|   | **NEVSUN RESOURCES LTD.**

 

Consolidated Financial Statements

Years ended December 31, 2011 and 2010

(Expressed in United States dollars) |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING**

The accompanyingconsolidated financial statements of Nevsun Resources Ltd. are theresponsibility of management.

The financialstatements have been prepared by management in conformity with InternationalFinancial Reporting Standards.  These statements include amounts that are basedon management’s best estimates and judgments.  Management has determined suchamounts on a reasonable basis in order to ensure that the consolidated financialstatements are presented fairly, in all material respects.  Financialinformation used elsewhere in annual filings is consistent with that in thefinancial statements.

The Companymaintains a system of internal control which provides management withreasonable assurance that assets are safeguarded and that reliable financialrecords are maintained.

The Board ofDirectors carries out its responsibility for the financial statementsprincipally through its Audit Committee, consisting solely of outsidedirectors.  The Audit Committee meets periodically with management, as well asthe external auditors, to review the financial statements and to satisfy itselfthat each party is properly discharging its responsibilities.

The externalauditors, KPMG LLP, have been appointed by the shareholders to render their opinionon the financial statements.  The auditors have full and free access to theAudit Committee and their report is included herein.

*“Cliff T. Davis”*

Cliff T. DavisChief Executive Officer

*“Peter J.Hardie”*

Peter J. HardieChief Financial Officer

March 20, 2012

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|   | **KPMG LLP      Chartered Accountants**      PO Box 10426 777 Dunsmuir Street      Vancouver BC V7Y 1K3      Canada | Telephone  (604) 691-3000      Fax              (604) 691-3031      Internet       www.kpmg.ca |
|--------|---------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**INDEPENDENT AUDITORS’ REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM**

To the  Shareholders and Directors of Nevsun Resources Ltd.

 We have  audited the accompanying consolidated financial  statements of Nevsun Resources Ltd., which comprise the consolidated balance sheets as at December 31, 2011  and December 31, 2010, and the consolidated statements  of comprehensive income (loss), changes in equity, and cash flows for the years then ended, and notes,  comprising a summary of significant accounting policies and other  explanatory information.

*Management's Responsibility for the Consolidated Financial Statements*

 Management is responsible for the preparation and fair  presentation of these consolidated financial statements in  accordance with International Financial Reporting Standards as issued by the  International Accounting Standards Board, and for such internal control as  management determines is necessary to enable the preparation of consolidated financial statements that are free from material  misstatement, whether due to fraud or error.

*Auditors’ Responsibility*

 Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our  audits in accordance with Canadian generally accepted auditing standards and the standards of the  Public Company Accounting Oversight Board (United States). Those  standards require that we comply with ethical requirements and plan and perform  the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 An audit involves performing procedures to obtain audit  evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on  our judgment, including the assessment of the risks of material misstatement of  the consolidated financial statements, whether  due to fraud or error. In making those risk assessments, we consider internal  control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures  that are appropriate in the circumstances. An audit also includes evaluating  the appropriateness of accounting policies used and the reasonableness of  accounting estimates made by management, as well as evaluating the overall  presentation of the consolidated financial statements.

 We believe that the audit evidence we have obtained in our  audits is sufficient and appropriate to provide a basis for our audit opinion.

|   | KPMG LLP  is a Canadian limited liability partnership and a member firm of the KPMG      network of independent member firms affiliated with KPMG International  Cooperative       (“KPMG International”), a Swiss entity.     KPMG Canada provides services to KPMG LLP |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Nevsun Resources Ltd. Page 2 

*Opinion*

 In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2011 and December 31, 2010, and its consolidated financial performance and cash flows for the years then ended, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. 

*Other Matter*

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 28, 2012 expressed an unqualified opinion on the effectiveness of the internal control over financial reporting. 

Chartered Accountants 

March 28, 2012  Vancouver, Canada

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**REPORT OF INDEPENDENT REGISTERED PUBLIC  ACCOUNTING FIRM**

We have audited Nevsun Resources Ltd. (the "Company")’s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Nevsun Resources Ltd.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on Nevsun Resources Ltd.'s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 

Nevsun Resources Ltd.'s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Nevsun Resources Ltd.'s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Nevsun Resources Ltd.'s assets that could have a material effect on the financial statements.

|   | KPMG LLP  is a Canadian limited liability partnership and a member firm of the KPMG      network of independent member firms affiliated with KPMG International  Cooperative       (“KPMG International”), a Swiss entity.       KPMG Canada provides services to KPMG LLP |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Nevsun Resources Ltd. Page 2 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Nevsun Resources Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with Canadian generally accepted auditing standards and in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as at December 31, 2011 and December 31, 2010, and the consolidated statements of comprehensive income (loss), changes in equity and cash flows for the years then ended, and our report dated March 28, 2012 expressed an unqualified opinion on those consolidated financial statements.

Chartered Accountants 

March 28, 2012  Vancouver, Canada

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| **NEVSUN RESOURCES LTD.**      Consolidated Balance Sheets      (Expressed  in thousands of United States dollars) |
|--------------------------------------------------------------------------------------------------------------------|

|                                                                      | Note   |   | December 31,2011 |   |   | December 31,  2010 |   |
|---------------------------------------------------------------------------|--------|--------|------------------|--------|--------|------------------------------|--------|
|                                                                      |   |   |             |   |   |                         |   |
| **Assets**                                                                |   |   |             |   |   |                         |   |
|                                                                      |   |   |             |   |   |                         |   |
| **Current assets**                                                        |   |   |             |   |   |                         |   |
|      Cash and cash equivalents                   | 7      | $      | 347,582          |   | $      | 50,145                       |   |
|      Available-for-sale investment               | 8      |   | -                |   |   | 775                          |   |
|      Accounts receivable and prepaids            | 9      |   | 20,490           |   |   | 5,529                        |   |
|      Inventories                                 | 10     |   | 32,099           |   |   | 11,113                       |   |
|      Due from non-controlling interest           | 11     |   | 11,137           |   |   | -                            |   |
|                                                                      |   |   | 411,308          |   |   | 67,562                       |   |
| **Non-current assets**                                                    |   |   |             |   |   |                         |   |
|      Due from non-controlling interest           | 11     |   | 84,312           |   |   | -                            |   |
|      Property, plant and equipment               | 12     |   | 279,606          |   |   | 288,618                      |   |
|                                                                      |   |   | 363,918          |   |   | 288,618                      |   |
| **Total assets**                                                          |   | $      | 775,226          |   | $      | 356,180                      |   |
|                                                                      |   |   |             |   |   |                         |   |
| **Liabilities and equity**                                                |   |   |             |   |   |                         |   |
|                                                                      |   |   |             |   |   |                         |   |
| **Current liabilities**                                                   |   |   |             |   |   |                         |   |
|      Accounts payable and accrued liabilities    | 13     | $      | 24,651           |   | $      | 17,571                       |   |
|      Dividends payable                           | 22     |   | 10,013           |   |   | -                            |   |
|      Income taxes payable                        | 14     |   | 103,670          |   |   | -                            |   |
|                                                                      |   |   | 138,334          |   |   | 17,571                       |   |
|                                                                      |   |   |             |   |   |                         |   |
| **Non-current liabilities**                                               |   |   |             |   |   |                         |   |
|      Deferred income taxes                       | 14     |   | 16,187           |   |   | -                            |   |
|      Provision for closure and reclamation       | 15     |   | 13,233           |   |   | 11,650                       |   |
|      Amounts related to non-controlling interest | 11     |   | -                |   |   | 124,127                      |   |
|                                                                      |   |   | 29,420           |   |   | 135,777                      |   |
| **Total liabilities**                                                     |   |   | 167,754          |   |   | 153,348                      |   |
|                                                                      |   |   |             |   |   |                         |   |
| **Equity**                                                                |   |   |             |   |   |                         |   |
|      Share capital                               | 16     |   | 409,305          |   |   | 390,658                      |   |
|      Share-based payments reserve                |   |   | 11,736           |   |   | 10,056                       |   |
|      Accumulated other comprehensive income      |   |   | -                |   |   | 708                          |   |
|      Retained earnings (deficit)                 |   |   | 76,383           |   |   | (194,675                     | )      |
|      Equity attributable to Nevsun shareholders  |   |   | 497,424          |   |   | 206,747                      |   |
|                                                                      |   |   |             |   |   |                         |   |
|      Non-controlling interest                    | 11     |   | 110,048          |   |   | (3,915                       | )      |
| **Total equity**                                                          |   |   | 607,472          |   |   | 202,832                      |   |
| **Total liabilities and equity**                                          |   | $      | 775,226          |   | $      | 356,180                      |   |

See accompanying notes to consolidated financial statements.

2

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| **NEVSUN RESOURCES LTD.**      Consolidated Statements of Comprehensive Income (Loss)      (Expressed in thousands of United States dollars)       Years ended December 31, 2011 and 2010 |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                                                                                       | Note   |   | 2011     |   |   | 2010    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------|---------|--------|
| Operations commenced February 22, 2011:                                                                                                                                                                    |   |   |     |   |   |    |   |
| Revenues                                                                                                                                                                                                   |   | $      | 547,770  |   | $      | -       |   |
| Cost of sales                                                                                                                                                                                              |   |   |     |   |   |    |   |
|      Operating expenses                                                                                                                                                           | 18     |   | (76,812  | )      |   | -       |   |
|      Royalties                                                                                                                                                                    |   |   | (27,283  | )      |   | -       |   |
|      Depreciation and depletion                                                                                                                                                   |   |   | (25,892  | )      |   | -       |   |
| Operating income (from February 22 to  December 31, 2011)                                                                                                                                                  |   |   | 417,783  |   |   | -       |   |
|                                                                                                                                                                                                       |   |   |     |   |   |    |   |
| Administrative expenses                                                                                                                                                                                    | 19     |   | (14,471  | )      |   | (12,233 | )      |
| Finance income                                                                                                                                                                                             | 20     |   | 4,913    |   |   | 3,766   |   |
| Finance costs                                                                                                                                                                                              | 21     |   | (2,334   | )      |   | (8,583  | )      |
| Income (loss) before taxes                                                                                                                                                                                 |   |   | 405,891  |   |   | (17,050 | )      |
|                                                                                                                                                                                                       |   |   |     |   |   |    |   |
| Income taxes                                                                                                                                                                                               | 14(a)  |   | (155,857 | )      |   | -       |   |
| Net income (loss) for the year                                                                                                                                                                             |   |   | 250,034  |   |   | (17,050 | )      |
|                                                                                                                                                                                                       |   |   |     |   |   |    |   |
| Other comprehensive income (loss), net of  tax:                                                                                                                                                            |   |   |     |   |   |    |   |
|      Reclassification adjustment for realized gain  on sale of available-for-            sale investment included in net income |   |   | (1,166   | )      |   | (752    | )      |
|      Unrealized gain on available-for-sale  investment                                                                                                                            |   |   | 458      |   |   | 408     |   |
| Comprehensive income (loss)                                                                                                                                                                                |   | $      | 249,326  |   | $      | (17,394 | )      |
|                                                                                                                                                                                                       |   |   |     |   |   |    |   |
| Income (loss) for the year attributable to:                                                                                                                                                                |   |   |     |   |   |    |   |
|      Nevsun shareholders                                                                                                                                                          |   |   | 147,065  |   |   | (13,316 | )      |
|      Non-controlling interest                                                                                                                                                     |   |   | 102,969  |   |   | (3,734  | )      |
|                                                                                                                                                                                                       |   | $      | 250,034  |   | $      | (17,050 | )      |
|                                                                                                                                                                                                       |   |   |     |   |   |    |   |
| Comprehensive income (loss) for the year  attributable to:                                                                                                                                                 |   |   |     |   |   |    |   |
|      Nevsun shareholders                                                                                                                                                          |   |   | 146,357  |   |   | (13,660 | )      |
|      Non-controlling interest                                                                                                                                                     |   |   | 102,969  |   |   | (3,734  | )      |
|                                                                                                                                                                                                       |   | $      | 249,326  |   | $      | (17,394 | )      |
|                                                                                                                                                                                                       |   |   |     |   |   |    |   |
| Earnings (loss) per share attributable to Nevsun  shareholders:                                                                                                                                            |   |   |     |   |   |    |   |
|      Basic                                                                                                                                                                        |   | $      | 0.74     |   | $      | (0.07   | )      |
|      Diluted                                                                                                                                                                      |   | $      | 0.73     |   | $      | (0.07   | )      |

See accompanying notes to consolidated  financial statements.

