Now Ivanhoe Mines (IVN) has approval to make it's investment in Ivanhoe Australia (IVA), IVA has some interesting fundamental characteristics. Firstly, including the newly issued shares, IVA now has approx 549.35mm shares on issue. As at June 30, IVA had $87.78mm in cash. It raised a net $150mm (and cancelled it’s primary debt of $30mm). They are expecting to receive (if they haven’t got it already) $30mm as a dividend from Exco. So cash on the Balance Sheet should be approximately $268mm OR $0.49 per share. So cash represents 54% of the current share price. Let’s remove that cash to calculate the EV. If we assume a Diluted Mkt Cap of $494.4mm (549.35 x $0.90), then the Enterprise Value (EV) is $226.63mm. Based on a recent presentation by IVA’s management IVA's Resources (all in Australia across 5 tenements) are: • 7.9B lbs Copper (IGV @$3/lb = $23.8B) • 6.1mm Oz Gold (IGV @ $1500/oz = $9.1B) • 89,000 t molybdenum (IGV @ $15/lb = $2.9B) • 155,000 kg Rhenium (IGV @ $5000/kg = $775mm) • TOTAL In Ground Value = $36.7B • Gold Equivalent Oz = 24.4mm Oz AND, therefore: • EV / Gold Equivalent Oz = $9.26 • EV / IGV = 0.62% Using very raw, back of the envelope metrics: Gold miners exploring in Africa and Central Asia with resources around 1mm oz are trading at EV/Gold OZ > $20. Some near producers, with larger resources are trading >$50 (some > $100). IVA’s EV/Gold Equiv Oz is $9.26. This for a near producer with significant resources in the mining friendly region of Australia. What am I missing? Another back of the envelope measure for little explorers in far away and hostile places is EV/IGV. 1% is always a pretty rough guide for very speculative companies, often not even listed. IVA’s is 0.62%. So let’s then assume that IVA blows all their cash on parties and nothing that adds any shareholder value. We then use Diluted Market Cap instead of EV for the above calculations: • Diluted Mkt Cap / Gold Equivalent Oz = $20.22 • Diluted Mkt Cap / IGV = 1.35% So while these numbers start to look a slightly more respectable, it puts IVA in the same league as a number of Explorers/producers in places like Kazakhstan and Mali who have resources of <1mm oz. Really?? So why is this company so cheap, and perennially getting cheaper?? The fact that they are called Ivanhoe doesn't help as a lot of people confuse this company with its parent who has it's primary assets in Mongolia. IVN (parent) has been hit hard lately with the double whammy of lower copper/gold prices and a potentially and unexpectedly business unfriendly governmental partner. And IVA is probably a victim by association. Then there is the question of what RIO will do with IVA if it buys the rest of IVN. My only guess is that the market may believe that RIO would be happy to sell IVA off for nothing. IVA is probably superfluous to RIO, so they may be happy to flick it quickly and cheaply as the $400-$500mm it may get is a rounding error vs the $10B it needs to buy the rest of IVN. I can't imagine RIO would be that careless with an asset that should be worth well over $1B, but it's the only thing I can think of that explains the company's stock price. However, RIO will only own 59% of IVA after it buys IVN, so they won't be able to sell it without insto support and the instos ain't selling less than $1.39 ps. Having said all that, all mining stocks are off since April, IVA just seems to have been hit harder than its peers. I am looking for the Merlin Pre-Feasibility study on its Molybdenum and Rhenium resources due out in Q4 2011 to be the catalyst for the re-rating, followed by the Mount Elliot scoping study due in Q1 2012 (this should be big). Of course, that assumes the world is a saner place.
IVA Price at posting:
88.2¢ Sentiment: LT Buy Disclosure: Held
