CA - Ivanhoe Electric Examines Copper's Long-Term Appeal But Headwinds In 2024

2024-01-10 06:53:21 ET

Summary

• Ivanhoe Electric Inc. is recommended a "Hold" rating. The company is involved in exploration activities and studies primarily on copper properties in US.
• The company's stock is highly correlated with the cycles of copper prices and the stock market.
• Copper demand has promising long-term prospects, which is good, especially for the company's primary mineral target.
• A short-term interest rate conflict scenario impacts the stock price and keeps it neutral.

A "Hold" Rating on Ivanhoe Electric Inc.

This analysis recommends a "Hold" rating on shares of Ivanhoe Electric Inc. ( IE ) (IE:CA), a Canadian company involved in exploration activities and studies primarily on copper properties and other metals properties, such as Santa Cruz in Arizona, Tintic in Utah, and Hog Heaven in Montana.

These appear to be high-quality projects that position the company well given the amazing long-term growth prospects, particularly for the future demand of the company's primary metallic target, copper.

Although the company is not a copper producer but rather focuses on exploration activities and the development of mineral properties, on the NYSE American and the Toronto Stock Exchange its stock is highly correlated with the cycles of copper prices, in addition to the stock market.

Ivanhoe Electric Inc. on the NYSE: In the lower part of the chart, the red area describes the stock's correlation with the price of copper, while the light blue area describes the stock's correlation with the US stock market.

Ivanhoe Electric Inc. on the TSX: In the lower part of the chart, the red area describes the stock's correlation with the price of copper, while the light blue area describes the stock's correlation with the US stock market.

Since both areas are almost always above zero (i.e. both are in the positive area of the sub-chart), the stock has a very good positive correlation with copper and US-listed stocks. The positive correlation means that if the copper or stock market is bullish, Ivanhoe Electric is most likely also bullish, and if the first two are in a bearish mood, Ivanhoe Electric shares are also likely in a bearish mood.

This means that this stock is exposed to the effects of a mixed short-term scenario where there is still the possibility of an extension of the Federal Reserve's hawkish policy amid traders waiting for the first rate cut at the next March-20 Fed meeting.

So, it is assumed that shares are trading in line with a neutral stance for now. Without taking anything away from its growth prospects, the stock also needs to show that it is linked to the promising medium to long-term ones for copper as a key metal for green projects and electrification projects, and not just exposed to the metal's price volatility. The market's task is therefore to show whether this security is suitable for a medium to long-term investment horizon if the retail investor is interested in participating in the medium and long-term prospects for copper through Ivanhoe Electric stock. This is a big question mark for medium to long-term-oriented retail investors. But if the retail investor still wants to bear the risk that such an investment method entails from now on, he must try to increase his holding of Ivanhoe Electric when share prices fall significantly. Currently, prices are low compared to recent trends in both markets, but it's still worth waiting because this analysis assumes that there are conditions - and these appear to be very solid conditions - in which shares will move significantly lower from current levels amid the effects of a looming economic recession.

The stock has an outstanding share count of 119.04 million. The float consists of 67.26 million shares outstanding and 92.27% of the float is held by institutions. The trading volume of shares traded on the Canadian stock market is low: the average volume was 1,431 shares traded in the last 3 months. While the average volume on the US stock market in the last 3 months was 385,604 shares traded.

If the position in the stock traded in Canada is too large, it may be difficult for the retail investor to scale back the position when needed.

Ivanhoe Electric Inc. on the Stock Market: The Current Situation and Likely Development

As of this writing, Ivanhoe Electric Inc. shares were trading at $9.98 per unit, with a market capitalization of $1.187 billion on the NYSE American. Shares were trading 22.41% below the 200-day simple moving average and 3.83% below the 50-day SMA. The stock price fluctuated between the floor of $9.64 and the ceiling of $16.75 for the 52-week interval, which means that at the time of writing, the stock price was 3.53% above the floor and 67.84% below the ceiling.

The 14-day RSI of 42.34x shows that despite the sharp decline over the last four months, IE shares still have plenty of room to move lower, offering the retail investor a more attractive entry point ahead of strong medium/long-term growth in copper demand. As discussed later in this analysis, the stock price could face recessionary headwinds well into 2024, which could help meet these types of expectations for retail investors looking to increase their holdings of IE for medium to long-term investment purposes.

