Ivanhoe’s Kamoa Project
Recently, the Mining Journal named Ivanhoe’s Kamoa Copper Deposit the top undeveloped mineral asset in the world. Discovering such an asset is only part of the picture, taking this behemoth into production is another story. Rick Rule sat down with Robert Friedland, the Executive Chairman and Founder of Ivanhoe Mines, which owns the Kamoa project, to discuss the development of Kamoa. Mr. Friedland gave a rare, candid chat on what it takes to bring the world’s top undeveloped asset into production. We summarized the interview for our readers below. Please click the hyperlink to listen to the full interview.
Link: https://soundcloud.com/sprott-us-media/rick-robert-final
First, we asked how significant the Kamoa project is likely to become.
While more exploration work will need to be completed before we understand its true dimensions, Kamoa may eventually prove larger than the famous El Teniente mine in Chile. For reference, Robert explains, El Teniente has been in production since 1882, and has roughly 100 million tonnes of contained copper. Kamoa has not been fully explored and is on track to prove to have 50 million tonnes. Additional regional exploration could eventually grow the deposit to over one billion tonnes.
The sheer size is one aspect; the grade and formation of the deposit are two more features we cannot ignore. Kamoa is essentially an easy-to-develop, high-grade sea of copper in the middle of the African continent with one of the lowest expected development costs in the world.
“If we can eventually grow the deposit to 10 million tonnes production per year, that’s a 100 year mine life for Kamoa,” says Robert.
But despite its size and grade, many critics would have called Kamoa “un-financeable” thanks to its remote location in the Congo. In a highly constrained financial market, how will Kamoa ever receive the estimated $1.6 billion it will need to move into production?
Robert has navigated this with characteristic creativity, reaching out to the largest copper producer in China for a partnership, the state-owned Zijin Mining. Zijin purchased half of Kamoa, and Robert tacked on one vital contingency: Zijin may earn an additional 1% (to achieve effective control of the deposit) only if they are able to secure non-recourse financing for it.
Robert expects the roughly $1.6 billion project to be financed with 65% debt (which Zijin will need to secure) and 35% equity (which Zijin and Ivanhoe will split 50/50). In short, of a $1.6 billion project, Robert has put Ivanhoe in a position to contribute only $280 million, and they’ve already spent around $400 million in drilling and production costs.
Meaning, for Ivanhoe, Kamoa is fully paid for.
Selling half the project has a few ancillary benefits as well. It brings in a well-capitalized and highly motivated joint venture partner who needs the deposit to feed a voracious and growing population at home in China. It secures financing in a world where debt is scarce, likely at better terms. Finally, it reduces Ivanhoe’s capital output. They will have to contribute, in equity, only 17.5% of the total project finance to move this into production, and their portion has effectively already been paid. By selling half of the project, Ivanhoe has cash in the bank – nearly $0.93 per share’s worth – to focus on their other key projects.
But still, the copper market remains challenged, with prices hovering around $2.00. Can Kamoa still make money at these levels?
Though the mine plan will have to be more selective at $2.00 copper, it can still be profitable. According to Mr. Friedland, if Ivanhoe can delineate the high-grade pockets on Kamoa, and can produce about 6% copper grade, the numbers remain attractive. “You started some scale where you make money from day one, and then it’s easy to expand.”
From Robert’s standpoint, he’s sitting on the top undeveloped asset in the world, its fully financed, and he’s got cash in the bank to spend on two other world class projects.
We’ll cover the rest of the interview in the next Sprott’s Thoughts. If you’d like to listen to the interview in it’s entirely, you can do so by clicking here.
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