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A geologist with experience working in exploration and development within Asia and Africa. Significant experience in project investment and due diligence. Particular focus on resource stocks and emerging markets.
My company:
Holden Geological
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  • An Overview Of Ivanhoe's Kamoa Project

    Ivanhoe Mines (OTCPK:IVPAF), (TSX:IVN), is a Vancouver based mining company initially listed as Ivanplats Limited in 2012. The company has 3 key projects, Kamoa copper project, the Kipushi Zinc Mine, in the Democratic Republic of Congo, and the Platreef Platinum deposit in South Africa. In this article I will study the Kamoa Project and look at valued it adds to the company.

    (click to enlarge)

    Figure 1 Location of the Kamoa and Kipushi deposits, and other major mining projects in the Central African Copper Belt, Source: Ivanplats, 2012.

    The Kamoa Project is located on the western end of the Central African Copperbelt, 25 km west of the town of Kolwezi via unsealed roads, 270 km west of the provincial capital of Lubumbashi, and 250 km away from the Kipushi project.

    Lubumbashi hosts the closest major airport and rail link, with the latter providing access to ports in Tanzania, Mozambique, and South Africa. The Central African Copperbelt is host to some of the best copper deposits in the world.

    As such the project is located close to many copper smelters in the area so off take agreements shouldn't be too much of an issue.


    The Kamoa project is largely continuous and tabular sediment hosted stratiform copper deposit, this is the most common style of mineralisation in the Congo Copper Belt, and host to some of the largest deposits in the area, for example Tenke Fungurume, a Joint Venture between Freeport and Lundin Mining.

    (click to enlarge)

    Figure 2. Schematic section through the Kamoa Deposit Source: Ivanhoe.

    Mineralisation at the majority of the Katangan Copperbelt orebodies such as at Kolwezi and Tenke Fungurume, are hosted in the Mines Supergroup. The mineralisation at Kamoa differs from these deposits in that it is located in the Grand Conglomerat unit at the base of the lower Kundelungu Group. The average grade of the deposit is 2.64% Cu at a 1% cut off. Many features of the mineralisation at Kamoa are analogous with the stratabound, sediment-hosted Zambian Ore Shale deposits, in particular the Konkola and Mufulira deposits.

    The true thickness of the mineraliisation at kamoa varies between 2.4m to 17.6m with an average of 5.6m; this makes it amenable to mechanised underground mining.

    Mineral Resource

    Kamoa is the largest high grade copper deposit discovered in the African Copper Belt in the last 100 years. The resource table shown below is as of the 2013 PEA.


    Cut-off grade (%)

    Tonnage Mt

    Grade %

    Contained Copper Billion Lbs

    Contained Copper (kt)













    Table 1 Mineral Resource table based on 2013 PEA Report

    Not only is the project one of the world's largest deposits it's also one of the highest grade. This will mean that it is suitable for underground mining, which will be required for the majority of the deposit.

    (click to enlarge)Figure 3 Comparison of Africa's top 10 highest-grade copper discovery's. Source Ivanplats

    The diagram below shows the current mineral resource coloured by copper grade. There is still good potential to increase the resource especially in the South Eastern corner of the deposit.

    (click to enlarge)

    Figure 4 Exploration target area with resource grades, the deposit is still open to the South East with potential to expand the resource.

    Mining Studies

    In August 2012, the government of the DRC granted the mining licenses for the Kamoa Project that cover an area of 400 square kilometres. The licences are valid for 30 years and can be renewed for 15 years at a time, until the end of the mine's life. The project is expected to start producing concentrate in 2017, and development of the first access decline could start as early as next year.

    The true thickness of the mineralisation at kamoa varies between 2.4m to 17.6m with an average of 5.6m, this makes it amenable to mechanised mining, it has been determined that large-scale, room-and pillar mining is the most suitable. This method will be used for resources down to 800m below surface and drift-and-fill will be used below that. The diagram below gives an illustration of the proposed method, these are conventional mining methods are widely used across the industry. Potential problems for this method could be faulting off setting the ore body, and Ivanhoe are continuing to infill drilling at a closer spacing to determine any potential structural issues.

    Figure 5 Room and pillar mining is the proposed method for Kamoa. Source AMEC N43-101 Report.

    The underground operation is expected to produce 4-5Mtpa. Mining will start as a small open pit that will supplement to underground operation during the ramp up phase. It is expected to produce an estimated 4.5 Mt over 5 years.

    (click to enlarge)

    Figure 6 The production tonnages and grades in the first 10 years of mining.