3

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| **NEVSUN RESOURCES LTD.**      Consolidated Statements of Cash Flows      (Expressed in thousands of United States dollars)      Years ended December 31, 2011 and 2010 |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                      | Note       |   | 2011     |   |   | 2010     |   |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------|----------|--------|--------|----------|--------|
| Cash provided by (used in):                                                                                               |       |   |     |   |   |     |   |
| Operating:                                                                                                                |       |   |     |   |   |     |   |
| Income (loss) for the year                                                                                                |       | $      | 250,034  |   | $      | (17,050  | )      |
| Items not involving the use of cash:                                                                                      |       |   |     |   |   |     |   |
|      Accretion on reclamation liability                                                          | 15         |   | 509      |   |   | -        |   |
|      Deferred income taxes                                                                       | 14(c)      |   | 16,187   |   |   | -        |   |
|      Depreciation and depletion                                                                  |       |   | 25,892   |   |   | 4        |   |
|      Share-based payments and stock appreciation  rights                                         | 16(c)16(d) |   | 8,897    |   |   | 6,357    |   |
|      Interest income on due from non-controlling  interest                                       | 11         |   | (3,625   | )      |   | -        |   |
|      Interest expense on advances from  non-controlling interest                                 | 11         |   | 1,681    |   |   | -        |   |
|      Gain on sale of available-for-sale investment                                               | 8          |   | (1,166   | )      |   | (716     | )      |
|      Write-off (recovery) of deferred finance costs                                              | 12         |   | -        |   |   | 6,100    |   |
| Changes in non-cash operating capital:                                                                                    |       |   |     |   |   |     |   |
|      Accounts receivable and prepaids                                                            |       |   | (14,960  | )      |   | (155     | )      |
|      Inventories                                                                                 |       |   | (20,595  | )      |   | -        |   |
|      Accounts payable and accrued liabilities                                                    |       |   | (560     | )      |   | (62      | )      |
|      Income taxes payable                                                                        |       |   | 103,670  |   |   | -        |   |
|                                                                                                                      |       |   |     |   |   |     |   |
| Net cash provided by (used in) operating activities                                                                       |       |   | 365,964  |   |   | (5,522   | )      |
| Investing:                                                                                                                |       |   |     |   |   |     |   |
|      Proceeds on sale of available-for-sale  investment                                          | 8          |   | 1,232    |   |   | 881      |   |
|      Proceeds on pre-production gold sales                                                       | 12         |   | 48,613   |   |   | -        |   |
|      Expenditures on property, plant and equipment –  gold phase                           |       |   | (33,717  | )      |   | (107,181 | )      |
|      Expenditures on property, plant and equipment –  copper phase                         |       |   | (24,050  | )      |   | (1,152   | )      |
|      Expenditures on exploration and evaluation                                                  |       |   | (6,105   | )      |   | (1,215   | )      |
|      Buyout of royalty interest                                                                  |       |   | -        |   |   | (17,514  | )      |
|      Changes in non-cash working capital related to  investing activities                        |       |   | 2,400    |   |   | (4,136   | )      |
|                                                                                                                      |       |   |     |   |   |     |   |
| Net cash used in investing activities                                                                                     |       |   | (11,627  | )      |   | (130,317 | )      |
| Financing:                                                                                                                |       |   |     |   |   |     |   |
|      Dividends paid                                                                              | 22         |   | (5,935   | )      |   | -        |   |
|      Receipt of purchase price settlement from  non-controlling interest                         | 11         |   | 27,088   |   |   | -        |   |
|      Principal and interest paid on loan from  non-controlling interest                          | 11         |   | (4,103   | )      |   | (1,247   | )      |
|      Advances from (repayment to) non-controlling  interest                                      | 11         |   | (74,995  | )      |   | 40,000   |   |
|      Interest paid on advances from non-controlling  interest                                    | 11         |   | (6,414   | )      |   | -        |   |
|      Issuance of common shares, net of issue costs                                               | 16         |   | 7,459    |   |   | 118,164  |   |
|                                                                                                                      |       |   |     |   |   |     |   |
| Net cash provided by (used in) financing  activities                                                                 |       |   | (56,900  | )      |   | 156,917  |   |
| Increase in cash and cash equivalents                                                                                     |       |   | 297,437  |   |   | 21,078   |   |
| Cash and cash equivalents, beginning of year                                                                              |       |   | 50,145   |   |   | 29,067   |   |
| Cash and cash equivalents, end of year                                                                                    |       | $      | 347,582  |   | $      | 50,145   |   |
| Non-cash investing and financing transactions:                                                                            |       |   |     |   |   |     |   |
|      Dividends declared                                                                          | 22         |   | 10,013   |   |   | -        |   |
|      Reclassification of share-based payments  reserve to share capital upon exercise of options |       |   | 2,737    |   |   | 4,077    |   |
|      Depreciation capitalized to property, plant and  equipment                                  | 12         |   | 705      |   |   | 2,361    |   |
|      Share-based payments capitalized to property,  plant and equipment                          | 16(c)      |   | 276      |   |   | 1,054    |   |
|      Closure and reclamation increase in property,  plant and equipment                          | 15         |   | 1,074    |   |   | 11,240   |   |
|      Interest capitalized to property, plant and  equipment                                      | 11,12      |   | 601      |   |   | 3,848    |   |
|      Stock appreciation rights liability settled  with common shares                             | 16(d)      |   | 8,451    |   |   | -        |   |
| Partial disposition of subsidiary recorded  directly to retained earnings:                                                |       |   |     |   |   |     |   |
|      Due from non-controlling interest                                                           | 11         |   | (253,500 | )      |   | -        |   |
|      Amounts related to non-controlling interest                                                 | 11         |   | 41,739   |   |   | -        |   |
|      Income taxes                                                                                | 11         |   | 92,849   |   |   | -        |   |

See accompanying notes to consolidated  financial statements.

4

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| **NEVSUN RESOURCES LTD.**      Consolidated Statements of Changes in Equity      (Expressed in thousands of United States dollars)      Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                 |   | Number of  shares  (note 16) |   | Share capital  (note 16) |   | Share-based  payments  reserve |   | Accumulated other  comprehensive  income |   | Retained  earnings   (deficit) |   | Shareholders’  equity |   | Non-controlling  interest |   | Total   Equity |
|--------------------------------------------------------------------------------------|--------|------------------------------|--------|--------------------------|--------|--------------------------------|--------|------------------------------------------|--------|-------------------------------------|--------|-----------------------------|--------|---------------------------|--------|---------------------|
| December 31, 2009                                                                    |   | 140,461,822                  | $      | 268,417                  | $      | 6,797                          | $      | 1,052                                    | $      | (181,434)                           | $      | 94,832                      | $      | (181)                     | $      | 94,651              |
| Exercise of stock options                                                            |   | 4,026,500                    |   | 7,013                    |   | -                              |   | -                                        |   | -                                   |   | 7,013                       |   | -                         |   | 7,013               |
| Transfer to share capital on  exercise of options                                    |   | -                            |   | 4,077                    |   | (4,077)                        |   | -                                        |   | -                                   |   | -                           |   | -                         |   | -                   |
| Share-based payments                                                                 |   | -                            |   | -                        |   | 7,411                          |   | -                                        |   | -                                   |   | 7,411                       |   | -                         |   | 7,411               |
| Expiry and forfeiture of options                                                     |   | -                            |   | -                        |   | (75)                           |   | -                                        |   | 75                                  |   | -                           |   | -                         |   | -                   |
| Private placement, net of issuance  costs                                            |   | 52,000,000                   |   | 111,151                  |   | -                              |   | -                                        |   | -                                   |   | 111,151                     |   | -                         |   | 111,151             |
| Other comprehensive loss                                                             |   | -                            |   | -                        |   | -                              |   | (344)                                    |   | -                                   |   | (344)                       |   | -                         |   | (344)               |
| Loss for the year                                                                    |   | -                            |   | -                        |   | -                              |   | -                                        |   | (13,316)                            |   | (13,316)                    |   | (3,734)                   |   | (17,050)            |
| December 31, 2010                                                                    |   | 196,488,322                  | $      | 390,658                  | $      | 10,056                         | $      | 708                                      | $      | (194,675)                           | $      | 206,747                     | $      | (3,915)                   | $      | 202,832             |
| Exercise of stock options                                                            |   | 2,510,300                    |   | 7,459                    |   | -                              |   | -                                        |   | -                                   |   | 7,459                       |   | -                         |   | 7,459               |
| Exercise of stock appreciation  rights                                               |   | 1,256,093                    |   | 8,451                    |   | -                              |   | -                                        |   | -                                   |   | 8,451                       |   | -                         |   | 8,451               |
| Transfer to share capital on  exercise of options                                    |   | -                            |   | 2,737                    |   | (2,737)                        |   | -                                        |   | -                                   |   | -                           |   | -                         |   | -                   |
| Activation of stock appreciation  rights                                             |   | -                            |   | -                        |   | (3,213)                        |   | -                                        |   | (9,716)                             |   | (12,929)                    |   | -                         |   | (12,929)            |
| Share-based payments                                                                 |   | -                            |   | -                        |   | 7,630                          |   | -                                        |   | -                                   |   | 7,630                       |   | -                         |   | 7,630               |
| Other comprehensive loss                                                             |   | -                            |   | -                        |   | -                              |   | (708)                                    |   | -                                   |   | (708)                       |   | -                         |   | (708)               |
| Partial disposition of subsidiary  to non-controlling interest, net of tax (note 11) |   | -                            |   | -                        |   | -                              |   | -                                        |   | 149,657                             |   | 149,657                     |   | 10,994                    |   | 160,651             |
| Income for the year                                                                  |   | -                            |   | -                        |   | -                              |   | -                                        |   | 147,065                             |   | 147,065                     |   | 102,969                   |   | 250,034             |
| Dividends (note 22)                                                                  |   | -                            |   | -                        |   | -                              |   | -                                        |   | (15,948)                            |   | (15,948)                    |   | -                         |   | (15,948)            |
| December 31, 2011                                                                    |   | 200,254,715                  | $      | 409,305                  | $      | 11,736                         | $      | -                                        | $      | 76,383                              | $      | 497,424                     | $      | 110,048                   | $      | 607,472             |

See accompanying notes to  consolidated financial statements.

