Ivanhoe Mines (OTCQX:IVPAF) has seen a sharp drop in share price recently, as have other copper miners. I’ve been following Ivanhoe Mines for almost a decade. And a good part of that time, I was a shareholder of Ivanhoe. However, at the beginning of last year, after the share price approached the $8 level, I liquidated the rest of my position. Yes, it was too early and I didn’t enjoy the $10 ride. But now the stock price is back to $5 and it’s time to look for a new entry point.
Ivanhoe Mines has several major assets. The Kipushi project with its fairy zinc grades of over 30%, as well as the Platreef mine which is soon to become one of the largest platinum group metal mines in the world, are business creators . But for Ivanhoe, these are just a few side projects, as its biggest asset is the giant, world-class Kamoa-Kakula multi-generational copper mine, which is becoming one of the biggest, and perhaps even the largest copper mine in the world in several years. .
Kamoa-Kakula is a large, high-grade, low-cost copper mining complex, owned 39.6% by Ivanhoe Mines, 39.6% by Zijin Mining (OTCPK: ZIJMF), 0.8% by Crystal River Global Limited, and 20% owned by the Democratic Republic of Congo. Yes, Kamoa-Kakula’s biggest (and perhaps only) flaw is its location in the Democratic Republic of Congo. Fortunately, to date, this fact has not caused any major problems. And hopefully that won’t change in the future.
Kamoa-Kakula began production ahead of schedule, in June 2021. Only 9 months later, still ahead of schedule, its first expansion was completed, when on March 22, Ivanhoe Mines announced commissioning at hot from the Stage 2 mill. This helped raise the production rate to 30,379 tonnes (67 million pounds) of copper per month. This volume of copper was produced in June alone. Second quarter production was 87,314 tonnes (192.5 million pounds) of copper.
Due to the growth in production, unit production costs continue to decline despite global inflationary pressures. Cash cost increased from $1.28/lb in Q4 to $1.21/lb in Q1. And it is likely that a further decline will also be reported for the second quarter. In the first quarter, the Kamoa-Kakula mining complex sold nearly 114.5 million pounds of copper, recording revenue of $519.6 million, operating profit of $380.5 million and net profit of $221.3 million, of which $87.1 million is attributable to Ivanhoe.
Importantly, production is poised to continue growing. The planned capacity of Phase 1 and Phase 2 operations is 7.6 Mtpy. However, several options to unclog the processes have been identified. The result should be an increase to 9.2 Mtpa. This is expected to increase annual copper production from 880 million pounds to 990 million pounds. But this is not the end. A PFS for the Phase 3 expansion is expected to be prepared by the end of this year. It is expected to increase the overall production of the Kamoa-Kakula mine to 1.32 billion pounds of copper, by developing two new mines (Kamoa 1 and Kamoa 2) and a 5 Mtpy mill. Additionally, according to the press release:
The associated electrical and surface infrastructure for Phase 3 will be designed to support future extensions.
Once the Phase 3 expansion is complete, likely by the end of 2024, Kamoa-Kakula will be one of the three largest copper mines in the world. Further expansion will likely propel it into the top spot.
Another piece of good news is that future Kamoa-Kakula expansions are expected to be funded solely by cash flow generated from the mine. This will limit the cash flow received by Ivanhoe Mines and the other partners in the near future, however, once the Phase 3 expansion is complete, this should change quickly. Although there should also be phase 4 and phase 5 (pictured below), the amount of money to be distributed to partners should continue to increase. And given the low production costs, Kamoa-Kakula should remain profitable even in the event of a sharp drop in the price of copper and massive losses for the majority of other copper producers. As can be seen in the graph above, Kamoa-Kakula is quite close to the bottom of the copper industry cost curve.
Meanwhile, Ivanhoe continues to explore its 100% owned Western Foreland property, which covers an area of approximately 2,400 km² directly west and north of the Kamoa-Kakula properties. The plan is to spend $25 million on 50,000 meters of shallow drilling and 45,000 meters of regional stratigraphic drilling this year alone.
Ivanhoe’s market capitalization is currently $6.66 billion. That may seem like a lot, however, as the first quarter showed, Kamoa-Kakula was able to generate an $87 million net profit for Ivanhoe on its own. Yes, the average copper price was around $4.5/lb, and it’s much lower now (around $3.4/lb), however, large copper market deficits are forecast for the second half of his decade. As a result, similar or even higher copper prices are entirely possible. In the first quarter, Kamoa-Kakula sold 114.5 million pounds of copper. In 2025, after Phase 3 ramp-up, quarterly sales are expected to reach 330 million pounds of copper. After a few simplifications, it is possible to make a very rough estimate of a net profit of $250 million for Ivanhoe. That 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 market capitalization of $10 billion does not take into account other assets held by Ivanhoe. The Western Foreland property has real potential to hold another Kamoa-Kakula, or something similar. The Kipushi project will be one of the richest base metal mines in the world. According to the feasibility study, it has an after-tax (8%) NPV of $941 million ($641 million attributable to Ivanhoe) at a zinc price of $1.2/lb. And Platreef, once fully developed, is expected to become one of the largest, if not the largest, PGM mines in the world, moreover, comfortably positioned at the bottom of the PGM mining industry’s cost curve. According to the feasibility study, Platreef has an after-tax (8%) NPV of $1.7 billion ($1.09 billion attributable to Ivanhoe) at a platinum price of $1,100/toz, a price of palladium price of $1,450/toz, a rhodium price of $5/toz, gold price of $1,600/toz, nickel price of $8/lb and copper price of $3.5/lb.
Incidentally, according to the company’s latest presentation, based on spot metal 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. This means that the two projects have a combined after-tax (8%) NPV attributable to Ivanhoe of $1.73 billion at base metal prices well below current spot prices, and $5.3 billion at base metal prices. March spot prices, which are well above current spot prices, however, over the next few years, metal prices are more likely to move closer to March levels than to decline and stay close to the levels reference.
As can be seen in the chart below, in less than 4 months, Ivanhoe’s stock price is down about 50%. The good news is that technical and psychological support in the $5 area is holding for now. If it also holds up over the next few days, the stock price could rebound and test the 50-day moving average which is currently in the $6.8 area. However, metal prices must first begin to recover. What is positive is that it looks like an RSI divergence is emerging, as the RSI has made a series of several ascending lows, while the stock price continues to make descending lows. This indicates that a trend reversal should be close.
The numbers show that Kamoa-Kakula, after the completion of Phase 3, has the potential to bring Ivanhoe’s market capitalization back into the $10 billion zone. Additionally, there are Platreef and Kipushi which bring several billions of additional value. Therefore, I would not be surprised to see Ivanhoe’s stock price return to the $10 level in the medium term. Or in the short term, if metal prices recover quickly. Yes, there are other companies that offer much greater growth potential and operate in better jurisdictions than the Democratic Republic of Congo and South Africa. But they typically don’t offer exposure to three world-class projects focused on crucial metals for electric vehicles and green energy. Therefore, Ivanhoe 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 build up the position slowly, in several tranches.