**MANAGEMENT’S DISCUSSION& ANALYSIS – FISCAL2012**

This MD&A was prepared by  management as at March 20, 2013, and was reviewed and approved by the Board  of Directors. The following discussion of performance, financial condition  and future prospects should be read in conjunction with the audited annual consolidated  financial statements of Nevsun Resources Ltd. (the Company or Nevsun) and  notes thereto for the year ended December 31, 2012. The information provided  herein supplements but does not form part of the financial statements. This  discussion covers the year and the subsequent period up to the date of issue  of this MD&A. Unless otherwise noted, all dollar amounts are stated in thousands  of United States dollars. Additional information relating to the Company,  including the Company’s Annual Information Form, dated March 20, 2013, is  available at www.sedar.com.

| **Contents** |
|--------------|

| Forward looking statements                                               | 2  |
|--------------------------------------------------------------------------|----|
| Business of the Company                                                  | 2  |
| 2012 annual highlights                                                   | 2  |
| Outlook for 2013                                                         | 3  |
| Highlights of the Bisha Mine                                             | 5  |
| Operating review                                                         | 6  |
| Selected annual financial information                                    | 8  |
| Results of operations                                                    | 8  |
| Selected quarterly financial information                                 | 9  |
| Fourth quarter 2012 review                                               | 9  |
| Valuation and settlement of sale of Bisha interest to Eritrea Government | 10 |
| Liquidity and capital resources                                          | 11 |
| Commitments and contractual obligations                                  | 11 |
| Off-balance sheet arrangements                                           | 11 |
| Contingencies                                                            | 12 |
| Outstanding share data                                                   | 12 |
| Non-GAAP measure                                                         | 12 |
| Financial instruments and risk management                                | 13 |
| Proposed transactions                                                    | 14 |
| Critical accounting policies and estimates                               | 14 |
| Disclosure controls and procedures                                       | 17 |
| Internal control over financial reporting                                | 17 |
| Limitations of controls and procedures                                   | 17 |
| Changes in accounting standards including initial adoption               | 18 |
| Related party transactions                                               | 19 |
| Quality assurance                                                        | 19 |
| Risk factors                                                             | 19 |
| NYSE MKT corporate governance                                            | 26 |
| Cautionary note regarding preparation of reserves and resources          | 26 |

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2

**Forward looking  statements**

*This report contains forward-looking statements concerning  anticipated developments on the Company’s continuing operations in Eritrea,  in the putative class action lawsuit, the adequacy of the Company’s financial  resources, financial projections, including, but not limited to, future gold  and copper production and grade, copper phase expansion, mine performance,  construction schedules and completion dates, drilling plans and programs,  growing resources, exploration programs, expanding exploration licenses,  dividend plans, possible acquisition activity, estimates of capital and  operating costs, processing rates, life of mine, net cash flows, metal  prices, exchange rates, reclamation costs, results of the drill program, the  conversion of mineral properties to reserves and resources and other events  or conditions that may occur in the future. Forward-looking statements are  frequently, but not always, identified by words such as “expects,”  “anticipates,” “believes,” “intends,” “estimates,” “potential,” “possible,”  “budget” and similar expressions, or statements that events, conditions or  results “will,” “may,” plans,” “could” or “should” occur or be achieved. Forward-looking statements are statements about the future and are  inherently uncertain, and actual achievements of the Company or other future  events or conditions may differ materially from those reflected in the  forward-looking statements due to a variety of risks, uncertainties and other  factors, including, without limitation, the risks that (i) any of the  assumptions in the historical resource estimates turn out to be incorrect,  incomplete, or flawed in any respect; (ii) the methodologies and models used  to prepare the resource and reserve estimates either underestimate or  overestimate the resources or reserves due to hidden or unknown conditions;  (iii) the mine operations are disrupted or suspended due to acts of God,  conflicts in the country of Eritrea, unforeseen government actions or other  events; (iv) the Company experiences the loss of key personnel; (v) the mine  operations are adversely affected by other political or military, or  terrorist activities; (vi) the Company becomes involved in any material  disputes with any of its key business partners, lenders, suppliers or  customers; (vii) the Company is subjected to any hostile takeover or other  unsolicited attempts to acquire control of the Company; (viii) the Company is  subject to any adverse ruling in any of the pending litigation to which it is  a party; (ix) the Company incurs unanticipated costs as a result of the  transition from the oxide phase of the Bisha mining operations to the copper  phase in 2013; or (x) those described in this MD&A. Information  concerning the interpretation of drill results and mineral resource and  reserve estimates also may be deemed to be forward-looking statements, as  such information constitutes a prediction of what mineralization might be  found to be present if and when a project is actually developed.*

*The Company’s forward-looking statements are based on the  beliefs, expectations and opinions of management on the date the statements  are made and the Company assumes no obligation to update such forward-looking  statements in the future, except as required by law. For the reasons set  forth above, investors should not place undue reliance on forward-looking  statements.*

| **Business of  the Company** |
|------------------------------|

The principal business of Nevsun is  the operation of the 60%-owned Bisha Mine in Eritrea, located in northeast Africa. The Company is involved in  all aspects of Bisha operations, including exploration, development,  extraction, processing and reclamation.   

The Company’s significant exploration and development  projects include the construction of the Bisha Mine copper flotation circuit,  exploration of the Northwest Zone, which is a potential satellite deposit to  Bisha, and exploration of the recently acquired Mogoraib license area,  including the historical Hambok mineral resource.

Nevsun is listed for trading on  both the Toronto Stock Exchange (TSX) and NYSE MKT LLC (NYSE MKT) stock  exchanges under the symbol NSU.

| **2012 annual highlights** |
|----------------------------|

- Operated safely and well below the industry LTI rate with no  fatalities
- Produced 313,000 ounces of gold in 2012, exceeding the top  end of guidance
- Revenues of $566 million, with average realized gold price  per ounce of $1,671
- Generated $194 million of cash flow from operations
- Net income of $247 million
- Gold production forecast extended to the end of Q2 2013
- Copper expansion on budget and on schedule for mid-2013  commissioning
- Continued peer leading semi-annual dividend of $0.05 per  share
- Increased mineral resource and reserve estimates from 2011/2012  drilling
- Commenced mining at the Harena satellite deposit
- Extended drilling program at Northwest Zone
- Acquired the Mogoraib exploration license, including the  Hambok historical mineral resources
- Personnel expanded to support operations and strategy 

----

 

3

| **Outlook for  2013** |
|-----------------------|

2013  Objectives 

- Maintain top quartile safety performance at Bisha operations
- Execute on social and environmental commitments
- Deliver copper plant expansion on budget
- Complete successful transition to copper production in  mid-2013
- H1 2013 – Produce 80,000 to 90,000 ounces of gold
- H2 2013 – Produce 60 to 80 million pounds of copper (for 2014  see below)
- Obtain expanded exploration rights and commence generative  exploration in Eritrea
- Publish resources estimate for Northwest Zone and drill the  historical Hambok resource
- Continue paying peer leading dividends 

Operations

Bisha Mining Share Company (BMSC),  Nevsun’s 60%-owned Eritrean registered subsidiary that operates the Bisha Mine,  will conclude gold production in late Q2 2013. The oxide ore mineral reserve  estimate of 167,000 ounces is found in the technical report titled “Bisha  Polymetallic Operation, Eritrea, Africa NI 43-101 Technical Report” prepared by  independent engineers (effective date of reserves and resources May 31, 2012)  (the Oxide Estimate) and dated August 31, 2012 (the 2012 Technical  Report).  

Nevsun expects cash costs per gold  ounce will increase significantly compared with the 2012 average as a result  of lower feed grades, longer haul distances, higher strip ratio and more  drill and blast consumables. 

After the conclusion of gold production,  BMSC will de-commission and retain the carbon-in-leach plant so it can be put  back into operation should Nevsun’s regional exploration efforts yield more  oxide deposits.  

On cessation of gold  production in mid-2013, BMSC will commence commissioning copper concentrate  production and optimization of the new facilities with a view to achieving  commercial levels of production in late 2013.  BMSC expects to produce 60 to 80 million  pounds of copper in concentrate in H2 2013 through processing nearly 900,000  tonnes of supergene ore from Bisha Main pit averaging 5.2% copper feed  grade.  Based on the mine plan, the  copper is expected to be contained in 100,000 to 120,000 tonnes of concentrate having  copper grades of 30% or higher with gold and silver by-product credits.

In 2014, the Company anticipates a full  year of copper production in the order of 200 million pounds of copper.  

In February 2013, the Company announced  that it completed a review of the exploration potential for its mining and  exploration licenses, which highlighted a large number of high quality  untested targets both in the immediate Bisha Mine are and surrounding  properties. The Company has formulated a strategy to assess their potential  and has commenced testing these targets. Bisha’s $9 million exploration budget  in 2013 will fund approximately 18,400 meters of drilling, data evaluation  and mineral resource estimation.

----

 

4

Exploration

Bisha Mine Area Exploration 

BMSC recently completed a review of the  geophysical and geochemical database for the immediate Bisha Mine area.  This review highlighted a substantial number  of targets that had not been tested or were partially tested prior to the  commencement of mine development.  Many  of these targets are immediately along strike of Bisha and have the potential  to provide near term new resources for the Bisha operations.  BMSC has begun testing these high priority  targets with an initial 2,400 meters of drilling.

Northwest Zone 

The Northwest Zone, located 1.2 kilometers northwest of  the Bisha plant facilities, was discovered in 2003. Follow-up exploration  work from 2004 to 2006 defined a 600 meter long zone of massive and stringer  sulphide mineralization. Further work was deferred from 2007 to 2010 while  the Bisha main deposit was being prepared for mining. A program of in-fill  drilling began in 2011 and remains in progress. In 2013, 14,000 meters of  drilling is planned to complete the in-fill program at the Northwest Zone and  to explore for additional mineralization to the north, south and southeast. 

It is anticipated that a new NI43-101 compliant mineral resource  will be completed in the latter half of 2013 that will form the basis for a  preliminary economic assessment of this zone.

Hambok Historical Resource Estimate and Further Drilling  

Hambok is a copper-zinc massive sulphide zone located 16  kilometers southwest of the Bisha mill and has a historical NI43-101  compliant resource completed by the previous owner in 2009 on 57 historical  diamond holes totalling 13,245 meters. Between 2010 and 2012, an additional  33 holes totaling 10,923 meters of in-fill diamond drilling and 42 holes  totaling 2,675 meters of reverse circulation drilling targeting near surface  gold potential was completed to further define the zone by the previous  owner. BMSC is currently completing the assaying work from this drilling. BMSC’s  objective is to determine if there are sufficient economic resources to truck  to the Bisha mill.  

BMSC also believes there is good evidence that there is  significant resource expansion potential. Compilation of a significant  amount of historical surveys and soil geochemical data has highlighted  possible extensions to the deposit along strike and to the immediate west of  the deposit. These targets have not been previously drill tested and BMSC has  budgeted 2,000 meters of drilling to be completed at Hambok during 2013 to  evaluate these high potential targets.

