Fresh on the heels of its 2015 Thayer Lindsley award win for discovering the Kamoa copper deposit in the Democratic Republic of the Congo (DRC), Ivanhoe Mines (TSX: IVN; US-OTC: IVPAF) has reeled in Zijin Mining as a strategic investor.
One of China’s largest gold producers, its second-largest copper producer and a significant miner of zinc, tungsten and iron ore — Zijin Mining is listed on the Shanghai and Hong Kong stock exchanges and has a market capitalization of more than US$10 billion.
The company, headquartered in southern China’s Fujian province, has taken a 9.9% stake in Ivanhoe through a private placement of 76.82 million shares at $1.36 per share for proceeds of $105 million. The placement is at a 40% premium to the pre-announcement price and almost double the average February price.
Ivanhoe said it will use the money for working capital and general corporate purposes as well as for advancing its projects in Africa. Zijin Mining has also acquired a 9.9% stake in Pretium Resources (TSX: PVG; NYSE: PVG). (Zijin acquired 12.8 million shares of the company at $6.30 per share for proceeds of $80.9 million, via a private placement in December 2014.)
Describing Zijin as “an old friend of Ivanhoe Mines,” that “shares our long-term vision,” executive chairman Robert Friedland said, adding that the two companies will “continue to explore additional opportunities to collaborate on the advancement of all three of our world-class projects.”
Ivanhoe’s world-class projects are the high-grade stratiform Kamoa copper deposit, within the Central African Copperbelt, 25 km west of the town of Kolwezi and 270 km west of the provincial capital of Lubumbashi in the DRC; the Kipushi zinc-copper project, southeast of Kamoa in the DRC’s Katanga province, next to the town of Kipushi and 30 km southwest of Lubumbashi; and the Platreef platinum group metals project in South Africa’s Limpopo province, 280 km northeast of Johannesburg.
Chen Jinghe, Zijin Mining’s chairman and a geologist by training, stated in a press release that he has been friends with Friedland for more than a decade, and admires “the achievements of his team in its significant discoveries in Africa.”
In prepared remarks, he said that “Zijin will establish a close and strategic partnership with Ivanhoe through which we plan to closely cooperate in the development of Ivanhoe’s mines.”
David Charles and Patrick Racicot of Dundee Capital Markets commented in a research note that “it is positive to see Ivanhoe securing financing with a large player, but at the same time this transaction will dilute shareholders by increasing the amount of shares outstanding by another 11%.”
The analysts noted that with three world-class projects, Ivanhoe will need to raise “significant funds” in today’s “challenging environment,” and reduced their target price on Ivanhoe from $1.60 per share to $1.50 per share.
The pair estimated that Ivanhoe had $168 million in cash in September and $55 million in short-term deposits for total pro-forma liquidity of $223 million. “With a cash burn of $40 million to 50 million per quarter … we estimate Ivanhoe could now have pro-forma total liquidity of $250 million, enough for four to five quarters at the current burn rate.”
Analysts at Investec Securities applauded the deal, arguing that it is a positive development for both companies. It says Ivanhoe gets “a backer with deep pockets,” while Zijin gets “access to advanced projects.”
Leon Esterhuizen, Arnold van Graan and Ben McEwen of CIBC, meanwhile, who have a $4-per-share target price on Ivanhoe, noted that bringing a major Chinese partner onto the books meets “a long-standing objective of management that should see further contributions to the [company’s] capital needs,” and “that the company continues to need more capital remains clear … still, over the medium- to long-term, Ivanhoe has now delivered the big outside investor long promised.”
The analysts also pointed out that “with a Chinese partner on-board, cheap Chinese government-funded debt may now be open to the company, while Chinese influence in the DRC and South Africa may also prove to be advantageous.”
They argue that the placement “pressures the Japanese partner at Platreef to act.” A Japanese consortium of Itochu Corp.; Japan Oil, Gas and Metals National Corp.; ITC Platinum Development, an Itochu affiliate; and Japan Gas Corp.; own a 10% stake in the Platreef project.
“We do not believe that the Chinese and Japanese partners have aligned interests and would expect that the Japanese will be keen to crystallize their interest in Platreef, rather than have Chinese partners ‘muscle in.’ As such, we believe that this placement will expedite the split of the company, with Platreef separated from Kamoa and Kipushi.”
News of Ivanhoe’s deal with Zijin sent its shares up 12.4% to $1.09, with 3.7 million shares changing hands. Over the last year, Ivanhoe has traded within a range of 67¢ to $2.04 per share.
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