Jul. 21, 2022 10:58 PM ET by Peter Arendas
Ivanhoe Mines' share price declined by approximately 50% since March.
The shares start to be attractively valued once again.
The Kamoa-Kakula production keeps on growing and after Phase 3 expansion is completed, in Q4 2024, the annual copper production should exceed 1.3 billion lb.
Kamoa-Kakua alone should push Ivanhoe's market capitalization 50% higher after Phase 3 is completed and the metals prices don't fall further.
Kipushi and Platreef provide additional value of several billion dollars.
Ivanhoe Mines (OTCQX:IVPAF) experienced a steep share price decline lately, just like the other copper miners. I have been following Ivanhoe Mines nearly for a decade. And a better part of this time period, I was Ivanhoe's shareholder. However, early last year, after the share price approached the $8 level, I liquidated the remainder of my position. Yes, it was too soon and I didn't enjoy the ride to $10. But now, the share price declined back to $5 and it is time to look for a new entry point.
Ivanhoe Mines owns several great assets. The Kipushi project with its fairytale zinc grades of more than 30%, as well as the Platreef mine that is about to become one of the biggest platinum group metals mines in the world soon, are company-makers. But for Ivanhoe, they are only some side projects, as its main asset is the world-class giant multigenerational Kamoa-Kakula copper mine, which is emerging into one of the biggest, and in several years possibly even the biggest copper mine in the world.
Kamoa-Kakula is a large, high-grade, low-cost copper mining complex, 39.6%-owned by Ivanhoe Mines, 39.6%-owned by Zijin Mining (OTCPK:ZIJMF), 0.8%-owned by Crystal River Global Limited, and 20%-owned by the Democratic Republic of Congo. Yes, Kamoa-Kakula's biggest (and maybe the only) flaw is its localization in the Democratic Republic of Congo. Fortunately, by now, this fact hasn't caused any major trouble. And with some luck, this won't change in the future.
Kamoa-Kakula started production ahead of schedule, back in June 2021. Only 9 months later, again ahead of schedule, its first expansion was completed, when on March 22, Ivanhoe Mines announced the hot commissioning of the Phase 2 concentrator plant. This helped to elevate the production rate to 30,379 tonnes (67 million lb) of copper per month. This volume of copper was produced in June alone. The Q2 production amounted to 87,314 tonnes (192.5 million lb) of copper.
Due to the growing production, the unit production costs keep on declining despite the global inflationary pressures. The cash cost declined from $1.28/lb in Q4 to $1.21/lb in Q1. And it is probable that further decline will be reported also for Q2. In Q1, the Kamoa-Kakula mining complex sold nearly 114.5 million lb copper, recording revenues of $519.6 million, operating income of $380.5 million, and net income of $221.3 million, of which, $87.1 million is attributable to Ivanhoe.
What is important, the production is about to keep on growing. The designed capacity of Phase 1 and Phase 2 operations is 7.6 Mtpa. However, several options to debottleneck the processes have been identified. The result should be an increase to 9.2 Mtpa. This should elevate the annual copper production from 880 million lb to 990 million lb. But that's not the end. A PFS for the Phase 3 expansion should be prepared by the end of this year. It is expected to boost the overall Kamoa-Kakula mine production to 1.32 billion lb copper, by developing two new mines (Kamoa 1, and Kamoa 2), and a 5 Mtpa concentrator plant. Moreover, according to the news release:
The associated power and surface infrastructure for Phase 3 will be designed to support future expansions.
After the Phase 3 expansion is completed, probably in late 2024, Kamoa-Kakula will be one of the three biggest copper mines in the world. Further expansion will probably push it to the first place.
Copper Industry Cost Curve
Source: Ivanhoe Mines
Another good news is that further Kamoa-Kakula expansions should be funded solely from cash flows generated by the mine. This will limit cash flows collected by Ivanhoe Mines and the other partners in the near future, however, after the Phase 3 expansion is completed, the situation should change rapidly. Although there should be also Phase 4 and Phase 5 (picture below), the amount of money to be distributed to the partners should keep on growing. And given the low production costs, Kamoa-Kakula should remain profitable even in the case of a steep copper price decline and massive losses of the majority of other copper producers. As can be seen in the chart above, Kamoa-Kakula is pretty close to the bottom of the copper industry cost curve.