5

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| **NEVSUN RESOURCES LTD.**         Notes to Consolidated Financial Statements        (Expressed in thousands of United States dollars, unless otherwise stated)         Years ended December 31, 2011 and 2010 |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **1.** | **Nature of business** |
|--------|------------------------|

|   | Nevsun Resources Ltd. and its subsidiaries (collectively, Nevsun or the Company) are in the mineral property exploration, development, extraction and processing business in Africa.  Nevsun is incorporated in Canada and maintains its head office and registered office at Suite 800 – 1075 West Georgia Street, Vancouver, British Columbia, Canada, V6E 3C9. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company achieved commercial production at the Bisha Mine on February 22, 2011.  As of that date it commenced recording income related to revenues from metals sales and the costs incurred to produce those revenues.  Prior to February 22, 2011, the Company capitalized proceeds from gold sales and the related costs to produce those revenues to construction-in-progress. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company’s continuing operations and the underlying value and recoverability of amounts shown for its property, plant and equipment are dependent upon continuing profitable production or proceeds from the disposition of its mineral property interests.  Future profitable production is primarily dependent on the quality of ore resources, future metals prices, operating and environmental costs, fluctuations in currency exchange rates, political risks and varying levels of taxation.  While the Company actively tries to manage these risks, many of these factors are beyond its control.  The Company has not entered into derivative financial instruments to manage foreign exchange or commodity price exposure. |
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| **2.** | **Basis of preparation (continued)** |
|--------|--------------------------------------|

|   | (a) | Statement  of compliance |
|--------|-----|--------------------------|

|   | These consolidated financial statements were prepared in  accordance with International Financial Reporting Standards (IFRS) as issued  by the International Accounting Standards Board (IASB). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | Approval  of the financial statements |
|--------|-----|---------------------------------------|

|   | The consolidated financial statements of Nevsun  Resources Ltd. for the year ended December 31, 2011 were reviewed by the  Audit Committee and approved and authorized for issue by the Board of  Directors on March 20, 2012. |
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| **3.** | **Summary of significant accounting policies** |
|--------|------------------------------------------------|

|   | (a) | Basis  of measurement |
|--------|-----|-----------------------|

|   | These consolidated financial statements have been  prepared on a historical cost basis except for financial instruments  classified as available-for-sale which are stated at their fair value. In  addition these consolidated financial statements have been prepared using the  accrual basis of accounting, except for cash flow information. |
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|   | (b) | Currency  translation |
|--------|-----|-----------------------|

|   | The functional and reporting currency of the Company and  its subsidiaries is the United States dollar. Transactions in currencies other  than the functional currency are recorded at the rate of exchange prevailing  on the date of the transaction. Monetary assets and liabilities that are  denominated in foreign currencies are translated at the rate prevailing at  each reporting date. Non-monetary assets and liabilities denominated in  foreign currencies that are measured at fair value are retranslated to the  functional currency at the exchange rate at the date the fair value was  determined. Non-monetary items that are measured at historical cost in a  foreign currency are translated at the exchange rate on the date of the  transaction. Foreign currency translation differences are recognized in  profit or loss, except for differences on the retranslation of  available-for-sale investments which are recognized in other comprehensive  income. |
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|   | (c) | Basis  of consolidation |
|--------|-----|-------------------------|

|   | These consolidated financial statements  include the accounts of the Company and its subsidiaries. All intercompany  transactions and balances are eliminated on consolidation. For partially  owned subsidiaries, the interest attributable to non-controlling shareholders  is reflected in non-controlling interest. |
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6

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| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **3.** | **Summary of significant accounting policies (continued)** |
|--------|------------------------------------------------------------|

|   | (d) | Earnings  per share |
|--------|-----|---------------------|

|   | Earnings per share calculations are  based on the weighted average number of common shares outstanding during the  period. Diluted earnings per share is calculated using the treasury stock  method. The weighted average number of common shares outstanding for the  calculation of diluted earnings per share assumes that the proceeds to be  received on the exercise of dilutive stock options are used to repurchase  common shares at the average market price during the period. |
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|   | (e) | Cash  and cash equivalents |
|--------|-----|----------------------------|

|   | Cash and cash equivalents are comprised  of cash on hand, deposits in banks and highly liquid investments having  original terms to maturity of 90 days or less when acquired. |
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|   | (f) | Property,  plant and equipment |
|--------|-----|--------------------------------|

|   | (i) | Exploration  and evaluation |
|--------|-----|-----------------------------|

|   |   |   | Once a license to explore an area has been secured, expenditures on exploration and evaluation activities are capitalized to exploration and evaluation, and classified as a component of property, plant and equipment. |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   | Exploration expenditures relate to the initial search for deposits with economic potential and to detailed assessments of deposits or other projects that have been identified as having economic potential. |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   | Management reviews the carrying value of capitalized exploration costs at least annually.  The review is based on the Company’s intentions for development of the undeveloped property. |
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|   | Subsequent recovery of the resulting carrying value  depends on successful development or sale of the undeveloped project. If a  project does not prove viable, all irrecoverable costs associated with the  project net of any impairment provisions are written off. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (ii) | Development |
|--------|------|-------------|

|   | When economically viable reserves have been determined and the decision to proceed with development has been approved, the expenditures related to development and construction are capitalized as construction-in-progress and classified as a component of property, plant and equipment.  Costs associated with the commissioning of new assets incurred in the period before they are operating in the way intended by management, are capitalized.  Development expenditure is net of the proceeds of the sale of metals from ore extracted during the development phase.  Interest on borrowings related to the construction and development of assets are capitalized until substantially all the activities required to make the asset ready for its intended use are complete. |
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|   | The costs of removing overburden to access ore are capitalized as pre-production stripping costs and classified as a component of property, plant and equipment. |
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|   | (iii) | Plant  and equipment |
|--------|-------|----------------------|

|   | Plant and equipment is  carried at cost, less accumulated depreciation and accumulated impairment  losses.  Cost comprises the fair value of  consideration given to acquire or construct an asset and includes the direct  charges associated with bringing the asset to the location and condition necessary  for putting it into use, along with the future cost of dismantling and removing  the asset. |
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|   | When  parts of an item of plant and equipment have different useful lives, they are  accounted for as separate items (major components) of plant and equipment. |
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7

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| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **3.** | **Summary of significant accounting policies (continued)** |
|--------|------------------------------------------------------------|

|   | (f) | Property, plant and equipment (continued) |
|--------|-----|-------------------------------------------|

|   | (iii) | Plant and equipment (continued) |
|--------|-------|---------------------------------|

|   | The cost of major overhauls of parts of  plant and equipment is recognized in the carrying amount of the item if it is  probable that the future economic benefits embodied within the part will flow  to the Company, and its cost can be measured reliably. The carrying amount  of the replaced part is derecognized. The costs of the day-to-day servicing  of plant and equipment are recognized in profit or loss as incurred. |
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|   | Plant and equipment associated with mining operations is  depreciated over the estimated useful lives of the assets, either on a units  of production basis or declining balance basis at rates of 20% to 30% per  annum, as appropriate. All other equipment is depreciated over the estimated  useful life of the assets using the declining balance method at rates of 20%  to 30% per annum, as appropriate. Depreciation methods and useful lives are  reviewed at each reporting date and adjusted as required. |
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|   | (g) | Impairment  of non-current assets |
|--------|-----|-----------------------------------|

|   | Non-current assets are evaluated at  least annually by management for indicators that carrying value is impaired  and may not be recoverable. When indicators of impairment are present the  recoverable amount of an asset is evaluated at the level of a cash generating  unit (CGU), the smallest identifiable group of assets that generates cash  inflows that are largely independent of the cash inflows from other assets or  groups of assets, where the recoverable amount of a CGU is the greater of the  CGU’s fair value less costs to sell and its value in use. An impairment loss  is recognized in profit or loss to the extent the carrying amount exceeds the  recoverable amount. |
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|   | In calculating recoverable amount, the  Company uses discounted cash flow techniques to determine fair value when it  is not possible to determine fair value either by quotes from an active  market or a binding sales agreement. The determination of discounted cash  flows is dependent on a number of factors, including future metal prices, the  amount of reserves, the cost of bringing the project into production, production  schedules, production costs, sustaining capital expenditures, and site  closure, restoration and environmental rehabilitation costs. Additionally,  the reviews take into account factors such as political, social and legal,  and environmental regulations. These factors may change due to changing  economic conditions or the accuracy of certain assumptions and, hence, affect  the recoverable amount. The Company uses its best efforts to fully  understand all of the aforementioned to make an informed decision based upon  historical and current facts surrounding the projects. Discounted cash flow  techniques often require management to make estimates and assumptions  concerning reserves and expected future production revenues and expenses. |
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|   | (h) | Reserve  estimates |
|--------|-----|--------------------|

|   | The Company estimates its ore reserves and mineral  resources based on information compiled by Qualified Persons as defined in  accordance with Canadian Securities Administrators National Instrument 43-101*Standards for Disclosure of Mineral Projects*(NI 43-101). Reserves  are used in the calculation of depreciation, impairment assessment and for  forecasting the timing of payment of mine closure, reclamation and  rehabilitation costs. |
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|   | There are numerous uncertainties inherent in estimating  ore reserves, and assumptions that are valid at the time of estimation may  change significantly when new information becomes available. Changes in the  forecasted prices of commodities, exchange rates, production costs or  recovery rates may change the economic status of reserves and may,  ultimately, result in the reserves being restated. |
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8

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| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **3.** | **Summary of significant accounting policies (continued)** |
|--------|------------------------------------------------------------|

|   | (i) | Provision  for closure and reclamation |
|--------|-----|----------------------------------------|

|   | The Company records a liability based  on the best estimate of costs for site closure and reclamation activities  that the Company is legally or constructively required to remediate. The  liability is recognized at the time environmental disturbance occurs and the  resulting costs are capitalized to the corresponding asset. The provision  for closure and reclamation liabilities is estimated using expected cash  flows based on engineering and environmental reports prepared by third-party  industry specialists and discounted at a pre-tax rate specific to the  liability. The capitalized amount is depreciated on the same basis as the  related asset. The liability is adjusted for the accretion of the discounted  obligation and any changes in the amount or timing of the underlying future  cash flows. Significant judgments and estimates are involved in forming  expectations of the amounts and timing of future closure and reclamation cash  flows. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Additional disturbances and changes in closure and  reclamation estimates are accounted for as incurred with a change in the  corresponding capitalized cost. Costs of rehabilitation projects for which a  provision has been recorded are recorded directly against the provision as  incurred, most of which are incurred at the end of the life of mine. |
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|   | (j) | Financial  instruments |
|--------|-----|------------------------|

|   | (i) | Financial  assets |
|--------|-----|-------------------|

|   | The Company classifies its financial  assets in the following categories: loans and receivables and  available-for-sale. The classification depends on the purpose for which the  financial assets were acquired. Management determines the classification of  financial assets at recognition. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Loans and receivables |
|--------|-----------------------|

|   | Loans  and receivables are non-derivative financial assets with fixed or determinable  payments that are not quoted in an active market.  They are classified as current assets or  non-current assets based on their maturity date.  Loans and receivables are initially  recognized at fair value and subsequently carried at amortized cost less any  impairment.  Loans and receivables are  comprised of cash and cash equivalents and trade and other receivables. |
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|   | Available-for-sale financial assets |
|--------|-------------------------------------|

|   | Available-for-sale  (AFS) financial assets are non-derivatives that are either designated as  available-for-sale or not classified in any of the other financial asset  categories.  Changes in the fair value of  AFS financial assets other than impairment losses are recognized as other  comprehensive income and classified as a component of equity.  AFS assets include investments in listed  equity of other entities. |
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|   | Management  assesses the carrying value of AFS financial assets at least annually and any  impairment charges are recognized in profit or loss.  When financial assets classified as  available-for-sale are sold, the accumulated fair value adjustments recognized  in other comprehensive income are included in profit and loss. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (ii) | Financial  liabilities |
|--------|------|------------------------|

|   | The Company classifies its financial  liabilities in the following categories: other financial liabilities and  derivative financial liabilities. |
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9

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| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **3.** | **Summary of significant accounting policies (continued)** |
|--------|------------------------------------------------------------|

|   | (j) | Financial instruments (continued) |
|--------|-----|-----------------------------------|

|   | (ii) | Financial liabilities (continued) |
|--------|------|-----------------------------------|

|   | Other  financial liabilities |
|--------|------------------------------|

|   | Other  financial liabilities are non-derivatives and are recognized initially at fair  value, net of transaction costs incurred and are subsequently stated at  amortized cost.  Any difference between  the amounts originally received, net of transaction costs, and the redemption  value is recognized in profit and loss over the period to maturity using the  effective interest method. |
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|   | Other  financial liabilities are classified as current or non-current based on their  maturity date.  Financial liabilities  include trade accounts payable, other payables, advances from non-controlling  interest, deferred credits, liability associated with stock appreciation rights  and loans. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (k) | Share  capital |
|--------|-----|----------------|

|   | The Company records proceeds from share  issuances net of issue costs and any tax effects. Common shares issued for  consideration other than cash are valued based on their market value at the  date the agreement to issue shares was concluded. |
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|   | (l) | Income  taxes |
|--------|-----|---------------|

|   | The Company uses the balance sheet method of accounting  for income taxes. Under the balance sheet method, deferred tax assets and  liabilities are recognized for the future tax consequences attributable to  differences between the financial statement carrying amounts of existing  assets and liabilities and their respective tax bases. Deferred tax assets  and liabilities are measured using substantively enacted tax rates expected  to apply to taxable income in the years in which those temporary differences  are expected to be recovered or settled. Deferred tax assets also result  from unused loss carried forward, resource related pools and other  deductions. A deferred tax asset is recognized for unused  tax losses, tax credits and deductible temporary differences to the extent  that it is probable that future taxable profits will be available against  which they can be utilized. Deferred tax assets are reviewed at each  reporting date and are reduced to the extent that it is no longer probable  that the related tax benefit will be realized. |
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|   | (m) | Share-based  payments |
|--------|-----|-----------------------|

|   | The Company has a stock option plan  that is described in note 16(c). Share-based payments to employees are measured at the fair  value of the instruments issued and amortized over the vesting periods.  Share-based payments to non-employees are measured at the fair value of the  goods or services received or the fair value of the equity instruments issued  if it is determined the fair value of the goods or services cannot be  reliably measured, and are recorded at the date the goods or services are  received. The amount recognized as an expense is adjusted to reflect the  number of awards expected to vest. The offset to the recorded cost is to  share-based payments reserve. Consideration received on the exercise of  stock options is recorded as share capital and the related share-based  payments reserve is transferred to share capital. Charges for options that  are forfeited before vesting are reversed from share-based payment reserve.  For those options that expire or are forfeited after vesting, the recorded  value is transferred to retained earnings (deficit). |
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10

