Ivanhoe Mines Ltd. (IVN) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Ivanhoe Mines Kamoa-Kakula 2023 Integrated Development Plan Conference Call. [Operator Instructions] Also note that the call is being recorded on Tuesday, January 31, 2023. And now I would like to turn the call over to Matthew Keevil. Please go ahead.

Hello, everyone. This is Matthew Keevil, and I'm the Director of Investor Relations and Communications with Ivanhoe Mines. It's my pleasure to welcome you today to this conference call to discuss the outstanding economic results of the updated Independent Integrated Development Plan or 2023 IDP for the world-leading Kamoa-Kakula Copper Complex in the Democratic Republic of Congo, which was announced yesterday. On the line today from Ivanhoe Mines, we have Founder and Executive Co-Chair, Robert Friedland; President, Marna Cloete; Chief Financial Officer, David Van Heerden; Executive Vice President of Projects, Steve Amos; and Senior Vice President, Corporate Development and Investor Relations, Alex Pickard. [Operator Instructions] Given our time constraints, we will unlikely be able to answer every question. Please do contact our Investor Relations team directly for follow-up. Before we begin, I'd like to remind everyone that today's event will contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Details of these forward-looking statements are contained in our January 30 and January 31 news releases as well as on the SEDAR and on our website at www.ivanhoemines.com. It is now my pleasure to present Ivanhoe Mines' Founder and Co-Chair, Robert Friedland, for some opening remarks.

Well, ladies and gentlemen, welcome to this IDP call for 2023. It's occurring in about the 26th year of our efforts in the Democratic Republic of the Congo. When we started, there was nothing there. The country was engaged in a civil war. The degree of human suffering and privation in that part of the world was difficult to describe. With a very long dedicated effort by a team of visionary geologists working through several changes of government, this grassroots discovery is now actually the best copper development in the world. It is actually the best copper development in the world. And it's not captured in a traditional NPV model, which assigns an 8% or 10% discount rate to the enormous cash flows and wealth and opportunity this development will bring to the Congolese people or any of the other stakeholders associated with ownership in the company. If you assign an 8% or a 10% discount rate to an asset that will run for 50 years, you're paying me nothing for anything that happens after year 10. That's crazy. You'd have to sell the stock. If I sold you my mine and had a 50-year life, and you assigned a 8% or 10% discount rate, you'd have to sell it back to me for $1 after 10 years because an NPV model does not capture the inherent value in the Tier 1 asset in a commodity our world desperately needs. So I'm calling you from Riyadh, Saudi Arabia. I've been doing a lot of traveling. It's 6:30 p.m. in the afternoon here, and I'd like to salute the incredible team of people that have worked for the last 20-odd years to bring this magnificent asset into a period of continuous growth in a way that has never been achieved before, in a way that empowers women, in a way that uses hydroelectric power so there's virtually no global warming gas generated in the production of the copper metal, in a way that's training young Congolese people who comprise the vast majority of the labor force and in a mining effort that really has heart and soul as well as numbers that cannot be captured in a sort of spreadsheet. And with no disrespect to my analytical friends, who only have a day to respond to a 35-page series of numbers, this mine and its efforts and the growth of Ivanhoe Mines can only be appreciated by coming and visiting the sites and talking to the people firsthand and seeing what's going on firsthand. This is the highest grade major copper mine in the world, and there'll be a lot more found in this region, and this is the commodity the world desperately needs if we're going to leave our children or our grandchildren a cleaner, cooler world. This copper has to be mined somewhere, and I just noted today that the Biden Administration put the final nail in the coffin on the Pebble mine in Alaska. Other mines are being legislated out of existence on places that are just too dangerous to invest. So to improve, for example, is in the state of near civil wars, which speak tonight, and Peru is the second largest producer of copper metal in the world. Chile has been unable to grow production despite decades of capital investment, their production is actually going down. That's the largest copper-producing region in the world. In short, the great future for metal production doesn't lie in Russia, it lies in Africa. And the heart of Africa is the Congo. And just as Barrick bet the company on that incredible gold mine called Kibali, the Congo is the brightest place for any mining company to go and operate if they want a light a lamp that will show the world you can find the copper metal we so desperately need. So hats off to all of the people that have brought us this far. You'll meet some of them in the upcoming video. And I'll try to hang around for any questions and answers at the end. I'm Robert at ivanhoe.net. We're heading to Endava after some tours of the mine for the next few weeks. And we hope all of you accept our heartfelt invitation to come visit Kamoa-Kakula and Kipushi and Platreef as well. With that, over to you, Matt. Let's roll that video. Thanks very much, Robert. And as Robert noted, we're just going to play a brief video now that's going to bring a little piece of Kamoa-Kakula to you right now, and you can meet some of the great people that are operating the mine. There may be -- for those on the phone line, about a 15-second delay in the audio starting up. So do bear with us and the operator. But I will run that video now, and we will see you on the other side. Thanks very much.

