Friedland: Mining companies ‘priced for Armageddon’

VANCOUVER — Vanguard executive chairman of Ivanhoe Mines (TSX: IVN; US-OTC: IVPAF) Robert Friedland took to the stage at the Sprott Natural Resource Symposium in Vancouver in late July, and delivered a talk about why he believes copper prices could rebound in two to three years.

“The further you push the price down, the higher it’ll bounce,” he said, predicting that higher environmental standards in China could strengthen copper demand in tow with other “green” metals, such as zinc, platinum and palladium. 

He said that China will “try very hard” to double its growth to 7% through sustainable development, but he’s dubious about whether the current world supply would match the metal needed to clean China’s air and fertilize its soils.  

He describes many of the world’s great copper mines as “little old ladies, kept on life support and waiting to die,” whereas others are so low grade “they’re practically mining air,” and kept alive by favourable currency exchange rates. 

Add that to the “enormous” amount of debt the major mining companies have been laden with over the past decade, and he doubts whether many of the capital-intensive mines of the future will get built at the current copper price of US$2.32 per lb.

Unless, he says, it’s a world-class, high-grade, potentially low-cost producer such as Ivanhoe’s Kamoa copper deposit, 25 km west of Kolwezi, in the Democratic Republic of the Congo (DRC). 

The greenfield discovery turned monster resource is under development in partnership with Chinese-owned Zinjin Mining Group. 

The mine could have a 30-year life with indicated resources of 739 million tonnes grading 2.7% copper for 43.5 billion lb. copper, and inferred resources of 227 million tonnes grading 1.96% copper for 9.8 billion lb. copper, using a 1% copper cut-off grade.

In late May, Zinjin agreed to buy 49.5% of Ivanhoe’s Kamoa stake valued at US$412 million, with the option to gain 1% after securing 65% financing for the first phase of development capital, estimated at US$1.4 billion.

“Mining is a miserable business, it’s not for intelligent people,” Friedland joked, using the US$10-billion Oyu Tolgoi project in Mongolia as an example of how it takes “intestinal fortitude” to build a giant mine.

And the international mining financier is keen on doing it again. In addition to Kamoa, Ivanhoe is gearing up to add two more world-class deposits to the pipeline: the high-grade Kipushi zinc deposit in the DRC, and the platinum and palladium-rich Platreef deposit in South Africa. 

He reckons that platinum and palladium have “brilliant” futures because of their use in ecologically friendly engines, wind turbines and in other green technologies — all of which are seeing increased use within China. 

“The Chinese look at the air in New York, and they want the same at home,” he said.

He argued the demand for zinc is made equally attractive by Chinese government initiatives that aim to renourish the country’s highly depleted soils with zinc sulphate.

Friedland predicts that Kipushi’s zinc will be in demand, considering one of the world’s largest producers of the metal — the Century mine in Australia, operated by Chinese-owned and traded MMG — is scheduled for closure this year.  

Depleting reserves and declining grades also put pressure on the world’s second-largest supplier of zinc — the 26-year-old Red Dog mine, operated by Teck Resources (TSX: TCK.B; NYSE: TCK) in northwestern Alaska. 

He stressed that developing the best-quality mineral assets “takes years” and that “nobody makes their money overnight,” yet boasted that once financing for Kamoa is secure, he could finance Platreef and Kipushi “in his sleep.”

The mining mogul maintains his interest in the junior sector and sees the downturn in the market as an opportunity to invest in greenfield explorers with high-quality properties, which is evident in the strategic partnership with Colombian explorer Cordoba Minerals (TSXV: CDB; US-OTC: CDBMF) in May. 

He described shares of mining companies as being “priced for Armageddon” and commodities valued as if the Chinese economy is “kaput,” but he says this isn’t the case. 

“China is a command economy, and they will command it to grow,” he said. “If they feel threatened by the sell-off in its stock market, or can’t maintain its growth, then it can come up with a mind-boggling policy response [later this year] … sentiment can turn on a dime.”

Ivanhoe has traded within a 52-week range of 62¢ to $1.48, and is trading at 65¢. The company has 772.1 million shares outstanding, for a $503-million market capitalization.