Mogoraib Regional Exploration 

Preliminary analysis of historical data across the  Mogoraib license has highlighted a number of primary targets of interest for  additional exploration. Two of the areas have not been drilled previously and  one area has seen only limited drilling with positive results. Although BMSC  does not plan to drill test the areas in 2013, ground evaluation will begin  in 2013 with a plan to pursue target testing in 2014.

Other Expansion Plans 

In addition to exploration, the Company expects to  consider the strategic timing of when to commence detailed design for the  future zinc flotation circuit at the Bisha Mine. Also, the Company continues  to review opportunities to acquire other gold and copper assets.

----

 

5

| **Highlights of  the Bisha Mine** |
|-----------------------------------|

The Bisha Mine is a gold, copper and zinc deposit that  is projected to have a strong economic return over the remaining twelve year  mine life. Nevsun is a 60% shareholder in BMSC, which owns and operates the  Bisha Mine. The remaining 40% interest is held by the Eritrean National  Mining Corporation (ENAMCO) and is referred to as the non-controlling  interest herein. The top layer of the deposit is gold oxide material lying  at surface that allowed an early payback of gold phase capital and has allowed  for funding of the copper phase expansion. Mining of the gold oxide phase is  expected to be completed at the end of Q2 2013. The copper flotation plant  expansion is near completion with copper concentrate production scheduled to  begin in mid-2013. Commissioning of the copper concentrate production will  commence in mid-2013 and optimization of the new facilities is expected to be  completed later in the year. The Mine has the full support of the Eritrean  Government, whose senior representatives assist Nevsun in expediting  development and operations.

The remaining Bisha Mine production  profile is as follows. The Supergene and Primary production statistics provided  below are based on the 2012 Technical Report and are subject to the  assumptions, qualifications and procedures set out in the 2012 Technical  Report. For a complete description of such assumptions, qualifications and  procedures, reference should be made to the full text of the 2012 Technical  Report which is available for review on SEDAR under the profile for the  Company located at www.sedar.com.

|   | (1) | The gold  oxide forecast includes Harena oxides and exceeds what was predicted from the  mineral reserve estimate included in the 2012 Technical Report. With the  increased gold production, the start of supergene phase is scheduled for  early Q3 2013 in the above schedule, whereas the 2012 Technical Report, scheduled  the start of supergene phase in early Q2 2013. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Does not  include additional pyritic sand material recently exposed at base of oxides,  currently estimated at 40,000 to 60,000 tonnes with high contained precious  metals of at least 15 g/t gold and considerable silver. However further  metallurgical testing and processing options are currently under  investigation and clarity of more precise tonnage, grades and recovery (ie:  saleability) are being explored and are expected to be reported on in Q2 2013. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Includes  Harena sulphides. |
|--------|-----|-----------------------------|

|   | (4) | The mine  plan for the purposes of reserves determination contemplates a period of  co-processing supergene and primary ores but BMSC has not made a final  determination on this approach. BMSC will continue to evaluate and will  advise if and when the approach is adopted. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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6

| **Operating review** |
|----------------------|

| Key operating information  – Bisha Mine: |      |
|------------------------------------------------|-----------|
|                                           | Q4 2012   | Q3 2012 | Q2 2012 | Q1 2012 | 2012 | Q4 2011 | 2011(1) |
| Ore mined, tonnes                              | 426,000   | 316,000 | 500,000 | 349,000 | 1,591,000 | 668,000 | 1,898,000 |
| Waste mined, tonnes(2)                         | 2,602,000 | 2,590,000 | 1,659,000 | 1,826,000 | 8,677,000 | 1,984,000 | 7,716,000 |
| Strip ratio, (using BCMs)(3)                   | 7.1       | 10.3 | 4.0 | 6.2 | 7.4 | 7.0 | 5.8 |
| Copper phase prestrip, tonnes                  | -         | - | 481,000 | 739,000 | 1,220,000 | - | - |
| Tonnes milled                                  | 447,000   | 465,000 | 465,000 | 430,000 | 1,807,000 | 455,000 | 1,806,000 |
| Gold grade (g/t)                               | 3.85      | 7.40 | 6.93 | 6.58 | 6.21 | 8.33 | 7.55 |
| Recovery, % of gold                            | 84%       | 87% | 85% | 86% | 86% | 88% | 88% |
| Gold in doré, ounces produced             | 46,000    | 98,000 | 87,000 | 82,000 | 313,000 | 101,000 | 379,000 |
| Gold ounces sold                               | 53,400    | 96,700 | 87,500 | 83,100 | 320,700 | 99,800 | 369,900 |
| Gold price realized per ounce                  | $         | 1,709 | $ | 1,681 | $ | 1,599 | $ | 1,712 | $ | 1,671 | $ | 1,685 | $ | 1,620 |
| Comparative gold price(4)                      | $         | 1,722 | $ | 1,652 | $ | 1,609 | $ | 1,691 | $ | 1,669 | $ | 1,688 | $ | 1,572 |
| Cash cost per ounce sold(5)                    | $         | 474 | $ | 307 | $ | 253 | $ | 277 | $ | 312 | $ | 314 | $ | 295 |

|   | (1) | The 2011 gold production and sales statistics include results from the pre-operating period, January 1 – February 21, 2011.  For accounting purposes, sales from ounces produced prior to February 22, 2011 were considered pre-production and capitalized to mineral  properties, plant and equipment. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | All waste  tonnes mined reflect updated rock density estimates. |
|--------|-----|-----------------------------------------------------------------|

|   | (3) | The increase in the Q3 2012 strip ratio to 10.3  was in accordance with expectations.  In  addition, the strip ratio increased as a result of increased pit depth and the  newly planned shallower pit walls due to updated geotechnical assessments, as  noted in the 2012 Technical Report.   Strip ratio levels similar to Q3 are expected to continue through-out  2013; however, a life of mine strip ratio of 6.6:1 is predicted in the 2012  Technical Report. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | Average London PM Fix spot price. |
|--------|-----|-----------------------------------|

|   | (5) | Cash cost  per ounce sold includes royalties and is a non-GAAP measure; see page 11 for  more information. |
|--------|-----|------------------------------------------------------------------------------------------------------------|

Mined ore tonnage for Q4 2012 of 426,000 decreased from  the 668,000 tonnes mined in Q4 2011 due to decreased ore mining in the Bisha  main pit and the start of mining operations in the Harena satellite deposit.  Mined waste tonnage for Q4 2012 of 2,602,000 increased from the 1,984,000  tonnes in the same quarter of 2011. As noted in the 2012 Technical Report,  high strip ratios are expected to continue throughout 2013 due to increased  pit depth and newly planned shallower pit walls resulting from updated geotechnical  assessments.

The milled tonnage of 447,000 in Q4 2012 was consistent  with 455,000 tonnes in Q4 2011. The gold grade for Q4 2012 of 3.85 g/t was  lower than the Q4 2011 grade of 8.33 g/t and was consistent with management’s  expectations as, during Q4 2012, ore was sourced primarily from the lower  grade Harena satellite deposit while in Q4 2011 ore was sourced from the  higher grade Bisha main deposit.

Gold recovery of 84% for Q4 2012, which was less  than the 88% experienced in Q4 2011, was as expected and was attributable to  changes in ore mineralogy.  The reduction  of gold ounces sold to 53,400 in Q4 2012 from the 99,800 ounces sold in Q4 2011  is due to the lower levels of gold production in Q4 2012, which is primarily a  result of the lower grades, as well as slightly reduced recoveries.

Mined ore tonnage for 2012 of 1,591,000 was 307,000  tonnes fewer than 2011’s 1,898,000 tonnes. Waste mining tonnage of 8,677,000  in 2012 increased from 7,716,000 tonnes in 2011. The increase in waste mined  and decrease in ore mined resulted in an increased strip ratio of 7.4 for  2012, as compared to 5.8 for 2011. The increase in strip ratio results from  the increased pit depth and newly planned shallower pit walls due to updated  geotechnical assessments.

The milled tonnage for 2012 of 1,807,000 was consistent  to that in 2011 of 1,806,000 tonnes.  The  combined decrease in average grade in 2012 to 6.21 g/t from 7.55 g/t in 2011  and decrease in recovery in 2012 to 86% from 88% in 2011 resulted in fewer gold  ounces produced in 2012 of 313,000 (2011 – 379,000 ounces) and gold ounces sold  of 320,700 (2011 – 369,900).  The  decrease in grade results from the shift to mining Harena ore for the majority  of Q4 2012.  There was no mining of  Harena ore in 2011.

----

 

7

Gold cash costs for 2012 were $312 per ounce on  320,700 ounces sold, net of $94 per ounce in silver by-product credits, while  cash costs for 2011, following the declaration of commercial production on  February 22, 2011, were $295 per ounce on 334,500 gold ounces sold post declaration  of commercial production on February 22, 2011, net of $14 per ounce in silver  by-product credits.  Gold cash costs for  Q4 2012 were $474 per ounce on 53,400 ounces sold, net of $144 per ounce in  silver by-product credits.  This  represents an increase from the cash cost of $314 per ounce of gold sold in Q4  2011, which was net of $19 per ounce in silver by-product credits.  The increase in full year 2012 cash operating  costs compared to full year 2011 and in Q4 2012 cash operating costs compared  to Q4 2011 is attributed to: (i) fewer gold ounces sold as a result of lower  grades and recoveries, which was expected; and (ii) higher fuel, mill  consumables and labour costs.  These  increases were, however, partially offset by the increased silver by-product  credits which were a result of significantly higher silver grades in the ore processed  and higher recoveries, particularly in Q4 2012.  Cash operating cost per  ounce sold includes royalties and is a non-GAAP measure; see page 11 for more  information.

New mineral resources and mineral reserves estimates

On September 7, 2012 the Company filed  a Canadian National Instrument 43-101 compliant technical report, the 2012  Technical Report, with respect to the mineral resources and reserves  estimates for the Bisha and Harena deposits. Expressed as contained metal,  the copper reserves estimate increased 6% and the zinc reserves estimate  increased 38% as of May 31, 2012, compared with the previous reserves  estimate with an effective date of January 1, 2011.

As part of the mineral resources and  reserves estimation review, the Company retained AGP Mining Consultants Inc.  (AGP), an independent mining and geological consulting firm that had not  previously reported on the property. AGP estimated the new mineral resources  at Bisha. AGP’s estimate was in turn reviewed by an independent third party  engineering company. AMEC Americas Limited estimated the new mineral  resources at Harena. AGP also prepared the new combined Bisha and Harena  mineral reserves estimate.

