When investors think of acquiring mining stocks, they usually look to larger miners with mature, stable operations. While senior and intermediate miners offer greater stability and come with lower risk, junior miners and explorers offer the potential to obtain outsized returns. One junior miner that stands out, offering an exciting opportunity for investors to gain exposure to high-quality precious and base metals assets, is Ivanhoe Mines (TSX:IVN).
The miner owns three properties located in Africa that contain a mixture of mineral deposits including platinum group metals, gold, copper, silver, nickel, and lead. Ivanhoe’s flagship asset is the Platreef project in South Africa, where it owns a 64% interest in the asset. The development activities at the mine are targeting an ore body containing platinum, palladium, rhodium, gold, and a mix of base metals.
Platreef has considerable reserves of a range of metals including 7.8 million ounces of platinum, eight million ounces of palladium, 1.2 million gold ounces, 500,000 ounces of rhodium, 457 million pounds of copper, and 932 million pounds of nickel. It is forecast to commence production in 2022; on completion, it will be the world’s largest platinum group metals mine and Africa’s lowest-cost producer.
The mine’s projected cash costs of US$351 per ounce produced are at the lower end of the cost curve for the industry globally and underscore the mine’s profitability in an environment where platinum is trading at over US$800 an ounce.
The outlook for platinum for 2019 is also positive, with the global supply surplus expected to continue shrinking. The World Platinum Investment Council projected that demand during 2019 will rise by 2.4% against an anticipated 1.6% increase in supply. This will support prices at their current levels, and there are signs that demand could expand at a greater clip if automotive manufacturers elect to substitute platinum for palladium in the fabrication of catalytic converters for gasoline-powered vehicles.
You see, while platinum is a crucial material used in the manufacture of catalytic converters for diesel power automobiles, palladium is used in those produced for use in gasoline-powered vehicles. Palladium has appreciated considerably over the course of 2018 — up by 15% for the last year to be trading at US$1,272.50 an ounce, which represents a US$469 premium over platinum.
It is this significant premium that creates an incentive for manufacturers to substitute less-costly platinum for palladium, particularly when the price of palladium is expected to remain firm. That is a positive omen for Ivanhoe, because the Platreef mine has reserves of eight million ounces of palladium.
The growing likelihood that a full-blown trade war between the world’s two largest economies, the U.S. and China, will be averted bodes well for the price of not only platinum and palladium but also base metals like copper.
Copper is extensively used globally in a wide range of industrial applications, including manufacturing and construction. Copper has lost 18% over the last year, but if the level of economic uncertainty subsides in coming months and there is an uptick in industrial activity in China, then the orange metal should firm. It is increasingly likely that economic activity in China will improve, because Beijing has indicated that it is considering further fiscal stimulus to ensure that gross domestic product expands at the projected rate.
That not only bodes well for Platreef, which has 457 million pounds of copper reserves, but also for Ivanhoe’s Kamoa-Kakula project located in the Democratic Republic of Congo. Kamoa-Kakula is ranked as the world’s fourth-largest copper discovery with indicated and inferred resources of 41 billion pounds of copper as well as some of the highest ore grades witnessed globally.
Ivanhoe finished the third quarter 2018 in sound financial shape. It had almost US$656 million in cash and short-term deposits compared to a mere US$31 million of long-term debt. That means the miner is well positioned to continue funding the development of its flagship Platreef project and the Kamoa-Kakula development.
Why buy Ivanhoe?
Ivanhoe is a risky investment because there is considerable work that needs to be completed before its flagship Platreef project comes online and commences production. The construction phase of any mine is hazardous, because it comes with considerable execution risk with cost blowouts and delays regularly occurring.
Nonetheless, the quality of Ivanhoe’s Platreef and Kamoa-Kakula assets — along with its sound financial position, including considerable liquidity — makes it a very attractive but speculative play on precious as well as base metals.
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Fool contributor Matt Smith has no position in any of the stocks mentioned.