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| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
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| **3.** | **Summary of significant accounting policies (continued)** |
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|   | (n) | Stock  appreciation rights |
|--------|-----|----------------------------|

|   | Stock appreciation rights (SARs) allow the holder to  receive cash or common shares of the Company in the amount of the underlying  value of the associated stock option.  When the holder has the option of settling in  cash or shares, the SAR is recorded at the fair value of the debt component of  the SAR while assigning nil value to the equity component.  Changes to the fair value of the liability  are recognized in income. |
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|   | Where  the holder elects to take common shares instead of cash, the value of the  related liability is transferred directly to retained earnings; where the  holder elects to settle SARs in cash instead of common shares, the value of the  related liability is extinguished when the cash is paid. |
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|   | Adoption of new accounting policies |
|--------|-------------------------------------|

|   | (o) | Revenue  recognition |
|--------|-----|----------------------|

|   | Revenue from the sale of goods is recognized when  persuasive evidence, usually in the form of an executed sales agreement, or  an arrangement exists, indicating there has been a transfer of risks and  rewards to the customer, no further work or processing is required by the  Company, the quantity and quality of the goods has been determined with  reasonable accuracy, the price is fixed or determinable, and collectability  is reasonably assured. For gold sales this is generally on receipt of a  shipment by a refiner. |
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|   | (p) | Inventories |
|--------|-----|-------------|

|   | Inventories are valued at the lower of cost and net  realizable value, on a weighted average cost basis. Average costs are  calculated by reference to the cost levels experienced in the current month  together with those in opening inventory. Cost for raw materials and  supplies is purchase price, and for partly processed and finished goods is  the cost of production. For this purpose the costs of production include: |
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|   | (i) | fuel,  power, labour costs, materials and contractor expenses which are directly  attributable to the extraction and processing of ore; |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------|

|   | (ii) | the  depreciation of mining properties and property, plant and equipment used in  the extraction and processing of ore; and |
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|   | (iii) | production  overheads. |
|--------|-------|------------------------|

|   | Work-in-progress inventory includes ore stockpiles and  other partly processed material. Stockpiles represent ore that has been  extracted and is available for further processing. Quantities are assessed  primarily through surveys and assays. |
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|   | (q) | Stripping  costs in the production phase |
|--------|-----|------------------------------------------|

|   | Where production stripping activity does not result in  inventory produced but does provide improved access to the ore body, the  costs are deferred when the stripping activity meets the following: (1) it is  probable the Company will be the future beneficiary of the stripping  activity; (2) the Company can identify the component of the ore body for  which access has been improved; and (3) the costs relating to the stripping  activity associated with that component can be measured reliably. Deferred  stripping costs are capitalized to property, plant and equipment and are  depreciated on a units of production basis. |
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11

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| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **4.** | **Changes in accounting standards** |
|--------|-------------------------------------|

|   | The  following accounting standards that may be relevant to the Company have been  introduced or revised by the IASB during 2011: |
|--------|-----------------------------------------------------------------------------------------------------------------------------------|

|   | (a) | Stripping  costs in the production phase of a surface mine |
|--------|-----|------------------------------------------------------------|

|   | In October 2011, the IASB issued IFRIC 20 – Stripping  Costs in the Production Phase of a Surface Mine (“IFRIC 20”). IFRIC 20  clarifies the requirements for accounting for the costs of stripping activity  in the production phase.  The costs associated with  stripping activity that result in production inventory are to be treated as a  variable production cost.  Where production stripping activity does  not result in the form of inventory produced but does provide improved access  to the ore body, the costs may be deferred when the stripping activity meets the  following: (1) it is probable the entity will be the future beneficiary of  the stripping activity; (2)  the entity can identify  the component of the ore body for which access has been improved; and (3)  the costs relating to the stripping activity associated  with that component can be measured reliably.  IFRIC 20 is effective for  annual periods beginning on or after January 1, 2013, with earlier  application permitted and includes guidance on transition for pre-existing  stripping assets. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company adopted IFRIC 20 in October 2011 without  impact. |
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|   | (b) | Consolidation |
|--------|-----|---------------|

|   | In May 2011, the IASB issued IFRS 10 – Consolidated  Financial Statements (“IFRS 10”), which supersedes SIC 12 – Consolidation –  Special Purpose Entities and the requirements relating to consolidated  financial statements in IAS 27 – Consolidated and Separate Financial  Statements. IFRS 10 is effective for annual periods beginning on or after  January 1, 2013, with earlier application permitted. IFRS 10 establishes  control as the basis for an investor to consolidate its investees and defines  control as an investor’s power over an investee with exposure, or rights, to  variable returns from the investee and the ability to affect the investor’s  returns through its power over the investee. |
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|   | In addition, the IASB issued IFRS 12 – Disclosure of  Interests in Other Entities (“IFRS 12”) which combines and enhances the  disclosure requirements for the Company’s subsidiaries and associates. The  requirements of IFRS 12 include enhanced reporting of the nature of risks  associated with the Company’s interests in other entities, and the effects of  those interests on the Company’s consolidated financial statements. |
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|   | The Company does not anticipate the application of IFRS  10 and IFRS 12 to have a significant impact on its consolidated financial  statements. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | Fair  value measurement |
|--------|-----|-------------------------|

|   | In May 2011, as a result of the convergence project  undertaken by the IASB with the US Financial Accounting Standards Board to  develop common requirements for measuring fair value and for disclosing  information about fair value measurements, the IASB issued IFRS 13 – Fair  Value Measurement (“IFRS 13”). IFRS 13 is effective for annual periods  beginning on or after January 1, 2013, with earlier application permitted.  IFRS 13 defines fair value and sets out a single framework for measuring fair  value which is applicable to all IFRSs that require or permit fair value  measurements or disclosures about fair value measurements. IFRS 13 requires  that when using a valuation technique to measure fair value, the use of  relevant observable inputs should be maximized while unobservable inputs  should be minimized. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company does not anticipate the application of IFRS  13 to have a significant impact on its consolidated financial statements. |
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12

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| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **4.** | **Changes in accounting standards (continued)** |
|--------|-------------------------------------------------|

|   | (d) | Financial  instruments |
|--------|-----|------------------------|

|   | The IASB intends to replace IAS 39 – Financial  Instruments: Recognition and Measurement (“IAS 39”) in its entirety with IFRS  9 – Financial Instruments (“IFRS 9”) in three main phases. IFRS 9 will be the  new standard for the financial reporting of financial instruments that is  principles-based and less complex than IAS 39. In November 2009 and October  2010, phase 1 of IFRS 9 was issued and amended, respectively, which addressed  the classification and measurement of financial assets and financial  liabilities. IFRS 9 requires that all financial assets be classified as  subsequently measured at amortized cost or at fair value based on the  Company’s business model for managing financial assets and the contractual  cash flow characteristics of the financial assets. Financial liabilities are  classified as subsequently measured at amortized cost except for financial  liabilities classified as at fair value through profit and loss, financial  guarantees and certain other exceptions. In response to delays to the  completion of the remaining phases of the project, on December 16, 2011, the  IASB issued amendments to IFRS 9 which deferred the mandatory effective date  of IFRS 9 from January 1, 2013 to annual periods beginning on or after  January 1, 2015. The amendments also provided relief from the requirement to  restate comparative financial statements for the effects of applying IFRS 9. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company is currently evaluating the impact the final  standard is expected to have on its consolidated financial statements. |
|--------|----------------------------------------------------------------------------------------------------------------------------------|

| **5.** | **Critical judgments in applying accounting policies** |
|--------|--------------------------------------------------------|

|   | The critical judgments that the  Company’s management has made in the process of applying the Company’s  accounting policies, apart from those involving estimations (note 6), that have the most significant effect on  the amounts recognized in the Company’s consolidated financial statements are  as follows: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (a) | Commercial  production |
|--------|-----|------------------------|

|   | Costs incurred to construct and develop  property, plant and equipment are capitalized until the assets are brought  into the location and condition necessary to be capable of operating in the  manner intended by management. Proceeds from mineral sales realized  during this period are offset against costs capitalized. Depletion of  capitalized costs for mineral properties and related plant and equipment  begins when operating levels intended by management have been reached. The  results of operations of the Company during the periods presented in these  audited consolidated financial statements have been impacted by management’s  determination that the Bisha Mine reached the operating levels intended by  management on February 22, 2011. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | Economic  recoverability and probability of future economic benefits of exploration,  evaluation and development costs |
|--------|-----|------------------------------------------------------------------------------------------------------------------------|

|   | Management has determined that exploration drilling,  evaluation, development and related costs incurred which have been  capitalized are economically recoverable. Management uses several criteria in  its assessments of economic recoverability and probability of future economic  benefit including geologic and metallurgic information, history of conversion  of mineral deposits to proven and probable reserves, scoping and feasibility  studies, accessible facilities, existing permits and life of mine plans. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | Functional  currency |
|--------|-----|----------------------|

|   | The functional currency for each of the Company’s  subsidiaries is the currency of the primary economic environment in which the  entity operates. The Company has determined the functional currency of each  entity is the US dollar. Assessment of functional currency involves certain  judgements to determine the primary economic environment and the Company  reconsiders the functional currency of its entities if there is a change in  events and conditions which determined the primary economic environment. |
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13

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| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States      dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **6.** | **Key sources of estimation uncertainty** |
|--------|-------------------------------------------|

|   | The preparation of consolidated  financial statements requires that the Company’s management make assumptions  and estimates of effects of uncertain future events on the carrying amounts  of the Company’s assets and liabilities at the end of the reporting period.  Actual results may differ from those estimates as the estimation process is  inherently uncertain. Actual future outcomes could differ from present  estimates and assumptions, potentially having material future effects on the  Company’s consolidated financial statements. Estimates are reviewed on an  ongoing basis and are based on historical experience and other facts and  circumstances. Revisions to estimates and the resulting effects on the  carrying amounts of the Company’s assets and liabilities are accounted for  prospectively. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The significant assumptions about the  future and other major sources of estimation uncertainty as at the end of the  reporting period that have a significant risk of resulting in a material  adjustment to the carrying amounts of the Company’s assets and liabilities  are as follows: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (a) | Impairment  of property, plant and equipment |
|--------|-----|----------------------------------------------|

|   | The Company considers both external and internal sources of information in assessing whether there are any indications that property, plant and equipment are impaired. External sources of information the Company considers include changes in the market, economic and legal environment in which the Company operates that are not within its control and affect the recoverable amount of property, plant and equipment. Internal sources of information the Company considers include the manner in which property, plant and equipment are being used or are expected to be used and indications of economic performance of the assets. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In determining the recoverable amounts of the Company’s property, plant and equipment, the Company’s management makes estimates of the discounted future after-tax cash flows expected to be derived from the Company’s mining properties using an appropriate discount rate. Reductions in metal price forecasts, increases in estimated future costs of production, increases in estimated future non-expansionary capital expenditures, reductions in the amount of recoverable reserves, resources, and exploration potential, and/or adverse current economics can result in a write-down of the carrying amounts of the Company’s property, plant and equipment. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | Mine  operating expenses |
|--------|-----|--------------------------|

|   | In determining mine operating expenses recognized in the  Consolidated Statements of Comprehensive Income, the Company’s management  makes estimates of quantities of ore on stockpiles and in process and the  recoverable gold in this material to determine the cost of finished goods  sold during the period. Changes in these estimates can result in a change in  mine operating expenses in future periods and carrying amounts of  inventories. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | Estimated  recoverable gold ounces and ore reserve tonnes |
|--------|-----|-----------------------------------------------------------|

|   | The carrying amounts of the Company’s property, plant  and equipment are depleted based on recoverable gold ounces and ore reserve  tonnes. Changes to estimates of recoverable gold ounces, ore reserve tonnes  and depletable costs, including changes resulting from revisions to the  Company’s mine plans and changes in metals prices forecasts, can result in a  change to future depletion rates. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (d) | Estimated  reclamation and closure costs |
|--------|-----|------------------------------------------|

|   | The Company’s provision for reclamation and closure cost  obligations represents management’s best estimate of the present value of the  future cash outflows required to settle the liability which reflects estimates  of future costs, inflation, movements in foreign exchange rates and assumptions  of risks associated with the future cash outflows, and the applicable risk-free  interest rates for discounting the future cash outflows. Changes in the above  factors can result in a change to the provision recognized by the Company. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Changes to reclamation and closure cost obligations  are recorded with a corresponding change to the carrying amounts of related  property, plant and equipment for the period. Adjustments to the carrying  amounts of related property, plant and equipment can result in a change to  future depletion expense. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