Good morning, and good afternoon, everybody. This is Marna Cloete, President of Ivanhoe Mines, Broadcasting from Johannesburg. I'm always so proud when I watch these videos and think that I was part of the team that achieved this. We have seen today's presentation a 26-year odyssey of discovery. But what exactly is in odyssey. It is a long journey full of adventure or a series of experiences that give knowledge and understanding to someone. The discovery and subsequent development of Kamoa-Kakula most certainly both, and go to the next slide, Matt. I still recall my first journey to Kamoa-Kakula when there was just a single bird track leading into the bush. Today, after $2.9 billion of investment as of September of last year, the results speak for themselves. We have achieved many milestones along the way, but none of this would have been possible. If it wasn't for the support of the DRC government, we have also a 20% shareholder in Kamoa-Kakula. From first production to September of last year, we have generated $1.5 billion in EBITDA, and we have unprecedented contained copper in our stockpiles to the tune of 165,000 tonnes, all this through the development and subsequent extraction of Phase 1 and Phase 2. During this webinar, Alex Pickard, my colleague in London, will talk you through the findings of our integrated development plan that boast an extraordinary net present value of $20.2 billion. 26 years ago, this ore body was a sleeping giant. It's through the drill bit and hard work of many dedicated people that we managed to unlock value, not just for our shareholders, but also to our stakeholders surrounding the mine. We can go to the next slide. This great discovery enabled Ivanhoe Mines to create ancillary value. Through the refurbishment of the government-owned hydro power facilities, we added an additional 250 megawatts to the grid. We also supply portable water to over 90% of the households in our 400 square kilometer mining footprint. We created in excess of 12,000 new jobs, of which over 95% are held by Congolese National. We paid $0.5 billion in taxes and royalties to the DRC government after only 2 years of operation, and we are in the process of constructing a world-class tertiary education facility called the Kamoa Center of Excellence. I now hand over to Alex Pickard to take you through the results of our 2023 integrated development plan.

Thank you, Marna, and good day to everybody on the line. I will now take you through a few slides on the highlights of the Kamoa-Kakula Life of Mine study, which we call the Integrated Development Plan 2023 or the IDP '23 for short. I'd just like to start by saying that it's not easy to summarize what is an incredible volume of work into a few slides. So I would highly recommend that the audience read our press release that we put on the site yesterday as well as the technical report that will be filed within 45 days on SEDAR. Next slide, please. So this slide is really just to set the scene in terms of what is included in the IDP. So in fact, there's 2 studies, the first of which is a pre-feasibility study covering the Phase 3 and 4 expansions and the second of which is a preliminary economic assessment, or PEA, which entails effectively a 9-year life of mine extension to the PFS, which already has a 33-year mine life. So if I could direct you to the graphic on the right-hand side of the page, this really just shows all of the mines and infrastructure that we will build on the full 400 square kilometer Kamoa-Kakula mining license area and all of this is covered within the IDP '23. Starting with the blue box as you can see at the bottom of the page, we have the Kakula mine, which today is producing over 400,000 tonnes of copper annually as well as the Kansoko mine, where we are currently ramping up for much larger operations. So the Kakula mine will very soon be feeding up to about 9.2 million tonnes per year of high-grade ore into the Kakula concentrators. That's Phase 1 and Phase 2, where we are basically complete in terms of the debottlenecking. We really are in the last month or so of installing the debottlenecking infrastructure. So all of this infrastructure in the blue is installed and completed today. Then we start to look at Phase 3. So Phase 3, you can see in the green, we bring the Kamoa Phase 3 concentrator online in 2024. So that's located about 10 kilometers to the north of Kakula, and that Phase 3 concentrator will be fed at a rate of about 5 million tonnes per annum from the Kamoa 1 and 2 mines, which we are opening up right now close to the concentrator. So you can see those highlighted in the yellow boxes. A very critical part of the Phase 3 expansion, it was mentioned in the video, and I will come back to it later on, is the 500,000 tonnes per annum direct-to-blister smelter that we are also targeting for commissioning in late 2024, and that's located next to the existing Kakula Phase 1 and 2 concentrators. The smelter will be fed from a blend of concentrate produced at both the Kamoa concentrators and the Kakula concentrators. Moving to Phase 4 towards the end of the decade, we will expand the Kamoa concentrator capacity by double, so from 5 million tonnes to 10 million tonnes with a parallel concentrator known as Phase 4. And all of this infrastructure that I've described falls under the scope of the PFS study. So what this entails is a massive increase in the reserve base that we're including across the Kamoa-Kakula project, over 100% increase