Ivanhoe Mines Ltd. (IVN) and its partner Rio Tinto Alcan should reach a deal with the Mongolian government in the next six to nine months that will allow the Oyu Tolgoi copper and gold mine to come onstream in 2012, says Desjardins Securities analyst John Redstone. He told clients that during a four-year period the project will build up to production of close to 800,000 metric tons of copper and 900,000 ounces of gold annually.
He also forecasts a copper supply shortage as global demand for the metal grows but the limited supply response fails keep up. Long-term prices are expected to average $2 per pound.
“Unfortunately, there are few potential new mine projects, as years of low prices have led to a lack of viable projects,” the analyst said.
As a result, Mr. Redstone feels Ivanhoe shares are undervalued and initiated coverage with a C$13.90 price target that represents upside of more than 25%.
“Like most major projects, Oyu Tolgoi has encountered delays,” he said. “Nevertheless, it remains one of the largest, high quality undeveloped copper mineral targets.”
Negotiations for an investment agreement for Oyu Tolgoi involving ownership, taxes, power costs and water access are ongoing.
Mr. Redstone added that a considerable amount of pre-development work has continued there, but since there are a number of alternative development plans, several changes may occur before start-up.
In terms of financing, he expects Oyu Tolgoi’s gold production will be sold forward through 2018 and noted that average prices for the next 10 years on forward markets is approximately $1,100 per ounce.
Mr. Redstone also feels Ivanhoe’s stake in SouthGobi Energy Resources Ltd., Ivanhoe Australia Ltd, and the Bakyrchik gold project in Kazakhstan will support its valuation.