Ivanhoe's Kamoa-Kakula Now Bigger Than Grasberg, But The Political Risks Weigh On The Share Price

Summary

• The Kamoa-Kakula resources have grown notably.
• Some new targets will be drilled in 2018.
• The new mining code is still the biggest problem.
• The short-term price development is questionable, due to the political situation.

This week, Ivanhoe Mines (OTCQX:IVPAF) announced the results of the updated resource estimate for its world-class Kamoa-Kakula deposit. The resource has increased significantly, which is not surprising as various drill results from the Kakula area reported in 2017 indicated that the update should be very positive. The Kamoa-Kakula project has successfully surpassed the Indonesian Grasberg mine operated by Freeport-McMoRan (FCX) and is officially the 4th largest copper deposit right now. As the deposit is still open in several directions, there is a good chance that it will climb even higher.

At a 1% cut-off grade, Kakula contains indicated resources of 37.7 billion lb, at a copper grade of 2.92% and inferred resources of 4.7 billion lb copper, at a 1.9% copper grade. At a 3% cut-off grade, it is 21.5 billion lb and 0.7 billion lb copper, at copper grades of 5.62% and 3.66% respectively. The exceptionality of the Kakula discovery is further underlined by the fact that even at an extremely high cut-off grade of 7%, the indicated resources contain 7.3 billion lb copper, at a copper grade of whopping 8.07%.

When comparing the May 2017 and February 2018 resource estimates (chart below), the total volume of contained copper has increased notably. At a 1% copper cut-off grade, Ivanhoe was able to add 12.8 billion lb copper of indicated and 1.7 billion lb copper of inferred resources. It means an increase of 51.4% and 56.7% respectively. The indicated resources experienced a respectable growth also at the 3% and 7% copper cut-off grades.

Source: own processing, using data of Ivanhoe Mines

Although the resource grades have declined slightly (chart below), the decline was more than compensated by the resource growth. Moreover, the grades are still at very high levels. All of the other copper miners can only dream about 37.7 billion lb copper at a copper grade of 2.92%, and it all at a 1% cut-off grade.

Source: own processing, using data of Ivanhoe Mines

The resource update is definitely positive. Thanks to it, the total combined Kamoa-Kakula resources contain 80.7 billion lb copper indicated and 13 billion lb copper inferred, at a cut-off grade of 1%. The copper grades equal to 2.72% and 1.87% respectively. According to the Ivanhoe Mines:

The new, independently-verified resource estimate now places Kamoa-Kakula ahead of Indonesia’s renowned Grasberg Deposit as the world’s fourth-largest copper discovery on the planet in terms of contained copper. And it still is growing.

But we are still far from over. As shown in the map below, Kakula is still open along trend to the east and Kakula West is open to the west, south-west, and north-east. Also Kamoa is still open to the west, east, south-east and south. Moreover, Ivanhoe Mines has identified two new exploration targets, in a close proximity to the southern border of Kamoa and Kakula West.

Source: Ivanhoe Mines

Ivanhoe Mines has also announced that the construction of the Kakula twin declines is well underway. The first 200 meters have been already completed and the orebody should be reached in late 2018 or early 2019. The zone of initial mining should be 7.1-11.7 meters thick and it should contain ore with copper grades of 8.11-10.35%.

Also the following statement sounds very positive:

Now that a Mineral Resource estimate has been independently verified for the Kakula West Discovery, Ivanhoe and Zijin can explore options to accelerate future mine production by bringing high-grade mineralization from Kakula West into the Kakula mine plan.

Additional exploration success could have a significant influence on the size, value and timing of the overall development plan; as such, the Kamoa-Kakula development plans will be reassessed and amended as the project moves forward to reflect ongoing exploration results.

As the area where the Kakula twin declines will meet the targeted ore zone is some 5 or 6 kilometers far away from Kakula West (map below), there is only one way how to include Kakula West into the mine plan. To build some additional declines somewhere in the Kakula West area. It means that the Kamoa-Kakula project would technically contain three mines: the original twin declines at Kamoa, the twin declines that are being built at Kakula right now and the potential twin declines at Kakula West. This option was indicated also in the November 28 news release:

Ivanhoe is continuing to explore options to increase Kamoa-Kakula production to 18 Mtpa and beyond. In light of the successful step-out drilling at Kakula West, as well as the potential to find additional resources in high-priority targets located in the untested parts of the Kamoa-Kakula Project, development plans will be reassessed and amended as the project moves forward.