compared to our previous study, which really defines the decreased level of risk that we see in these estimates. Finally, just to mention the PEA again, that's effectively a life-of-mine extension to the PFS. The way that we do that is by opening up 4 additional lines in sequence. You can see them highlighted in the orange towards the north of the Kamoa mining license. They are called Kamoa 3, 4, 5 and 6. So these are largely inferred resources today, but of course, we will drill them as needed to a greater degree of accuracy as we continue to produce from Kamoa and Kakula. Next slide, please. So that was a lot of detailed and description of all the infrastructure. But here, you can really see the ramp-up to 19.2 million tonnes per annum in a graphical format. So where this is slightly different from previous studies is that we historically looked at doing this in 5 phases of roughly 3.8 million tonnes per annum each. Where we are today is that we have Phase 1 and Phase 2 doing 9.2 million tonnes per annum. And then we're adding further 2 phases at 5 million tonnes per annum each, so 4 phases overall, which is more capital efficient than what we previously looked at. I think also on this slide, it's worth pointing out that we will have an increased contribution from Kakula in the early years. So today at the mine, we're working very hard to put in additional underground infrastructure, which will allow us to ramp up Kakula to between a capacity of 8 million and 9 million tonnes per annum. So this will effectively support the full capacity of the Phase 1 and 2 mills together with the surface stockpiles at Kakula that we've mined and effectively already paid for in our cash flow. And the effect of expanding the contribution of Kakula is to improve the grade profile in the first 5 or 10 years of mining, which you can see quite clearly from the red line. Eventually, as Kakula starts to decline in terms of mining rate, Kakula will be supported by a new high-grade mine, which will be established at Kakula West. Finally, maybe just to note on the timing of Phase 4, you can see here we've modeled it at 2030 in the studies. The reason for this is really just to create a steady stream of concentrate feed for our smelter, which you will see in the next slide. But depending on the copper market environment, we can accelerate the timing of Phase 4. The only real critical path item is further investment in DRC power rehabilitation, but we already have plans that are well advanced in that regard. Next slide, please. So this is zooming in on the production profile, which is showing copper in concentrate. Of course, a lot of that concentrate will be refined further to be blister anode copper. But in terms of the production profile, I think this is why we've made a big improvement on our previous studies. So not only is the ramp-up of Phase 2 and 3 happened way ahead of our original schedule, but we've also managed to sustain a higher production profile for much longer. So after Phase 3, we're looking at production in excess of 600,000 tonnes annually of copper for over 15 years. And bearing in mind, during this period of time, the mine will be producing a huge amount of cash flow. We have it modeled at well over $3 billion of EBITDA annually. You can also see the green line, which is the 500,000 tonne production level. So it's anticipated in this study, including the PEA that Kamoa-Kakula will maintain that level for close to 30 years, and that's what really sets Kamoa-Kakula apart as being a truly Tier 1 multigenerational mine. Next slide, please. Yes. So this slide really just puts that in context on a global scale. So you can see the largest copper mines in the world are shown here. This is 2025 data, and they are sorted by the production scale and the grade. So you can clearly see that Kamoa-Kakula will be the fourth largest copper mine in the world, and it will be for a long period of time, but also operating at a grade that is multiples of the other major copper mines. The bubble size that you can see represents the measured and indicated resource, which shows that Kamoa-Kakula really is among the biggest deposits out there, and we're still not finished in terms of exploration on the license and in the Western Foreland. So we mentioned the smelter quite prominently on the video. And that's because we really firmly believe the smelter is one of the most important and value accretive aspect of the whole of the Phase 3 project and actually is the thing that will really sustain Kamoa-Kakula as a Tier 1 mine for generations. So this just touches on some of the highlights. Compared to the mine and the concentrator, the smelter is an enormous construction project of significant complexity. But with that in mind, we're very pleased to report that the capital cost is still coming in under $1 billion, at about $900 million here. There's a bit of allowance in addition for contingency and so on. But it's also worth considering that this number is based on commitments and orders that we've already made, so we're expecting the key equipment to start arriving over the course of this year and the foundation works and the civil works are already well underway. So we have a high degree of confidence in that number. We mentioned in the video, we'll be producing 500,000 tonnes of blister copper anode. So that's actually a target spec well in excess of 99%, and that will be the largest smelter of its kind in the world and the largest smelter in