14

----

 

| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **6.** | **Key sources of estimation uncertainty (continued)** |
|--------|-------------------------------------------------------|

|   | (e) | Income  taxes |
|--------|-----|---------------|

|   | In assessing the probability of realizing income tax  assets recognized, management makes estimates related to expectations of  future taxable income, applicable tax opportunities, expected timing of  reversals of existing temporary differences and the likelihood that tax  positions taken will be sustained upon examination by applicable tax  authorities. In making its assessments, management gives additional weight to  positive and negative evidence that can be objectively verified. Estimates of  future taxable income are based on forecasted cash flows from operations and  the application of existing tax laws in each jurisdiction. Forecasted cash  flows from operations are based on life of mine projections internally  developed and reviewed by management. Weight is attached to tax planning  opportunities that are within the Company’s control, and are feasible and  implementable without significant obstacles. The likelihood that tax  positions taken will be sustained upon examination by applicable tax  authorities is assessed based on individual facts and circumstances of the  relevant tax position evaluated in light of all available evidence. Where  applicable tax laws and regulations are either unclear or subject to ongoing  varying interpretations, it is reasonably possible that changes in these  estimates can occur that materially affect the amounts of income tax assets  recognized. At the end of each reporting period, the Company reassesses  unrecognized income tax assets. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **7.** | **Cash and cash equivalents (continued)** |
|--------|-------------------------------------------|

|   |                |   | December 31,  2011 |   |   | December 31,  2010 |   |
|--------|---------------------|--------|--------------------|--------|--------|--------------------|--------|
|   | Cash                | $      | 284,582            |   | $      | 19,902             |   |
|   | Short-term deposits |   | 63,000             |   |   | 30,243             |   |
|   |                | $      | 347,582            |   | $      | 50,145             |   |

|   | Cash and cash equivalents located outside of Africa at December  31, 2011 equal $339,869 (December 31, 2010 - $47,082). |
|--------|-------------------------------------------------------------------------------------------------------------------------|

| **8.** | **Available-for-sale investment (continued)** |
|--------|-----------------------------------------------|

|   | During the year ended December 31, 2011, the Company  disposed of 1,204,250 shares of PMI Gold Corporation for a gain of $1,166.  At December 31, 2010, available-for-sale investment is comprised of 1,204,250  shares of PMI Gold Corporation. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | During February 2010, the Company disposed of 6,024,000  shares for a gain of $716.  In October 2010, PMI Gold Corporation completed a  share consolidation on a 2 for 1 basis. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **9.** | **Accounts receivable and prepaids** |
|--------|--------------------------------------|

|   |                |   | December 31,  2011 |   |   | December 31,  2010 |   |
|--------|---------------------|--------|--------------------|--------|--------|--------------------|--------|
|   | Trade receivables   | $      | 3,470              |   | $      | -                  |   |
|   | Advances to vendors |   | 15,408             |   |   | 2,763              |   |
|   | Prepaid expenses    |   | 923                |   |   | 492                |   |
|   | VAT receivable      |   | 251                |   |   | 926                |   |
|   | Other receivables   |   | 438                |   |   | 1,348              |   |
|   |                | $      | 20,490             |   | $      | 5,529              |   |

15

----

 

| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **10.** | **Inventories** |
|---------|-----------------|

|   |                   |   | December 31,  2011 |   |   | December 31,  2010 |   |
|--------|------------------------|--------|--------------------|--------|--------|--------------------|--------|
|   | Materials and supplies | $      | 23,101             |   | $      | 11,113             |   |
|   | Work-in-progress       |   | 6,777              |   |   | -                  |   |
|   | Finished goods         |   | 2,221              |   |   | -                  |   |
|   |                   | $      | 32,099             |   | $      | 11,113             |   |

| **11.** | **Due from/to non-controlling interest** |
|---------|------------------------------------------|

|   | The Company’s principal operation, the  Bisha Mine, is held via the Eritrean registered corporation, Bisha Mining  Share Corporation (BMSC or Bisha Mine), in which Nevsun has a 60% interest.  The  non-controlling interest in BMSC is held by the State owned Eritrean National  Mining Corporation (ENAMCO). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In October 2007, the Company entered  into an agreement with ENAMCO whereby the State increased its interest in  Bisha by 30%, to add to its 10% free carried interest provided by Eritrean  mining legislation, resulting in a total participation of 40%. At the time,  ENAMCO made a provisional payment of $25,000 and agreed to fund its share of  the capital requirements for the development of Bisha.  ENAMCO advanced  $74,995 over the course of construction of the Bisha Mine to fund its share  of the development. In addition ENAMCO provided a loan of $20,000 to Nevsun  to assist the Company in financing its share of development costs. These  financing arrangements are displayed in the table below under the column  December 31, 2010. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Purchase price settlement: |
|--------|----------------------------|

|   | During August 2011, the Company finalized its  arrangements with ENAMCO for the purchase of the 30% participating interest  in the Bisha Mine.  After the parties mutually engaged independent expert  valuation advice, the parties agreed to a purchase price of $253,500,  resulting in a gain to the Company of $242,506.  The gain, net of income  taxes, was recorded directly to retained earnings as it represents a change  in Nevsun’s interest in a subsidiary that did not result in a change in  control. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The resulting amount receivable from  ENAMCO bears interest at 12 month US dollar LIBOR plus 4% and the receivable  and interest shall be collected from cash flow from the Bisha Mine that would  otherwise be distributed to ENAMCO in accordance with its share ownership.  The estimated amount to be collected in the next twelve months is recorded as  a current asset. Interest of $3,625 has been accrued on this receivable and  recorded for the year ended December 31, 2011 as finance income. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Income tax related to the gain on  disposition to ENAMCO was $92,849.  Nevsun agreed with ENAMCO that  ENAMCO  take responsibility for the settlement of taxes and accordingly adopted a net  of tax presentation on the balance sheet. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | During October 2011, the Company collected $27,088 of  the purchase price receivable net of taxes. |
|--------|----------------------------------------------------------------------------------------------------|

|   | Advances: |
|--------|-----------|

|   | The development advances from ENAMCO to  Bisha were at an interest rate of 12 month US dollar LIBOR plus 4% and have  earned cumulative interest of $6,414, of which $4,753 has been capitalized to  property, plant and equipment as of December 31, 2011 (December 31, 2010 -  $4,132). In the year ended December 31, 2011, ENAMCO earned $2,282 in  interest on those, of which $601 was capitalized to property, plant and  equipment and $1,681 was included in finance costs.  During the year ended December  31, 2011, Bisha repaid $74,995 of the ENAMCO advances and $6,414 of interest  on those advances out of cash flow from Bisha operations. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

16

----

 

| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **11.** | **Due from/to non-controlling interest (continued)** |
|---------|------------------------------------------------------|

|   | Loan: |
|--------|-------|

|   | The $20,000 loan from ENAMCO was at a  rate of LIBOR plus 7%.  Nevsun repaid ENAMCO principal of $3,333 and interest  of $770 in January 2011.  In August 2011, in accordance with agreements  between the parties, the unpaid portion of the loan plus unpaid interest totalling  $16,739 was applied to the purchase price referred to above, along with the  $25,000 provisional payment noted above. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Gain on sale of interest in subsidiary: |
|--------|-----------------------------------------|

|   | For the years ended            |   | 2011    |   |   | 2010 |   |
|--------|--------------------------------|--------|---------|--------|--------|------|--------|
|   | Purchase price                 | $      | 253,500 |   | $      | -    |   |
|   | Carrying amount                |   | (10,994 | )      |   | -    |   |
|   | Gain                           |   | 242,506 |   |   | -    |   |
|   | Income taxes                   |   | (92,849 | )      |   | -    |   |
|   | Net gain to  retained earnings | $      | 149,657 |   | $      | -    |   |

|   | Reconciliation of due from non-controlling interest: |
|--------|------------------------------------------------------|

|   | For the years  ended                            |   | 2011    |   |   | 2010 |   |
|--------|-------------------------------------------------|--------|---------|--------|--------|------|--------|
|   | Purchase price                                  | $      | 253,500 |   | $      | -    |   |
|   | Less provisional  payment                       |   | (25,000 | )      |   | -    |   |
|   | Less loan to  Nevsun                            |   | (16,739 | )      |   | -    |   |
|   | Less income taxes settled                       |   | (92,849 | )      |   | -    |   |
|   | Add accrued  interest on purchase price         |   | 3,625   |   |   | -    |   |
|   | Less principal  and interest received by Nevsun |   | (27,088 | )      |   | -    |   |
|   | Due from  non-controlling interest              | $      | 95,449  |   | $      | -    |   |

|   | Balances as at: |
|--------|-----------------|

|   |                                                         |   | December 31,  2011 |   |   | December 31,  2010 |   |
|--------|--------------------------------------------------------------|--------|--------------------|--------|--------|--------------------|--------|
|   | Current asset –  due from non-controlling interest     | $      | 11,137             |   | $      | -                  |   |
|   | Non-current  asset – due from non-controlling interest |   | 84,312             |   |   | -                  |   |
|   | Due from non-controlling  interest                           |   | 95,449             |   |   | -                  |   |
|   |                                                         |   |               |   |   |               |   |
|   | Deferred credit  / provisional payment                       |   | -                  |   |   | 25,000             |   |
|   | Loan to Nevsun                                               |   | -                  |   |   | 20,000             |   |
|   | Advances by  non-controlling interest                        |   | -                  |   |   | 79,127             |   |
|   | Due to non-controlling interest                              | $      | -                  |   | $      | 124,127            |   |

