Ivanhoe Australia upgrades resource at 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 20,000 tonnes of copper a year 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 10 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, which are all underground copper-gold mining operations.

An upgraded resource estimate released Sept. 19 for Kulthor has brought the company one step closer to its goal. Ivanhoe Australia has boosted contained metal at Kulthor by 60% with drilling from late 2011, and 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.

Measured and indicated resources at Kulthor stand at 7.4 million tonnes grading 1.6% copper and 1 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 as “the highest-grade molybdenum and rhenium project in the world.” It is undertaking development work at its Mount Dore copper cathode project and at Mount Elliott, a large copper-gold system, 17 km north of Merlin.

It also holds 100% of Starra Line. The Starra Line deposits, including Starra 276, are hosted in hematite-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 one 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 and a throughput of 500,000 tonnes per year. Average production is 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. Initial capital expenditure (capex) to first production is 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 capital expenditure to 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 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-million roaster.”

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

At press time Ivanhoe Australia was trading at A78¢ per share.