While precious metals like gold and silver might be the talk of the town right now, it is easy to overlook investment opportunities in the realm of industrial metals. Commodities such as iron, aluminum, and copper will always be in demand in the manufacturing sector, and despite what many investors would suspect, prices can fluctuate significantly over a short period of time.
Although weak economic data from manufacturing giants such as China have temporarily pushed down prices for some of these metals, this also means that investors are more likely to overlook investment opportunities in these areas. In particular, there are many copper miners that fall into this camp. Ivanhoe Mines (IVPAF 1.04%) is one mining stock that I'd consider to be one of the best speculative copper investments in the sector for a couple of reasons.
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Understanding the copper market
Currently, prices for copper have been low. While the red metal has recovered somewhat from hitting a recent two-year low at $2.55 per pound, prices have overall been going downhill since 2018, when copper hit a five-year high at $3.30 per pound. Copper has historically been strongly correlated to the Chinese economy, which is the world's top consumer of the metal. Thus, some analysts often look at copper as a canary in the coal mine for the Chinese economy and, to a lesser extent, the global economy as well.
At first glance, it might seem that the future prospects for copper aren't great. Combined with the ongoing U.S.-China trade wars and other recessionary warning signs such as the inverted yield curves, it seems that a downturn in the global economy seems likely.
However, the demand for copper in other areas is growing. Goldman Sachs currently predicts that copper supplies will enter a deficit due to the growing demand for electric vehicles and clean energy. So, while demand from China in the manufacturing sector might be falling, the growth in electric-vehicle and green energy demand should mitigate this.
Looking at Ivanhoe Mines
That brings us to Ivanhoe Mines and why I consider it to be a top copper play. With a market cap of $4.63 billion, Ivanhoe Mines has witnessed a major turnaround in its stock price. Back in 2016, shares jumped by 669%, breaking out of the penny stock range with a combination of both industrial and precious metal production.
Ivanhoe owns stakes in three mining projects, all of which are considered world-class in their respective metal groups although none are operational at the moment. This includes a 68% stake in the Congo-based Kipushi zinc project and a 64% stake in the South African Platreef platinum facility. However, what really sets Ivanhoe apart is its 39.6% stake in the Congo-based Kamoa-Kakula copper project.
Earlier in May, Ivanhoe Mines announced the discovery of a major thick zone of ultra-high-grade copper in a previously unexplored area of the Kamoa project. While this recent statement from the company hasn't been independently verified yet, Ivanhoe Mines did announce an earlier independent pre-feasibility study in February on the Kamoa project which found that the mine's first stage will yield an impressive 6.8% copper yield over its first five year period. Even at this yield rate, which is lower then what Ivanhoe Mine's most recent announcement suggests, it would make the Kamoa project a remarkable discovery considering that the average copper yields for discoveries in the 21st century are around 0.62%. If these figures are true, this could make Kamoa project could turn into one of the highest-grade copper deposits in the world.
Paul Gait, an analyst at Sanford C. Bernstein, said in a note back in February that if this data is accurate, it would be "nothing short of extraordinary," and that "the broader Kamoa-Kakula region is by far the most important and exciting mining project in the world today."
Addressing potential concerns
While this might seem to paint a rosy picture for the company, there are a number of issues to watch out for. Ivanhoe Mines has been working on the Kamoa-Kakula project for 12 years after it was first discovered in 2007, making very slow progress for such a supposedly promising endeavor. Although most of this time was spent trying to find suitably large financial backers for the project, this long of a delay is enough to make investors justifiably concerned.
On the other hand, however, the leadership of Ivanhoe mines does have a record of hitting home runs when they finally happen. The company's founder, billionaire Robert Friedland, had his initial success from selling the Voisey Bay nickel deposit in Canada for $3.1 billion back in 1996. In 2012, an earlier version of Ivanhoe Mines was taken over by Rio Tinto (RIO 0.13%) for a total of $4.2 billion, acquiring a majority stake in the Oyu Tolgoi copper-gold deposit in Mongolia in the process. While this post-2012 iteration of Ivanhoe Mines, previously known as Ivanplats, might not have produced results yet, the leadership behind it does have a history of doing that eventually.
Geopolitical risks are also a major concern for investors. With both the copper-focused Kamoa-Kakula project alongside its Kipushi zinc project being based in the already unstable Democratic Republic of the Congo, mining investors are worried about further mining disputes in the country. The possibility of higher mining taxes and royalties from the DRC government is enough to make investors hesitant about companies working in this area.
Even mining giants such as Glencore (GLCNF 0.22%) have had some challenges recently. Mining operations had remained smooth only as long as they had Dan Gertler as a partner, someone who happened to be a close friend of the Congo's former president. After the partnership came to an end, mining royalties had jumped, and operations took a turn for the worse. If a company of Glencore's stature can fall out of favor with that country so quickly, investors are justified to worry about what could happen with a smaller company like Ivanhoe Mines.
However, there's a good reason why Ivanhoe could be safer from the Congolese government then many would have first guessed. Its largest shareholder, the Chinese CITIC metal, decided to invest an additional CA$612 million to help fast-track the development of these major projects, with the Kamoa copper mine being the main focus. This gives Ivanhoe a level of political backing that other companies don't have. I'd argue that the Congolese government would think twice about messing with Ivanhoe now that a major Chinese partner is so heavily involved with the company. This is a key consideration that most experts aren't taking into consideration, who are still overemphasizing the geopolitical risk present in Ivanhoe's case.
From the company's perspective, this major investment for CITIC puts its cash position at CA$1.3 billion, which meets the projected $1.1 billion needed in capital development for the Kamoa project according to the pre-feasibility study released in February.This is also the second major investment made by the Chinese shareholder this year and is a sign that institutional investors are well aware of how big of a deal this copper discovery is.
Global copper supplies expected to enter a deficit in the next couple of years. Combined with the fact that company's management team expects copper production at the Kamoa project to start sometime in the third quarter of 2021, Ivanhoe could see a surge in stock price similar to what happened back in 2016.
BMO Capital Markets analyst Andrew Mikitchook published a research note in May where he gives Ivanhoe Mines an Outperform rating with a CA$9 price target, despite it's facilities still being in the preconstruction stage. This would suggest a 252% potential upside from its current prices, something that I think is reasonable in the next couple of years. However, I wouldn't recommend Ivanhoe as anything more then a speculative investment. The fact that the company still isn't producing anything at the moment means that there's plenty of room for things to change for the worse. Despite this, from what we've seen so far, I'd argue the bullish case for Ivanhoe Mines is stronger than the bearish one.