Robert Friedland’s Ivanhoe Mines (IVN:TSX) and the Department of Mineral Resources (DMR) in South Africa jointly announced today that the mining right for the development and operation of the Platreef project has been finalized and work can resume immediately. Work at Platreef, which will be one of the world’s largest platinum mines, had been delayed since May 30th.
A number of media outlets reported last week that a letter sent to Ivanhoe by the DMR stated that the project could be delayed for an additional 12 weeks (to November 26th) as officials determined whether the benefit plans for the surrounding communities were sufficient.
South African authorities are wary of allowing new platinum mines given the country’s deadly protests over the past 2 years which have brought the mining sector there to its knees and forced many major companies to abandon the country altogether. Despite this, over 70% of the world’s platinum production comes from the country.
The mining right, or licence, authorizes Ivanhoe to mine and process PGM’s and base metals for an initial 30 year period and may be renewed for further periods, each of which may not exceed 30 years at a time, in accordance with the terms of the Mineral and Petroleum Resources Development Act.
“The final regulatory approval of the Platreef Project’s mining right is significant not only for the development of the project itself but it also signals the South African government’s determination to grow our country’s economy. The Platreef Project will attract foreign capital, create much needed jobs and contribute significantly to socio-economic development in areas surrounding the project,” said Minister of Mineral Resources Advocate Ngoako Ramatlhodi.
Ivanhoe was originally granted the mining right for Platreef on May 30th, although formal activation of the right was delayed by the DMR to ensure Ivanhoe’s compliance with all of South Africa’s rules and regulations surrounding their mining industry, the goal of which is to ensure companies can “meaningfully contribute toward the socio-economic development of the area in an environmentally sustainable manner.”
Many investors who wondered why the delay for the mining right was so prolonged and if the company would, in fact, be able to obtain the final right will be relieved.
“With the shared, ongoing commitments of the Department of Mineral Resources, our Broad-Based, Black Economic Empowerment partners and our supportive co-investors from the Japanese trade and industry consortium, Ivanhoe Mines’ Platreef Project is going to become a sustaining foundation of jobs and support serving the common interests of our host communities in Limpopo province,” Mr. Friedland said.
Friedland plans on creating a completely mechanized mine that will revolutionize the mining industry in South Africa, a country where innovation in the sector has been stagnant for 100 years.
A March 2014 PEA highlighted a base-case 8Mtpa underground operation (with an initial phase 1 4Mtpa starter operation) capable of sustaining 785,000 ounces of platinum, palladium, rhodium and gold production annually at an estimated cash cost of US$341 per ounce of 3PE+Au, net of by-products. That amount of platinum production equates to approximately 6% of the annual global supply.
The economics of a large-scale operation at current metals prices isn’t great, but the company is examining a phased approach to its development. At higher prices ($1,700/oz platinum), Platreef produces a strong after-tax return of 14.3%. An important intangible of the story is that Ivanhoe has deep connections in Japan and their industry partners there care less about returns and more about obtaining the physical metal to feed the industrial complex of the island nation. Furthermore, Ivanhoe hired bankers earlier this year to look at its options in terms of a potential spinout, JV and/or sale of one or more of their assets which could be used to finance the other(s).
The project is estimated to cost US $1.7 billion which will allow Ivanhoe to start mining by 2020. Much of the capex goes into underground access shafts.
Shaft #1 is planned to be sunk to a depth of 800 metres and will enable the collection of a mineralized bulk sample (H1/2016). Development of this shaft had been pushed back due to the delay in receiving the official approval of the approved mining right from the DMR. The company planned to complete engineering and design work on a second shaft (the main production shaft) by the end of the year, in order to start development work by Q1/2015. They were also planning to complete a pre-feasibility study on the initial phase 1 development plan.
It is unclear how these timelines will be impacted by the approval of the delayed mining right.
The company also stated that as a result of the execution of the mining right, “Ivanplats will take immediate steps to terminate a consultation process with its Platreef workforce that the company launched earlier this month as a prelude to possible retrenchments at the idled Platreef site.”
As a result of the delays, the company was preparing to lay off many workers at the site, something that can now be avoided.
Shares of Ivanhoe are up 15% in Toronto to $0.93 at the time of writing, but remain well below the last issuance price of $1.50. Ivanhoe stock traded at an all-time low of $0.78 per share on October 30th.
To continue this share price appreciation, Friedland will have to lay out his financing plans to the market, not only for Platreef but also for the other two world-class, but capital intensive mining projects; Kamoa and Kipushi.
The fact that Ivanhoe has a market cap and enterprise value of $650 and $380 million, respectively highlights how unwilling investors currently are to accept high capex projects for fear of dilution. A Japanese consortium invested $300 million for a 10% stake in the Platreef project, valuing the project alone at $3 billion.
According to the June 30th filing, Ivanhoe has $127.2 million in cash earmarked for the Platreef project after spending $35 million on Platreef in the first two quarters of the year.
Based ONLY on the Kamoa project in DRC, the market is currently valuing the company’s massive 36.9 billion pound copper resource (3.04% copper) at just $0.01 per pound. Again, this valuation doesn’t assign any value to Platreef or Kipushi (where zinc grades of 40.9% over 348.5 metres, 44.8% over 339.4 metres, and 33.3% over 305.8 metres have been encountered in recent drilling).
Still one of the best…On an African dog and pony show with mining mogul Robert Friedland
Disclosure: I am long Ivanhoe Mines and as a result am very biased. This is not investment advice. Always do your own due diligence.