Ivanhoe Mines Ltd (IVPAF)

[JB3729]

ursusbrumae posted most of what RF had to say during the Kakula CC -

CC link - https://www.dropbox.com/s/dr0anm4njyzp65d/2016-12-15%20Kakula%20PEA%20conference%20call%20recording.m4a?dl=0


On the Kakula Copper Strike
Robert Friedland, Executive Chairman of Ivanhoe Mines Ltd.
15 December 2016
 
Wow. Thank you, gentlemen, and I want to thank all the participants on this holiday season call.
After twenty-one years of incredibly hard work by hundreds of very talented people, arguably the
very best in the industry, our company is about to be an overnight success.
 
Now, we found Kamoa a number of years ago, and David Broughton and his team won a number
of the highest awards you can get in geology for that discovery, and we drilled it to a point where
it's 27 kilometres long and 10 kilometres wide – and you can't blame us for continuing to drill
that enormous blue whale to see how big it was. It's kind of hard to go to a new area 5 kilometres
away, where even now if we go up to Kamoa and drill the edges, it gets bigger. But we found
some very interesting early geology at Kakula. Now, in the mean time, we designed a 4 million
tonne a year mine at Kamoa and I am going to tell you how rapidly the situation has evolved and
in a very real sense, and only half tongue-in-cheek, this 25 page press release we have just made
for building a 4 million-, and then an immediate extension 8 million tonne a year mine, is
obsolete even before the ink is dry. I want to explain how this happened and where we're
headed.
 
Now, we had a bear market, and availability of capital was very low. We had pundits and
observers thinking we were going to issue billions of shares of stock diluting ourselves in the
development of three simultaneous world class assets. And so we said, well, let's see how small
we can make the capital investment in Kamoa at only 4 million tonnes a year – actually, we we
just started out thinking about 3 million tonnes a year, and then we realised the capital cost was
almost the same at 4 million – and we cooked up a plan for an excellent mine that could be
financed at the bottom of the cycle at 4 million tonnes a year. We developed the detailed
engineering and we announced it, and then we started charging ahead to pre-feasibility and
feasibility study in much more detail.
 
And then the discovery occurred at Kakula: first a few holes, and then just an overwhelming
discovery of an unbelievably rich and disruptive ore body. So, we started moving drill rigs down
there, we had to build a road to get down there. It's only 5 or 6 kilometres away. And we started
drilling and in 6 months we drilled out this monster that remains open. And we've now
announced 60 to 100 million tonnes: if you look at the indicated category and add the inferred in
this extremely continuous deposit, something on the order of 60 million tonnes, 80 million
tonnes, 100 million tonnes of plus-6% material, very shallow. And so we thought, well, let's see
what happens if we move that 4 million tonne mine, as designed, to Kakula. And the result was
lower capital, less capital in terms of economic development, because of the thickness and the
consistency, higher metallurgical recoveries, higher-grade concentrate, which reduces shipping
costs and realisation costs – and in short, a real world beater. And then we thought, well, what if
we build that one and then just build the original idea, the 4 million tonnes at Kamoa, a total of
8 million tonnes, all out of the first little billion dollars. One billion dollars: ladies and
gentlemen, it isn't what it used to be; Oyu Tolgoi is taking 13 billion so far, and before the district
is fully developed up to 350 thousand tonnes a day, at least 25 billion of capital will go into Oyu
Tolgoi. And the expansion underground for Grasberg has roughly a 25 billion dollar budget.
We're talking about one measly little billion dollars, of which our partners from Zijin came in to
provide 65 percent of the capital by debt, and our share of the capital, 175 million bucks, we have
that money in our pocket now, and more.
 
So we started designing this billion dollar unit to be comfortable. Now we've taken a hard look at
the ongoing drilling, and we will announce, in the first quarter, the results of that ongoing
drilling. But it's blatantly obvious, and we have now disclosed, that we're going to look at Kakula
at 8 million tonnes a year to start, and maybe even higher, maybe 10 million tonnes a year to
start. And it will generate ridiculous cash flows.
 
If you're making a 38 percent rate of return, 38 percent IRR, and cost of capital out of Asia, for a
Japanese company, where they are experiencing nearly negative rates of interest, you have access to cheap capital. And now that sentiment in the mining market has turned – in fact, Goldman Sachs, who is professionally short the copper market (probably talking their book, I might add), now that they've covered their short position at a massive loss for their clients, has turned around and become a bull on copper – so all of a sudden there's enormous capital flows interested in seeing what this resource can do and how big it can get. So, that 25 pages of information is very material to a mining analyst, it's very material to the people with whom we are engaged in strategic discussions, but I am happy to tell you it's already obsolete. We are now talking to potential sources of capital, in Europe, in Africa, in Asia, and in the Middle East, that have no material limitation on capital, and what we are being asked is, “well, how big can you make this thing? How fast can you make it big? What's the ultimate size?” And the mineralisation is now a blanket stretching about 27 kilometres further north, 5, 6, 7 kilometres at Kakula – you know, we're getting on 35 kilometres of strike. It's like a flat-lying blanket. How many holes would you like to poke in it? Would you like to put in 2 billion of capital?
 