Africa. And as well as the production of the anodes, we will also be producing roughly around 700,000 tonnes of sulfuric acid as a byproduct. The sulfuric acid is in huge demand in the DRC. There's a captive market consuming around 1.4 million tonnes annually, which is mostly from oxide copper operations that use the acid for [indiscernible] for leaching. And recently, we've seen prices as high as $500 or $600 per ton in Kolwezi, although in this report, we are forecasting much more conservatively at about $150 per tonne long run. Finally, I think probably the biggest impact of the smelter overall is in terms of the logistics and the shipping. So not only is it much more straightforward to ship anodes than it is to ship concentrates. But overall, we will be reducing the volume of copper that we are shipping per unit of metal by more than half. So that's effectively moving from shipping 40% to 50% copper and concentrate to 99% plus copper anodes. So that obviously brings significant environmental benefits in terms of the amount of trucks that we will be using per tonne of copper ship, but also, we estimate a big reduction in our overall operating costs. Factoring in all of these things, the logistics as well as the byproduct credits as well as the operating cost of the smelter, we are still factoring in an overall reduction of around 21% from bringing the smelter online, which brings our cash cost in it to around $1.20. Next slide, please. So David van Heerden, our CFO, will shortly cover the nearer-term 2023 guidance and give some pointers in terms of our cash cost. But this slide really shows the bigger picture impact of the smelter. So you can see, on average, this is the first 10 years of production, and that includes 2 years without the smelter. We are averaging $1.22 per pound. So that place is Kamoa-Kakula right towards the very bottom end of first quartile cash cost globally. And as I mentioned before, we feel that these numbers have been well estimated, but also there are areas of potential upside. So for example, we have assumed a relatively conservative asset price. And as well as that, we've assumed in our cost, no material improvement in the logistics cost in the long run, which result from the opening up of the Lobito rail corridor to Angola. But we know firsthand that this project is now very quickly gathering momentum. So both of these factors are just examples where we could have a significant positive upside on our cash cost. Looking at the capital expenditure breakdown, I will leave it to David to give the big picture, which will include all of our projects but this is the detail of Phase 3 and Phase 4. We believe that these numbers, particularly for Phase 3 are quite in line with expectations and where we have been guiding. We haven't -- we've never seen material CapEx loss at Kamoa-Kakula. And that should give investors additional confidence. I mean, firstly, looking at what we did on Phase 1 and 2 where we came in budget both times. But secondly, the $3 billion number you hear -- the number you see here is based on orders that we placed. Much of the CapEx has been committed. The work is already well underway on site. So we have a very high degree of confidence in our CapEx projections. Of that $3 billion, it's worth adding that we will spend roughly $2.5 billion in the next 2 years. And then the remaining $500 million or so is more associated with sustaining the mining production profile at that rate of 14 million tonnes per annum once Phase 3 is in operation. So that's in years '25 and 2026 mostly. And then finally, just to note on the Phase 4 capital number, you can see that, that's quite significantly lower than Phase 3. This is actually very similar to the dynamic we had with Phase 2 and Phase 1, where during Phase 1, we overbuilt a lot of the infrastructure that we needed in the production area. And so that didn't need to be duplicated in Phase 2. It's a very similar story when you look at Phase 1, where we are estimating a capital cost of $1.5 billion to $1.6 billion today. And so this last slide from me is really the conclusion. I think Robert made the point very well at the beginning of the call. How do you place a value on a mine like the Kamoa-Kakula, which will surely be one of the world's largest and longest life copper-producing asset but also one of the -- the most profitable for a long period of time based on the findings of the IDP that we are presenting here. So we believe that the near-term cash flow impact of Kamoa-Kakula is very much overlooked. But the long-term value is represented here in an NPV number, we are using an 8% discount rate. We think that 8% is steep, considering what we've delivered at Kamoa-Kakula so far and our cost of capital. But you can see that despite this, the NPV of the mine is well over $19 billion, and this is based on our long-term price from the Street consensus that's $3.70 per pound, which is roughly 10% to 15% below the spot price today. Looking at the spot price, the NPV increases to $23 billion. And obviously, we are strongly of the view that this comparable market has plenty of room left to run. And then perhaps just to add, this is showing the PFS, all of this is excluding roughly an extra $1 billion in terms of NPV today, which -- which would be included by adding the inferred resources at the end of the mine life in the life of mine extension scenario. So with that summary of the IDP, I will hand over to David to take you through our guidance.