17

----

 

| **NEVSUN RESOURCES LTD.**        Notes to Consolidated Financial Statements        (Expressed in thousands of United States dollars, unless otherwise stated)         Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **12.** | **Property, plant and equipment** |
|---------|-----------------------------------|

|   | Year ended December 31, 2011                                    |   | Exploration  and evaluation |   |   | Construction-  in-progress |   |   | Mineral  properties |   |   | Plant and  equipment |   |   | Total   |   |
|--------|-----------------------------------------------------------------|--------|-----------------------------|--------|--------|----------------------------|--------|--------|---------------------|--------|--------|----------------------|--------|--------|---------|--------|
|   | **Cost**                                                        |   |                        |   |   |                       |   |   |                |   |   |                 |   |   |    |   |
|   | December 31, 2010                                               | $      | 2,053                       |   | $      | 263,886                    |   | $      | -                   |   | $      | 26,459               |   | $      | 292,398 |   |
|   |      Additions                         |   | 6,105                       |   |   | 24,050                     |   |   | -                   |   |   | 37,946               |   |   | 68,101  |   |
|   |      Pre-production gold sales         |   | -                           |   |   | -                          |   |   | -                   |   |   | (48,613              | )      |   | (48,613 | )      |
|   |      Disposals                         |   | -                           |   |   | -                          |   |   | -                   |   |   | (3                   | )      |   | (3      | )      |
|   |      Transfers                         |   | -                           |   |   | (262,734                   | )      |   | 29,630              |   |   | 233,104              |   |   | -       |   |
|   | December 31, 2011                                               |   | 8,158                       |   |   | 25,202                     |   |   | 29,630              |   |   | 248,893              |   |   | 311,883 |   |
|   | **Accumulated depreciation**                                    |   |                        |   |   |                       |   |   |                |   |   |                 |   |   |    |   |
|   | December 31, 2010                                               |   | -                           |   |   | -                          |   |   | -                   |   |   | 3,780                |   |   | 3,780   |   |
|   |      Charge for the year               |   | -                           |   |   | -                          |   |   | 1,818               |   |   | 26,682               |   |   | 28,500  |   |
|   |      Disposals                         |   | -                           |   |   | -                          |   |   | -                   |   |   | (3                   | )      |   | (3      | )      |
|   | December 31, 2011                                               |   | -                           |   |   | -                          |   |   | 1,818               |   |   | 30,459               |   |   | 32,277  |   |
|   | Net book value       December 31, 2011 | $      | 8,158                       |   | $      | 25,202                     |   | $      | 27,812              |   | $      | 218,434              |   | $      | 279,606 |   |

|   | Year ended December 31, 2010                                    |   | Exploration  and evaluation |   |   | Construction-  in-progress |   |   | Mineral  properties |   |   | Plant and  equipment |   |   | Total   |   |
|--------|-----------------------------------------------------------------|--------|-----------------------------|--------|--------|----------------------------|--------|--------|---------------------|--------|--------|----------------------|--------|--------|---------|--------|
|   | **Cost**                                                        |   |                        |   |   |                       |   |   |                |   |   |                 |   |   |    |   |
|   | December 31, 2009                                               | $      | 838                         |   | $      | 145,232                    |   | $      | -                   |   | $      | 9,478                |   | $      | 155,548 |   |
|   |      Additions                         |   | 1,215                       |   |   | 118,654                    |   |   | -                   |   |   | 16,997               |   |   | 136,866 |   |
|   |      Disposals                         |   | -                           |   |   | -                          |   |   | -                   |   |   | (16                  | )      |   | (16     | )      |
|   | December 31, 2010                                               |   | 2,053                       |   |   | 263,886                    |   |   | -                   |   |   | 26,459               |   |   | 292,398 |   |
|   | **Accumulated  depreciation**                                   |   |                        |   |   |                       |   |   |                |   |   |                 |   |   |    |   |
|   | December 31, 2009                                               |   | -                           |   |   | -                          |   |   | -                   |   |   | 1,429                |   |   | 1,429   |   |
|   |      Charge for the year               |   | -                           |   |   | -                          |   |   | -                   |   |   | 2,365                |   |   | 2,365   |   |
|   |      Disposals                         |   | -                           |   |   | -                          |   |   | -                   |   |   | (14                  | )      |   | (14     | )      |
|   | December 31, 2010                                               |   | -                           |   |   | -                          |   |   | -                   |   |   | 3,780                |   |   | 3,780   |   |
|   | Net book value       December 31, 2010 | $      | 2,053                       |   | $      | 263,886                    |   | $      | -                   |   | $      | 22,679               |   | $      | 288,618 |   |

|   | The Company’s properties are located in western Eritrea, a country  located in north-eastern Africa.  The  properties consist of a 53 km2 exploration license and a 39 km2 mining  agreement area that is inclusive of a 16.5 km2 mining license.  The mining license for the  gold-silver-copper-zinc Bisha Mine was granted in 2008 for an initial period of  20 years.  The exploration license  expires in May 2012.  Eritrean State  participation in the Bisha Mine is described in note 11. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Development  of the Bisha Mine commenced in early 2008, commissioning commenced in Q4 2010  and commercial production was achieved in Q1 2011.  As a result, the Company transformed into an  operating mining company and allocated construction-in-progress amounts to  appropriate categories of property, plant and equipment and commenced  depreciating based on their useful lives. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

18 

----

 

| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **12.** | **Property, plant and equipment (continued)** |
|---------|-----------------------------------------------|

|   | Until August 2010, Nevsun’s interest in  the Bisha Mine was subject to a 1.5% net smelter return royalty in  favour of an arms-length third party. In August 2010, the  Company paid $17,514 to buy out the royalty, which was subsequently  capitalized to property, plant and equipment. During 2011, $705 (2010 - $2,361)  of depreciation was capitalized to property, plant and equipment. At  December 31, 2009 $8,700 of deferred finance costs was included in property,  plant and equipment. In 2010, a further $2,483 in finance costs was incurred  and $2,600 was recovered and recorded in accounts receivable. The Company  wrote-off $8,583 of finance costs related to debt facilities that expired  unutilized during 2010. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Costs classified as mineral properties represent  historic exploration and development costs at Bisha.  Construction-in-progress at the end of the quarter represents costs  associated with the copper phase expansion at the Bisha Mine. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **13.** | **Accounts payable and accrued liabilities** |
|---------|----------------------------------------------|

|   |                     |   | December 31,  2011 |   |   | December 31,  2010 |   |
|--------|--------------------------|--------|--------------------|--------|--------|--------------------|--------|
|   | Trade accounts payable   | $      | 6,014              |   | $      | 12,720             |   |
|   | Accrued royalties        |   | 8,528              |   |   | -                  |   |
|   | Accrued liabilities      |   | 10,109             |   |   | 4,122              |   |
|   | Accrued interest payable |   | -                  |   |   | 729                |   |
|   |                     | $      | 24,651             |   | $      | 17,571             |   |

|   | The Company incurs a 5% precious metals royalty payable  to the State of Eritrea. Total royalties paid to the State of Eritrea as of March  20, 2012 are $29,713. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **14.** | **Income taxes** |
|---------|------------------|

|   | (a) | Income tax expense |
|--------|-----|--------------------|

|   | Income tax expense was recorded for income earned in the  period February 22, 2011 to December 31, 2011. |
|--------|----------------------------------------------------------------------------------------------------------|

|   |   |                         |   | December 31,  2011 |   |   | December 31,2010 |   |
|--------|--------|------------------------------|--------|--------------------|--------|--------|------------------|--------|
|   |   | Current income  tax expense  | $      | (139,670           | )      | $      | -                |   |
|   |   | Deferred income  tax expense |   | (16,187            | )      |   | -                |   |
|   |   | Income tax expense           | $      | (155,857           | )      | $      | -                |   |

|   | (b) | Reconciliation of income taxes |
|--------|-----|--------------------------------|

|   | A  reconciliation of the income tax expense to the amount calculated using the  Company’s statutory tax rate for the year ended December 31, 2011 is as  follows: |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |                                                                            |   | December 31,   2011 |   |   |   | December 31,   2010 |   |
|--------|--------|---------------------------------------------------------------------------------|--------|---------------------|--------|--------|--------|---------------------|--------|
|   |   | Income tax (expense) recovery at statutory rate  of 26.5% (2010 – 28.5 %) | $      | (107,561            | )      | $      |   | 4,859               |   |
|   |   | Tax effect of:                                                                  |   |                |   |   |   |                |   |
|   |   | Difference in tax rates of foreign  jurisdictions(1)                            |   | (46,881             | )      |   |   | 512                 |   |
|   |   | Non-deductible and other amounts                                                |   | (4,125              | )      |   |   | (1,312              | )      |
|   |   | Benefit of tax losses not recognized                                            |   | 2,505               |   |   |   | (5,411              | )      |
|   |   | Other                                                                           |   | 205                 |   |   |   | 1,352               |   |
|   |   |                                                                            | $      | (155,857            | )      | $      |   | 0                   |   |

|   | (1) | The Eritrean statutory  mining tax rate is 38%. |
|--------|-----|-------------------------------------------------|

|   | The Company commenced payment of quarterly income tax instalments  in Eritrea in Q4 2011. The first instalment of $36,000 was made in October  2011. A second instalment of $36,000 was made in January 2012. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

19

----

 

| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **14.** | **Income taxes (continued)** |
|---------|------------------------------|

|   | (c) | Recognized deferred tax assets and liabilities |
|--------|-----|------------------------------------------------|

|   | The tax effects of temporary differences that give rise  to deferred tax assets and liabilities at December 31, 2011 are as follows: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------|

|   |   |                           |   | December 31,    2011 |   |   | December 31,    2010 |   |
|--------|--------|--------------------------------|--------|----------------------|--------|--------|----------------------|--------|
|   |   | Deferred tax  assets           |   |                 |   |   |                 |   |
|   |   | Losses carried forward         | $      | 3,261                |   | $      | -                    |   |
|   |   | Property, plant  and equipment |   | 1,379                |   |   | -                    |   |
|   |   |                           |   | 4,640                |   |   | -                    |   |
|   |   | Deferred tax liabilities       |   |                 |   |   |                 |   |
|   |   | Property, plant  and equipment |   | (20,827              | )      |   | -                    |   |
|   |   |                           |   | (20,827              | )      |   | -                    |   |
|   |   | Net deferred tax  liabilities  | $      | (16,187              | )      | $      | -                    |   |

|   | (d) | Tax  losses and tax assets |
|--------|-----|----------------------------|

|   | At December 31, 2011, the Company has available losses for income  tax purposes in Canada totaling approximately $30,959 (2010 - $27,200) and  losses carried forward in foreign jurisdictions of approximately $5,869 (2010  - $15,600) which, if not utilized to reduce income in future periods, expire  through 2026. Access to the losses carried forward in the future may be  restricted. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Deferred  tax assets have not been recognized in respect of the following items: |
|--------|----------------------------------------------------------------------------------|

|   |   |                           |   | December 31,    2011 |   |   | December 31,    2010 |   |
|--------|--------|--------------------------------|--------|----------------------|--------|--------|----------------------|--------|
|   |   | Property, plant  and equipment | $      | 930                  |   | $      | 947                  |   |
|   |   | Losses carried forward         |   | 8,252                |   |   | 11,180               |   |
|   |   | Short-term  investments        |   | -                    |   |   | (21                  | )      |
|   |   |                           | $      | 9,182                |   | $      | 12,106               |   |

| **15.** | **Provision for closure and reclamation** |
|---------|-------------------------------------------|

|   |                       |   | December 31,   2011 |   |   | December 31,   2010 |   |
|--------|----------------------------|--------|---------------------|--------|--------|---------------------|--------|
|   | Balance, beginning of year | $      | 11,650              |   | $      | 410                 |   |
|   | Accretion                  |   | 509                 |   |   | -                   |   |
|   | Additional liability       |   | 1,074               |   |   | 11,240              |   |
|   | Balance, end of year       | $      | 13,233              |   | $      | 11,650              |   |

|   | The Company’s provision for closure and reclamation  consists of costs accrued based on the current best estimate of mine closure  and reclamation activities that will be required at the Bisha site upon  completion of mining activity. These activities include costs for  earthworks, including land re-contouring and re-vegetation, water treatment  and demolition. The Company’s provision for future site closure and  reclamation costs is based on the level of known disturbance at the reporting  date, known legal requirements and estimates prepared by a third party  specialist. It is not currently possible to estimate the impact on operating  results, if any, of future legislative or regulatory developments. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Management used a pre-tax discount rate of 4.79% and an  inflation factor of 3.0% in preparing the Company’s provision for closure and  reclamation. Although the ultimate amount to be incurred is uncertain, based  on development, legal requirements and estimated costs as at December 31,  2011, the undiscounted inflation-adjusted liability for provision for closure  and reclamation is estimated to be approximately $25,100 (December 31, 2010 –  $21,000). The cash expenditures are expected to occur over a period of time  extending several years after the Bisha Mine’s projected closure. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

