Ivanhoe Mines Ltd T.IVN

BMO re Q1

[guarantor1]

May 10, 2022 | 15:33 ET~

Ivanhoe Mines

IVN-TSX Rating Price: May-9 Target Total Rtn Outperform $9.18 $16.50 80%

Strong Cost Performance at Kakula/Kamoa; More Production Growth

Bottom Line:

Ivanhoe reported Q1 earnings this morning, showing strong cost performance at Kakula/ Kamoa with a C1 cash cost of $1.21/lb beating our $1.25/lb expectation. EPS was $0.02, below our estimates and consensus both at $0.06, as non-cash fair value adjustments impacted earnings. Phase 2 of Kakula/Kamoa came online early in Q2, and we expect to see a significant increase in copper production quarter over quarter. Ivanhoe is also advancing Phase 3 of the mine as well as exploration at the adjacent Western Foreland property.

Key Points

Strong cost performance at Kakula/Kamoa. C1 cash costs of $1.21/lb beat our estimate, and Ivanhoe attributed the lower costs (Q4/21 was $1.28/lb) to increased production as well as the project's resistance to inflationary pressures, partly via its use of renewable power. The downward trajectory of production costs at the mine to date is notable to us, given that Q1 costs are already at the bottom of IVN's guided $1.20-1.40/ lb range.

Production to increase with Phase 2 this quarter. The second phase of the mine entered commercial production on April 7 and is expected to double the production capacity once it ramps up. After producing a record 55,602t in Q1, we forecast 81,000t of total copper production in Q2, rising to 101,000t in Q4 as Phase 2 ramps up.

Phase 3 construction approaching. Construction of Phase 3 will begin in the second half of this year, and Ivanhoe is forecasting over $480mm of Phase 3 capex to be spent in 2022. The Phase 3 capital will be funded from mine cash flows, and will include starting construction of a 500ktpa smelter.

Western Foreland exploration drilling coming soon. Ivanhoe will drill up to 95,000m at the property this year after laying the required infrastructure in 2021. Western Foreland is an extensive 2,407km2 property adjacent to Kakula/Kamoa and 100%- owned by Ivanhoe. Drilling is expected to begin in May.

Well funded for growth. Beyond Kakula/Kamoa and Western Foreland, Ivanhoe is developing the world-class Platreef and Kipushi projects with a combined capex this year budgeted at $248mm. The company had $562mm of cash at the end of Q1, in our opinion putting it in a strong position to fund significant growth.

Key Changes

Estimates Q2 / 22E

EPS $0.09

Previous $0.07

CFPS $0.10

Previous $0.07

EBITDA $240

Previous $73

2022E 2023E

$0.29

$0.27

$0.24

$0.31

$467 $468

$408 $465

This report was prepared by an analyst(s) employed by BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules.
For disclosure statements, including the Analyst Certification, please refer to page(s) 5 to 8.

Metals & Mining - International

Andrew Mikitchook, P.Eng., CFA

[e-mail]

Kevin O'Halloran [e-mail]

Legal Entity: BMO Nesbitt Burns Inc.

Analyst [phone] Associate [phone]

14 12 10 8 6 4

2YR Price Volume Chart

      

20 Nov May Nov May

LHS: Price (C$) / RHS: Volume (mm) Source: FactSet

60 40 20

Company Data

Dividend
Yield
NAV
BMO Estimates
(FY-Dec.) 2021A 2022E EPS $0.09 $0.29↑ CFPS $(0.01) $0.24↓ EBITDA $(27) $467↑ EV $8,627 $9,005↓ Consensus Estimates

2021A 2022E

EPS $(0.04)

Valuation

2021A 2022E

P/E NM 25.1x P/CFPS NM 30.3x EV/EBITDA NM 19.3x

in C$

1,210.6 $11,113 0.8x

in $

2023E

$0.19 $0.28 $468↑ $9,234↓

2023E

$0.54

2023E

37.3x 25.6x 19.7x

Q4

$0.00 SharesO/S(mm) 0.0% Market Cap (mm)

$11.08 P/NAV

QTR. CFPS

2021A 2022E 2023E

Our Thesis

In our opinion, Ivanhoe's portfolio of world-class development assets is undervalued by the market. With production from Kamoa-Kakula expanding aggressively, we expect a revaluation in the near and medium terms as the company graduates to a high-margin world-class producer.

