Ivanhoe Mines: Don't Believe the Hype - Raymond James 3 comments

Yesterday, Mr. Freidland unveiled a major copper discovery in the Democratic Republic of Congo by private company Ivanhoe Nickel and Platinum Ltd. (Ivanplats). Ivanhoe Mines shares also jumped 10% on the day, and Mr. Meyer thinks that is irrational given that it only owns 1.9% of Ivanplats.

He wrote in a note to clients:

"We believe that some of the excitement by the media on the yet-to-be-quantified discovery rubbed off on Ivanhoe Mines shares despite the miniscule ownership in the private company."

Mr. Meyer reiterated that Mongolia is what really matters. Ivanhoe shares have rallied in recent weeks as investors expect that parliamentary approval for the giant Oyu Tolgoi project could be imminent. Mr. Meyer agrees, and thinks an announcement is likely in the coming "week or two." But, he thinks the government will take a 51% stake in the project [recent articles have suggested it will only be a 34% stake]. He is also assuming Ivanhoe pays a 30% corporate tax and a 2.5% net smelter royalty to the government.

Beyond that, Mr. Meyer noted that there is still plenty of uncertainty on the capital and operating cost front. Given the cost inflation in the mining industry in recent years, he thinks the $1.5-billion capital cost estimate for Oyu Tolgoi from 2005 is way out of date, and that it is more like $2.8-billion today.

And then there is the question of Ivanhoe's strategic investor Rio Tinto Ltd. (RTP). Rio has its own capital issues, and Mr. Meyer suspects the company has other priorities (like debt reduction) that are likely to take precedence over Oyu Tolgoi.

Put it all together, and his bearish stance on Ivanhoe Mines has not changed. He reiterated his "underperform" rating, and has a price target of just C$4.00 a share.