Source: Ivanhoe Mines

Although the development of Kamoa-Kakula progresses well, Ivanhoe's share price still suffers. The main issue is still the new Congolese mining code. The current status of the mining code is relatively unclear. The code should be signed by president Kabila to be enacted. However, although the signature hasn't been confirmed, it is possible that the code is already valid, as according to a recent Reuters article:

Under the constitution, the president has 15 days from the time parliament sends him the bill to either sign it into law or return it to parliament for further deliberation. If he takes no action, the bill automatically becomes law.

It is unclear what day the president received the bill from parliament but Mines Minister Martin Kabwelulu said at a conference on Feb. 7 that the code was “with the president”.

As 22 days have passed since February 7 and there was no news about president Kabila returning the mining code to the parliament, it should be valid now. On the other hand, based on the Ivanhoe's news release, it seems like the Congolese government is willing to negotiate with the miners. It would indicate that the new mining code hasn't been enacted yet:

Ivanhoe Mines recently has had constructive discussions in Kinshasa, the capital of the DRC, regarding the review of the DRC 2002 Mining Code. In conjunction with other international mining companies operating in the DRC, progress has been made toward understanding the key issues of concern to both the government and industry participants.

Ivanhoe Mines has received specific assurance that a detailed consultation process will commence in the near future with the goal of reaching a collaborative, sustainable, and stable long-term fiscal and regulatory framework that provides the foundation for the continued development of the mineral resources sector, and helps create a brighter future for all the citizens of the DRC. The organization of all major mining companies operating in the DRC, announced at the 2018 Cape Town Mining Indaba, will represent the industry during the upcoming consultation period.

According to a Bloomberg article from last Friday, president Kabila should meet with the representatives of Randgold Resources (GOLD), Glencore (OTCPK:GLCNF) (OTCPK:GLNCY), China Molybdenum (OTCPK:CMCLF) (OTC:CMCLY), Ivanhoe Mines, MMG (OTC:MMETY), Zijin Mining (OTCPK:ZIJMF) and AngloGold Ashanti (AU) to discuss the new mining code on Tuesday, March 6.

The investor's uncertainty is further supported by the civil unrests. Last Sunday, 4 people were killed, 47 wounded and 100 arrested, during a protest against president Kabila. It is very probable that further protests will take place over the rest of 2018, as the long-postponed presidential elections should take place on December 23. Although Ivanhoe's operations shouldn't be affected directly, any political instability may have a negative impact on its share price.

Conclusion

The Kamoa-Kakula project is a unique world-class copper play. There are huge amounts of very high-grade copper and the future mine is destined to dominate the global copper market for decades. The problem is, that the political situation in the Democratic Republic of Congo is very complicated and the new mining code further destabilizes the investment environment in the country. This is why Ivanhoe's share price is 27% down year-to-date. Regardless the exploration and development successes, further price decline is a real threat. This is why I closed my position when the share price dropped below the $2.6 level (as I indicated in my previous article). However, I'm still watching the situation closely and I intend to reestablish my position as soon as the situation starts to stabilize.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IVPAF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[TCK Follower]

The minerals will not move from their present location. If the extraction is done by Zijin and Ivanhoe, who both have a history of operating in countries where the social licence can be bought through employment of nationals, having the government as a partner, and by developing infrastructure in the province where the mines are located, then we, as shareholders should benefit from getting into production. The mining code does nothing for the DRC if the mines are not brought into production. The greed of politicians will never be satisfied-no matter in whatever country they are located- look at the NDP in the 70's in British Columbia, or the National Energy policy of the Trudeau Liberals. Getting elected trumps reason most of the time-and I think the reality of the economic benefit to the electorate in the DRC will determine the outcome. Money need s certainty and if the DRC wants the investment-they will have to set the rules to ensure benefit for the companies, and their citizens as well as the pigs at the trough. I expect reason to prevail and a timely resolution to the obstacles.

[Norman Bates at Disneyland]

You might be correct but unfortunately history suggests otherwise. Even where African governments act in the name of 'the people' they can do it in such a ham-fisted manner that it destroys international business confidence for years (see Tanzania and Acacia Mining, as one of many examples).

BTW - a sack of fufu and free T-shirt per person at the appropriate time will get a person/party elected in many countries in Africa.

[kwikscan]

Hope this bleeds off to $2. Chomping to buy later this year.