Q1 Q2

Q3

$(0.02) $(0.01) $(0.02) $0.04 $(0.02)a $0.10 $0.08 $0.08 $0.08 $0.07 $0.07 $0.06

Ivanhoe Mines - Block Summary Model

Income Statement

2021A 2022E

2023E

Sales Revenue 225	573	508
Operating Costs 0	0	0
EBITDA $(27)	$467	$468
ND/EBITDA (3.8)x	0.8x	1.3x
Depreciation 0	0	0
EBIT (27)	467	468
Less Net Interest Expense 31	18	14
Pre-Tax Profits (27)	467	468
Less Tax (0)	120	221
Less Minorities 0	(5)	0
Net Income to Equity 44	411	258
Adjusted Net Income to Equity 113	346	233

Cash Flow Statement

Balance Sheet

2021A 2022E

2021A 2022E

2023E

2023E

Operating Cash Flow (7)	286	339
Investing Cash Flow (209)	(536)	(579)
Financing Cash Flow 562	(4)	(40)
Increase/Decrease in cash 345	(245)	(279)
Free Cash Flow (59)	(236)	(240)
Cash at Beginning of Year 263	608	363
Cash at End of Year 608	363	84

Total Current Assets 687	445	166
Total Assets 3,218	3,655	3,954
Total Current Liabilities 32	79	70
Total Liabilities 841	841	872
Minority Interest (117)	(120)	(120)
Shareholders' Capital 2,377	2,814	3,082
Net Debt 105	360	590
Net Debt/Equity 0.0x	0.0x	0.0x

Source: BMO Capital Markets, Company Reports

Ivanhoe Mines | Page 2

Valuation

Our valuation is based on a 10% discount rate, and a 1.5x P/NAV target-setting multiple at our long-term commodity price assumptions.

Upside Scenario $19.00

Our upside scenario is based on 1.75x our NAV10% NPV/ share estimate at BMO metal price assumptions.

Downside Scenario $5.50

Our downside scenario is based on 0.5x our NAV10% NPV/ share estimate at BMO metal price assumptions.

-40%

Downside Scenario 5.50

Current Price 9.18

+80%

Target Price 16.50

in CAD

+107%

Upside Scenario 19.00

Key Catalysts

Ongoing updates on Kakula/Kamoa debottlenecking to exceed design capacity; Phase 2 ramp-up imminently; updated PFS and details on sizing and timing of Phase 3; Kipushi and Platreef updates delivered to lock in development timelines.

Company Description

Ivanhoe is a mining development company with projects in South Africa and the Democratic Republic of Congo. Its Kamoa-Kakula project started production in May 2021. Its other assets are the Platreef PGE-Ni-Cu-Au development project in the Bushveld region of South Africa, and the Kipushi zinc/copper mine in the DRC.

IVN-TSX Glossary Company Research Models

May 10, 2022

Costs Trending Downward at Phase 1

Cash costs at Kakula/Kamoa decreased to $1.21/lb in Q1, steadily down from $1.28/lb in Q4/21 and $1.37/lb in Q3/21. On the conference call, management generally attributed the decline to a continued rise in production spreading fixed costs across a larger production base, and also highlighted the mine’s low GHG emissions as a key driver of the low costs.

Kakula/Kamoa currently sources renewable electricity from the Mwadingusha hydropower plant and plans to refurbish the larger Inga II hydropower plant to power the Phase 3 expansion of the mine. It was also noted on the call that these renewable power sources provide insulation from inflationary cost pressures as their power costs stay level. Ivanhoe also announced that it aims to make Kakula/Kamoa a net-zero carbon emitting mine, and is working towards electrifying its underground mining equipment fleet with battery-electric vehicles. This matches similar battery-electric equipment plans at Platreef, where the company has taken first deliveries, and plans to build a solar power plant starting in August.