Take a look at Las Bambas. My Chinese friends have 9 billion dollars dedicated to Las Bambas,
and that's a lot. And that's supposed to get them to 350 thousand tonnes a year. Well, our first
billion gets you to a peak of 347 thousand tonnes a year, and I am confident that the quality of
the concentrate is better, the access to market, all the factors. So, we're not at a high elevation;
we're on flat land. Water is not an issue in the Congo. The Congo River is the second largest
source of fresh water in the world after the Amazon.
 
So what we're doing now is we're going to expand the drilling. And we have the most intensive
interest in the affairs of this company that I have experienced since Voisey's Bay. And, in fact, I
would go so far to say, that if you have a 4.7 billion dollar net present value, at an 8 percent
interest rate, in these little baby mines, imagine what the NPV could be when we go to 8 million,
12 million, 16 million, perhaps 20 million tonnes a year. This is going to be either the second
largest copper mine in the world, or the largest. And it's going to pump out massive cash flows,
to the benefit of the Congolese people, who are now a partner in the project, and to all of our
stakeholders, and to all of our end users of that metal who desperately need it to change the
miserable current state of the world.

Now, Lao Tse, the famous Chinese philosopher, said that the best fertiliser for a farm is the
footsteps of its owner. This morning we had a commentary in the Globe and Mail. It
was basically an attack on Don Lindsay, attacking him on the thesis that he was being paid too
much and that miners get paid too much, and that people that invest in mining companies are
hurt when management have stock options. Actually, when people have exposure to equity, they
work with Silicon Valley intensity, and if you want to make a comment about exposure to equity
and companies, the greatest growth companies in the world in Silicon Valley all have employees
where everybody is exposed to equity. The mining industry is very cyclical and you need to
attract the very best people on the planet if you're going to make the best discoveries on the
planet. So the people that we have at this company are the software. The people that we have at
this company are the guts of it. They're the heart. And when people say “how is this fellow
talking to you so lucky as to find so many of the world's largest mineral deposits?” I always
protest and say “it's not me! It's the strength and the depth and the intensity of the technical
management team that is moving mountains.”
 
Now Kakula, I can assure you, is growing every day, including today, and it's growing this week
and it's growing this month, and it's going to prove to be probably the most disruptive copper
discovery this century. It's already achieved that accolade on the African continent, but we've got
wider horizons in mind for comparison.
 
Now the problem is that the engineers and the third party QPs (the qualified persons) are
struggling to keep up with the scale of the growth of the asset, and our sudden availability of
extremely large amounts of capital. When you've got a lot of money, all your problems are
solved. Once a company like Barrick gets in the index and makes cash flow, any kind of problem
that occurs in mining can be resolved by just spending more capital, and if you've got a cost of
capital of 1 or 2 or 3 percent, and your IRR is 38 percent, you can expand a resource like this
infinitely. Net present value is an evaluation stick for idiots. The numbers that we've published
on an NPV8 means that if I sell you a mine for a billion dollars, after ten years, you have to sell it
back to me for one dollar, because with the magic of compounding interest, there's no value to
anything beyond year 10. And we're three years away from commercial production, plus or
minus, and so, just on that three year delay you're taking a 30 or 40 percent interest compounded
in the deduction of net present value; in other words, just by getting three years older, that 4.7
billion will be more like a 6 1/2 or 7 billion dollar NPV because the mills are turning.

So, we are going to access from strategic players a lot of capital. We are in a competitive process.
We are in the midst of it. We are concerned that this company be run on the very best
international corporate practice, and that the mines be run on the very best possible
environmental and social corporate practice in the world, because when you have a mine with
very broad shoulders and it generates fantastic cash flows, you've got the capital for community
development, and you're generating huge amounts of valued employment, and you can train
your employees. For example, we've invested hundreds and hundreds of millions of dollars in
training in Mongolia, in the Mongolian workforce, and Rio Tinto is now proud that the
Mongolian workforce has the highest productivity and the best safety record in the entire Rio
Tinto system, and those people were trained from scratch, because they didn't come to the mine
with any bad habits. So in short, this is truly a once in a lifetime discovery, and we are the Jedi
you're looking for.
 
Now, solar energy has just become cheaper than wind power, and Lars-Eric Johansson is on the
board of Canadian Solar, one of the largest solar energy companies in the world. All of their
components are made in China. Today, electricity, generated by solar, is dropping below 2 cents
a kilowatt hour. And this mine is also connected to existing hydro-electric capacity. We have our
foot on over 200 megawatts of hydro-electric power. The third element is vanadium redox
batteries for the storage of grid-scale electricity. We have flat land. There's an infinite amount of
solar energy we can generate. We control in an affiliated company a very powerful vanadium
redox battery company based in China that can build very large scale – grid-scale – batteries.
And if you have those batteries, in case you have low water in a hydro-electric dam, as First
Quantum recently experienced in Zambia, the solar energy and the batteries can store the energy
you need. If you have ample rainfall you can run the hydro-electricity as fast as possible and fill
up the batteries. So the combination of hydro-electric power, solar power, and vanadium redox
storage will make this the greenest mine in the world. And if you're a greenie and you want to
stop burning our Arab friends' hydrocarbons, if you campaign against the Athabasca oil sands or
don't like pipelines or don't like coal, you have to acquire our copper.
 