Copper phase development

The Company continued work on copper  phase development activities during 2012, expending $62,053 on the copper  phase during the year. Total capital for the copper phase expansion is  expected to be approximately $125,000, including the copper plant, port  facilities and concentrate container transport and handling equipment. The  Company is taking the same approach to eliminate price risk on construction  that it was successfully able to accomplish during the build of the gold  plant. As at December 31, 2012, $97,017 had been spent, ordered or arranged,  thereby fixing over three quarters of the expected project costs. The copper  flotation plant is targeted to be operational in mid-2013. The same firm,  SENET of South Africa, is the engineering, procurement, and construction  management contractor. Photos of the expansion can be found at www.nevsun.com/projects/photogallery/copperphase.

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8

| **Selected annual  financial information** |
|--------------------------------------------|

The  following annual financial information for the years ended December 31, 2012,  2011, and 2010, were prepared in accordance with International Financial  Reporting Standards (IFRS).

| Fiscal years ended                                                                   |
|--------------------------------------------------------------------------------------|
| In  $000’s (except per share data)                                             |   | December  31,   2012 |   |   | December  31,   2011(1) |   |   | December  31,   2010(1) |   |
| Revenues                                                                             | $ | 566,039 |   | $ | 547,770 |   | $ | - |   |
| Operating  income                                                                    |   | 405,674 |   |   | 417,783 |   |   | - |   |
| Net income (loss) for the year                                                       |   | 246,696 |   |   | 250,034 |   |   | (17,050 | ) |
|                                                                                 |   |   |   |   |   |   |   |   |   |
| Net income (loss) attributable to Nevsun shareholders                                | $ | 145,262 |   | $ | 147,065 |   | $ | (13,316 | ) |
| Earnings (loss) per share attributable to Nevsun shareholders  – basic         |   | 0.73 |   |   | 0.74 |   |   | (0.07 | ) |
| Earnings (loss) per share attributable to Nevsun  shareholders – fully diluted |   | 0.72 |   |   | 0.73 |   |   | (0.07 | ) |
|                                                                                 |   |   |   |   |   |   |   |   |   |
| Total assets                                                                         | $ | 873,696 |   | $ | 775,226 |   | $ | 356,180 |   |
| Total long term financial liabilities                                                | $ | 38,717 |   | $ | 29,420 |   | $ | 110,777 |   |
| Dividends                                                                            | $ | 19,947 |   | $ | 15,948 |   | $ | - |   |

|   | (1) | Operations commenced 2011. The  2011 figures reflect operating results from February 22, 2011, the date  commercial production commenced at the Bisha Mine. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **Results of  operations** |
|----------------------------|

The following variances result when comparing operations  for the year ended December 31, 2012, with the year ended December 31, 2011  (in US $000s, except per ounce data). Refer to the audited annual  consolidated financial statements.

Revenues:   The Company’s revenues for 2012 of $566,039 (2011 – $547,770) are  comprised of revenues on gold sales of $535,945 (2011 - $543,153) and revenues  on by-product silver sales of $30,094 (2011 - $4,617).  Gold revenues included sales of 320,700  ounces of gold (2011 – 334,500 ounces) at an average realized price of $1,671  per ounce (2011 – $1,620 per ounce).  These  average realized prices per ounce of gold sold compare to the average market  price per ounce (London PM Fix) of $1,669 for 2012 and $1,572 for 2011.  An additional 35,400 ounces of gold were sold  in the 2011 pre-production period and were not included in revenue for the  year, but were applied as a reduction of capitalized costs.  Included in revenues are silver by-product  revenues for 2012 from sales of 962,000 ounces of silver (2011 – 142,000  ounces) at an average realized price of $31.28 per ounce (2011 – $32.52 per  ounce).  Increased 2012 silver by-product  sales over 2011 were a result of higher silver grade ore and higher silver recoveries.

Operating expenses: The Company’s 2012  operating expenses were $103,432 (2011 – $76,812). 2012 operating expenses  were higher due to the inclusion of a full year of operating results compared  to 2011, which included operating results from February 22 to December 31,  2011. In addition, the Company experienced higher labour, fuel and  consumables costs as well as increased waste removal in 2012 compared to  2011.

Royalties: The Company incurs a 5%  precious metals royalty on gold and silver doré sales. In 2012 royalty  expenses of $27,898 (2011 – $27,283) were recorded on gold and silver sales.

Depreciation and depletion: In 2012,  depreciation and depletion of $29,035 (2011 – $25,892) was recorded. The increase in depreciation and depletion is mostly attributable  to the Company having a full year of operations in 2012. The comparative  period included commissioning and pre-operating activities that ended on  February 22, 2011, with the commencement of commercial production.

Administrative: Administrative costs for  2012 were $8,261 (2011 – $14,471) down $6,210 from 2011. The  decrease is due primarily to a $5,903 decrease in non-cash share-based  payments expenses resulting from fewer stock options having been granted by  the Company from late Q1 2011 to late Q4 2012. As a result, for 2012,  share-based payments expenses were $740, compared to the prior year, which  were $6,643. In 2012, there was also a decrease in non-cash stock  appreciation rights expense of $2,338 resulting from a decrease in the  Company’s share price which resulted in a decrease in the stock appreciation  rights liability. The decreases in share-based payment expenses and stock  appreciation rights were offset by increases in business development costs of  $852, salaries and benefits of $964 and legal fees of $466.

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9

Income taxes: Income tax expense for  2012 of $154,049 (2011 – $155,857) is comprised of current income tax expense  of $149,532 (2011 – $150,209) related to the BMSC mining operations at an  effective rate of 38% and deferred income tax expense of $4,517 (2011 –  $5,648).

Net income: Net income for 2012 was  $246,696 (2011 – $249,326) of  which $101,434 (2011 –  $102,969) is attributable to non-controlling interest and $145,262 (2011 – $147,065) is attributable to Nevsun shareholders.

| **Selected  quarterly financial information** |
|-----------------------------------------------|

Selected consolidated  financial information from continuing operations for the most recent eight  quarters (unaudited) are presented below.

| In $000s (except per  share data)                                          |   | **2012  4th** |   |   | **2012  3rd** |   |   | **2012  2nd** |   |   | **2012  1st** |   |
|----------------------------------------------------------------------------|--------|---------------|--------|--------|---------------|--------|--------|---------------|--------|--------|---------------|--------|
| Revenues                                                                   | $      | 98,944        |   | $      | 169,992       |   | $      | 147,713       |   | $      | 149,390       |   |
| Operating income                                                           |   | 59,893        |   |   | 125,482       |   |   | 109,671       |   |   | 110,628       |   |
| Net income for the  period                                                 |   | 35,432        |   |   | 75,636        |   |   | 66,865        |   |   | 68,763        |   |
|                                                                       |   |          |   |   |          |   |   |          |   |   |          |   |
| Net income attributable to Nevsun shareholders                             |   | 20,245        |   |   | 44,211        |   |   | 39,568        |   |   | 41,238        |   |
| Earnings per share  attributable to Nevsun shareholders – basic(2)   |   | 0.10          |   |   | 0.22          |   |   | 0.19          |   |   | 0.21          |   |
| Earnings per share  attributable to Nevsun shareholders – diluted(2) |   | 0.10          |   |   | 0.22          |   |   | 0.19          |   |   | 0.20          |   |

| In  $000s (except per share data)                                 |   | **2011  4th** |   |   | **2011  3rd** |   |   | **2011  2nd** |   |   | **2011  1st(1)** |   |
|-------------------------------------------------------------------|--------|---------------|--------|--------|---------------|--------|--------|---------------|--------|--------|------------------|--------|
| Revenues                                                          | $      | 170,868       |   | $      | 186,502       |   | $      | 136,085       |   | $      | 54,315           |   |
| Operating income                                                  |   | 129,254       |   |   | 146,944       |   |   | 101,947       |   |   | 39,638           |   |
| Net income for the  period                                        |   | 78,336        |   |   | 89,200        |   |   | 60,605        |   |   | 21,893           |   |
|                                                              |   |          |   |   |          |   |   |          |   |   |             |   |
| Net income attributable  to shareholders                          |   | 46,652        |   |   | 53,323        |   |   | 35,287        |   |   | 11,803           |   |
| Earnings per share  attributable to Nevsun shareholders - basic   |   | 0.23          |   |   | 0.27          |   |   | 0.18          |   |   | 0.06             |   |
| Earnings per share attributable to Nevsun shareholders  - diluted |   | 0.23          |   |   | 0.27          |   |   | 0.17          |   |   | 0.06             |   |

|   | (1) | First quarter 2011 results reflect operating results from  February 22, 2011, the date commercial production commenced at the Bisha  Mine, to March 31, 2011. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Total earnings per share attributable to Nevsun shareholders  for the four quarters of 2012 when added together do not agree to the annual  figures due to rounding differences. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Explanations of variations from quarter to quarter are  contained below and in prior quarterly MD&A’s.

| **Fourth quarter  2012 review** |
|---------------------------------|

The following variances result when comparing operations  for the three month period ended December 31, 2012, with the same period of  the prior year (in US $000s, except per ounce data):

----

 

10

Revenues: The Company’s Q4 2012  revenues of $98,944 (Q4 2011 – $170,868) are comprised of revenues on  gold sales of $91,237 (2011 - $169,000) and revenues on by-product silver sales  of $7,707 (2011 - $1,868). Gold revenues included sales of  53,400 ounces of gold (Q4 2011 – 99,800 ounces) at an average realized price  of $1,709 per ounce (Q4 2011 – $1,685 per ounce). Silver by-product  revenues for Q4 2012 included sales of 239,000 ounces of silver (Q4 2011 – 68,000  ounces) at an average realized price of $32.25 per ounce (Q4 2011 – $27.47  per ounce). Increased Q4 2012 silver by-product sales over Q4 2011 were a  result of higher silver grade ore and higher silver recoveries.

Operating expenses: The Company  recorded operating expenses for Q4 2012 of $28,231 (Q4 2011 - $24,848). The  increase from the comparative period results from increases in costs associated with fuel, mill  consumables, and labour and costs associated with an increased volume of  waste removal resulting from the higher strip ratio in Q4 2012.

Royalties: The Company incurs a 5%  precious metals royalty on gold and silver doré sales. In Q4 2012 royalty  expenses of $4,964 (Q4 2011 - $8,521) were recorded on gold and silver  sales. In Q4 2012, the Company sold fewer gold ounces than in the same  quarter in the prior year, resulting in lower royalties.

Depreciation and depletion: In Q4 2012  depreciation and depletion of $5,856 (Q4 2011 - $8,247) was recorded. Depreciation is primarily calculated using the  units-of-production method with gold ounces produced and ore tonnes mined as  the basis for the calculation. There were fewer gold ounces sold and fewer  ore tonnes mined in Q4 2012 compared to Q4 2011, resulting in the lower  depreciation and depletion figure for Q4 2012.