As of this writing, Ivanhoe Electric Inc. shares were trading at CA$13.42 per unit, with a market capitalization of CA$1.559 billion on the Toronto Stock Exchange. Shares were trading 22.45% below the 200-day simple moving average and 4.81% below the 50-day SMA. The stock price fluctuated between the floor of CA$12.97 and the ceiling of CA$22.65 for the 52-week interval, which means that at the time of writing, the stock price was 3.47% above the floor and 68.78% below the ceiling.

As for IE stock on the NYSE, shares of IE:CA are still far from oversold levels despite the past 4 months of significant decline on the Toronto Stock Exchange and thus have a good margin to the downside to occupy as the recessionary headwind threat the TSX listed shares.

However, in the short term, an outlook dominated by a contrast between pro-bullish and pro-bearish factors will continue to impact the stock's share price, which is therefore seen to continue to behave in line with a neutral stance. Essentially, this kind of contrasting short-term scenario is that while interest rate traders are predicting a high probability of a 25 basis point cut in the federal funds rate from 5.25 to 5.50% to 5.00 to 5.25%, consumers' rebound in December under the upward pressure of Christmas shopping, could lead the Federal Reserve to continue to hold interest rates "higher for longer" and therefore delay the start of the series of cuts, or there could even be grounds for a further increase. It is known that during Christmas shopping, people tend to push aside their problems, including financial ones, and bite off more than they can chew. This could temporarily dampen the disinflation process. So, the potential for a rate hike to combat high inflation still exists, as Richmond Fed President and CEO Tom Barkin, a voting member of the FOMC, warned markets last week. In addition, an unexpected decline in ongoing jobless claims and other indicators underscoring the historic tightness in the U.S. labor market give the Federal Reserve more room to extend its hawkish stance through 2024 if necessary to reduce inflation.

In addition, the December 2023 S&P Global US Composite PMI shows that the strong development of new sales in the services sector, together with the significant increase in the cost of production factors, could lead to an inflationary reaction that could require further restrictive measures on the part of the Fed.

While the expectation of an interest rate cut has a positive effect on the shares of Ivanhoe Electric Inc., the possible extension of the restrictive interest rate policy hurts the shares of the copper explorer. Given a high 24-month beta market, these sentiments have very powerful effects on the stock, but by simultaneously neutralizing each other, they allow the stock price to move neither really up nor down. For the solid reasons described, it can be assumed that this trend will continue for some time.

The Downside Catalyst of the Economic Recession

However, there is a very high probability that the stock will be caught up in a general market decline as a result of an economic recession, which this analysis assigns a very high probability of taking over the cycle well into 2024. As a result, the stock should form significantly more appealing entry points than current ones, which the retail investor may be comfortable using to increase his portfolio's exposure to copper's bright future through this interesting player. From a technical perspective, as seen, there is also scope for the share price to fall significantly below current levels under the negative pressure of the negative cycle. Therefore, it is advisable to wait for now and monitor the company's progress on its metal projects in the meantime.

The spread between 10-year and 3-month US Treasury notes is a yield curve, but it is currently inverted as the 10-year US Treasury note yield is 3.998% while the 3-month US Treasury note yield is 5.387% at the time of writing. This anomaly is a strong indicator of an economic recession because it has correctly predicted each of the eight economic recessions over the past six decades.

Traders expect the Fed to cut interest rates this year, but the first cut is not expected until March 2024. In the meantime, "longer for higher" interest rate policies will continue to slow economic activity and then lead to job losses. The headwinds will increase risk aversion in equity markets.

