Ivanhoe Mines Ltd. T.IVN

RBC: Outperform rating and $3.50 target for Ivanhoe Mines

[hockeyguy123]

According to RBC Capital Markets:

https://app.box.com/s/hbjypxn2kwnova0jcb7c

May 16, 2014

Ivanhoe Mines Ltd.

Rating: Outperform

Price Target CAD 3.50

Funding in focus

Our view: We have updated our model for the Q1/14 balance sheet. In addition, we have updated our Kamoa and Platreef valuations to reflect the recent PEAs. In the near term, funding is a challenge as highlighted by the company and our analysis. Longer-term, the upside potential of the three projects remains very attractive, in our view.

Key points:

Q1/14 results immaterial; little progress at projects: Ivanhoe reported Q1/14 fully diluted EPS of ($0.07) versus ($0.12) in Q4/13 and ($0.07) in Q1/13. See our note "Focus on funding" for more details.

Spending down from Q4/13: During Q1/14, Ivanhoe spent $37.1 million on exploration and project expenditures vs. $60.7 million in Q4/13, $11.9 million on SG&A vs. $13.6 million in Q4/13, and $0.4 million on finance costs vs. $0.6 million in Q4/13.

Q1/14 cash balance of $170.2 million compared to $224.1 million one quarter ago: Total liquidity of $170.2 million included $89.9 million of cash and equivalents and $80.3 million of short-term deposits. Of the $170.2 million, $146.7 million is restricted for spending at Platreef. Cash, equivalents, and short-term deposits at the end of Q4/13 totaled $224.1 million, $161.8 million of which was restricted for Platreef.

Financing required to develop projects: Of Ivanhoe's quarter-end cash balance, only $23.5 million is available to be used at Kamoa and Kipushi and for general corporate purposes. Ivanhoe indicated that a financing will be required by the end of Q2/14 in order to continue with its planned work on Kamoa and Kipushi. We estimate that the company's spending plans could total up to $500 million if Kamoa and Platreef were to proceed on the basis of the recent PEAs and other disclosure. In addition to a financing, we believe lower spending than we are currently modeling is likely for the remainder of 2014.

Estimate revisions: We have revised our estimates for the quarter-end balance sheet and have lowered our estimate of exploration spending in line with spending to-date. We have also updated our NAV for Kamoa based on the phased approach to the project's development in the PEA, updated our NAV for Platreef from one based on adjusted market capitalization per ounce in resource to one based on the recently released PEA, and made modest changes to our estimate for Kipushi. See pages 3 and 4 for more detail.

Investment summary

Ivanhoe Mines has the potential to realize significant value as it advances its three main projects through development and into production over the next five years. The company intends to become a global, diversified mining and exploration company by advancing Kamoa (Cu) and Platreef (PGM) from discovery to production, reopening the Kipushi (Zn) mine, and maintaining active exploration and acquisition programs. Kamoa is one of the largest undeveloped and high-grade copper deposits in the world, and Platreef could emerge as a low-cost PGM producer.

The near-term potential catalysts for Ivanhoe Mines include:

• Q2/14: Completion of anticipated financing;

• May 2014: Receipt of Mining Right for Platreef expected;

• 2014: Excavation of first mine-access decline at Kamoa;

• H2/14: Platreef pre-feasibility study; and

• H2/14: Comprehensive development study at Kamoa including initial mineral reserves.

Risks for our investment thesis include:

Key risks include geo-political risk in the DRC and South Africa, financing risk, execution risk at the company’s development projects given they are early-stage and long-dated, and risks associated with the development of infrastructure for the projects, including transportation in the DRC and power and water in South Africa.