Administrative: Administrative costs,  comprising head office salaries, professional fees, share based payments  expense and other general and administrative expenses in Q4 2012, were $3,145 and were comparable to the  administrative costs of $3,425 in Q4 2011.

| **Valuation and  settlement of sale of Bisha interest to Eritrea Government** |
|-------------------------------------------------------------------------------|

In October 2007 the Company entered into an agreement with ENAMCO  whereby the State of Eritrea increased its interest in BMSC 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.

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 has  been 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.

Income tax related to the gain on  disposition to ENAMCO was $92,848. Nevsun arranged for ENAMCO to take  responsibility for the settlement of taxes and, accordingly, adopted a  net-of-tax presentation on the balance sheet.   

The resulting amount receivable from ENAMCO  bears interest at 12 month US dollar LIBOR plus 4% and the receivable and  interest are 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 $748 was recorded in  Q4 2012 (Q4 2011 - $1,243) as finance income.   For the full year 2012, $3,677 (2011 - $3,625) of interest was recorded.

In 2011 the Company collected $27,088 of the purchase  price receivable, including $598 of interest. A further $35,996 was  collected in 2012, including interest of $1,773, leaving a balance due from  ENAMCO of $63,130 at December 31, 2012.

----

 

11

| **Liquidity and capital resources** |
|-------------------------------------|

The Company’s cash and cash  equivalents at December 31, 2012, were $396,404 (December 31, 2011 – $347,582).  The Company is confident this cash, along with ongoing operating cash flows,  will be sufficient to meet its ongoing operating and capital requirements.

During the year ended December 31,  2012, the Company generated $193,815 in cash flows from operating activities  (year ended December 31, 2011 – generated $365,964). The difference in year over  year operating cash flows arises principally from the $209,586 in income  taxes the Company paid in 2012 (2011 – paid $36,000). Of the income tax  payments made in 2012, $114,409 related to the 2011 fiscal year and the  balance was on account of installments for 2012 fiscal year. The Company  commenced paying quarterly tax installments in Q3 2011.

The Company used $88,091 in investing activities in 2012  (2011 – used $11,627). In 2011, the Company received $48,613 from sales of  gold during the pre-production period. In 2012, the Company used $63,680  (2011 – used $21,650) in copper phase plant and equipment, $11,263 (2011 – used  $6,105) in exploration work and $13,148 (2011 – used $33,717) in gold phase  property, plant and equipment.

The Company used $56,902  in its financing activities in 2012 (2011 – used $56,900).  During 2012, the  Company paid dividends to shareholders of $19,989 (2011 – $5,935) and distributed  $68,000 to non-controlling interest (2011 – $nil) and received payments from  non-controlling interest, as partial payment on the sale of 30% of the Bisha  Mine, of $34,223 (2011 – received $26,490).   In 2011, the Company used $74,995 to repay loans and advances from  non-controlling interest and used $6,414 to repay interest on such.  As the loans, advances and related interest thereon  were extinguished by the end of 2011, there were no such payments in 2012.  In 2012, the Company spent $6,272 to  repurchase and cancel 1,732,600 common shares.   No such repurchases and cancellations were made in 2011.

In 2012, the Company received $1,363 (2011 – received  $7,459) from the issuance of common shares related to the exercise of stock  options.

| **Commitments  and contractual obligations** |
|----------------------------------------------|

| As of  December 31, 2012, the Company had the following contractual obligations: |
|----------------------------------------------------------------------------------|
| In US  $000’s                                                              |   | Total |   |   | Less  than1   year |   |   | 2-3  years |   |   | 4-5  years |   |   | Over 5  years |   |
| Purchase  commitments and contractual obligations                                | $ | 35,534 |   | $ | 35,534 |   | $ | - |   | $ | - |   | $ | - |   |
| Mine  closure and restoration                                                    |   | 29,600 |   |   | 449 |   |   | 884 |   |   | 399 |   |   | 27,868 |   |
| Minimum  operating lease payments                                                |   | 4,348 |   |   | 4,348 |   |   | - |   |   | - |   |   | - |   |
| Total contractual obligations                                                    | $ | 69,482 |   | $ | 40,331 |   | $ | 884 |   | $ | 399 |   | $ | 27,868 |   |

The Company also has an environmental  bond to cover remediation liabilities for Bisha in the amount of $7,500 at a  cost of 1% per annum.  

The above table includes the Company’s estimated  obligation for mine closure and restoration following completion of mining  activities at the Bisha Mine and is based on the level of known disturbance  at the reporting date, known legal requirements and estimates prepared by a  third party specialist. Based on the specialist’s conclusions, the undiscounted  amounts of the estimated obligations for restoration and closure of the  operations, adjusted for estimated inflation of 3%, are approximately  $29,600. While the Company has recorded the fair value for the mine closure  and restoration obligation using a pre-tax discount rate of 4.84%, the  amounts reflected in the above table represent the undiscounted amounts  estimated at the time of payment. Ongoing reclamation costs incurred as part  of normal mining operations are expensed as incurred.

| **Off-balance  sheet arrangements** |
|-------------------------------------|

The Company has not entered into any  specialized financial arrangements to minimize its commodity price risk,  investment risk or currency risk. There are no off-balance sheet  arrangements.

----

 

12

| **Contingencies** |
|-------------------|

Two putative class actions were filed  in the United States District Court for the Southern District of New York, on  March 13, 2012 and March 28, 2012, respectively, naming the Company and  certain officers of the Company as defendants (hereafter the US Actions).  The plaintiffs assert claims under Sections 10(b) and 20(a) of the Securities  Exchange Act of 1934, based on alleged misrepresentations and omissions  relating to the amount of gold reserves at the Bisha Mine. The plaintiffs  purport to bring suit on behalf of all purchasers of the Company's publicly  traded securities between March 31, 2011, and February 6, 2012. Plaintiffs  seek unspecified damages, interest, costs and attorneys' fees on behalf of  the putative class. By order of court, the two cases have been consolidated,  and a consolidated amended complaint was filed on August 21, 2012. The  consolidated amended complaint expanded the purported class period to run  from March 28, 2011, until February 6, 2012, and asserted alleged  misrepresentations and omissions relating the Bisha Mine’s “strip ratio”  throughout 2011, the omission of “material negative trends,” allegedly in  violation of a disclosure duty under US Regulation S-K, and the departure of  certain senior executives at the Bisha Mine. On September 20, 2012, the Company  filed a motion to dismiss all claims against the Company and its officers.  The legal briefing of that motion was completed on November 7, 2012, and the  Company is awaiting a ruling from the courts.

A putative class action also was filed  in the Ontario Superior Court of Justice on July 12, 2012, naming the Company  and certain officers of the Company as defendants (hereafter the Canadian  Actions). The plaintiff’s Statement of Claim asserts claims for (i)  violation of certain provisions of the Ontario Securities Act, as well as the  equivalent statutes of other provinces, (ii) negligent misrepresentation, and  (iii) vicarious liability of the Company, based on alleged misrepresentations  and omissions relating to the amount of gold reserves, and the grade of the  mineable gold reserves, at the Bisha Mine. The plaintiffs purport to bring  suit on behalf of all purchasers of the Company’s publicly traded securities  between March 31, 2011, to and including February 6, 2012, including  purchasers of the Company’s stock on the Toronto and American Stock  Exchanges. The plaintiffs amended their claim on February 13, 2013, to add  further detail to their factual allegations. The Canadian Actions are based  on essentially the same set of facts and the same alleged misrepresentations  as the US Actions. The plaintiff seeks damages in the sum of $100 million  plus interest and costs, on behalf of the putative class. The Canadian  Actions are expected to proceed more slowly than the US Actions, due to  differences between US and Canadian procedural rules. 

It is not possible at this time to  estimate the ultimate outcome of the US and Canadian Actions. The Company  believes the allegations are without merit and will vigorously defend itself  in these actions.

| **Outstanding share  data** |
|-----------------------------|

As of March 20, 2013, the Company  had 199,007,815 shares and 10,832,500 options issued and outstanding.  

On March 19, 2012, the Company  announced a common share repurchase program in accordance with the rules of  the Toronto Stock Exchange. The program allowed 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 were authorized to commence no earlier than March 26, 2012, and  continued until September 26, 2012. At completion of the repurchase program,  1,732,600 shares had been repurchased and cancelled for an aggregate cost of  $6,272.

| **Non-GAAP  measure** |
|-----------------------|

Cash cost is a non-GAAP (Generally Accepted Accounting  Principles) performance measure and includes all costs absorbed into  inventory, as well as royalties and by-product credits, but excludes depreciation  and depletion and share-based payments. Total cash costs are divided by  ounces of gold sold to arrive at per ounce cash costs. It is intended to  provide additional information and does not have any standardized meaning  prescribed by IFRS and should not be considered in isolation or as a  substitute for measures of performance prepared in accordance with IFRS. The  measure is not necessarily indicative of operating profit or cash flow from  operations as determined under IFRS. Other companies may calculate cash cost  per ounce differently.

----

 

13

The following table  provides a reconciliation from the financial statements to cash cost per  ounce sold:

| Cash  cost per gold ounce sold:                          |
|----------------------------------------------------------|
|                                                     |   | Q4 2012 |   |   | Q3 2012 |   |   | Q2 2012 |   |   | Q1 2012 |   |   | 2012 |   |   | Q4 2011 |   |   | 2011 |   |
| Cost of sales (USD 000s)                                 | $ | 39,051 |   | $ | 44,510 |   | $ | 38,042 |   | $ | 38,762 |   | $ | 160,365 |   | $ | 41,614 |   | $ | 129,987 |   |
| Less silver by-product revenues                          |   | (7,707 | ) |   | (7,442 | ) |   | (7,818 | ) |   | (7,128 | ) |   | (30,094 | ) |   | (1,868 | ) |   | (4,617 | ) |
| Less non-cash items:                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      Depreciation and depletion |   | (5,856 | ) |   | (7,160 | ) |   | (7,745 | ) |   | (8,274 | ) |   | (29,035 | ) |   | (8,247 | ) |   | (25,892 | ) |
|      Share-based payments       |   | (186 | ) |   | (186 | ) |   | (342 | ) |   | (337 | ) |   | (1,051 | ) |   | (163 | ) |   | (712 | ) |
| Cash operating costs                                     | $ | 25,302 |   | $ | 29,722 |   | $ | 22,137 |   | $ | 23,023 |   | $ | 100,185 |   | $ | 31,336 |   | $ | 98,766 |   |
| Gold ounces sold during operating period(1)              |   | 53,400 |   |   | 96,700 |   |   | 87,500 |   |   | 83,100 |   |   | 320,700 |   |   | 99,800 |   |   | 334,500 |   |
| Cash cost per ounce sold                                 | $ | 474 |   | $ | 307 |   | $ | 253 |   | $ | 277 |   | $ | 312 |   | $ | 314 |   | $ | 295 |   |

|   | (1) | The 2011 cash operating costs and gold ounces  sold exclude results from the pre-operating period, January 1 – February 21,  2011.  |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------|

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

The following  describes the use of financial instruments and types of risks that the  Company is exposed to and its objectives and policies for managing such  risks:  

Credit risk  

Financial instruments that potentially  subject the Company to credit risk consist of cash and cash equivalents,  trade receivables, and due from non-controlling interest. In order to manage  credit risk, the Company deposits cash and cash equivalents kept in highly  liquid instruments with high credit quality financial institutions. Such  instruments are managed by independent financial managers with ultimate  oversight by the Company. Given the strong credit ratings of these institutions,  management does not expect any counterparty to fail to meet its obligations.  Additionally, a high percentage of the funds are maintained in accounts  outside of Africa. As at December 31, 2012, the Company’s credit risk  related to the recovery of trade accounts receivable included receivables of  $4,736 related to gold doré sales due from two customers. The sale of gold  is at spot prices in world markets to internationally recognized, credit  worthy precious metals refiners. As cash receipts following the gold sales  are usually at same-day or next-day value, the Company does not consider  credit risk associated with gold sales to be a significant risk. Further,  the Company maintains separate and sufficient insurance and requires the  transporters of its gold doré and the refiners to carry sufficient insurance  to prevent loss during transportation or the refining process. The Company  does not consider credit risk associated with the recovery of value added  taxes (VAT) and other receivables, which at December 31, 2012 totaled $497,  to be a significant risk.

