Ivanhoe Mines (IVPAF/IVN.TO) is one of my largest individual holdings, and the vehicle I’m using to speculate on the eventual rise in copper prices. Some exciting news occurred earlier this year when the company reached an agreement with Chinese mining powerhouse Zijin Mining to sell 49.5% of its Kamoa project for $412 million.
However, this past July, the Congolese government stepped in and put a temporary halt to the deal, wanting more time to negotiate perhaps an even larger stake of the project for its own benefit. Fast forward to this past September, and any objections were dropped, as the Congolese government decided to approve the deal.
Shares of IVN.TO surged immediately following the September 22 news release, up 25%, from C$0.71/share to C$0.89/share:
From Google Finance:
However, those gains were short-lived, as the stock has since retraced back to C$0.62/share, basically at all-time low levels, on no additional news regarding the Zijin deal.
This morning, Ivanhoe Mines announced the following:
From Ivanhoe Mines:
HONG KONG – Robert Friedland, Executive Chairman of Ivanhoe Mines Ltd. (TSX: IVN), and Chen Jinghe, Chairman of Zijin Mining Group Co., Ltd., jointly announced today that Ivanhoe and Zijin have agreed to complete Zijin’s investment in Ivanhoe’s Kamoa Copper Project in the Democratic Republic of Congo on or before December 8, 2015.
Zijin agreed in May this year to acquire, through a subsidiary company, a 49.5% interest in Kamoa Holding Limited for an aggregate consideration of US$412 million. Kamoa Holding is an Ivanhoe Mines subsidiary that owns the company’s interest in the Kamoa Project. Ivanhoe also has agreed to sell 1% of its share interest in Kamoa Holding to Crystal River Global Limited. Details of the transaction are contained in the news release issued by Ivanhoe Mines on May 26, 2015.
Mr. Friedland said that constructive and cordial negotiations between Ivanhoe Mines, Zijin and senior DRC government officials in recent weeks have established an agreed course of action to develop the Kamoa Project.
“Ivanhoe and Zijin, together with Crystal River, have confirmed that all conditions to completion have been satisfied or waived and that the investment will be completed on or before December 8, 2015, in Hong Kong. Zijin is one of the world’s most accomplished miners and the conclusion of this transaction is a major step toward the realization of significant benefits for all of the stakeholders of Ivanhoe and Zijin, as well as for the Congolese people,” Mr. Friedland added.
With Indicated Mineral Resources of 739 million tonnes grading 2.67% copper, containing 43.5 billion pounds of copper, and Inferred Mineral Resources of 227 million tonnes grading 1.96% copper, containing 9.8 billion pounds of copper (at a 1% copper cut off), Kamoa is independently regarded as Africa’s largest, high-grade copper discovery1 and the world’s biggest, undeveloped high-grade copper discovery2. In March this year, members of the Ivanhoe Mines exploration team received the prestigious Thayer Lindsley Award from the Prospectors & Developers Association of Canada for the Kamoa copper discovery, recognized as 2014’s top international mineral discovery.
The 2013 Kamoa preliminary economic assessment (PEA) reflects a two-phased approach to development of the Kamoa Project (https://www.youtube.com/watch?v=Tb3v8OBHhs0). The first phase of mining will target high-grade copper mineralization from shallow, underground resources to produce approximately 100,000 tonnes of contained copper per year in a high-value concentrate. The Kamoa PEA estimated that the pre-production capital required for Kamoa’s first phase of development would be approximately US$1.4 billion. The proposed second phase will entail a major expansion of the mine and mill, and construction of a smelter to produce approximately 300,000 tonnes of blister copper each year. The Kamoa pre-feasibility study is progressing and the completed report is expected to be finalized in early 2016.
That’s great news! Perhaps a strong catalyst to push the stock back up? We’ll see…
To put the current share price in perspective — Zijin’s 49.5% stake of the Kamoa project is valued at $412 million. The entire market cap of Ivanhoe is currently trading at C$480 million… In addition to Kamoa, Ivanhoe also holds two other top-notch projects (Platreef and Kipushi). Previously, Japan Oil, Gas and Metals National Corporation (JOGMEC) and ITOCHU Corporation purchased just 10% of Platreef (when the market was much more favorable to metals) for ~$300 million.