20

----

 

| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **16.** | **Share capital** |
|---------|-------------------|

|   | (a) | Authorized  share capital consists of an unlimited number of common shares without par  value. |
|--------|-----|------------------------------------------------------------------------------------------------|

|   | (b) | Private  placements |
|--------|-----|---------------------|

|   | During February 2010 the Company issued 52,000,000  common shares at CAD $2.25 per share in a non-brokered private placement for  net proceeds of $111,151. Share issue transaction costs were $301. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | Stock options |
|--------|-----|---------------|

|   | The stock option plan is designed to attract and retain  individuals and to reward them for current and expected future performance.  The maximum term of options granted is ten years, however, to date all have  been granted for five years. The vesting periods of stock options granted  vary with terms determined by the board of directors. Under the plan the  Company is authorized to grant stock options of up to ten percent (10%) of  the number of common shares issued and outstanding. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company has recorded the fair value of all options  granted using the Black-Scholes model. Share-based payment costs are  amortized over vesting periods of 6 and 12 months or 12 and 24 months.  During 2011 share-based payments costs were calculated using the following weighted  average assumptions: expected life of option 1.8 years (2010 – 1.9 years),  stock price volatility 69% (2010 – 71%), dividend yield 0.5% (2010 – nil%),  and a risk-free interest rate yield of 1.2% (2010 – 1.1%). The fair value is  particularly impacted by the Company’s stock price volatility. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The year ended December 31, 2011 included $7,630 (2010 -  $7,410) in share-based payment costs, $6,642 (2010 - $6,357) of which were  presented in administrative expenses, $712 (2010 – nil) in operating expenses  and $276 (2010 - $1,053) capitalized to property, plant and equipment. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |                                    | Number of options |   | Weighted average exercise  price (CAD) |   |
|--------|--------|-----------------------------------------|-------------------|--------|----------------------------------------|--------|
|   |   | Outstanding, December 31, 2009          | 7,895,000         | $      | 1.83                                   |   |
|   |   | Granted                                 | 6,555,000         |   | 3.32                                   |   |
|   |   | Expired                                 | (75,000)          |   | 2.32                                   |   |
|   |   | Exercised                               | (4,026,500)       |   | 1.79                                   |   |
|   |   | Outstanding, December 31, 2010          | 10,348,500        |   | 2.79                                   |   |
|   |   | Granted                                 | 3,650,000         |   | 5.62                                   |   |
|   |   | Exercised                               | (2,510,300)       |   | 2.93                                   |   |
|   |   | Exercised as stock appreciation  rights | (2,400,000)       |   | 1.96                                   |   |
|   |   | Forfeited                               | (260,000)         |   | 5.69                                   |   |
|   |   | Outstanding, December 31, 2011          | 8,828,200         | $      | 4.06                                   |   |

|   |   | Type                 | Number of options | Range of exercise  price (CAD) | Average remaining  life in years |
|--------|--------|----------------------|-------------------|--------------------------------|----------------------------------|
|   |   | Vested (exercisable) | 753,900           | $1.35 – 2.00             | 2.0                              |
|   |   | Vested (exercisable) | 4,464,300         | $3.07 – 4.16             | 3.4                              |
|   |   | Vested (exercisable) | 1,297,500         | $5.68 – 6.34             | 3.8                              |
|   |   | Unvested             | 850,000           | $4.81 – 5.58             | 4.9                              |
|   |   | Unvested             | 1,462,500         | $5.68 – 6.34             | 4.2                              |
|   |   | Total                | 8,828,200         | $1.35 – 6.34             | 3.6                              |

|   | The weighted average share price of the Company on the  dates options were exercised in 2011 was CAD $6.18 (2010 – CAD $5.00). The  weighted average price of options exercisable at the end of the year was CAD  $3.52 (December 31, 2010 – CAD $2.15). The majority of options vest over a  service period of one or two years, however, 3,720,000 of the options granted  in 2010 included vesting criteria that were specific to construction  performance of Bisha. The criteria were met in February 2011 and the options  vested at that time. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

21

----

 

| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **16.** | **Share capital (continued)** |
|---------|-------------------------------|

|   | (d) | Stock appreciation  rights |
|--------|-----|----------------------------|

|   |   | In August 2011, 3,090,000 SARs associated with previously  issued options were activated.  These  SARs allow for settlement in common shares of the Company or cash at the option  of the holder.  Of these, 2,400,000 were  exercised in September 2011 in exchange for $2,912 cash and 1,256,093 common  shares of the Company, at a total value of $11,363.  The liability associated with stock  appreciation rights at December 31, 2011 was $2,727 and recorded in accounts  payable and accrued liabilities.  The  Company incurred $1,543 in administrative expenses related to changes in the  fair value of the stock appreciation rights during 2011.  There were no such expenses incurred by the  Company in 2010. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | In December 2011, a further 6,000,000 SARs associated  with previously issued options were activated.   These SARs allow for settlement in common shares of the Company and thus  there is no liability associated with these SARs at December 31, 2011. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (e) | Shares  reserved for issuance (fully diluted) |
|--------|-----|-----------------------------------------------|

|   |   |                                                               | Number of shares |
|--------|--------|--------------------------------------------------------------------|------------------|
|   |   | Issued and fully paid at December 31, 2011                         | 200,254,715      |
|   |   | Reserved for options (note 16(c))                                  | 8,828,200        |
|   |   | Shares reserved for issuance (fully diluted) at December 31,  2011 | 209,082,915      |

|   | (f) | Earnings (loss) per share |
|--------|-----|---------------------------|

|   | The calculations of  earnings (loss) per share is based on the following data: |
|--------|--------------------------------------------------------------------------------|

|   |   |                                                                                                              |   | December 31,   2011 |   |   | December 31,   2010 |   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------|---------------------|--------|
|   |   | Income (loss) attributable to Nevsun  shareholders                                                                | $      | 147,065             |   | $      | (13,316             | )      |
|   |   | Weighted average number of common shares  outstanding for the purpose of basic earnings (loss) per share (000s)   |   | 198,053             |   |   | 187,054             |   |
|   |   | Dilutive options                                                                                                  |   | 2,764               |   |   | -                   |   |
|   |   | Weighted average number of common shares  outstanding for the purpose of diluted earnings (loss) per share (000s) |   | 200,817             |   |   | 187,054             |   |
|   |   | Earnings (loss) per share (in $’s)                                                                          |   |                |   |   |                |   |
|   |   | Basic                                                                                                             | $      | 0.74                |   | $      | (0.07               | )      |
|   |   | Diluted                                                                                                           | $      | 0.73                |   | $      | (0.07               | )      |

|   | Basic earnings (loss) per share is computed by dividing  the income (loss) attributable to Nevsun shareholders by the weighted average  number of common shares outstanding during the year. Diluted earnings (loss)  per share reflects the potential dilution of outstanding stock options in the  weighted average number of common shares outstanding during the year, if dilutive.  In the year ended December 31, 2011 all of the stock options outstanding were  dilutive and in the year ended December 31, 2010 the stock options  outstanding were anti-dilutive. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **17.** | **Commitments** |
|---------|-----------------|

|   | As  of December 31, 2011 the Company had the following contractual obligations: |
|--------|---------------------------------------------------------------------------------|

|   |                                              |   | Total  |   |   | Less than 1  year |   |   | 2-3 years |   |   | 4-5 years |   |   | Over 5 years |   |
|--------|---------------------------------------------------|--------|--------|--------|--------|-------------------|--------|--------|-----------|--------|--------|-----------|--------|--------|--------------|--------|
|   | Purchase commitments and contractual  obligations | $      | 14,891 |   | $      | 14,891            |   | $      | -         |   | $      | -         |   | $      | -            |   |
|   | Minimum operating lease payments                  |   | 10,370 |   |   | 5,185             |   |   | 5,185     |   |   | -         |   |   | -            |   |
|   | Total contractual obligations                     | $      | 25,261 |   | $      | 20,076            |   | $      | 5,185     |   | $      | -         |   | $      | -            |   |

22

----

 

| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **17.** | **Commitments (continued)** |
|---------|-----------------------------|

|   | The Company has arranged an annually  renewable environmental bond for the Bisha Project for $2,000,000 at a cost  of 1% per annum. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------|

| **18.** | **Operating expenses** |
|---------|------------------------|

|   | The  components of operating expenses are as follows: |
|--------|-------------------------------------------------------|

|   | For the years ended December 31 |   | 2011   |   |   | 2010 |   |
|--------|---------------------------------|--------|--------|--------|--------|------|--------|
|   | Materials and supplies          | $      | 59,688 |   | $      | -    |   |
|   | Salaries and employee benefits  |   | 15,821 |   |   | -    |   |
|   | Contractors                     |   | 3,944  |   |   | -    |   |
|   | Change in inventories           |   | (6,419 | )      |   | -    |   |
|   | Other                           |   | 3,778  |   |   | -    |   |
|   |                            | $      | 76,812 |   | $      | -    |   |

| **19.** | **Administrative expenses** |
|---------|-----------------------------|

|   | The  components of administrative expenses are as follows: |
|--------|------------------------------------------------------------|

|   | For the years ended December 31 |   | 2011   |   |   | 2010   |   |
|--------|---------------------------------|--------|--------|--------|--------|--------|--------|
|   | Salaries and employee benefits  | $      | 2,477  |   | $      | 2,439  |   |
|   | Share-based payments            |   | 8,186  |   |   | 6,357  |   |
|   | Other                           |   | 3,808  |   |   | 3,437  |   |
|   |                            | $      | 14,471 |   | $      | 12,233 |   |

| **20.** | **Finance income** |
|---------|--------------------|

|   | The components of finance income are as follows: |
|--------|--------------------------------------------------|

|   | For the years ended December 31               |   | 2011  |   |   | 2010  |   |
|--------|-----------------------------------------------|--------|-------|--------|--------|-------|--------|
|   | Interest on due from non-controlling interest | $      | 3,625 |   | $      | -     |   |
|   | Gain on sale of available-for-sale investment |   | 1,166 |   |   | 716   |   |
|   | Royalty income                                |   | -     |   |   | 2,926 |   |
|   | Other                                         |   | 122   |   |   | 124   |   |
|   |                                          | $      | 4,913 |   | $      | 3,766 |   |

| **21.** | **Finance costs** |
|---------|-------------------|

|   | The  components of finance costs are as follows: |
|--------|--------------------------------------------------|

|   | For the years  ended December 31             |   | 2011  |   |   | 2010  |   |
|--------|----------------------------------------------|--------|-------|--------|--------|-------|--------|
|   | Accretion of  reclamation liability          | $      | 509   |   | $      | -     |   |
|   | Interest on due  to non-controlling interest |   | 1,681 |   |   | -     |   |
|   | Write-off of  deferred finance costs         |   | -     |   |   | 8,583 |   |
|   | Other                                        |   | 144   |   |   | -     |   |
|   |                                         | $      | 2,334 |   | $      | 8,583 |   |

| **22.** | **Dividends** |
|---------|---------------|

|   | On May 18, 2011 the Company declared a  $0.03 per share dividend for shareholders of record on June 30, 2011. Dividends  of $5,935 were paid on July 15, 2011. On November 21, 2011 the  Company announced an increased semi-annual dividend of $0.05 per share for  shareholders of record on December 31, 2011. Dividends of $10,013 were paid  on January 16, 2012. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