[mbrune]

March 8, 2018
Ivanhoe Mines, industry principals and the DRC Government jointly commit to ongoing detailed discussions to resolve issues arising from DRC’s 2018 mining code
Ivanhoe Mines (TSX: IVN; OTCQX: IVPAF) welcomes the commitment made yesterday by mining industry representatives and Democratic Republic of Congo President Joseph Kabila Kabange to continue productive and mutually advantageous discussions to resolve industry concerns arising from the DRC’s 2018 mining code.

[Peter Arendas]

The good news is that the question is still opened. The bad news is that technically, there's nothing new and the uncertainty continues.

[47742501]

We should be mindful of how the farms were acquired by the white farmers in SA in the beginning. I don't think they were ever there's to begin with however I also don't believe the SA government will move along the same path as Zimbabwe either given the outcome. The mining properties were never stolen from anyone. Two different things all together.

[kwikscan]

I’m with you Peter I sold but will re enter after more clarity. Hoping to buy close to $2 which would be unbelievable given the potential worth.

[TCK Follower]

Killing the Goose that lays the golden eggs has never been a satifactory result for any government and is never an intended consequence of any legislation. DFriedland has proveen success in other countries-Mongolia Canada,and now South Africa and the DRC in locating monstrous orebodies that will affect the countries where the resources are located. Canada and Mongolia have Voiseys Bay and Olgoy Tolgoi respectively which demonstrates that there is a solution available when the chips are on the table. Friedland has been serially successful in dealing with political posturing and I see no reason to think that the result this time will be any different. The DRC wants the living standards of this, one of the countries with a very low standard of living to benefit from mineral wealth extraction as opposed to leaving it in the ground. China wants and needs the Copper and the DRC needs the economic activity and wants there to be real benefits to the DRC and the populace as a whole. There will be an increase in royalties and there will be taxes to be paid-but in the end their will be a reward for discovery and it is to everyones benefit that there be ground rules that work.

[Norman Bates at Disneyland]

I am afraid you are extremely naive. I lived for 3 years in the DRC providing services to almost all the largest mining companies in Kolwezi at the peak of the mining boom there. Both the government and tax department in the DRC is 100% corrupt, and cares nothing for either its people or the long term future of the country (I could provide endless examples but won't bother). Do you really think the Chinese have prospered there through good governance? Read through the list of companies in the country 10-15 years ago and now, and you will see the shift from reputable entities to questionable entities (and yes, I would definitely include Glencore as a questionable entity). Even better, read up about Dan Gertler - 'the king of Congolese mining'. Either you pay bribes in the DRC or you do not exist - there is no other way.

[Martine 1]

Very realistic conclusion !! Living standards of local people won't be influenced in any way. This is only about personal portfolios of politicians !!

[Martine 1]

Africa will only make a change if they get leaders who care more about their peolple than about their personal portfolio. In the meanwhile these 'fonctionnaires' will give in as soon as they've have secured their pensions. An African president has no 'after-carreer'.

[bmrfan]

Listened to a commodities specialist and he said impact to IVN.TO is minimal as a result of recent changes in the new 10yr code and increase in royalties in “super” profits??? Some amount of insider buying activity...

[Martine 1]

I agree because super profits refers to strategic materials like cobalt and Ivanhoe hasn't got about any cobalt.

[Peter Arendas]

Actually, super profit refers to any commodity that experiences a more than 25% price growth compared to the feasibility study (https://seekingalpha.c...)

[Da Shi Research]

you're mad for selling out. A compromise deal will be reached and the stock will be back above $4 in no time. Above $8 when production starts later.

[Peter Arendas]

I agree that if a compromise is reached, the share price will jump. However, I don't expect it to return to the $4 level immediately, it will take some time.

[kwikscan]

What's the estimated start of production date? Tia

[Peter Arendas]

Around 2020.

[Oliver Sudden Jr]

If South Africa can take white owned farms without compensation then I'm not confident that they won't take the mines in the Congo eventually. Africa remains a basket case.

[Da Shi Research]

Read between the lines a bit more. Of course the government wont seize farms in south africa. The new president understands investment would crash along with the rand. What you are reading in the press is simply political posturing.

[Norman Bates at Disneyland]

It wasn't political posturing in Zimbabwe - and that IS now a basket case. Nevertheless a number of countries in Africa are following the Zim model. Don't underestimate the stupidity (or greed) of African politicians. I've lived in 5 countries in Africa and worked in about 15, so I do have personal experience of the situation there.

[Peter Arendas]

Yes, it wasn't posturing in Zimbabwe, on the other hand, all of the other African countries could see how Zimbabwe ended up. One of the richest African countries turned into one of the poorest ones.