Costs are likely also aided by Phase 1’s continued outperformance over design throughput rates. The plant has achieved a consistent throughput of 10-15% above nameplate capacity, and the company highlighted that the Phase 2 plant has also regularly outperformed during its first few weeks of production.

Exhibit 1: Actual and Expected Cash Costs at Kakula/Kamoa

1.6 1.4 1.2

1 0.8 0.6 0.4 0.2 0

Phase2comesonline

Phase3comesonline

       

Q3/21 Q4/21

Q1/22 Q2/22E

Q3/22E Q4/22E 2023E

2024E

Source: Ivanhoe Mines, BMO Capital Markets.

Exhibit 1 shows Kakula/Kamoa’s C1 cash cost performance, declining over the past three quarters, as well as our forecast for the mine’s cash costs as Phase 2 and 3 come online. We forecast costs leveling off at $1.18/lb (just below the $1.20/lb low end of guidance) once Phase 2 begins, with costs dropping further upon commencement of Phase 3 in 2024 as production significantly increases. The PFS for Phase 3 is expected in the second half of this year, at which time we will update our modeling of Phase 3 according to the disclosure in the technical report.

Ivanhoe Mines | Page 3

May 10, 2022

C1 CashCost(US$/lb)

Well-Funded, With a World-Class Project Pipeline

Ivanhoe’s Q1 results outlined capital spending expectations for the year across its portfolio of world-class projects. While Q1’s record copper production of 55,602t is no small number, the company has plans to greatly increase its production profile in the coming years.

Phase 2 of the mine began commercial production on April 7, and construction of Phase 3 will begin this year. Phase 3 will add 5mtpa of processing capacity, which combined with the debottlenecked Phases 1&2, will provide a total of 14.2mtpa of capacity. Ivanhoe noted on the conference call that an eventual Phase 4 will also be sized at 5mtpa, and the front-end crushing circuit of Phase 3 will be sized at 10mtpa to accommodate the future addition of a fourth phase.

We outline Ivanhoe’s planned capital expenditures in Exhibit 2. With $562mm of cash at the end of Q1, we would highlight that the company is well-funded to deliver on its growth plans. It is particularly noteworthy that Ivanhoe reconfirmed its expectation that Kakula/Kamoa’s capital spending will be fully funded by cash flows from the mine, providing significant copper production growth with no capital input from the company.

Exhibit 2: Ivanhoe’s 2022 Capital Spending Plans

Remaining 2022 Capex (US$mm)

Q1/22 cash balance $562

Platreef $150

Kipushi $80

Kamoa-Kakula Sustaining* $58 * Funded from mine cash flows

Kamoa-Kakula Phase 2* $364 * Funded from mine cash flows

Kamoa-Kakula Phase 3* $483 * Funded from mine cash flows

Source: Ivanhoe Mines, BMO Capital Markets.

On the conference call, Ivanhoe guided that 2022 Phase 3 capex will be weighted toward the back half of the year, and will fund work including early civil works for the smelter, work at Inga II turbine 5, completion of the Kamoa 1/2 mine portal and start of ramp development and early civil works for the Phase 3 plant. Ivanhoe indicated in the press release it has issued tenders for long-lead equipment.

Building Momentum at Western Foreland

This morning’s press release included a discussion on the 100%-owned Western Foreland exploration property, with Ivanhoe outlining its plans to drill up to 95,000m at the project this year. On the call, management discussed that preparations for the drilling program were made throughout Q1, and drilling will begin this quarter now that the region is entering its dry season.

The drill program budgets for $25mm of drilling, starting with 50,000m of shallow drilling to define sub- outcrop positions and bedrock sampling under the extensive regional sand cover. This will be complemented by up to 45,000m of deeper regional drilling targeting new discoveries.