    One of the biggest problems with the project will be the recovery particularly the pillars of ore left behind that cannot be mined on the retreat. Mining recovery has been estimated at between 50%-80%, which is one of the biggest technical risks to the project. Copper recovery will use a floatation circuit with processing recovery rates for concentrate estimated at 84.8% producing an average copper concentrate grade of 32.7%.


    It is important to note the uncertainty that is inherent in the scoping level study work carried out at Kamoa thus far. Most of the inputs for the valuation model were taken from the N43-101 report available here. The company is working the update the PEA into the pre feasibility study, which should be finalised soon.

    Table 2 Results from financial modeling, based on inputs from the PEA.Using Monte Carlo simulation to model the factors below to get an NPV and a NAV/Share

    Table 3 Copper price sensitivity results.

    Financial modeling at a copper price of $2.95/lb base case, gives an NPV of $1.791 billion with an IRR of 21%. Capital is predicted to be paid back within 6.2 Years and the life of all in cost is $2.04/lb of copper produced. Free cash flow should average between $300 -­ $500 million in the first 20 years.

    (click to enlarge)

    I have used the NPV discounted by the development stage (60%) to get a diluted value per share of ~$2 add to this analyst estimates for the values of the Platreef $0.66 and Kipushi $0.58 (which I intend to look at in another article). Were looking at a value per share for Ivanhoe of around $3.24, and there is a lot of upside in that with further drilling at Kamoa and a PFS soon, with the continuing construction of the Platreef. Real value won't be seen for 4-5 year when the mines become operational.

    (click to enlarge)

    Figure 7 Monte Carlo Simulation Results

    Looking at a less optimistic simulation scenario Kamoa's mean NAV/share is $1.29 highlighting the technical risks associated with the project, the variations of the simulation are shown below.

    (click to enlarge)

    Table 4 Simulation Variables

    Obviously with more insight into the project from the update PEA and feasibility study to follow there will be more clarity on these variables. In this case the mining dilution is varied from 20% to 400% to represent the potential problems with ore continuity, capex and opex are also increased.

    Share Price

    IVN Chart

    IVN data by YCharts

    The current share price has trended lower since the company IPO at $4.75 to a low of $0.99 this week, the current market capitalisation is nearly $700 million.

    According to Bloomberg the Initial public offering was the worst performing IPO larger than $100million globally in the last 12 months. The company may not receive the premium it may usually get due to the locations of its projects, which is one of the reasons for the lower price, however in 2011 Itochu the Japanese commodity trader spent $280 million for 10% of the Platreef valuing it alone at over $2 billion, and at that time it was half the size. Itochu are expected to continue to help to provide finance for its development. Ivanhoe is likely to have to find a similar partner to develop Kamoa, with its high capital costs. The company has said it was in "detailed discussions" with major international mining industry "participants" for financing and developing the project and associated infrastructure. The decline in Ivanhoes' share price since listing will make further equity financing difficult, so this will become even more likely.


    Robert Friedland is the founder of Ivanhoe Mines Ltd and has been the Executive Chairman and director since November 2000. He has had considerable success in finding and developing mines around the world including the chain of copper, gold and silver deposits at Oyu Tolgoi. He has been described as visionary by Frank Holmes, chief executive officer of U.S. Global Investors Inc. who also have a stake in the company.

    "I've bought some more on the down days because it will have its day," Holmes said in a July 11 phone interview. "It's Robert Friedland and he's a visionary and he's relentless."


    The government of the Democratic Republic of Congo have delayed a recent export ban of copper and cobalt concentrate, the hope is to encourage smelting in country. Ivanhoe intends to develop a smelter onsite, however this may not be in place at the beginning of operation, and production will start as concentrate only. There are other potential smelters to use in DRC, used by Glencore and Freeport. The government has tried to bring in these changes in 2007 and 2010 however both times it was abandoned. The Governor of Katangan Province has also stated he won't enforce the new laws.

    Electricity - DR Congo has had power issues particularly in the Katanga Region has a power shortage of more than 300 megawatts, according to a statement by SNEL the state-owned electricity company. The province was supposed to purchase power from neighbouring Zambia to make up for part of the shortfall. Ivanhoe has signed a memorandum of understanding with SNEL to upgrade two power stations for the entitlement of 100MW from these facilities.

    Cash, the company has cash on hand after a recent capital raise, however this is quickly being burnt through (~$20million per month) as the company continues to drillout Kamoa and develop Platreef, another financing by one way or another won't be too far away.

    For more reasons not to buy see a presentation by Rick Rule here.


    In summary, Ivanhoe owns 3 world-class deposits and in the long term they have the potential to bring significant value to the company. They have operations in high-risk jurisdictions and may not be suitable for some investors and it's not a stock that will double over night.