Thank you very much, Alex. You can move over to the next slide, please, Matt. The 2023 annual production guidance for the Kamoa-Kakula Copper Complex, is estimated at between 390,000 to 420,000 tonnes of copper and concentrate following the anticipated completion of the debottlenecking program early in the second quarter of 2023. Our cash cost guidance for 2023 is $1.40 to $1.50 per pound of payable copper. This factors in an increase in the grid power tariffs applied by the DRC state-owned utilities now. which has increased from approximately $0.06 per kilowatt hour to $0.10 per kilowatt hour and from the same by 2022 onwards. That is still very inexpensive when compared to other power sources and the cost of power in other jurisdictions. And the fact that it's green and hydro energy cannot be overemphasized. Kamoa-Kakula also continues to receive a 40% rebate on the power invoices, which repays the loan made to SNEL to rehabilitate the state-owned hydropower infrastructure assets. And this reduces the impact of the power tariff increase on our cash costs. Our C1 guidance also assumes prevailing logistics costs based on estimated regional trucking capacity as well as increased benchmark treatment and refining charges and an inflation in consumables and other inputs. More important than the current guidance for 2023 is the financial benefits we expect from the on-site smelter, which Alex has already highlighted. According to the Kamoa-Kakula 2023 PFS smelter commissioning is expected to drive a decrease in the average cash cost from 2025 to $1.15 per pound of payable copper. Next slide, please, Matt. And we have regularly been asked to quantify the impact of inflation on our planned capital expenditure and on this slide is the answer. And importantly, the capital expenditure guidance is what we are guiding towards what we will spend and not the cash we will need our treasury to fund our growth plans. And at current copper prices, Kamoa-Kakula's Phase 3 and future expansion capital costs is expected to be funded by operating cash flows generated by the copper complex -- the Kamoa-Kakula amount in the table are consistent with the CapEx requirement shown in the IDP 2023, which Alex just summarized. And the annual EBITDA forecasted in the IDP of over $3 billion for the first 10 years and really makes the required CapEx look tiny. At Platreef, where construction of the Phase 1 mine is underway, with the first production on track for Q3 2023 to 2024. And the $300 million stream facility have already in place have been fully drawn and are being utilized for the funding of the development of the Phase 1 project. We also continue to progress the Platreef project senior debt facility of $150 million with the mandated lead arrangers, and that is targeted to close during the first half of this year. The Phase 2 capital expenditure of $100 million at Platreef represents mainly the continuation of the sinking of Shaft 2 and the construction of the shaft 2 head frame, allowing optionality for a possible acceleration of Phase 2, which is currently under review. Construction of the Kipushi mine is also underway with the processing plant scheduled for completion also in Q3 2024. And long-lead equipment items have been audited and manufacturing is underway and earthworks and civil construction activities are also taking place in surface. Offtake discussions and including a proposed $250 million prepayment financing facility have now advanced to final drop term sheets from shortlisted parties and also and we are also evaluating a possible $50 million working capital facility for Kipushi. And when comparing the estimates for Platreef and Kipushi to the 2022 feasibility studies, Platreef is still bang on the estimate on the estimated initial capital in the 2022 [ FS. ] And the increase at capacity reflect work packages placed to date and equates to an annual escalation of around 6%, which we believe is not off market. As at the end of September 2022, we had approximately $663 million in cash and cash equivalents on hand. So we are well placed to proceed with our growth plans, allowing us to take another big step up on all fronts in 2024, but also to continue with exploration. So we can further bolster our portfolio of Tier 1 assets. And I now hand over to Marna for concluding remarks.

Thank you, David. One cannot always quantify the impact on new discovery such as Kamoa-Kakula will have on firstly, its community, its host country and on securing the metal of the world [indiscernible] desperately need for the green energy transition. NPV calculation is conventional in calculating an estimated underlying value for a finite period of time. But discoveries such as Kamoa-Kakula are transformational for companies, communities and countries. Our human capital and know-how in finding Tier 1 assets and subsequently successfully developing those mines are not easy to quantify. Our team is set on continuous shareholder value creation. Just look at our track record. We discovered Kamoa-Kakula. We both Phase 1 and 2 on time and on budget. We are among the world's largest producers of the greenest copper in the world. We are ready for Phase 3, which will bring another step change in production and costs, not to mention the execution of Platreef and Kipushi that is nearing first production next year. We have already delivered significant cash flow and EBITDA that funds our future expansions. We pay taxes and royalties, we create jobs, and we are an overall model for greenfield exploration and mine development in the DRC and beyond. Thank you for joining us today. I now hand over to Matt for Q&A.

Thanks very much, Marna. We'll now begin the question-and-answer session. The way this is going to go. First, we'll handle the calls on the line, and then we'll revert to the webcast questions as time allows. So I'll now hand back to the operator who will populate the phone line, and we'll proceed with phone questions before moving on to the webcast portion. Operator?