June 5, 2017
Ivanhoe Mines Ltd.
Just starting to unlock the value of Kakula
Our view: Ivanhoe is in the early stages of unlocking the value of the Kakula deposit
which is now one of the largest, highest grade copper deposits anywhere in the world. We
reiterate our Outperform rating and increase our price target to $5.50 as we believe the shares
do not yet reflect the full value of this world class discovery.
Key points:
Kamoa-Kakula one of the world's largest copper deposits: The recent resource update
continues to demonstrate the world class nature of the Kakula deposit which is now one of the
five largest copper deposits in the world (see exhibit 2 for global context). The Kakula
indicated resource is now 116Mt at 6.09% copper (at a 3.0% cut off), and the combined Kamoa-
Kakula indicated resource is 1B tonnes at 3.02% copper (at a 1.4% cut-off). The resource update
did not include recent exploration success at Kakula West which shows the potential to add
additional higher grade ore and 12 drill rigs continue to turn.
Not pricing in the full potential: We do not believe Ivanhoe shares are pricing in the
full potential of the assets, trading at 0.7x our $5.36 NAV estimate despite the strong
performance ytd with IVN up 50% vs. the S&P/TSX global base metals index -1.82% YTD. Our NAVPS
is based on a
$2.85/lb copper price in real terms and an 8% discount rate. We model Kakula starting at 3Mtpa,
growing to 6Mtpa, at Platreef we model 4Mtpa for Phase I and later expanded to 8Mtpa, and for
Kipushi use similar assumptions to the 2016 PEA. Our upside NAV of $6.78 includes additional
value for the Kansoko deposit and Phase 3 at Platreef. Our downside NAVPS of $2.16 factors in
20% higher operating and capital costs and heightened geopolitical risks which could imply a
higher discount rate.
Several catalysts remain this year: We expect additional drill results from Kakula
West drilling, the Platreef Phase I feasibility study in the next few weeks, a pre-feasibility
study for Kipushi in Q3, and a PEA for Kakula before the end of the year.
Price target to $5.50 from $4.25: We have updated our model to include additional
value for Kakula which brings our NAVPS to $5.36 from $2.82. We now use a 1.0x NAVPS multiple to
calculate our target price which is in-line with peers and down from 1.5x previously.
A key risk is rising political tensions in the Congo and South Africa: In the Congo
there is uncertainty over the future of the government as long time president Joseph Kabila
remains in power despite his mandate ending in December, 2016. In South Africa, there are
rumblings of increasing BEE ownership to 30% from 26%. We believe Ivanhoe has taken steps to
mitigate political risk and has strong partners; however, there is increased risk of negative
headlines from both countries in the next 12 months.
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