Following the commencement of sales of  copper concentrate, expected in the third quarter of 2013, the Company will  also be subject to credit risk related to trade receivables from the sale of  metal in concentrate. Sales of metals in concentrate are recognized when  title passes. These concentrates will be generally sold under pricing  arrangements where the final prices are determined by quoted market prices in  a period subsequent to the date of sale. As a result, the estimated revenue  will be recorded based on forward metal prices for the expected date of final  settlement, resulting in the existence of an embedded derivative in the accounts  receivable. This embedded derivative will be recorded at fair value, with  changes in fair value recorded as adjustments to revenue as they occur.  These adjustments will also reflect changes in quantities arising from final  weight and assay calculations. The Company believes that its credit risk  exposure on sales of concentrate will be limited as the Company intends to  sells its product to large, international purchasers with high credit  ratings, and may require purchasers to issue letters of credit with high  credit quality financial institutions to support such purchases.  Additionally, the Company intends to maintain separate and sufficient  insurance and will require the transporters of its concentrates to carry  sufficient insurance to prevent loss during transportation.

The Company is also subject to credit risk  related to due from non-controlling interest, which at December 31, 2012 was  $63,130.  Due from non-controlling  interest is collected from cash flow from the Bisha Mine that would otherwise  be distributed to ENAMCO in accordance with its share ownership.  Management expects that cash flow will be  sufficient to allow collection in full from non-controlling interest and, as a  result, credit risk on exposure on due from non-controlling interest is not  considered to be a significant risk. 

----

 

14

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 manages its liquidity risk through a rigorous planning and budgeting  process, which is reviewed and updated on a regular basis, to help determine  the funding requirements to support the Company’s current operations and  expansion and development plans and by managing its capital structure. The  Company’s objective is to ensure that there are sufficient financial  resources to meet its liabilities as they come due, both under normal and  stressed conditions, without incurring unacceptable losses or risking damage  to the company’s reputation. In the opinion of management, the working  capital at December 31, 2012 of $398,444, together with future cash flows  from operations, is sufficient to support the Company’s operations and  expansion plans.

Market  risk  

Price risk: The Company is, or will  be, subject to price risk from fluctuations in market prices of gold, copper  and other metals. As discussed above in respect of metals in concentrate,  there is a time lag between the time of initial payment on shipment and final  settlement pricing, and changes in the price of gold, copper and other metals  during this period impact the Company’s revenues and working capital  position. As at December 31, 2012, final metal prices for the Company's  trade receivables on gold shipments have been determined, and as such, these  trade receivables are not exposed to commodity price risk. The Company’s  policy is not to hedge gold. Accordingly, as at December 31, 2012 and as of  the date of this MD&A, the Company has not entered into any hedge  contracts or other financial arrangements to minimize its commodity price  risk.

Currency risk: Currency risk is the  risk that the fair values or future cash flows of the Company’s financial  instruments will fluctuate because of changes in foreign exchange rates.  Exchange rate fluctuations may affect the costs that the Company incurs in  its operations. The Company’s functional currency is the United States  dollar, and while metal sales are sold in US dollars, certain of the  Company’s costs will be incurred in other currencies, namely the Eritrean  nakfa, Canadian dollar and South African rand. Additionally, the Company  also holds cash and cash equivalents that are denominated in these currencies  which are subject to currency risk. Accounts receivable and other current  and non-current assets not denominated in US dollars relate to goods and  services taxes, income taxes, value-added taxes.

The Eritrean nakfa is directly tied to  the USD and, accordingly, is not considered a currency risk. At December 31,  2012, net financial assets denominated in South African rand are $2,392 and net  financial liabilities denominated in Canadian dollars are $2,165. A 10% strengthening  of the US dollar against these currencies at December 31, 2012, with all  other variables held constant, would have resulted in an estimated gain on  the Canadian dollar denominated net financial liabilities of $196 and an  estimated loss on South African rand denominated net financial assets of  $217. As a result, management does not consider currency risk to be significant.  Interest rate risk:

 Interest rate risk  is the risk that the fair values and future cash flows of the Company will  fluctuate because of changes in market interest rates. The Company is not  exposed to interest rate risk on any outstanding borrowings, but is exposed  to interest rate risk on amounts due from non-controlling interest. A 1%  increase or decrease in the interest earned from amounts due from  non-controlling interest is estimated to be $600 and would result in a  nominal increase or decrease in the Company’s after-tax net income.

| **Proposed  transactions** |
|----------------------------|

The Company continually reviews  opportunities for growth, however, there are no proposed asset or business  acquisitions or dispositions currently under offer.

| **Critical accounting  policies and estimates** |
|-------------------------------------------------|

The Company's  consolidated financial statements are prepared in accordance with IFRS as  issued by the International Accounting Standards Board (“IASB”). The  significant accounting policies applied and recent accounting pronouncements  are described in Note 3 and Note 4 to the Company's annual consolidated  financial statements, respectively.

In preparing the consolidated financial  statements in accordance with the IFRS, management is required to make  estimates and assumptions that affect the reported amounts of assets, liabilities,  revenues and expenses. These estimates involve considerable judgment  and are, or could be, affected by significant factors that are out of the  Company’s control. Actual results could differ from those estimates. Management reviews its estimates and assumptions on an ongoing  basis using the most current information available. Revisions to estimates  and the resulting effects on the carrying values of the Company’s assets and  liabilities and are accounted for prospectively.

----

 

15

Critical judgements in the  application of accounting policies:

Information about critical judgements and estimates in  applying accounting policies that have the most significant effect on the  amounts recorded in the financial statements are as follows:

Commencement of commercial production:  Prior to reaching operating levels intended by management, costs incurred are  capitalized as part of the costs of related mining properties and proceeds  from mineral sales are offset against those costs capitalized. Depletion of  capitalized costs for mining properties begins when operating levels intended  by management have been reached. Management considers several factors in  determining when a mining property has reached the operating levels intended  by management. 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 its Bisha Mine reached the  operating levels intended by management on February 22, 2011.

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 judgments 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. 

Capitalization of exploration and  evaluation 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.  During the year, the Company capitalized a total of $11,263 (2011 - $6,105)  of exploration and evaluation expenditures.

Assets’ carrying values and  impairment charges: The Company’s recoverability evaluation of its property,  plant and equipment is based on market conditions for minerals, underlying  mineral resources associated with the assets and future costs that may be  required for ultimate realization through mining operations or by sale. The  Company is in an industry that is exposed to a number of risks and  uncertainties, described below under Risk Factors. Bearing these risks in  mind, the Company has assumed historical world commodity prices will be  achievable, as will costs used in studies for construction and mining  operations. The Company has relied on mineral resource and reserve reports  by independent engineers on the Bisha Property in Eritrea. All of these  assumptions are potentially subject to change, out of the Company’s control  and such changes are not readily determinable. Accordingly, there is always  the potential for a material adjustment to the value assigned to 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.

----

 

16

Key sources of estimation  uncertainty: 

Information about assumptions and  estimation uncertainties that have a significant risk of resulting in a  material adjustment are as follows: 

Mine closure and restoration costs: The Company has an  obligation to reclaim its property after the minerals have been mined from  the site. As a result, the Company has recorded a liability for the best  estimate of the reclamation and closure costs it expects to incur. The  Company has estimated applicable inflation and discount rates as well as  expected reclamation and closure time frames. To the extent that the  estimated reclamation costs change, such changes will impact future accretion  recorded and depreciation.

Share-based payments: The factors affecting share-based  payments include estimates of when stock options might be exercised and the  stock price volatility. The timing for exercise of options is out of the  Company’s control and will depend, among other things, upon a variety of  factors including the market value of Company shares and financial objectives  of the holders of the options. The Company has used historical data to  determine volatility in accordance with Black-Scholes modeling, however  future volatility is inherently uncertain and the model has its limitations.  While these estimates can have a material impact on the share-based payments  expense and hence, results of operations, there is no impact on the Company’s  financial condition or liquidity.

Classification of current and non-current portion of due  from non-controlling interest: In determining the classification of current  and non-current portion of due from non-controlling interest, the Company  makes estimates of the future after-tax cash flows expected to be derived  from the Bisha mining operation. Reductions in metal price  forecasts, increases in estimated future costs of production, increases in  estimated future expansionary and non-expansionary capital expenditures could  result in a change in the classification of the current and non-current  portions of the due from non-controlling interest.   

Operating expenses and valuation of  work-in-progress inventory: In determining operating expenses recognized in  the period, 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 operating expenses in future  periods and carrying amounts of inventories. 

Deferral of stripping costs: In  determining whether stripping costs incurred during the production phase of a  mineral property relate to reserves and resources that will be mined in a  future operating period and therefore should be capitalized, the Company  makes estimates. 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.

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. 

Contingencies: Due to the nature of  the Company’s operations, various legal, tax or other matters can be  outstanding from time to time. In the event that management’s estimate of the  future resolution of these matters changes, the Company will recognize the  effects of the changes in its consolidated financial statements on the date  such changes occur. Refer to “*Contingencies*” in this MD&A.

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| **Disclosure  controls and procedures** |
|-----------------------------------------|

The Company’s management, with the  participation of the Chief Executive Officer and Chief Financial Officer, is  responsible for establishing and maintaining the Company’s disclosure  controls and procedures. Disclosure controls and procedures are designed to  provide reasonable assurance that information required to be disclosed in the  Company’s annual filings, interim filings and other reports filed or  submitted is recorded, processed, summarized and reported, within the  appropriate time periods and is communicated to senior management, including  the Chief Executive Officer and Chief Financial Officer on a timely basis so  that the appropriate decisions can be made regarding public disclosures.  

