months, I have spoken and written a lot about Reservoir Minerals. This has made my clients and me a lot of money; actually a huge amount of money. The last one was when we ended up with Nevsun Resources (NSU; C$4.20). Since then, NSU has gone up another 16% or so.

In my view, NSU has still some upside left, but there are also many risks now becoming increasingly visible. Is there upside left on a risk-adjusted basis?

At the Bisha project (Eritrea), they are now mining primary ore and are starting the zinc circuit as well. This means that now they need to extract copper into the copper-concentrate without too much zinc going into this concentrate. And then they need to float the zinc-concentrate, making sure that most of copper and gold would have gone into the copper concentrate. This is the metallurgical puzzle they need to solve. Of course this is done all the time, but there is indeed a bit of risk here. If nothing else fine-tuning can take time.

Now, they recently acquired properties around their mine in Eritrea for $38 million (including 40% paid for non-controlling interest). I did pause to consider if this was not too much money. Or one must pay what one is asked to pay in Eritrea? NSU will also have to spend a lot of money on exploration on this new ground. I don’t like this.

Finally, in the last technical report NSU did not give much information on the economics of the zinc circuit and the kind of RC/TC they expect to pay. The problem with zinc concentrate always is that the smelter pays only about 85% of the metal content and on top charge treatment charges. This often costs >20% of the value of the metal.

Also, Zinc grade is low for the first three years of operations.

Adding all the above together... While I still see an upside in owning NSU, I must account for the risks. In mining, everything that can go wrong has a tendency to go wrong. On a risk adjusted basis, NSU might be fully priced.

On other matters… If you would like to store physical gold in Singapore, consider BullionStar. And here are some of my thoughts on India and Gold Demand.

Warm regards,

Jayant Bhandari

www.jayantbhandari.com

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