Ivanhoe Mines Ltd. became the latest stock to join the Sanford C. Bernstein coverage universe, with an upside potential of around 300%.
The broker attributed the Canadian company an "incredibly attractive valuation" and a "unique portfolio," based on which the stock received an outperform rating with a target price of C$10.00. Ivanhoe shares on Dec. 14 stood at C$2.71, a level that Bernstein regarded as "strongly undervalued."
"We value the company at C$11.9 per share, using a 10% discount rate and the following long term commodity prices: copper at US$8,200 per tonne, zinc at US$2,700 per tonne and platinum at US$1,286 per tonne," analyst Paul Gait and his team flagged in a Dec. 16 note.
Key aspects for this assessment were Ivanhoe's strong management structures "with interests aligned with shareholders," as well as a "world class" portfolio and "exceptional projects."
The company owns three undeveloped assets: the Platreef platinum group metals asset in South Africa, and the Kamoa-Kakula copper project and Kipushi zinc project, each in the Democratic Republic of the Congo. "Each one of these projects can make a legitimate claim to being the best project in the world in their respective commodities," Bernstein stated.
"Our initial interest in the company arose as a result of our bullish take on copper, and we began following the remarkable copper discovery that the company announced this year in the shape of the Kakula section of the Kamoa deposit," the analysts noted. "We are far from peak copper demand. For every person on our planet to enjoy the same standard of living as an American, we would need to produce ~120 million tonnes of copper annually, versus ~20 million tonnes currently. ... The supply side is unsupportive."
With geological copper discoveries being extremely rare, the average discovery year for copper mines is 1928, and reserve increases widely resulting from productivity gains and drops in cutoff grades, Bernstein highlighted that it was "unique" to find a company capable of delivering copper growth in an ex-growth world.
"We think that the cumulative cash flow over the next 20 years from Kamoa-Kakula is sufficient to buy out the entire market capitalization of Ivanhoe 28 times over," Bernstein concluded.
Meanwhile, Patersons Securities assessed mining majors Rio Tinto and BHP Billiton Ltd.
For Rio Tinto, the firm raised its fair value estimate to A$38 per share, from A$33 per share, due to higher near-term prices for iron ore, coal and copper.
Estimates for iron ore were lifted to US$60 per tonne in 2017 and US$50 per tonne the year after, both from a level of US$35 per tonne previously. Thermal coal prices were increased to an estimated US$75 per tonne for the 12 months ended March 2018 and US$60 per tonne for the next year, from previously US$55 per tonne. Metallurgical coal price forecasts were adjusted to US$200 per tonne in 2017 and US$120 per tonne in 2018, from US$80 per tonne. For copper, the firm now forecasts US$2.40 per pound in 2017, up from US$1.90 per pound.
Long-term forecasts remained unchanged at US$35 per tonne of iron ore by 2020, US$80 per tonne of metallurgical coal, US$50 per tonne of thermal coal and US$2.00 per pound of copper.
Higher price expectations also prompted Patersons to raise its fair value estimate for BHP Billiton shares to A$18.50 apiece from A$17.00 apiece. However, the firm said the stock was overvalued.
The team wrote Dec. 10, "BHP remains overvalued with the market betting higher commodity prices will be sustained in the face of structural change in China's economy."
"No change to our high fair value uncertainty and no-moat ratings, reflecting leverage to cyclical commodity prices, the high capital intensity of mining and the lack of a sustainable cost advantage."