The Chief Executive Officer and Chief  Financial Officer, after participating with the Company’s management in  evaluating the effectiveness of the Company’s disclosure controls and  procedures have concluded that as of the end of the period covered by this  report, the Company’s disclosure controls and procedures were effective.

| **Internal control over  financial reporting** |
|------------------------------------------------|

The Company’s management, with the  participation of the Company’s Chief Executive Officer and Chief Financial  Officer, is responsible for establishing and maintaining adequate internal  control over financial reporting. The Company’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 IFRS. The  Company’s internal control over financial reporting includes those policies  and procedures that:

- pertain to the maintenance of records that, in reasonable  detail, accurately and fairly reflect the transactions and dispositions of  assets of the Company; 
- provide reasonable assurance that transactions are recorded as  necessary to permit preparation of financial statements in accordance with  IFRS, and that the Company’s receipts and expenditures are being made only in  accordance with authorizations of management and the Company’s directors; and
- provide reasonable assurance regarding prevention or timely  detection of unauthorized acquisition, use or disposition of the Company’s  assets that could have a material effect on the Company’s consolidated  financial statements.

There has been no change in the Company’s internal  controls over financial reporting during the fiscal year ended December 31,  2012 that has materially affected, or is reasonably likely to materially  affect, the Company’s internal control over financial reporting.

KPMG LLP, the Company's Independent Registered Public  Accountants, have audited the annual consolidated financial statements of the  Company for the year ended December 31, 2012, and have also issued a report  on the internal controls over financial reporting based on the criteria  established in the*Internal Control - Integrated Framework*issued by  the Committee of Sponsoring Organizations of the Treadway Commission.

| **Limitations of  controls and procedures** |
|---------------------------------------------|

The Company’s management, including the  Chief Executive Officer and the Chief Financial Officer, believe that any  disclosure controls and procedures or internal controls over financial  reporting, no matter how well conceived and operated, can provide only  reasonable, not absolute, assurance that the objectives of the control system  are met. Further, the design of a control system must reflect the fact that  there are resource constraints, and the benefits of controls must be  considered relative to their costs. Because of the inherent limitations in  all control systems, they cannot provide absolute assurance that all control  issues and instances of fraud, if any, within the Company have been prevented  or detected. These inherent limitations include the realities that judgments  in decision-making can be faulty, and that breakdowns can occur because of  simple error or mistake. Additionally, controls can be circumvented by the  individual acts of some persons, by collusion of two or more people, or by  unauthorized override of the control. The design of any systems of controls  also is based in part upon certain assumptions about the likelihood of future  events, and there can be no assurance that any design will succeed in  achieving its stated goals under all potential future conditions.  Accordingly, because of the inherent limitations in a cost effective control  system, misstatements due to error or fraud may occur and not be detected.

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| **Changes in accounting standards  including initial adoption** |
|-----------------------------------------------------------------|

No new accounting standards were  adopted by the Company in 2012. However, the following standards that may be  relevant to the Company have been introduced or revised by the IASB:

(a) 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.

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. IFRS 12 is also effective for annual periods beginning on or  after January 1, 2013, with earlier application permitted. 

The Company does not anticipate the  application of IFRS 10 and IFRS 12 to have a significant impact on its  consolidated financial statements.

(b) 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.

(c) Fair value  measurement

In May 2011, the IASB issued IFRS 13  Fair Value Measurement (IFRS 13) as a single source of guidance for all fair value  measurements required by IFRS to reduce the complexity and improve  consistency across its application. The standard provides a definition of  fair value and guidance on how to measure fair value as well as a requirement  for enhanced disclosures. 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. IFRS 13 is effective  for annual periods beginning on or after January 1, 2013, with earlier  application permitted. 

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

| **Related party transactions** |
|--------------------------------|

Except for those transactions with the non-controlling  interest disclosed in this MD&A and in the 2012 annual consolidated  financial statements, there were no material transactions with related  parties during the years ended December 31, 2012 and 2011.

| **Quality assurance** |
|-----------------------|

Mr. Peter Manojlovic, PGeo, and Vice President  Exploration of Nevsun Resources Ltd. is a Qualified Person under the terms of  NI 43-101 and has reviewed the exploration statements of this MD&A and  approved its dissemination.

| **Risk factors** |
|------------------|

The operations of the Company are  highly speculative due to the high-risk nature of its business in the mining  industry,  which is the acquisition, financing, exploration,  development and operation of mining properties. The risks below, some of  which are summarized elsewhere in this MD&A, are not the only ones  facing the Company. Additional risks not currently known to the Company, or  that the Company currently deems immaterial, may also impair the Company’s  operations. If any of the following risks actually occur, the Company’s  business, financial condition and operating results could be adversely  affected.

**Commodity price risk** Revenue and profitability of the Company’s operations will be  dependent upon the market price of mineral and materials commodities. In  2012, substantially all of the Company’s revenues were attributable to gold  sales. In 2013, it is expected that the Company’s revenues will be derived  from the sale of gold, copper and other metals, the market prices for which  are volatile. The Company does not enter into any commodity  hedging and accordingly is fully exposed to price risk. The price of gold,  copper and other metals can and has experienced volatile and significant  price movements over short periods of time, and is affected by numerous  factors beyond the control of the Company, including international economic  and political trends, expectations of inflation or deflation, currency  exchange fluctuations (specifically, the US dollar relative to other  currencies), interest rates, global or regional consumption patterns,  speculative activities and increased production due to improved mining and  production methods. The supply of and demand for gold, copper and  other metals are affected by various factors, including  political events, economic conditions and production costs, and governmental  policies. Fluctuations in gold or copper prices may have a material  adverse effect on the Company’s financial performance or results of  operations. If the market price of gold or copper falls significantly from  its current level, the mine development projects may be rendered uneconomic  and the development of the mine project may be suspended or delayed. In  addition, if the market price of gold and copper were to drop and the prices  realized by the Company on gold sales and future copper sales were to  decrease significantly and remain at this level for a significant period of  time, profitability of the Company and cash flow would be negatively  affected.

Mineral reserve calculations and  life-of-mine plans using significantly lower metal prices could result in  material write-downs of the Company’s investment in mining properties and  increased amortization, reclamation and closure charges. In addition to  adversely affecting the Company’s mineral reserve estimates and its financial  condition, declining commodity prices can impact operations by requiring a  reassessment of the feasibility of a particular project. Such a reassessment  may be the result of a management decision or may be required under financing  arrangements related to a particular project. Even if the project is  ultimately determined to be economically viable, the need to conduct such a  reassessment may cause substantial delays or may interrupt operations until  the reassessment can be completed.

 The Bisha Mine’s power generation plant  and mobile equipment fleet are diesel fueled. As fuel costs are a  significant component of the Company’s operating costs, changes in the price  of diesel could have a significant effect on its operating costs.

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**Exploration, development and operating  risks** Mining operations generally involve a high  degree of risk. The Company’s operating mine in Eritrea is subject to all  the hazards and risks normally associated with mineral production, including  damage to or destruction of plant and equipment, unexpected geologic  formations, pit collapse, injury or life endangerment, environmental damage,  fire, equipment failure or structural failures, such as retaining walls or  tailings dams, potentially resulting in environmental pollution and  consequent liability. The payment of such liabilities may have a material,  adverse effect on the Company’s financial position.   

The exploration for and development of  mineral deposits involves significant risks, which even a combination of  careful evaluation, experience and knowledge may not eliminate. While the  discovery of an ore body may result in substantial rewards, few properties  that are explored are ultimately developed into producing mines. There is no  certainty that expenditures made by the Company towards the search and  evaluation of mineral deposits will result in discoveries or future  development. Whether a mineral deposit will be commercially viable depends  on a number of factors, which include, among other things, the interpretation  of geological data obtained from drill holes and other sampling techniques,  feasibility studies (which include estimates of cash operating costs based  upon anticipated tonnage and grades of ore to be mined and processed), the  particular attributes of the deposit, such as size, grade and metallurgy,  expected recovery rates of metals from the ore, proximity to infrastructure  and labour, the cost of water and power, anticipated climatic conditions,  cyclical metal prices, fluctuations in inflation and currency exchange rates,  higher input commodity and labour costs, and government regulations,  including regulations relating to prices, taxes, royalties, land tenure, land  use, importing and exporting of minerals and environmental protection. 

Major expenses may be required to  locate and establish additional mineral reserves. It is impossible to ensure  that the exploration or development programs planned by Nevsun will result in  additional profitable commercial mining operations. Whether a mineral deposit  will be commercially viable depends on a number of factors, some of which  are: the particular attributes of the deposit, such as size, grade and  proximity to infrastructure, metal prices that are highly cyclical, and  government regulations, including regulations relating to prices, taxes,  royalties, land tenure, land use, importing and exporting of minerals and  environmental protection. The exact effect of these factors cannot be  accurately predicted, but the combination of these factors may result in  Nevsun not receiving an adequate return on invested capital.  

The marketability of natural resources  that may be acquired or discovered by the Company will be affected by  numerous factors beyond its control. These factors include market fluctuations,  the proximity and capacity of natural resource markets and processing  equipment, and government regulations, including regulations relating to  prices, taxes, royalties, land tenure, land use, importing and exporting of  minerals and environmental protection. The exact effect of these factors  cannot be accurately predicted, but the combination of these factors may  result in the Company not receiving an adequate return on invested capital.

**Foreign operation and political risk** The Company conducts operations through foreign subsidiaries with  financial assets in Barbados and mining operations in Eritrea, and  substantially all of its assets are held in such entities. While the Company  believes that the political climate of these countries and strong government  support in Eritrea provide a favourable environment for its operations, there  is no guarantee against any future political or economic instability in these  countries or neighbouring countries which might adversely affect the  Company.   

Political unrest in Egypt, Libya,  Syria, Yemen, Saudi Arabia, Somalia and other countries in the region has had  an impact on investor confidence with companies operating in northern Africa,  including Eritrea, even though no direct effect is evident or anticipated in  the operations at Bisha or communications with the Eritrean government. In  addition, intervention by the international community through organizations  such as the United Nations could affect the political risk of operating in  Eritrea. In December 2009, the United Nations Security Council (UNSC) imposed  sanctions on Eritrea related to an arms embargo, which in itself has had no  direct impact to the Bisha Project, except to cause some uncertainty as to  how UN member states may continue to deal with the country. In December 2011,  the UNSC provided additional sanctions guidance to member states. Effects of  the sanctions could restrict the Company’s ability to fund its operations  efficiently and to repatriate cash.

Other risks the Company could face in operating  in foreign jurisdictions include terrorism, hostage taking, military  repression, extreme fluctuations in currency exchange rates, high rates of  inflation, labour unrest, the risks of war or civil unrest, expropriation and  nationalization, renegotiation or nullification of existing concessions, licenses,  permits and contracts, illegal mining, changes in taxation policies,  restrictions on foreign exchange and repatriation, and changing political  conditions, currency controls, export controls and governmental regulations  that favour or require the awarding of contracts to local contractors or  require foreign contractors to employ citizens of, or purchase supplies from,  a particular jurisdiction.  

