Upgrade To Outperformer After Recent Pullback; Kamoa Financing In Spotlight

Ivanhoe Mines Ltd

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As of Jan. 21, we upgrade our Ivanhoe Mines (IVN) rating to Outperformer from Neutral, but slightly decrease our 12- to 18- month price target to C$5.25/share from C$5.50/share after rolling over our P/E and EV/EBITDA analyses to 2019 from 2018, as well as our P/NAV, to obtain our price target. The 18% pullback on IVN shares from the end of November 2017 to date, on expectation of an equity financing, is over-done in our opinion. Despite a $315M equity raise assumption in H1/18, our analysis suggests a potential IVN share appreciation return of +25%.

What’s The Event?

We raised our copper and zinc prices (2018-2020, see our commodity update), but left the subsequent years’ forecasts unchanged. We note that this had a limited positive impact on our IVN valuation because the company’s projects start post-2020 (Kamoa-Kakula 2020, Platreef 2022, Kipushi 2022). We revised our Kamoa-Kakula financing assumptions from 50%/50% debt/equity in 2018 to 100% equity. This lowered our price target.

We have revised our model to account for: 1) revised commodity price and FX forecasts; 2) roll-over of all our NAV calculations to base quarter Q4/18 vs. Q4/17 previously; and 3) revised Kamoa-Kakula financing assumptions to 100% equity in 2018. We now assume IVN would raise approximately $315M in equity, for a total of 110M shares (vs. $178M in equity, or 57M shares, and $175M in debt, previously).

Valuation We estimate IVN trades at a 13% discount to copper peer average of 0.8x P/NAV. Our analysis suggests that a small premium would be warranted given the potential upside in IVN’s cash flow generation from its world-class Kamoa-Kakula deposit, albeit with development and financing risks.

Upgrade To Outperformer After Recent Pullback; Kamoa Financing In Spotlight