Ivanhoe has reconfirmed in recent press releases, including this morning’s webinar, that it expects to fund Kamoa-Kakula’s Phase 3 (and 4) expansion from mine cash flows assuming copper prices remain relatively stable. Our model supports this concept, and we currently see no need for any external financing for Phase 3’s $3 billion capex, the bulk of which will be spent this year and 2024.
Our model shows that Phase 1 & 2 cashflows fund Phase 3. At our BMO copper price deck which averages $3.57/lb copper in 2023 and $3.51/lb in 2024, our modeled Phase 1 & 2 cash flows, plus Kamoa Copper’s approximately $343 million cash balance, provide the funds required for the expansion. Using broad assumptions we see a break-even of cashflow vs. 2023/2024 capex likely between $3.25- $3.50/lb copper prices vs. a current spot price of ~4.20/lb. We would also note that every day at recent copper prices, that well exceed our modeled average prices, contributes to further bolstering the mine’s treasury and reduces the chance of requiring additional financing should prices taper.
If external funding is needed, Ivanhoe has discussed the use of short-term debt financing from in- country sources in the DRC, as well as possibly a copper pre-sale or offtake agreement. Furthermore, as we discussed in our note following yesterday’s IDP for Phase 3 and 4, in our view the risk of any significant capex overruns is notably low due to the advanced stage of the project which has completed detailed engineering and ordered major equipment, and almost completed civils and foundations for the main infrastructure. Overall, in our opinion, IVN is in a strong position to fund major expansions at Kamoa-Kakula without financing at the company level.
As capital is spent over 2023 and 2024, in accordance with the budget laid out this morning, we expect NPV to increase as production growth draws nearer and capital spending is realized. Looking at the impact of achieving Phase 3 alone, we expect NPV growth in the general range of US$1/share over 2023 and 2024. Further growth from Phase 4 in 2030, as well as from Platreef and Kipushi over the coming years, adds additional value.
Looking Ahead: Transitioning From Growth to High-Margin Steady State
The IDP shows a relatively steady production profile from the expanded Kamoa-Kakula mine, particularly after Phase 4’s timing was adjusted to smooth out the production profile and optimize the feed to the smelter. The mine is expected to produce over 600,000t of copper per year until approximately 2040, averaging 620,000t per year for the first 10 years. The mine will maintain production above the 500ktpa mark for almost 30 years. Peak production of approximately 700kt is expected in 2031. This substantial production profile is supported by grades at multiples of peer producers. Discussions on the webinar emphasized that the IDP increased reserves by 101%, and an increase in high-grade ore from Kakula/Kakula West has helped the grade profile over the first 10-15 years.
The steadying production profile implies a transition from 2025 onwards from a growth phase to an extended period of relatively steady production and by extension cashflows. We would expect the market to start looking ahead in 2024 and onwards to more comparable operating cashflow, free cashflow, and EBITDA metrics against peer copper producers. In our opinion, Kamoa-Kakula’s advantage of very high grades (and therefore high margins) is likely to drive a premium valuation compared to peers, even after Kamoa-Kakula’s growth is realized.
Another takeaway from this morning’s webinar is the possibility of accelerating the Phase 4 expansion.