UBS ups targets for Ivanhoe shares

Vancouver — Ivanhoe Mines’ (IVN-T, IVN-N) massive Oyu Tolgoi copper project in Mongolia is likely to be much larger than previously planned now that Rio Tinto (RTP-N, RIO-L) is involved, according to a new investment report.

In a December report from investment firm UBS, mining analyst Tony Lesiak said the initial production level at Oyu Tolgoi could reach 110,000 tonnes per day, a 50% increase from previous Ivanhoe estimates, and cost US$2.25 billion to develop for commercial startup in 2009.

Lesiak increased his stock price target for Ivanhoe — to roughly $15 from about $12 — reflecting his view that Rio Tinto’s involvement will remove previous capital and technological barriers, setting the stage for a substantial increase in the scale of the mine.

The prediction comes just two months after Rio Tinto committed to make staged payments of up to US$1.5 billion in Ivanhoe to finance construction of the Oyu Tolgoi mining complex, about 550 km south of Ulaanbaatar.

Lesiak’s forecasts are ahead of any announcements by either Rio Tinto or Ivanhoe, which has yet to reach a long-term investment agreement with the Mongolian government that will govern the amount of tax and royalties paid by a future mining operation.

However, he said he is confident that the investment contract will be signed by the end of the first quarter of 2007 and ratified by Mongolia’s parliament.

“As we have previously stated, we believe one of the key benefits of Rio Tinto’s partnership is that it should allow the senior officials in Mongolia to more easily sell the benefits of the Oyu Tolgoi investment contract to its own people and parliament,” Lesiak said. “Any slippage will directly result in project startup delays.”

In September 2005, cost estimates were US$1.3 billion for a 70,000-tonne-per-day open-pit mine. But Lesiak is predicting that a new development plan, which he expects to be released in the second quarter of 2007, will boost the initial production to 110,000 tonnes per day.

He says a move to block caving, where controlled explosions result in the downward collapse of the orebody, could eventually double production.