Kakula NPVTaking the NPV figures from the Kakula PEA and translating them into CAD/share at the company's 40% interest yields the following results, at copper prices of 2.00 / 2.50 / 3.00 / 3.50 / 4.00 USD/lb, and at discount rates of 4%, 6% and 8%:
4%: 1.80 / 3.01 / 4.22 / 5.44 / 6.55
6%: 1.33 / 2.28 / 3.24 / 4.19 / 5.15
8%: 0.98 / 1.75 / 2.51 / 3.27 / 4.03
This assumes a 4 million metric ton per annum operation. However, given the scalability of the project owing to the geometry of the ore body, I think it is a near certainty that production will commence at at least 8Mtpa from day 1, and it is not unreasonable to contemplate a 12Mtpa operation. The company has even discussed 16 and 20, and it is probable that it will get there once this mine hits its stride. Note that each 4Mtpa of throughput represents a little more than 200ktpa of copper metal production. To put this into context, an eventual 20Mtpa throughput would place this mine in the league of Escondida, the largest copper mine in the world, owned by BHP, Rio Tinto and JECO, whose production has fallen below 1Mtpa of payable copper for FY 2016 as a result of steadily declining grades. BHP's guidance for FY 2017 production is 1.07 Mtpa Cu, thanks to the Los Colorados Extension and the Water Supply Project, which have required billions of dollars in capital to implement.
So coming back to Kakula, I suggest taking your preferred copper price and discount rate and doubling or trebling the figure above, to reflect scalability of the project, and you will arrive at the value per share of Kakula (ex Kamoa, ex Kipushi, ex Platreef, ex cash). So, for example, at the current spot copper price of USD 2.60/lb., the NPV8 of Kakula at 8Mtpa (assuming linear scaling) would be roughly CAD 4/share, and at 12Mtpa would be roughly CAD 6/share.
Revisiting an earlier discussion, Warren Buffett said that to arrive at a fair value for a business, he discounted reasonably certain cash flows at the higher of 6% and the current 30 year treasury rate. Firstly, given that the lowest-cost copper mine in the world with a guaranteed 80+% operating margin even under the most pessimistic copper price projection of say, USD 2/lb., constitutes a business which Buffett would regard as a castle surrounded with a moat about a league wide, twenty fathoms deep, and filled with hungry crocodiles, from an economic point of view such cash flows may be regarded as reasonably secure. Given that the US 30 year bond is currently yielding 2.88% ytm, his rate would be 6%. At this rate your 8 and 12Mtpa values would be about CAD 5/share and 7.50/share. One might argue that 4% is a fairer rate (indeed, viewing the imputed valuations of recent Berkshire Hathaway acquisitions) in that this would afford a 4% dividend in perpetuity (a fair rate today), indexed to inflation, or at least the reasonable proxy of copper price inflation. At this rate you have about CAD 6.50/share and CAD 10/share for the 8 and 12Mtpa options, again at the current copper price of USD 2.60/lb. Adjust the price deck as you like with reference to the above table. Remember also to accrete for the discount factor when imputing a value 3-4 years out at time of production.
Now, as to a reasonable long term copper price? At today's price majors are deferring expansion capital, and in fact are struggling to fund sustaining capital. They often refer to this sustaining capital as expansion capital because it expands throughput, but because grades decline as mines deplete (highest grades are mined first to maximise NPV) it often really only sustains the rate of production of payable metal. Therefore, so-called "growthex" is really "susex". And certainly, current prices do not incentivise exploration in any significant way industry-wide. So given the facts that global consumption, currently at about 22-23 million tonnes per annum, has risen consistently by 3% per annum over the past 100 years or more, and that demand drivers for the future are easily identifiable (the chairman points to the special copper intensity of green energy infrastructure as a turbo driver, but simple global development and population growth could easily sustain this historic growth), and even the best of existing tier 1 mines are in relentless decline, voraciously devouring capital by the billions just to stand still, I think it is reasonable to expect, on a multi-year horizon, the next major move in the copper price to be NORTH. Mr Friedland puts it rather succinctly when he says that the world needs one entire new Oyu Tolgoi every year. One ENTIRE OYU TOLGOI EVERY YEAR! Needless to say, at higher prices the value of Kakula alone is staggering. Again, for purposes of this discussion we are ignoring altogether Kamoa, Kipushi, Platreef and cash on hand. So I think it is fair to say that the financial markets are utterly in the dark in their appraisal of the equity of Ivanhoe Mines Ltd.