    Tags: IVPAF, Mining
    Oct 12 3:18 PM | Link | Comment!
  • Some Important Mining Terms And What They Mean For Investors: Part 1


    Mining is an inherently high risk and uncertain business for investors. In this post I will discuss some important technical terms, namely dilution, and high grading that have a large effect on the value of projects.


    Dilution is a term that refers to the waste material in a mine that is mined with the ore but is not separated from the ore during the operation. This waste is mixed with the ore and sent to the processing plant. Dilution can be a problem in both open pit and underground mines.

    Dilution happens in two ways: Low-grade pods of mineralization within a mining block that can't be separated is inevitable in open pit operation and is termed internal dilution. External (or Contact) Dilution is waste rock outside of the ore body that is mined within a mining block. This varies with the shape of the orebody, drill and blast techniques, and the scale of the operation. Unlike internal dilution external dilution can be controlled using good mining practices, and the appropriate mining techniques.

    Dilution is expressed as a percentage and calculated using the formula below.

    The main concern with dilution is the reduction of the mill feed grade (the grade sent to the mill). The dilution can vary significantly depending on the type of mineral deposit.

    In the diagram above the deposit is relatively homogeneous, for example a Copper-Gold porphyry may have minimal dilution ~ 10%. Where as a vein hosted deposit is likely to have much higher dilution up to 50% or more.

    The effect of the dilution on the mill feed grade can be determined using the formula below.


    • Feedgis Mill Feed Grade
    • Oreg is the grade of ore in the ground
    • Wasteg is the grade of the waste rock
    • Dilution is the dilution as a percentage

    The table below shows the effect dilution has on Mill feed grade.

    Another aspect of the problems with dilution can be shown in the Palabora Mine (Palabora Mining Company, PBOAF) in South Africa. Originally operated as an open pit, production finished in 2002, after a decision in 1996 to continue mining underground as a block cave operation. The underground mine that has since been developed is the deepest block cave in the world with the largest column height. It has the lowest average grade of any underground mine at 0.6% Copper. Full production was reached in 2002, with the main shaft designed to haul 30,000 tons but has managed 39,000 per day.

    Since the closure of the open pit in November 2004, there was a major failure in the pit wall as shown in the photo below. So why should this be a big problem now the open pit is finished? Well this failure deposited an estimated 59,000 tons of waste rock onto the floor of the open pit. This is going to have a significant impact on the dilution in the block cave in the future. All of this waste will be drawn down with the ore into the block cave diluting the already low grade. This has been projected to lower the mine life by 7 years, which equates to a loss of 20% or 47Mt of the original ore body.

    (click to enlarge)

    So while investors should be concerned about the grade of the deposit, they should look at the potential dilution, and how that affects the grades that are going to the mill.

    High Grading

    High grading is the process of mining grades higher than that of the reserve grade. Mining plans are governed by the geology, so the shape of the ore body may determine that higher grades are mined at the beginning of the mine life. Although mining high grades at the beginning of a project is normal for many projects, main reasons are to improve the NPV, IRR, and payback period.

    If a company plans to mine for 10 years at 2 grams per ton gold (g/t), in the first two years it could mine higher grades around 2.6 g/t. This lowers costs and increases production early in the mine life, and increases company's cash flows earlier.

    By the third year, the mine's residual reserve grade is 1.85 g/t. The same amount of material goes through the plant, but production drops while operating costs stay the same. The company is spending the same to produce less gold; there is less profit.

    In this example to maintain the gold production of the first 2 years (75,233 oz.), at a reserve grade of 1.85 g/t the required tonnage of ore through the mill will have to increase 1,405,405t per annum, thus an increase in costs and a reduction in profits. The alternative is of course to continue mining the higher grade which will eventually make the lower grade material uneconomic, and so reduce the overall mineral reserve.

    Quarterly reports should contain information on the reserve grades and what the head grade is going into the mine. If the reserve grade is substantially lower than what is being mined, you know that eventually production will fall.

    A good example would be Nevsun Resources who are mining well under their reserve grade at their Bisha Mine. It is a good position to be in because it means production can rise and cash cost could fall as the mine goes on. The companies with the very high-grade deposits are lucky enough to be able to mine under reserve grade.

    Reserves change over time depending on commodity prices and the mine plans change over time with the geology of the deposit. Companies do high grade on purpose to increase production and lower costs, however this may have detrimental influence on the mines future costs

    References and more information

    EBRAHIMI, A. 2013. The Importance of Dilution Factor for Open Pit Mining Projects. SRK Consulting. Available Here

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jan 07 11:19 AM | Link | Comment!
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