The Chinese state grid is the world's largest buyer of copper metal. They have to clean the air for
1.3 billion Chinese people. A deposit like this is in the national security interest of any of the
major powers.
 
So, we are extremely blessed to have no snow, no ice, easy access to markets, extremely high
grades, and the concentrate – no one has ever seen a mine producing over 50% of concentrate
grade. So there are tremendous amounts of additional value to be squeezed out of this asset with
the advancement of technology in the next ten years. Mining is going to undergo a complete
revolution in technology: the way we drill, the way we grind, the way we blast, the way we
produce metal. And what we do with the metal is going to rapidly change because the world is
moving to electric automobiles, and the world is moving to much cleaner ways to generate power
and this mine is going to sit at the heart of the world industrial transformation. You don't
believe me? Just watch. Wait till you see what happens. We've given you fair warning.
 
So the goal is to surpass this preliminary economic evaluation, 25 pages long, 8 million tonnes a
year, 1 billion of capital, 4.7 billion dollar NPV. We'd like to double it. We'd like to triple it.
Maybe in time, we can quadruple it. And we're talking to the most interesting companies in the
world to team up with us and achieve this task. You know, when you have extremely high grade –
no one pointed out that – your mill has a very small footprint. You use less cement, you use less
steel, you use less electricity, you use less of everything because it's very high grade! And so,
nothing can compete with this, and the only mining share I recommend you buy is something at
the very bottom of the world cost curve. Well, ladies and gentlemen, let me tell you, this mine
will be at the very bottom of the world cost curve. As David Broughton said, it's Lucifer to
everybody else contemplating building a copper mine, with no exceptions. And that's why
Voisey's Bay became so valuable. The people at Sudbury, Ontario: one group used to work for
Falconbridge and drink in one bar, and another group used to work for Inco and drink in another
bar, and if somebody got drunk and went to the wrong bar, they'd beat him half to death because
he came from the competing company. When we found Voisey's Bay, we made a deal with
Falconbridge – in fact, Don Lindsay, who now runs Teck, was my backer – and the people at Inco
just couldn't stomach the idea, and raised the bid by 1.7 billion dollars, because the greatest asset
is a profound enemy to the second best asset. And ain't anybody have a copper discovery like
this.
 
And, you know, our Chinese friends who are already in this project, we've known them for 25
years, they know how important this project is to China's economic, political and military
security. And our Chinese friends bring great stability in the Congo, and we think that any
perception of political risk is quite misplaced. Actually, when I take a good look at the president
of the United States, either the current one, or the next one, I'm not sure any of them knows
what they are going to even say about mining. I mean, you might get a tweet out the Donald any
second that could dramatically change the future of oil and gas or mining. We just don't know.
And who is going to be the next president? Are they going to reverse those policies? Will it be a
Democrat? We know that the Congo lives on copper mining. The Congo produced a million
tonnes of copper, approximately, for the last two years. Each year. It's the fastest growing source
of copper. The economy is growing at about 7 percent a year. This mining project can more than
double Congolese production to 2 million tonnes a year. It dwarfs total Canadian production
which is in inexorable decline.
 
So, we are going to move mountains in the new year. We are going to drill assiduously, and we
are going to increase the size of this resource, and we are going to scale up the project
accordingly. What we're trying to do here is, we're trying to make history. Making history is a lot
better than just making money. If you build the biggest and best new copper mine in the world,
all of our shareholders are going to make a ridiculous amount of money. But that's not as
important or as satisfying at my age as making history. So, the key thing is to uplift the lives of
the surrounding people in Katanga. To strengthen our social licence. The government in
Katanga has been an enormous supporter of our efforts. The people in Katanga were elated
when we restarted one of the hydro-electric power generation units that had been abandoned,
basically, for maintenance, since the Belgian colonial era. We are training the local people in
farming and agriculture and chicken husbandry. We have a honey factory. And we haven't even
made any money yet! When this mine makes money, with its broad shoulders, it's going to set
the industry standard for improving the lives of the neighbouring peoples.
 
Now, the world needs so much copper for electric cars, for power transformation, for solar energy
and for wind power, for nuclear power. If you want to stop burning coal, and if you want to stop
burning hydrocarbons, and if you want to eliminate urban air pollution, you need our copper.
And if 9 billion people that are soon to arrive on this planet are going to breathe clean air, you
need this copper.
 
And so I want all of you on this call to join hands with us, take a piece of the equity, and help us
make history, because we are going to do it. Thank you for your support.