Long-term, the Chinese and Japanese are both bullish on metals. Zijin, in particular has been on a rampant buying spree, knowing full well how depressed metal prices are right now:
- C$81 million investment in Pretium (PVG); ~9.9% ownership stake
- C$105 million investment in Ivanhoe Mines; ~9.9% ownership stake
- $298 million investment in Barrick Gold (ABX); for 50% stake of Barrick’s 95% stake in Porgera gold mine in Papua New Guinea.
On October 21st, at the invitation of the organization committee, Mr. Chen Jinghe, the Chairman of Zijin Mining Group Company, delivered a keynote speech named Under the Economic New Normal: the Present and Future of China’s Mining Industry at the forum of China Mining 2015.
He had this to say:
Mr. Chen points out that it is widely agreed in the market that China’s economy has entered “the new normal”, an era labeled with overcapacity. China accounts for 40-50% of global metal production and consumption, and its per capita figures are twice of the world’s average, leading to a super cycle in bulk commodities over the past ten years. It is not realistic to expect China to continue to lead the world consumption while the consumption growth in China declines and even drop.
Mr. Chen believes that because under the present difficult market conditions when price falls and companies make losses, many mining companies get their profits by increasing production, it will take much longer time than expected to restore reasonable prices by eliminating additional capacity and reducing supply.
In the next 3 to 5 years, commodity prices will still fluctuate at current level, the price of some products may drop even further. Price may rise in the future, but the “Golden Ten Years” will not come back. Mr. Chen says, “Therefore, the more sufficient we estimate the difficulties we are confronted with, the safer we will be. As the new normal is featured with weak demand, over-supply and low prices, survival is priority. To reform and improve management systems established at peak time and apply strict cost control shall be on the top of our must-do list.
At the end of the speech, Mr. Chen amplifies the tremendous stress Zijin Mining faces with in the slump of metal prices and Zijin’s counter measures. Under this new normal, Zijin takes “internationalization, large-scale projects and assets securitization” as strategy, “reform, growth and development” as focus and would very much like to cooperate with domestic and foreign friends to overcome this frosty winter for a better future.
More from China Daily:
China’s largest gold producer Zijin Mining Group Co said it is open to acquisition opportunities in resource-rich countries, as many mining assets are undervalued due to a sluggish global market.
Chen Jinghe, chairman of Zijin, said that the company is still weighing the possibilities for acquisitions but declined to provide any detailed information.
“Chinese mining companies should ‘go out’ and compete in the global market as many undervalued mines present a good buying opportunity,” he said.
Chen said his company’s major focus in overseas assets are gold and copper, especially for large mines with reserves of above 100 metric tons for gold and 1 million metric tons for copper.
“Prices of mining products will fluctuate at the current level for the next three to five years,” he said. However, experts said the tough times are not that bad, as it can be an opportunity for an industrial consolidation and for strategic, profitable acquisitions.
So, in spite of the current dire market environment in metals, at this time, Zijin is being extremely aggressive in going out and acquiring top quality assets because they know that they can buy at bargain basement prices. Long-term, this may turn out to be a brilliant strategy.
Again, we’ll see…
I’m doing my best to take a page out of Zijin’s book! I’m also on the hunt for cheap, high quality mining stocks (particularly in gold and silver) and I’m buying up as much as I possibly can. Although I should point out that it’s probably most prudent for any speculator entering the space to buy in tranches (periodically), spread out over the course of a few years… Commodity prices can (and probably will) continue to head lower, still… But at this stage of the game, it’s about as crystal clear as can be that the current market in commodities is broken.
Opportunities are more than plentiful right now… As an investor/speculator with patience, it’s like being a kid in a candy store.
Full Disclosure: I currently own 40,000 shares of Ivanhoe Mines (IVPAF).
Photo Credit: Mining.com