Raymond James Analyst: Sell Ivanhoe Despite Jump in Share Price

Shares of Ivanhoe Mines Ltd. (IVN) jumped after the company agreed to sell its 42% stake in Jinshan Gold Mines Inc.[JSE/TSX], whose main asset, the Chang Shan Hao gold mine in Mongolia, began producing output last year. The C$218-million deal gives Ivanhoe the right to buy up to 1.5 million Jinshan shares at C$2.50 each until June 26, 2009.

Ivanhoe is awaiting approval from the government of Mongolia to develop the giant Oyu Tolgoi copper and gold project with partner Rio Tinto (RTP). But delays come with more spending by the Vancouver-based company. To make things worse, the government is proposing to take a greater control of mining assets.

The delays, as well as a premium share price, capital cost inflation and project execution risks, together present a compelling case to sell Ivanhoe shares, Raymond James analyst Tom Meyer told clients in a note before Ivanhoe’s announcement. He has a C$7.50 price target and “underperform” rating on the shares, and has reduced his net asset value estimate from C$14.18 to C$13.92.

He recommends investors switch into Northern Dynasty Minerals Ltd. (NAK), which is working with Anglo American (AAUK) to develop a project in Alaska. The Pebble Mine, which is roughly 200 miles southwest of the state capital, Anchorage, is consider one of the world’s largest copper and gold deposits. Mr. Meyer has a “strong buy” rating and C$29 price target” on its shares.

Ivanhoe spent $304-million in 2007, and ended the year with $146-million in cash. But it has been drawing on the $350-million convertible facility Rio Tinto provided to keep the project moving, Mr. Meyer noted. He said their partnership deal calls for Ivanhoe to issue 46.3 million shares at $8.38, or $388-million, to Rio Tinto when a “suitable investment agreement” is made with Mongolia. But the timing of this agreement is “highly uncertain” and could be delayed well beyond the country’s elections in June 2008, the analyst added.

He also said he would not be surprised to see capital costs climb to $4-billion and mill throughput rise to 100,000 tonnes per day, up from his initial base estimate of $2.75-billion and 85,000 tonnes, respectively.

Comments

[Alaskanreader]

I sure hope Mr. James didn't write this article, because if he did I wouldn't put much stock in his research. He stated that the Pebble Project in Alaska is "roughly 200 miles southwest of the state capitol Anchorage... Well the people of Juneau the real capitol of Alaska) would certainly be surprised to hear that.