23

----

 

| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **23.** | **Segment  information** |
|---------|--------------------------|

|   | The Company conducts its business as a single operating  segment being the mining business in Africa. All mineral properties and  equipment are situated in Africa. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **24.** | **Royalty  income** |
|---------|---------------------|

|   | The Company retained a 1% net smelter return royalty  interest from the sale of its Malian assets in 2008. In 2010 the Company  earned royalties of $926 until November 2010 when the payor of the royalty  exercised its right to buy out the royalty for an additional $2,000. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **25.** | **Financial instruments and risk management** |
|---------|-----------------------------------------------|

|   | Financial instruments are agreements between two  parties that result in promises to pay or receive cash or equity  instruments.  The Company classified its  financial instruments as follows:  cash  and cash equivalents and accounts receivable are classified as loans and  receivables and measured at amortized cost; short-term investments as  available-for-sale and measured at fair value; accounts payable and accrued  liabilities as other financial liabilities and measured at amortized cost.  |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company has exposure to the  following risks from its use of financial instruments: |
|--------|-----------------------------------------------------------------------------------------|

|   | - credit risk,
- liquidity risk, and
- market risk. |
|--------|-----------------------------------------------------|

|   | This note presents information about the Company’s  exposure to each of the above risks, the Company’s objectives, procedures and  processes for measuring and managing risk, and the Company’s management of capital.  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Board of Directors has overall responsibility for  the establishment and oversight of the Company’s risk management  framework.  The Company’s risk management  procedures are established to identify and analyze the risks faced by the  Company.  The Company, through its  training and management standards and procedures, aims to develop a disciplined  and constructive control environment in which all employees understand their  roles and obligations. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company’s Audit Committee oversees how management  monitors compliance with the Company’s financial risk management procedures and  processes and reviews the adequacy of the risk management framework in relation  to the risks faced by the Company. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (a) | Credit  risk |
|--------|-----|--------------|

|   | Credit risk is the risk of financial loss to the Company  if a counterparty to a financial instrument fails to meet its contractual  obligations, and arises principally from the Company’s receivables and its  investment securities. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (i) | Cash  equivalents |
|--------|-----|-------------------|

|   | The Company limits its exposure to  credit risk by only investing in highly liquid securities and only with  counterparties that have a strong credit rating. Given these high credit  ratings, management does not expect any counterparty to fail to meet its  obligations. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (ii) | Accounts  receivable |
|--------|------|----------------------|

|   | The Company’s accounts receivable are  due primarily from value-added tax (VAT) paid in South Africa and other  receivables. Management does not expect these counterparties to fail to meet  their obligations. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

24

----

 

| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **25.** | **Financial instruments and risk management (continued)** |
|---------|-----------------------------------------------------------|

|   | (a) | Credit risk (continued) |
|--------|-----|-------------------------|

|   | (iii) | Due from non-controlling interest |
|--------|-------|-----------------------------------|

|   | Due from non-controlling interest shall be collected  from cash flow from the Bisha Mine that would otherwise be distributed to  ENAMCO in accordance with its share ownership. Management expects that  Bisha Mine cash flow will be sufficient to allow collection from  non-controlling interest. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (iv) | Exposure  to credit risk |
|--------|------|--------------------------|

|   | The carrying amount of financial assets  represents the maximum credit exposure. Cash and cash equivalents held by  the Company have contractual maturities of less than 90 days. The maximum  exposure to credit risk at the reporting date was: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |                               |   | December 31,  2011 |   |   | December 31,  2010 |   |
|--------|--------|--------|------------------------------------|--------|--------------------|--------|--------|--------------------|--------|
|   |   |   | Cash and cash  equivalents         | $      | 347,582            |   | $      | 50,145             |   |
|   |   |   | Due from  non-controlling interest |   | 95,629             |   |   | -                  |   |
|   |   |   | Accounts  receivable               |   | 4,159              |   |   | 2,274              |   |
|   |   |   |                               | $      | 447,370            |   | $      | 52,419             |   |

|   | The Company does not have accounts  receivable that it considers impaired or otherwise uncollectible. |
|--------|-------------------------------------------------------------------------------------------------------|

|   | (b) | Liquidity  risk |
|--------|-----|-----------------|

|   |   | Liquidity risk is the risk that the Company will not be  able to meet its financial obligations as they fall due.  The Company’s approach to managing liquidity  is to ensure, as far as possible, that it will always have sufficient liquid  funds to meet its liabilities when due, under both normal and stressed  conditions, without incurring unacceptable losses or risking damage to the  Company’s reputation. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | Typically the Company ensures that it has sufficient  cash on hand to meet expected operational expenses including the servicing of  financial obligations, if any; this excludes the potential impact of extreme  circumstances that cannot reasonably be predicted, such as natural disasters. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The contractual financial liabilities of the Company as  of December 31, 2011 equal $24,651 (December 31, 2010 - $116,699). The undiscounted  cash flows of the liabilities are equal to their contractual amounts. All of  the liabilities presented as accounts payable and accrued liabilities are due  within ninety days of December 31, 2011. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | Market  risk |
|--------|-----|--------------|

|   | Market risk is the risk that changes in market prices,  such as foreign exchange rates, interest rates and equity prices will affect  the Company’s income or the value of its holdings of financial instruments.  The objective of market risk management is to manage and control market risk  exposures within acceptable parameters, while optimizing the return on  capital. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (i) | Currency  risk |
|--------|-----|----------------|

|   | The Company’s functional currency is  the United States dollar (USD). The Eritrean nakfa (ERN) is directly tied to  the USD and, accordingly, is not a currency risk in terms of the functional  currency. The Company is exposed to currency risk on settlements of  purchases that were denominated in currencies other than the functional  currency. The currency exposures are primarily to the European euro (EUR),  Canadian dollar (CAD), British pound (GBP), and South African rand (ZAR). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

25

----

 

| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **25.** | **Financial instruments and risk management (continued)** |
|---------|-----------------------------------------------------------|

|   | (c) | Market risk (continued) |
|--------|-----|-------------------------|

|   | (i) | Currency risk  (continued) |
|--------|-----|----------------------------|

|   | The following is a break-down of financial assets and liabilities  denominated in foreign currencies to which the Company is exposed: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   |                                       |   | December  31, 2011 |   |
|--------|--------|--------|--------------------------------------------|--------|--------------------|--------|
|   |   |   |                                       |   | CAD                |   |   | ZAR |   |
|   |   |   | Cash and cash  equivalents                 |   | 1,015              |   |   | 4,411 |   |
|   |   |   | Accounts  receivable                       |   | 78                 |   |   | 7,667 |   |
|   |   |   | Trade payables                             |   | (2,992             | )      |   | (13,158 | ) |
|   |   |   | Net financial  liabilities                 |   | (1,899             | )      |   | (1,080 | ) |
|   |   |   | USD foreign  exchange rate                 |   | 1.02               |   |   | 8.12 |   |
|   |   |   | Balance sheet  exposure in  equivalent USD |   | (1,862             | )      |   | (133 | ) |

|   |   |   |                                      |   | December 31, 2010 |   |
|--------|--------|--------|-------------------------------------------|--------|-------------------|--------|
|   |   |   |                                      |   | EUR               |   |   | CAD |   |   | GBP |   |   | ZAR |   |
|   |   |   | Cash and cash  equivalents                |   | -                 |   |   | 464 |   |   | - |   |   | - |   |
|   |   |   | Accounts  receivable                      |   | -                 |   |   | 34 |   |   | - |   |   | 8,665 |   |
|   |   |   | Trade payables                            |   | (173              | )      |   | (1,202 | ) |   | (216 | ) |   | (12,357 | ) |
|   |   |   | Net financial liabilities                 |   | (173              | )      |   | (704 | ) |   | (216 | ) |   | (3,691 | ) |
|   |   |   | USD foreign  exchange rate                |   | 0.75              |   |   | 0.99 |   |   | 0.65 |   |   | 6.65 |   |
|   |   |   | Balance sheet exposure in  equivalent USD |   | (231              | )      |   | (711 | ) |   | (332 | ) |   | (555 | ) |

|   |   |   | Currency risk sensitivity analysis |
|--------|--------|--------|------------------------------------|

|   |   |   | A 10 percent strengthening of the US dollar against  the above currencies at December 31 would have decreased net income by the  amounts shown below.  A 10 percent  weakening of the US dollar against the above currencies would have had an equal  and opposite effect.  This analysis  assumes that all other variables, in particular interest rates, remain  constant: |
|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |   | 2011 |   | Gain (loss) |   |
|--------|--------|--------|------|--------|-------------|--------|
|   |   |   | CAD  | $      | 170         |   |
|   |   |   | ZAR  |   | 12          |   |

|   |   |   | 2010 |   | Gain (loss) |   |
|--------|--------|--------|------|--------|-------------|--------|
|   |   |   | EUR  | $      | 21          |   |
|   |   |   | CAD  |   | 65          |   |
|   |   |   | GBP  |   | 30          |   |
|   |   |   | ZAR  |   | 50          |   |

|   |   | (ii) | Interest rate risk |
|--------|--------|------|--------------------|

|   |   |   | Interest rate risk arises from interest accruing on advances from the non-controlling interest of the Bisha Project at LIBOR plus 4%. The interest incurred on the non-controlling interest advances is capitalized to construction-in-progress. The loan from the non-controlling interest (note 11) incurs interest at a rate of six month LIBOR plus 7%. The interest incurred on the loan from the non-controlling interest is capitalized to construction-in-progress. |
|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

26

----

 

| **NEVSUN RESOURCES LTD.**      Notes to Consolidated Financial Statements      (Expressed in thousands of United States dollars, unless otherwise stated)       Years ended December 31, 2011 and 2010 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **25.** | **Financial instruments and risk management (continued)** |
|---------|-----------------------------------------------------------|

|   | (d) | Fair value versus carrying amounts |
|--------|-----|------------------------------------|

|   |   | The carrying amount of financial assets and  liabilities carried at amortized cost is a reasonable approximation of fair  value. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|

| **26.** | **Capital   management** |
|---------|--------------------------|

|   | The Board’s policy is to maintain a  strong capital base so as to maintain investor, creditor and market  confidence and to sustain future development of the business. The capital of  the Company consists of equity and amounts related to non-controlling  interest. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company manages its capital  structure and makes adjustments in light of the changes in its economic  environment and the risk characteristics of the Company’s assets. To  effectively manage the Company’s capital requirements, the Company has in  place a planning, budgeting and forecasting process to help determine the  funds required to ensure the Company has the appropriate liquidity to meet  its operating and growth objectives. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **27.** | **Key management personnel compensation** |
|---------|-------------------------------------------|

|   | Key  management personnel compensation is as follows: |
|--------|-------------------------------------------------------|

|   |                                        |   | December 31,  2011 |   |   | December 31,  2010 |   |
|--------|---------------------------------------------|--------|--------------------|--------|--------|--------------------|--------|
|   | Short-term employee benefits                | $      | 2,725              |   | $      | 2,488              |   |
|   | Share-based  payments                       |   | 6,022              |   |   | 5,751              |   |
|   | Total key management personnel compensation | $      | 8,747              |   | $      | 8,239              |   |

| **28.** | **Subsidiaries** |
|---------|------------------|

|   | Significant  subsidiaries of Nevsun Resources Ltd. are as follows: |
|--------|--------------------------------------------------------------------|

|   |                            |                     |               | Nevsun’s  effective interest |
|--------|---------------------------------|--------------------------|--------------------|------------------------------------|
|   | Name                            | Country of incorporation | Principal activity | 2011  (%)                          | 2010  (%) |
|   |                            |                     |               |                               |   |
|   | Nevsun (Barbados) Holdings Ltd. | Barbados                 | Holding company    | 100                                | 100 |
|   | Nevsun Africa (Barbados) Ltd    | Barbados                 | Holding company    | 100                                | 100 |
|   | Nevsun Resources (Eritrea) Ltd. | Barbados                 | Holding company    | 100                                | 100 |
|   | Bisha Mining Share Company      | Eritrea                  | Mining             | 60                                 | 60 |

| **29.** | **Subsequent  events** |
|---------|------------------------|

|   | (a) | Putative  class action complaint |
|--------|-----|----------------------------------|

|   | A putative class action complaint was filed against the Company  in March 2012 in the United States District Court for the Southern District  of New York, alleging liability under the U.S. federal securities laws. The  complaint seeks unspecified damages, including interest, reasonable costs,  including attorneys’ fees, and such equitable relief as the court may deem  proper. It is not possible to estimate the ultimate outcome of such action.  The Company believes the allegations are without merit and will vigorously  defend itself. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | Share repurchase program |
|--------|-----|--------------------------|

|   | On March 19, 2012, the Company announced a common share  repurchase program in accordance with the rules of the Toronto Stock  Exchange. The program allows for the purchase of up to 4,009,408 common  shares of the Company, representing approximately 2% of the 200,470,415  common shares issued and outstanding as at March 15, 2012. The purchases may  commence no earlier than March 26, 2012 and may continue until September 26,  2012. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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