Ivanhoe Australia beefs up Osborne

In late February Ivanhoe Australia (IVA-T, IVA-A) started production ahead of schedule and on budget at its Osborne copper-gold project in northwestern Queensland. The initial shipment of copper-gold concentrate to Asian smelters left port in June and the mine is expected to produce annually about 20,000 tonnes copper and 30,000 oz. gold along with positive cash flow from 2013.

But with a current mine life of just four years, the junior hopes to extend Osborne’s lifespan to more than ten years with resource expansions and the discovery of additional low-cost mill feed from green and brownfield exploration targets close to the Osborne processing complex, including Osborne, Kulthor and Starra 276, all underground copper-gold mining operations.

An upgraded resource estimate released Sept. 19 for Kulthor has brought the company one step closer to that goal. Ivanhoe Australia has boosted contained metal at Kulthor by 60% with drilling from late 2011 and successfully converted a significant amount of inferred resources to the measured and indicated category. Ivanhoe Australia estimates the upgraded resource has the potential to provide an additional one to two years of mill feed for the Osborne operation.

Currently measured and indicated resources at Kulthor stand at 7.4 million tonnes grading 1.6% copper and 1.0 gram gold per tonne with inferred resources adding 5.4 million tonnes of 1.3% copper and 0.9 gram gold per tonne.

Johannes Faul of BMO Capital Markets in Toronto initiated coverage of the company on Sept. 18, and expects the company will be “successful in proving up additional mill feed from the existing mining operations to maintain production for another six years at an annual throughput rate of 1.6 million tonnes and average grades of 1.4% copper.”

Ivanhoe Australia acquired 100% of the Osborne mine and concentrator from Barrick Gold (ABX-T, ABX-N) in 2010. The company has postponed restarting the Osborne open pit because it involves pushing back the pit wall and the company wants to conserve cash.

Ivanhoe Australia has put together a significant package of molybdenum, rhenium, copper and iron-oxide-copper-gold (IOCG) projects in northwestern Queensland but its key development project is Merlin, which it describes on its website as “the highest grade molybdenum and rhenium project in the world.” It is also undertaking development work at Mount Elliott, a large copper-gold system 17 km north of Merlin, and at its Mount Dore copper cathode project. It also holds 100% of Starra Line; the Starra Line deposits, including Starra 276, are hosted in haematite-bearing iron stones and classified as IOCG-type deposits.

The company has made progress bringing Merlin closer to production with access to the adjacent Little Wizard deposit in December 2011, completion of Phase 1 of the Merlin decline in January 2012 and completion of the Merlin feasibility study in April 2012. The feasibility study envisions a 15-year underground operation with a processing plant at the Osborne complex with a throughput of 500,000 tonnes per year. Average production was estimated at 5,100 tonnes of molybdenum and 7,300 kilograms of rhenium a year for the first seven years following ramp up, as molybdenum trioxide (MoO3) and ammonium perrhenate, respectively. Initial capital expenditure to first production was estimated at A$345 million.  (An additional A$52 million would be needed during the first year to upgrade the concentrate treatment plant, bringing total capex to about A$397 million.)

BMO Capital Markets’ Faul expects Merlin to start production in 2015 and describes it as “the most attractive growth project in Ivanhoe Australia’s pipeline.” But while Merlin makes up a hefty part of the company’s net present value, he adds, it lacks funding, which creates uncertainty that will likely overhang the stock in the near term until the Merlin project is de-risked.  

“Merlin’s estimated capex of A$397 million is currently unfunded and the company is exploring a range of financing options for the project including a partial sale,” the analyst writes. “A strategic partner in search of a secure supply of rhenium could have an interest in the project. In parallel, Ivanhoe Australia is undertaking metallurgical test work to determine whether a saleable moly-rhenium concentrate can be produced at Merlin, eliminating the need for the A$150 roaster.”

He also believes that Ivanhoe Australia could become a takeover target.

“It is likely that Turquoise Hill Resources is ultimately a seller of its subsidiary, leaving Ivanhoe Australia as a potential takeover target,” Faul reasons. Turqouise Hill Resources (TRQ-T), formerly Ivanhoe Mines, has a 59% stake in Ivanhoe Australia.

At presstime Ivanhoe Australia was trading at A$0.78 per share.