Ivanhoe mines is currently developing one of the largest copper/gold projects in the world. It owns 66% of the Oyu Tolgoi mine located in Mongolia. The project is now under construction and is scheduled to come online in mid-2013. Ivanhoe also owns interest in various other projects including a 57% interest in Mongolian coal miner SouthGobi Resources, a 63% interest in Ivanhoe Australia, with copper-gold and molybdenum-rhenium development projects, and a 50% interest in Altynalmas Gold Ltd., which is developing the Kyzyl Gold Project in Kazakhstan.
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Rio Tinto currently owns 29.6% of Ivanhoe, and has the opportunity to increase that percentage to 46.6% in the near future through the exercise of warrants and convertible debt.
Oyu Tolgoi
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In 2000, Ivanhoe optioned the Oyu Tolgoi property, and after several years of drilling the deposit it became clear that Ivanhoe found something very big. Oyu Tolgoi is now the world's largest undeveloped copper-gold project. Based on Ivanhoe Mines' discoveries at Oyu Tolgoi during the past nine years, independently verified estimates indicate that Oyu Tolgoi contains approximately 81 billion pounds of copper and 46 million ounces of gold in measured, indicated and inferred resources.
The project is literally the size of Manhattan:
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One of the big hurdles though with the project was coming to a resolution with the Mongolian Government. Finally, on October 6, 2009, Ivanhoe Mines and Rio Tinto signed a long-term, comprehensive Investment Agreement with the Government of Mongolia for the construction and operation of the Oyu Tolgoi copper-gold mining complex. The agreement creates a partnership between the Mongolian Government — which will acquire a 34% interest in the project — and Ivanhoe Mines, which will retain a controlling 66% interest in Oyu Tolgoi.
The total cost of the project will be $4.5 billion, with Ivanhoe funding the full amount.
In December 2009, President and CEO John Macken announced that the joint Ivanhoe Mines-Rio Tinto Oyu Tolgoi Technical Committee approved a US$758 million budget for 2010 to begin full-scale construction of the copper-gold mining complex in southern Mongolia.
"The approval of the 2010 construction budget represents the next big step toward bringing this project into production," Mr. Macken said. "Ivanhoe is considering a schedule that could see construction of the initial open-pit mine completed in 2012 and commercial production begin in 2013."
Work in 2010 is planned to include:
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* Resumption of the sinking of the 10-metre-diameter Shaft #2, which will be used to hoist ore to the surface from the deep, underground, copper-gold-rich Hugo Dummett Deposit.
* Construction of a 97-metre-tall (approximately 31 storeys), reinforced-concrete headframe for Shaft #2.
* Pouring the concrete foundation for the 100,000-tonne-per-day concentrator and deliveries of building materials for the concentrator and infrastructure.
* Installation of a 20-megawatt power station and 35-kilovolt distribution system.
* Initial earthworks for the open-pit mine at the Southern Oyu deposits.
* Continuation of lateral underground development off Shaft #1 at the Hugo Dummett Deposit.
* Construction of a 105-kilometre highway link to the Mongolia-China border, which will be fully paved by the time production begins.
* Construction of a regional airport, with a concrete runway to accommodate Boeing 737-sized aircraft.
Full-scale construction at Oyu Tolgoi commenced in June 2010 and there are now approximately 4,400 workers at Oyu Tolgoi. Production is expected to commence in mid-2013.
On May 11, 2010 Ivanhoe Mines released a new, independent Integrated Development Plan (IDP-10) produced by some of the world's foremost engineering, mining and environmental consultants, led by Australia-based AMEC Minproc and including U.S.-based Stantec Engineering. The new plan is a comprehensive update of the original 2005 Integrated Development Plan. This updated plan considers bringing all three of the major deposits at Oyu Tolgoi into production. Ivanhoe still hasn't made a decision yet on what mine plan they will proceed with.
SouthGobi Resources
Ivanhoe Mines is SouthGobi Resources' largest shareholder, currently owning approximately 57% of the issued and outstanding shares. SouthGobi Resources is focused on exploration and development of its coal deposits in Mongolia's South Gobi Region. The company's flagship coal mine, Ovoot Tolgoi, is producing and selling coal to customers in China. The revenue generated from this mine isn't substantial, only 17.7 million last quarter. But it still is a quality asset.