Meanwhile, Ivanhoe keeps on exploring its 100%-owned Western Foreland property that covers an area of approximately 2,400 km² directly to the west and north of the Kamoa-Kakula properties. The plan is to expend $25 million on 50,000 meters of shallow drilling and 45,000 meters of regional stratigraphic drilling this year alone.
The Valuation
Ivanhoe's market capitalization is $6.66 billion right now. This may seem like a lot, however, as the Q1 has shown, Kamoa-Kakula alone was able to generate a net profit of $87 million for Ivanhoe. Yes, the average copper price was around $4.5/lb, and it is much lower now (around $3.4/lb), however, major copper market deficits are projected for the second half of his decade. As a result, similar, if not even higher copper prices are quite possible. In Q1, Kamoa-Kakula sold 114.5 million lb copper. In 2025, after Phase 3 is ramped up, the quarterly sales should increase to 330 million lb copper. After some simplifications, it is possible to make a very rough estimate of a net income of $250 million for Ivanhoe. It means $1 billion annualized. The median P/E ratio is 9.7 in the industry right now. This leads to a market capitalization of nearly $10 billion.
However, the $10 billion market capitalization doesn't take into account any other asset held by Ivanhoe. The Western Foreland property has a real potential to contain another Kamoa-Kakula, or something similar. The Kipushi project will be one of the highest-grade base metal mines in the world. According to the feasibility study, it has an after-tax NPV(8%) of $941 million ($641 million attributable to Ivanhoe) at a zinc price of $1.2/lb. And Platreef, after fully developed, should become one of the biggest, if not the biggest, PGM mines in the world, moreover, comfortably positioned at the bottom of the PGM mining industry cost curve. According to the feasibility study, Platreef has an after-tax NPV(8%) of $1.7 billion ($1.09 billion attributable to Ivanhoe) at a platinum price of $1,100/toz, palladium price of $1,450/toz, rhodium price of $5/toz, gold price of $1,600/toz, nickel price of $8/lb, and a copper price of $3.5/lb.
By the way, according to the latest corporate presentation, based on the spot metals prices valid in March, the after-tax NPV(8%) of Kipushi and Platreef was $2.98 billion ($2 billion attributable to Ivanhoe) and $5.1 billion ($3.3 billion attributable to Ivanhoe), respectively. It means that the two projects have a combined after-tax NPV(8%) attributable to Ivanhoe of $1.73 billion at the base-case metals prices that are well below the current spot prices, and $5.3 billion based on the March spot prices, which are well above the current spot prices, however, over the coming years, it is more probable that the metals prices will approach the March levels than that they will decline and remain close to the base-case levels.
Conclusion
As can be seen in the chart below, in less than 4 months, Ivanhoe's share price declined by approximately 50%. The good news is that the technical and psychological support in the $5 area has been holding for now. If it resists also over the coming days, the share price may bounce up and test the 50-day moving average that is situated in the $6.8 area now. However, the metals prices need to start recovering first. What is positive, it looks like an RSI divergence is emerging, as the RSI has made a series of several ascending lows, while the share price keeps on making descending lows. This indicates that a trend reversal should be near.
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The numbers show that Kamoa-Kakula, after Phase 3 is completed, has the potential to push Ivanhoe's market capitalization back to the $10 billion area. Moreover, there are Platreef and Kipushi that provide several billion of additional value. Therefore, I wouldn't be surprised to see Ivanhoe's share price to return back to the $10 level in the mid term. Or in the near term, if the metals prices recover quickly. Yes, there are other companies that offer much bigger upside potential and that operate in better jurisdictions than the Democratic Republic of Congo and South Africa. But they usually don't offer exposure to three world-class projects focused on metals that are crucial for electric vehicles and green energetics. Therefore, Ivanhoe's shares are worth considering at the current price level. However, given the negative market sentiment, it is reasonable to wait for signs of bottoming or to accumulate the position slowly, in several tranches.