When it comes to mining stocks, investors often gravitate towards gold and silver miners. Often dismissed are miners that are focused on other minerals, such as copper. That’s where the appeal of Ivanhoe Mines (TSX: IVN) comes into focus.
The company’s primary copper mine ended September with a massive 43,000 tonnes of unsold copper.
For those unfamiliar with the stock, Ivanhoe is a Canadian mining company that has operations in multiple African markets. Those operations include a pair of mines in the Democratic Republic of Congo, and the Platreef mine in South Africa.
The company’s main project is its near 40% interest in the Kamoa-Kakula copper complex in the Democratic Republic of Congo.
Here’s what investors should know before buying.
Source: Getty Images
Why Ivanhoe has 43,000 tonnes of unsold copper
At first glance, having 43,000 tonnes of copper on hand sounds like a good problem. Sell it while prices are high, collect the proceeds, and move on.
Unfortunately, it’s never quite that simple.
That inventory number includes copper in concentrates and material still moving through processing. In other words, it’s not all finished metal that’s ready to ship. And the figure covers the entire joint venture, rather than just Ivanhoe’s 40% share.
At the beginning of the quarter, Kamoa-Kakula had 40,000 tonnes of unsold copper. The company also expects that inventory to decline to between 35,000 and 40,000 tonnes by the end of the year.
That would be progress, but it still leaves a huge remaining inventory. Selling down that inventory helps to release cash that’s tied up in the business.
Copper prices give the business a lift
The good news is Ivanhoe has a supportive copper market.
The Kamoa-Kakula operation realized an average copper price of US$6.12 per pound during the third quarter. That helped it generate record quarterly revenue of just over US$1 billion.
The operation also benefits from its smelter. Sulphuric acid produced during processing can be sold, which helps to offset the cost of running the facility. That part of the business is rarely mentioned. Revenue from a by-product can improve the bottom line and be beneficial to investors.
The outlook is harder to ignore
Kamoa-Kakula now expects to produce between 300,000 and 350,000 tonnes of copper in 2027. That’s down from the previous forecast of 380,000 to 420,000 tonnes.
Concurrently, expected cash costs increased to between US$2.50 and US$3.00 per pound, compared with the previous range of US$2.10 to US$2.50.
In other words, Ivanhoe now expects higher cash costs and less copper production than previously forecast.
One thing that offsets part of that challenge is the higher price of copper. The London Metal Exchange’s three-month copper benchmark has risen over 30% over the past year.
That still leaves the challenge of Ivanhoe’s existing inventory, however.
Is Ivanhoe worth buying?
Ivanhoe is an intriguing option that I would keep on the watchlist for now. The stock has dropped nearly 50% year-to-date and is still sitting on a massive inventory of copper.
There’s a case for buying the stock before the recovery becomes obvious. If operations improve while copper prices remain strong, investors who accepted the uncertainty early could benefit.
Before buying, I’d want to see that inventory decline and production meet those revised targets. That would give me more confidence that Ivanhoe can turn strong copper prices into results for shareholders.
For now, I’m comfortable waiting.
