Summary
- Zijin Mining, the biggest Chinese gold producer, should acquire a 9.9% stake in Ivanhoe Mines.
- Zijin Mining will acquire 76,817,020 shares of Ivanhoe Mines at a price of $1.07 per share, while the market price was only $0.76, before the announcement.
- Zijin Mining seems to be interested especially in the Kamoa Project.
- The deal only confirms the tremendous potential of Ivanhoe Mines.
Ivanhoe Mines (OTCPK:IVPAF) announced, that Zijin Mining (OTCPK:ZIJMF), the biggest Chinese gold producer, will acquire a 9.9% stake in the company. Ivanhoe Mines will issue 76,817,020 shares to Zijin, for total proceeds of C$105 million ($82 million). It represents a price of approximately $1.07 per share. It is a significant demonstration of confidence in Ivanhoe Mines and its projects, as the share price was only $0.76 at the market close on Friday (chart below). The shares should be issued at a 40% premium in favor to Ivanhoe Mines.
Zijin Mining made another strategic investment back in December, when it acquired a 9.9% stake in Pretium Resources (NYSE:PVG). Zijin Mining bought 12,836,826 shares of Pretium Resources at a price of $5.49 per share. The pre-announcement closing price was $5.70. It means that while Zijin Mining bought shares of Pretium Resources 3.7% below the market price, it agreed to buy shares of Ivanhoe Mines 40.7% above the market price. It means that Zijin Mining must be really interested in Ivanhoe Mines and its projects.
Zijin Mining seems to be interested especially in the Kamoa Project, according to the press release:
In particular, Ivanhoe and Zijin are in detailed, friendly discussions about the strategic co-development of our Kamoa copper discovery in the Democratic Republic of Congo.
The Kamoa Project is a huge high-grade copper deposit, located in the Democratic Republic of Congo. It is 95% owned by Ivanhoe Mines and it is supposed to be the world's biggest undeveloped high-grade copper deposit. It contains indicated resources of 43.5 billion lb of copper, at a 2.67% copper grade and inferred resources of 9.8 billion lb of copper, at a 1.96% copper grade.
As shown by the chart below, Kamoa is one of the undeveloped projects with the highest planed annual production. What is more important, it has by far the highest copper grades, compared to its peers. It means that it should be in the lower parts of the production cost curve.
(click to enlarge)
Source: Ivanhoe Mines
The preliminary economic assessment was based on a two-phased approach. The estimated mine life is 30 years at an average annual production of 300,000 tonnes of blister copper and 600,000 tonnes of sulfuric acid. The total cash costs after sulfuric acid credits are expected at $1.18/lb. The projected capital costs are $1.4 billion for the first (concentrate) phase and $3.5 billion for the second (blister copper) phase.
Conclusion
This deal only confirms the tremendous potential of the projects held by Ivanhoe Mines. Zijin Mining is a strong partner that should help Ivanhoe Mines in the later phases of development of the projects. A strong Chinese partner may also help to reduce the political risks. China has invested huge amounts of money in Africa during the last decade. The Chinese position is strong in Africa and the African governments don't want to annoy its major investor. The Chinese backing may turn out to be a major advantage in the future. The deal will also support the financial position of Ivanhoe Mines significantly. The company had cash & cash equivalents of $168 million, as of September 30, 2014. It should be significantly over $200 million after the transaction is closed (expected on April 20, 2015). Ivanhoe Mines remains a strong buy.
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