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All or any of these factors,  limitations, or the perception thereof could impede the Company’s  activities, result in the impairment or loss of part or all of the Company’s  interest in the properties, or otherwise have an adverse impact on the  Company’s valuation and stock price.

**Infrastructure risk** Mining, processing and development activities depend, to some  degree, on adequate infrastructure. Reliable roads, bridges, power sources  and water supply are important determinants that affect capital and operating  costs. Unusual or infrequent weather phenomena, sabotage, government or  other interference in the maintenance or provision of such infrastructure  could adversely affect the Company’s operations, financial condition and  results of operations.

**Key executive risk** The Company is to a large degree dependent on the services of key  executives and senior personnel. The loss of these persons or the Company’s  inability to attract and retain executives and personnel with the  qualifications necessary to operate the business successfully may adversely  affect its business and future operations. The Company competes with  numerous other companies for the recruitments and retention of qualified  executives and employees.

**Expatriate and third-party nationals  skills risk** The Company’s Eritrean operations are  the first modern commercial mining operation in that jurisdiction. As a  result, the Company is reliant on attracting and retaining expatriate and  third-party nationals with mining experience to staff key operations and  administration management positions. The Company’s inability to attract and  retain personnel with the skills and experience to manage the operation and  train and develop staff, due to the intense international competition for  such individuals, may adversely affect its business and future operations.

**Labour risk** The Company is dependent on its workforce to extract and process  minerals, and is therefore sensitive to a labour disruption of the Company's  mining activities. The Company endeavours to maintain good relations with its  workforce in order to minimize the possibility of strikes, lock-outs and  other stoppages at its work sites. Relations between the Company and its  employees may be impacted by changes in labour relations which may be  introduced by, among other things, employee groups, unions, and the relevant  governmental authorities in whose jurisdictions the Company carries on  business.

**Mineral resource and mineral reserve  estimate risk** The figures for mineral resources and  reserves presented in this document and contained in the Company’s continuous  disclosure documents filed on SEDAR (www.sedar.com) and  EDGAR (www.sec.gov) are estimates, and no  assurance can be given that the anticipated tonnages and grades will be  achieved or, in the case of reserves, that the indicated level of metallurgical  recovery will be realized. Actual reserves may not conform to geological,  metallurgical or other expectations, and the volume and grade of ore  recovered may be below the estimated levels. Market fluctuations in the  price of mineral commodities or increases in the costs to recover minerals  may render the mining of ore reserves uneconomical and require the Company to  take a write-down of the asset or to discontinue development or production.  Moreover, short-term operating factors relating to the reserves, such as the  need for orderly development of the ore body or the processing of new or  different ore grades, may cause a mining operation to be unprofitable in any  particular accounting period.

There are numerous uncertainties  inherent in estimating quantities of mineral resources and reserves,  including many factors that are beyond the Company’s control. The estimates  are based on various assumptions relating to metals prices and exchange rates  during the expected life of production, mineralization of the area to be  mined, the projected cost of mining, and the results of additional planned  development work. Actual future production rates and amounts, revenues,  taxes, operating expenses, environmental and regulatory compliance  expenditures, development expenditures and recovery rates may vary  substantially from those assumed in the estimates. Any significant change in  these assumptions, including changes that result from variances between  projected and actual results, could result in material downward or upward  revision of current estimates.

**Production risk **As is typically the case with the mining industry, no assurances  can be given that future mineral production estimates will be achieved.  Estimates of future production for the Company’s mining operations are  derived from the Company’s mining plans. These estimates and plans are  subject to change. The Company cannot give any assurance that it will  achieve its production estimates. The Company’s failure to achieve its  production estimates could have a material and adverse effect on the  Company’s future cash flows, results of operations, production cost,  financial condition and prospects. The plans are developed based on, among  other things, mining experience, reserve estimates, assumptions regarding  ground conditions, hydrologic conditions and physical characteristics of ores  (such as hardness and presence or absence of certain metallurgical  characteristics) and estimated rates and costs of production. Actual  production may vary from estimates for a variety of reasons, including risks  and hazards of the types discussed above, and as set out below, including:

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22

-   mining dilution;
-   accidents; 
-   equipment failures; 
-   natural phenomena such as inclement weather  conditions, floods, droughts, rock slides and earthquakes;
-   encountering unusual or unexpected geological  conditions; 
-   changes in power costs and potential power  shortages; 
-   shortages of principal supplies needed for  operations; 
-   strikes and other actions by labour; and 
-   regulatory restrictions imposed by government  agencies.

 Such occurrences could, in addition to  stopping or delaying mineral production, result in damage to mineral  properties, injury or death to persons, damage to the Company’s property or  the property of others, monetary losses and legal liabilities. These factors  may also cause a mineral deposit that has been mined profitably in the past  to become unprofitable. Estimates of production from properties not yet in  production or from operations that are to be expanded are based on similar  factors (including, in some instances, feasibility studies prepared by the  Company’s personnel and outside consultants) but it is possible that actual  operating costs and economic returns will differ significantly from those  currently estimated. It is not unusual in new mining operations or mine  expansion to experience unexpected problems during the startup phase. Delays  often can occur in the commencement of production.

**Need for additional reserves risk** Given that mines have limited lives based on  proven and probable mineral reserves, the Company must continually replace and  expand its reserves at its mines.  The  life-of-mine estimates included in the Company’s continuous disclosure  documents filed on SEDAR are subject to adjustment.  The Company’s ability to maintain or increase  its annual production of gold and other commodities will be dependent in  significant part on its ability to bring new mines into production and to  expand reserves at existing mines.   The Bisha Mine has an estimated 12 year mine life remaining. 

**Permitting risk **The Company’s operations are subject to receiving and maintaining  permits from appropriate governmental authorities. There is no assurance  that delays will not occur in connection with obtaining all necessary  renewals of permits for any new or existing operations, or for additional  permits for any possible future changes to operations, or additional permits  associated with new legislation. Prior to any development on any of its  properties, the Company must receive permits from appropriate governmental  authorities. There can be no assurance that the Company will obtain or continue  to hold all permits necessary to develop or continue operating at any  particular property. Any failure to obtain or maintain  requisite permits could have a material adverse effect on the Company and its  future production.

**Putative class action and****litigation risk **Nevsun is  party to legal proceedings, which, if decided adversely to the Company, may  have a material effect on the financial or business position or prospects of  the Company. Investors are urged to read the description of the pending  legal proceedings set out under the heading, “Contingencies”. Any litigation  could result in substantial costs and damages and divert management’s  attention and resources.

**Risks related to the construction,  plant expansion, transition to supergene production at Bisha, and start-up of  new mining operations or mine phases **The success  of construction projects, plant expansions and the start-up of new mines by  the Company is subject to a number of factors including the availability and  performance of engineering and construction contractors, mining contractors,  suppliers and consultants, the receipt of required governmental approvals and  permits in connection with the construction of mining facilities and the  conduct of mining operations, including environmental permits, price  escalation on all components of construction and start-up, the underlying  characteristics, quality and unpredictability of the exact nature of  mineralogy of a deposit and the consequent accurate understanding of doré or concentrate production, the successful completion and  operation of ore passes and conveyors to move ore and other operational  elements. Any delay in the performance of any one or more of the contractors,  suppliers, consultants or other persons on which the Company is dependent in  connection with its construction activities, a delay in or failure to receive  the required governmental approvals and permits in a timely manner or on  reasonable terms, or a delay in or failure in connection with the completion  and successful operation of the operational elements in connection with new  mines could delay or prevent the construction and start-up of new mines as  planned. There can be no assurance that current or future construction and  start-up plans implemented by the Company will be successful.

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**Environmental risk** Production at the Company’s mine involves the use of toxic  materials. Should toxic materials leak or otherwise be discharged from the  containment system then the Company may become subject to liability for  clean-up work that may not be insured. While the Company intends to prevent  discharges of pollutants into the ground water and the environment, it may be  unsuccessful and may become subject to liability for hazards that it may not  be insured against. Losses from these events may cause the Company to incur significant  costs that could have a material adverse effect upon its financial  performance and results of operations.

The Company’s operations are subject to  environmental regulations promulgated by the government of Eritrea.  Environmental legislation provides for restrictions and prohibitions on  spills, releases or emissions of various substances produced in association  with certain mining industry operations, such as seepage from tailings  disposal areas that could result in environmental pollution. A breach of  such legislation may result in the imposition of fines and penalties.  Environmental legislation is evolving in general in a manner that means  standards and enforcement, fines and penalties for non-compliance are  becoming more stringent. Environmental assessments for projects carry a  heightened degree of responsibility for companies, directors, officers and  employees. The cost of compliance with changes in government regulations has  the potential to reduce the profitability of operations. The Company plans  to comply with all environmental regulations in the countries in which the  Company has operations and comply with prudent international standards.  

The Company adopted the International  Finance Corporation (IFC) Social and Environmental Performance Standards of  April 2006 and developed its management plans accordingly. The plans have  been subject to review by the host country, as well as part of an extensive  due diligence by international bankers who at one time were considered for  funding. The social and environmental plans have been implemented and have  subsequently been audited by an independent third party. Staff training and  engagement with local authorities, as well as significant employment from  both local and other in-country sources are key elements of the Company’s  social and environmental management. Department heads for both Human  Resources and Environment are experienced professionals with a solid  understanding of local requirements as well as IFC Performance Standards. The  Company continues to place significant emphasis on all social and  environmental impacts of its operations.

Environmental hazards may also exist on  the properties on which the Company holds interests that are unknown to the  Company at present and that have been caused previous to the Company  receiving title to the properties.  

Failure to comply with applicable laws,  regulations and permitting requirements may result in enforcement actions,  including orders issued by regulatory or judicial authorities causing operations  to cease or be curtailed, and may include corrective measures requiring  capital expenditures, installation of additional equipment, or remedial  actions. Parties engaged in mining operations, including the Company, may be  required to compensate those suffering loss or damage by reason of the mining  activities and may have civil or criminal fines or penalties imposed for  violations of applicable laws or regulations.  

Amendments to current laws, regulations  and permits governing operations and activities of mining companies, or more  stringent implementation thereof, could have a material adverse impact on the  Company and cause increases in exploration expenses, capital expenditures or  production costs, reduction in levels of production at producing properties,  or abandonment or delays in development of new mining properties.

