February 14, 2022 | 16:12 ET~
Ivanhoe Mines
IVN-TSX Rating Price: Feb-14 Target Total Rtn Outperform $11.29 $15.00 33%
Kipushi Agreement to Build High-Grade Zinc Mine
Bottom Line:
Ivanhoe's Kipushi feasibility study announced this morning extends mine life and increases annual zinc production. The announcement included an updated operating agreement that will see IVN transfer 6% ownership to DRC state-owned Gecamines, leaving IVN with 62% of the project that will decrease to 57% in 2027 and 20% after the current reserves have been mined. While the NAV impact is minimal (Kipushi is ~6%
of our NAV), we view the announcement as positive as it enables investors to have visibility on the project moving towards production.
Key Points
The impact of increased production is offset by moderately larger capex and the updated ownership scheme. After modeling the FS assumptions, our Kipushi NAV has decreased 16.5% from $708mm to $591mm. Kipushi makes up 6% of our IVN NAV and today's updates do not make a material impact on our overall valuation.
We view the announcement as a net positive since it allows the project to move ahead. Without an agreement between IVN and Gecamines, the project was effectively stalled; today's announcement sets the stage for construction activities to begin by year-end to achieve zinc production either in 2024 or 2025.
New agreement transfers more ownership to Gecamines. The agreement involves IVN transferring 6% ownership to Gecamines, resulting in a 62%/38% ownership between IVN and Gecamines. IVN will transfer another 5% ownership on January 25, 2027, and the final ownership split will be 20% Ivanhoe and 80% Gecamines. This final ownership level is triggered after mining 12mt (vs. 10.8mt of current reserves and our modeling of 12.1mt modelled in our valuation).
More zinc production from high-grade Kipushi. The feasibility study expanded Kipushi zinc production to 240ktpa over 14 years, a life-of-mine increase from the 2017 PFS, which forecasted 225ktpa over 11 years. IVN optimized the project to mine higher grades earlier in the mine plan, averaging 278ktpa of zinc in the first five years. Kipushi is one of the highest-grade zinc projects in the world, averaging a 32% zinc grade.
Catalysts for IVN include results from Phase 1 operations in Q1, Phase 2 startup in Q2, and Phase 3 prefeasibility study in Q3 at Kamoa-Kakula; Western Forelands exploration mobilization; Kipushi financing in H2 2022; and updates on Platreef's integrated development plan this quarter.