Ivanhoe Australia
Ivanhoe Mines is also Ivanhoe Australia's largest shareholder, currently owning approximately 63% of the issued and outstanding shares. Ivanhoe Australia is planning for the development of four separate projects containing molybdenum, rhenium, copper, gold, zinc, silver and uranium.
Altynalmas Gold
Altynalmas is focused on building a new, state-of-the-art gold mine designed to produce a first-stage average of 368,000 ounces of gold per annum over a 16-year mine life. Based on current parameters, the operation initially would treat an estimated 1.5 million tonnes of ore per year at an estimated average gold grade of 8.53 g/t. A feasability study is expected to be completed in the first quarter of 2011. Ivanhoe Mines has a 50% interest in Altynalmas Gold, the company that holds 100% ownership of the Kyzyl Gold Project.
Financials and Production
The only revenue that Ivanhoe is currently generating is coming from SouthGobi Resources, which amounted to $17.7 million last quarter, but that was from the sale of coal not gold. The real reason people are investing in Ivanhoe is because of Oyu Tolgoi.
As of August 16, 2010, Ivanhoe Mines' current consolidated cash position is approximately $1.4 billion. The company has about $670 million in convertible debt.
One issue to be aware of is the dilution that could take place over the next few years. Rio Tinto has the option to exercise the remaining warrants it holds, which convert to roughly 81 million shares. Rio Tinto can also convert the debt they hold which would equate to another 46 million shares being issued.
488 million shares outstanding
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Let's look at two possible production scenarios for the Oyu Tolgoi project. The first is the Reserve Case which is based on just the current copper and gold reserves and gives Oyu Tolgoi a mine life of 27 years. The other scenario extends the mine life to 59 years by including the copper and gold resources, and doubles the overall production level for the life of the mine. Ivanhoe hasn't committed yet to these increased production cases, rather they are still trying to decide the best route to take on the project.
To be honest, does it really matter? This is one massive deposit and I don't think investors really care if the mine life is 27 years or 59 years. You are talking about an era where investors have become traders, and holding a stock for 1 year is considered an eternity nowadays.
Conclusion
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Ivanhoe mines has been through the long process of finding a deposit, drilling the deposit to establish a resource, getting the mine approved by the local government, and raising the cash to build the project. It's taken 10 years but all the hard work is about to pay off. And this isn't just some little copper and gold deposit, it's the size of Manhattan!
Oyu Tolgoi won't enter into production until 2013, and even then it will take a few years to really ramp up. But for the interested gold investors, if Ivanhoe decides to go with the new updated reserve case, then by year 2 the mine will be producing 700,000-800,000 oz of the precious metal. Gold production drops off the following year but will end up averaging around 650,000 oz for the first 10 years. Of course it will also be producing over 1.2 billion pounds of copper for the first 10 years as well. But remember, Ivanhoe only gets 66% of this production, with the Mongolian Government retaining 34%.
Ivanhoe currently has a market cap of just over 9 billion, so are shares cheap here? Well, given the current prices of copper and gold and assuming Ivanhoe moves forward with this updated reserve case, their 66% share equals revenue on average of just over $3.2 billion per year for the first 10 years. The company also owns several other assets which have a substantial value already. But you also have to take into consideration that Oyu Tolgoi won't be in production for another 3 years, and it will take a few more years to ramp up. So the company won't realize the full benefit of the mine until about 2015-2016. You also have the dilution factor to worry about. If Rio Tinto exercises all their warrants and converts the debt they hold, then that will result in 130 million shares being issued by Ivanhoe. So I think given all those factors the shares are currently trading at fair value.
Of course by 2015-2016 the gold run could be over, but even if it is it probably won't have that big of an effect on Ivanhoe. Oyu Tolgoi is a substantial copper producer and the world is always going to need a fresh supply of copper, China especially. In other words the company is going to do fantastically well for what could be decades
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