Derrick Penner
Sun
Ivanhoe waits for Mongolian decision
Company a buy but valuation cut, analyst says
For Ivanhoe Mines Ltd. and Mongolian Prime Minister Sanjaa Bayar, it is not a question of if, but rather a question of when the Mongolian government will approve an investment agreement for the Vancouver-based mining firm’s massive Oyu Tolgoi copper mine.
However, that question of when — and whether parliamentary elections in Mongolia will mean further delays — prompted analysts at the Canadian branch of investment bank UBS on Tuesday to decrease their valuation of the company.
UBS analyst Tony Lesiak still rates Ivanhoe a “buy”, but cut his valuation of Ivanhoe to $15.19 a share, and UBS’ target price to $15 from $19 because of the possibility approval of the agreement with the Mongolian government may be delayed, pushing the timeline for Ivanhoe to build Oyu Tolgoi and put it into production out to mid-2011 from early 2010.
Ivanhoe Mines shares declined 44 cents to close at $9.72 in trading Tuesday on the Toronto Stock Exchange. The 52-week high was $17.48, achieved last July 9, its low was $8.50 on Jan. 21.
The company points to a December letter to Bayar and Rio Tinto, Ivanhoe’s partner in developing the mine, that states that completing the long-awaited agreement with Ivanhoe before the election is one of the prime minister’s priorities.
However, in his report Lesiak said news reports from Mongolia indicate there is uncertainty over whether a draft agreement drawn up last June has been pulled back, and how much work still needs to be done to bring it to conclusion.
Lesiak said he doubts an agreement can be finalized before the election, although investment analysts who cover Ivanhoe are of divided opinions on that question.
On Jan. 30, BMO analyst Craig Miller upgraded his recommendation on the stock to a speculative outperform based on “a high probability that the Oyu Tolgoi investment agreement gets ratified” during the first-half of this year.
He valued Ivanhoe at $16.56 per share in his Jan. 30 note.
However, regardless of the lack of consensus, analysts do not disagree that Oyu Tolgoi is an extremely valuable asset that the Mongolian government wants to see developed.
Lesiak called the mine “a very scarce asset” in his report.
“Oyu Tolgoi is one of the largest and most lucrative mining development projects in the world,” Lesiak wrote.
According to data from Bloomberg, three of five analysts that cover Ivanhoe rated it a “buy”, one rated it a “hold”, and one as a “sell.”
The outlook for copper, at least in the medium term, is for strong prices because continued growth of the Chinese economy is expected to outweigh the decline of copper consumption in the U.S., where the possibility of a recession is growing.
“Consumption of copper in China is probably double what it is in the U.S. in terms of its share of world consumption,” said Patricia Mohr, vice-president of industry and commodities research at Scotiabank.
And China still has big investments in copper-intensive infrastructure projects, she added. Spending on consumer products is also still rising in China, which will require the use of more copper.
Don Lindsay, CEO of Vancouver-based miner Teck Cominco, said during a conference call on Tuesday that a drop in U.S. consumption hasn’t phased world markets.
“We have a significant slowdown in the U.S., probably a recession, which historically would have a major effect on metal prices,” he said.
“But so far, at least in copper and the outlook in metallurgical coal related to steel, it doesn’t seem to be having much effect.”
© The Vancouver Sun 2008