**Currency risk** At present all of the Company’s activities are carried on outside  of Canada and are subject to risks associated with fluctuations of the rate  of exchange of foreign currencies. The United States dollar (USD) is the  Company’s functional currency, exposing the Company to risk on any  fluctuations of the USD with other currencies to which the Company is  exposed, which are primarily the Canadian dollar (CAD), South African rand (ZAR),  and the Eritrean nakfa (ERN). While only a small portion of the Bisha mine’s  operating expenses are denominated in ERN, which is currently pegged to the  USD at 15 ERN to one USD, a re-valuation or de-pegging of this currency to  the USD could expose the Company to additional currency risk. As of the  date of this MD&A, the Company has not entered into forward contracts or  other instruments to help manage its currency risk with respect to any of  these currencies.

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**Funding risk** The exploration, development, operations, acquisitions or  other activities may require substantial additional financing. Failure to  obtain sufficient financing may result in delaying or indefinite postponement  of exploration, development, operations, acquisitions or other activities of  the Company including a loss of property interest. Historically,  the Company has financed its activities through the sale of equity capital.  The sale of metals from Bisha currently provides and is expected to continue  to provide revenue from operations, which the Company expects will be  sufficient to fund its future needs. Factors which may impact cash flows  include changes in metal prices, taxes, operating costs, capital expenditures  or other unexpected occurrences such as slowdown or stoppage of operations.  Failure to obtain sufficient financing to continue operations if such needs  arise may adversely affect the Company’s business and financial position.  Should the Company require additional funding for exploration, development,  operations, acquisitions or other activities, there is no assurance that  sources of financing will be available on acceptable terms or at all.

**Counterparty risk** The Company is exposed to various counterparty risks including,  but not limited to: (i) financial institutions that hold the Company’s cash  and cash equivalents; (ii) companies that have payables to the Company,  including doré customers and non-controlling interest;  and (iii) insurance providers. As a result the Company may become exposed to  credit related losses in the event of non-performance by such counterparties.

**Insurance risks** Although the Company maintains insurance  to protect against certain risks in such amounts as it considers to be  reasonable, its insurance will not cover all the potential risks associated  with a mining company’s operations. Nevsun may also be unable to maintain  insurance to cover these risks at economically feasible premiums. Insurance  coverage may not continue to be available or may not be adequate to cover any  resulting liability.

**Land title risk **The acquisition of title to mineral properties is a very detailed  and time-consuming process. Title to, and the area of, mineral concessions  may be disputed. Although the Company believes it has taken reasonable  measures to ensure proper title to its properties, there is no guarantee that  title to any of its properties will not be challenged or impaired. Third  parties may have valid claims underlying portions of the Company’s interests,  including prior unregistered liens, agreements, transfers or claims,  including indigenous land claims, and title may be affected by, among other  things, undetected defects. In addition, the Company may be unable to  operate its properties as permitted or to enforce its rights with  respect to its properties.

**Competition****risk** The mining industry is intensely competitive in all  of its phases and the Company competes with many companies possessing greater  financial and technical resources than itself. There is intense competition  in the mining industry for mineral rich properties that can be developed and  produced economically, the technical expertise to find, develop, and operate  such properties, the labour to operate the properties, and the capital for  the purpose of funding such properties. Many competitors not only explore  for minerals, but conduct refining and marketing operations on a global  basis. Such current and future competition may result in the Company being  unable to acquire desired properties.

**Write-downs and impairments risk **Mining and mineral interests are the most significant assets of  the Company and represent capitalized expenditures related to the development  of mining properties and related plant and equipment and the value assigned  to exploration potential on acquisition. The costs associated with mining  properties are separately allocated to exploration potential, reserves and  resources and include acquired interests in production, development and  exploration-stage properties representing the fair value at the time they  were acquired. The values of such mineral properties are primarily driven by  the nature and amount of ore believed to be contained or potentially  contained, in properties to which they relate.

The Company reviews and evaluates its  mining interests for impairment at least annually or when events or changes  in circumstances indicate that the related carrying amounts may not be  recoverable, which becomes more of a risk in the global economic conditions  that exist currently. An impairment is considered to exist if the total  estimated future undiscounted cash flows are less than the carrying amount of  the assets. An impairment loss is measured and recorded based on discounted  estimated future cash flows. Future cash flows are estimated based on  expected future production, commodity prices, operating costs and capital  costs. There are numerous uncertainties inherent in estimating mineral  reserves and mineral resources. Differences between management’s assumptions  and market conditions could have a material effect in the future on the  Company’s financial position and results of operation.  

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In addition, with a weaker global  economy, there is a larger risk surrounding inventory levels. The  assumptions used in the valuation of work-in process inventories by the  Company include estimates of gold contained in the ore stock piles, crushed  ore piles, processing plant circuits, and an assumption of the gold price  expected to be realized when the gold is recovered. If these estimates or  assumptions prove to be inaccurate, the Company could be required to  write-down the recorded value of its work-in-process inventories, which  would reduce the Company’s earnings and working capital.

**Derivatives****risk **In the future, the Company may use certain derivative  products to manage the risks associated with changes in gold prices, silver  prices, interest rates, foreign currency exchange rates and fuel prices. The  use of derivative instruments involves certain inherent risks including,  among other things: (i) credit risk — the risk of default on amounts owing to  the Company by the counterparties with which Company has entered into such  transaction; (ii) market liquidity risk — risk that the Company has entered  into a derivative position that cannot be closed out quickly, by either  liquidating such derivative instrument or by establishing an offsetting  position; and (iii) unrealized mark-to-market risk — the risk that, in  respect of certain derivative products, an adverse change in market prices  for commodities, currencies or interest rates will result in the Company  incurring an unrealized mark-to-market loss in respect of such  derivative products.

**Acquisitions and integration risk** From time to time, the Company  examines opportunities to acquire additional mining assets and businesses. Any  acquisition that the Company may choose to complete may be of a significant  size, may change the scale of the Company’s business and operations, and may  expose the Company to new geographic, political, operating, financial and  geological risks. The Company’s success in its acquisition activities  depends on its ability to identify suitable acquisition candidates, negotiate  acceptable terms for any such acquisition, and integrate the acquired  operations successfully with those of the Company.   

Any acquisition would be accompanied by  risks. For example, a material ore body may prove to be below expectations;  the Company may have difficulty integrating and assimilating the operations  and personnel of any acquired companies, realizing anticipated synergies and  maximizing the financial and strategic position of the combined enterprise,  and maintaining uniform standards, policies and controls across the  organization; the integration of the acquired business or assets may disrupt  the Company’s ongoing business and its relationships with employees,  customers, suppliers and contractors; and the acquired business or assets may  have unknown liabilities which may be significant.

 In the event that the Company chooses  to raise debt capital to finance any such acquisition, the Company’s leverage  will be increased. If the Company chooses to use equity as consideration for  such acquisition, existing shareholders may suffer dilution. Alternatively,  the Company may choose to finance any such acquisition with its existing  resources. There can be no assurance that the Company would be successful in  overcoming these risks or any other problems encountered in connection  with such acquisitions.

**Governmental regulation risk **The Company’s mineral exploration, development and production  activities are subject to various laws governing prospecting, development,  production, taxes, labour standards and occupational health, mine safety,  toxic substances, environmental protection and preservation, and other  matters. No assurance can be provided that the Company will be successful in  its efforts to comply with all applicable rules and regulations, no assurance  can be given that new rules and regulations will not be enacted or that  existing rules and regulations will not be applied in a manner that could  limit or curtail production or development of the Company’s properties. Amendments  to current laws and regulations governing the operations and activities of  the Company or more stringent implementation thereof could have a material  adverse effect on the Company’s business, financial condition and  results of operations.

**Share price risk** The market price of a publicly traded stock is affected by many  variables not directly related to the success of the Company, including the  market for all resource sector shares, the breadth of the public market for  the stock, and the attractiveness of alternative investments. The effect of  these and other factors on the market price of the common shares of the  Company on the exchanges on which the common shares are listed suggests that  the share price will be volatile. In the previous eight quarters, between  January 1, 2011 and December 31, 2012 the Company’s shares traded in a range  between Cdn $2.65 and Cdn $7.04.

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**Dividend policy risk**The Company has established a dividend policy providing for a  dividend yield that is consistent with the yield of comparable companies’  dividend rates and will be reviewed on a periodic basis and assessed in  relation to the growth of the operating cash flows of the Company.  

Payment of any future dividends will be  at the discretion of the Company’s board of directors after taking into  account many factors, including the Company’s operating results, financial  condition, comparability of the dividend yield to peer gold companies  and current and anticipated cash needs. There can be no assurance that the  Company will continue to pay dividends at the current yield or at all.

**Conflicts of Interest **Certain of the directors and officers of the Company also serve as  directors and/or officers of other companies involved in natural resource  exploration and development and consequently there exists the possibility for  such directors and officers to be in a position of conflict. Any decision  made by any of such directors and officers involving the Company will be made  in accordance with their duties and obligations to deal fairly and in good  faith with a view to the best interests of the Company and its shareholders.  In addition, each of the directors is required to declare and refrain from voting  on any matter in which such directors may have a conflict of interest in  accordance with the procedures set forth in the Business Corporations Act  (British Columbia) and other applicable laws.

| **NYSE MKT  corporate governance** |
|------------------------------------|

The Company’s common shares are listed  on NYSE MKT, which was previously the American Stock Exchange. Section  110 of the NYSE MKT company guide permits NYSE MKT to consider the laws,  customs and practices of foreign issuers in relaxing certain NYSE MKT listing  criteria, and to grant exemptions from NYSE MKT listing criteria based on  these considerations. A company seeking relief under these provisions  is required to provide written certification from independent local counsel  that the non-complying practice is not prohibited by home country law.  A description of the significant ways in which the Company’s governance  practices differ from those followed by U.S. domestic companies pursuant to NYSE  MKT standards is posted on the Company’s website at http://www.nevsun.com/corporate/governance/nyse-amex/  and a copy of such description is available by written request made to the  Company.

| **Cautionary note  regarding preparation of reserves and resources** |
|----------------------------------------------------------------------|

This MD&A uses the terms “reserves”  and “resources” and derivations thereof. These terms have the meanings set  forth in Canadian National Instrument 43-101 - Standards of Disclosure for  Mineral Projects (NI 43-101) and the Canadian Institute of Mining, Metallurgy  and Petroleum’s Classification System (CIM Standards). NI 43-101 and CIM  Standards differ significantly from the requirements of the United States  Securities and Exchange Commission (the SEC). Under SEC Industry Guide 7,  mineralization may not be classified as a “reserve” unless the determination  has been made that is “part of a mineral deposit which could be economically  and legallyextracted or produced at the time of the reserve  determination”. In addition, the term “resource”, which does not equate to  the term “reserve”, is not recognized by the SEC and the SEC’s disclosure  standards normally do not permit the inclusion of information concerning  resources in documents filed with the SEC, unless such information is  required to be disclosed by the law of the Company’s jurisdiction of  incorporation or of a jurisdiction in which its securities are traded.  Accordingly, information concerning descriptions of mineralization and  resources contained in this Management’s Discussion and Analysis may not be  comparable to information made public by US domestic companies subject to the  reporting and disclosure requirements of the SEC.

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