Ivanhoe rolls out Oyu Tolgoi plans

Vancouver – Ivanhoe Mines (IVN-T, IVN-N) has tabled its much anticipated Integrated Development Plan (IDP) for its monstrous Oyu Tolgoi copper-gold deposit in the Gobi region of southern Mongolia.

In charting its vision to put the massive Mongolian metals deposit on-stream, the company reviews anticipated average output of over one billion pounds of copper and 330,000 oz. of gold annually for at least 35 years. Initial production is forecast to commence in mid-2008.

The independent IDP, led by engineering firms AMEC Americas and Ausenco, reviews an Oyu Tolgoi development schedule over 15 years with a greater than 40-year mine life. First on the schedule is the feasibility study on the Southern Oyu deposits, which will host the initial, open pit operations. Second is a pre-feasibility and scoping study on infrastructure requirements (power, etc.) for underground mining of the Hugo Dummett North and South deposits.

Two Development Scenarios

The IDP reviews a two-phase approach toward development. The first phase, or “Base Case”, specs a 70,000-tonne-per-day circuit producing a gold-rich copper concentrate from open pit ore mined at the Southwest Oyu deposit. Over the first three years of mining, ore will be principally sourced from the gold-rich portions of the Southern open pit operations, while the large-scale underground block caving development on the Hugo North deposit proceeds. Commencing around Year-4, production from Hugo North will begin and is expected to the primary source of mill feed in the fifth year. As the underground ore is softer, a boosted throughput rate of 85,000-tonnes-per-day is anticipated by Year-6, with some modifications to the downstream section of the single SAG (semi-autogenous grinding) concentrator circuit. At this stage, open pit mining would cease with only the first two stages of a modeled 9-stage open pit plan conducted. The Base Case envisions Hugo North providing the ore-stream beyond Year-40.

A Phase 2, or “Expanded Case”, reviews a more aggressive development plan. Initial operations would progress as outlined in the Base Case, however in Year-3, a decision on block cave development of Hugo South and stripping of stages 3 and 4 of the open pit mine would be initiated. The ramped-up scenario would include a doubling of the concentrator capacity, through the addition of a second SAG milling circuit, giving the combined open pit-underground operation at least a 140,000-tonne-per-day production rate by Year-7. With mining of Hugo South starting in Year-12, underground ore output would hit 140,000-tonne-per-day.

Under the Expanded Case schedule, the IDP shows Oyu Tolgoi could produce about 35 billion pounds of copper and 11 million oz. of gold over a projected 35-year initial mine life, based on current resources. Optimistic on its deposits resource expansion potential, Ivanhoe believes mill throughput in the twin circuits could be boosted to the 170,000-tonne-per-day level with a modest infusion of additional capital.

But what will it all cost

Initial capital requirements for the open pit mine and milling complex are estimated at US$1.15 billion, with an additional US$232 million earmarked for development of the underground Hugo North mine. The expenditure would carry the project through its 6-month phase into full production of 70,000-tonnes-per-day by early-2009.

Ivanhoe believes that additional capex required for implementation of the 140,000-tonne-per-day Expanded Case, between 2009 to 2014, could be financed from cash flow.

IDP financial modeling indicates a net present value (NPV) of US$3.4 billion before tax for Oyu Tolgoi, US$2.7 billion after tax, using an 8% discount rate and assuming the Expanded Case production scenario. The project shows an after tax internal rate of return (IRR) of 19.75% and a 6.5-year pay-back period. Base metal process of US$1.00 per pound of copper and US$400 per oz. of gold were used in the study.

With its strong sensitivity to copper price, a 10% increase in the metal’s value to US$1.10 per pound boosts the project’s after-tax IRR to 22.1% and the after-tax NPV rises to US$3.4 billion using the same 8% discount rate.

None of the NPV calculations in the IDP include any value for the deep, high-grade mineralization recently discovered adjacent to and north of Ivanhoe’s Hugo Dummett deposit, on its Shivee Tolgoi joint venture with Entre Gold (ETG-V, EGI-X). With an eye on enhancing overall project economics, ongoing drilling by Ivanhoe is expected to yield an indicated and inferred resource estimate in early-2006. Initial indications are that the high-grade copper mineralization encountered will likely add significantly to the project’s economics.

Going deep

Ivanhoe Mines recently initiated its underground work program on the Hugo North deposit, engaging the Redpath Group to construct the 6.7-metre diameter Shaft #1 and a headframe and hoisting plant. The shaft is scheduled to be completed by the third quarter of 2007 to be followed underground drifting and drill programs. A second 10-metre diameter production and service shaft is currently under design.

A kinder, gentler mining company

Evident throughout Ivanhoe’s IDP is the emphasis on the project’s “significant and long-lasting benefits for Mongolia” and its moniker as “a model of environmentally-sound mineral development”. Rightfully so, as the company is keenly aware it will be scrutinized at a higher level than most others mine proposals due the shear scale and its significant contribution potential to Mongolia’s economy.

Essential for advancement of the project, the company is still awaiting the Mongolian government’s Stability Agreement, anticipated by early-2006. The Mongolian political environment is still fraught with a vocal minority of “old guard” critics and detractors over having foreign mining companies reaping the “riches of the people”.

Studies commissioned by Ivanhoe indicate significant benefits to the Mongolian economy from Oyu Tolgoi production. Direct contributions to the Mongolian government of about US$4.5 billion are estimated over the initial 35-year mine life, through corporate taxation, sale royalties, employee taxes and social security contributions, and other charges.

The Stokes Report reviews the project’s anticipated contributions to the Mongolian economy, between 2002 and 2043, under the Expanded Case development scenario:

• Average increase of 34.3% in real Gross Domestic Product;
• Nationwide employment levels increased over 10%;
• Nationwide real per capita disposable income boosted 11.5%;
• Mongolians are projected to hold 90% of jobs at Oyu Tolgoi by Year-5 of operation, increasing to 98% by Year-7.

Tolgoi contains measured and indicated resources of 1.15 billion tonnes grading 1.3% copper and 0.47 grams gold per tonne (1.54% copper equivalent grade), using a 0.6% copper equivalent cut-off. The measured and indicated resource equates to a contained metal figure of almost 33 billion pounds of copper and over 17 million oz. of gold. The deposit also hosts an additional 1.16 billion tonnes of inferred resource grading 1% copper and 0.23 grams gold, equating to a further 26 billion pounds of copper and 8.4 million oz. of gold of contained metal.

Ivanhoe posts a market capitalization of about $3.1 billion with its 314 million shares outstanding. The company has recently traded in the $9.80 per share level, near the higher end of its $6.82-11.27 trading range for the last 52 weeks.