Signs of weaker consumption come from the strong benchmark of well-known top retailers in the US, which reported a year-on-year sales decline in the third quarter of 2023, coupled with expectations that sales will be lower in the future: Best Buy Co., Inc. (BBY), Burlington Stores , Inc. (BURL), DICK'S Sporting Goods (DKS), Kohl's Corporation (KSS), Nordstrom , Inc. (JWN) Lowe's Companies, Inc. (LOW). Most recently, Nike (NKE) spooked investors in the week before Christmas 2023 when management at the athletic footwear and apparel giant warned of short-term sales growth, sending ripples through consumer stocks. Additionally, Walmart's (WMT) decision to integrate Affirm's (AFRM) "Buy Now, Pay Later" technology into its self-checkout online lanes may now be a signal of weaker consumption and the need for a counter-strategy. The technology helps increase customer loyalty but arguably reduces the impact of the current difficult macroeconomic conditions on sales by minimizing the risk of customers changing their minds before completing the order. Additionally, also in line with the weaker sales/consumption outlook, chip-maker Mobileye Global (MBLY) recently expected first-quarter revenue to decline by about 50%, while Walgreens (WBA) announced a 48% dividend cut. The bleaker outlook for future demand, reflected in declining actual sales, lower sales forecasts, and steep dividend cuts, is discouraging companies from investing in growth plans. This could be confirmed by this data, which suggests that the number and value of IPO deals are still well below 2021 levels , suggesting that companies are not raising funds through IPOs in the US stock market. If that doesn't happen through an IPO, why would they raise money through loans when interest rates are still at record highs? Once these negative consumption and investment trends are accompanied by an increase in unemployment, a recession officially occurs. The labor market appears to be stubborn, but there are signs of easing: a significant decline in the number of job creations from 4.8 million in 2022 to 2.7 million jobs created in 2023, along with a 98 percent year-over-year increase in the number of job cuts announced by the companies to 721,677 cuts in 2023.

To protect their profit margins from the consequences of lower consumption and a slowdown in price growth of goods and services in the face of the ongoing decline in inflation, companies need to adapt their operating capacity to the changing environment, which inevitably entails a restructuring of the workforce. Labor costs make up the majority of the total operating cost.

Ivanhoe Electric Inc.: Growth Long-Term Prospects for Copper Demand Ahead

The demand for copper has great long-term prospects, as this base metal is a key element in the electrification of human activities and the use of environmentally friendly technologies in a globally coordinated plan to curb global warming, which some scientists blame for extreme climate change phenomena. In this regard, copper, along with other base metals such as lithium and nickel, will benefit from the global strategy to reduce dependence on fossil fuels, which, with their emissions of CO2 and other greenhouse gases, are expected to play a major role in increasing the Earth's temperature. The global strategy also aims to promote the adoption of technologies with minimal impact on the environment.

Analysts at S&P Global reported that Nornickel, a major Russian nickel and palladium mining and smelting company, expects a huge increase in global copper consumption in the coming decade, with demand expected to reach levels of 30 million tonnes per year by the year 2035, reflecting a sharp increase of 20% compared to 24.8 million tonnes in 2022. The main drivers of the massive increase in global copper consumption will be the expansion of electric transport, electricity transmission networks, and renewable energy generation. The Russian operator predicts a huge increase in the consumption of battery and EV technologies as well as charging infrastructure over the next decade. Nornickel's growth estimates for global copper consumption due to the first two key factors are well supported by the goal of the world's first economy - the US - to make at least 50% of all new vehicles sold in the US electric vehicles (EVs) by the end of 2030 and building and strengthening the country's infrastructure with 500,000 chargers to make electric vehicles more affordable for a growing number of Americans.

Turning to the second pillar of robust future copper demand, the metal is a key element in the various "Go Green" projects among countries around the world committed to developing renewable energy technologies.

In this sense, the outlook was strengthened by the endorsement of Cop28 Global Stocktake at the United Nations Climate Change Conference in Dubai as follows: tripling renewable energy and doubling energy efficiency by 2030. With this, Dubai has set the stage for this new era in which humanity must reduce its dependence on burning fossil fuels to generate energy.

Copper is also widely used by manufacturers of technology in sectors such as public infrastructure and the aerospace and defense industries. Thanks to the US government's strategy to increase public spending, copper demand also has a promising future in these areas: The United States, home to the world's largest manufacturer of aerospace technology and weapons, is notable for the sharp increase in U.S. military budgets in recent years and the volume of U.S. arms sales reaching near-record levels.

Demand for copper is bolstered by the U.S. government's Infrastructure Investment and Jobs Act, as this legislation encourages investment in infrastructure projects such as bridges and railways, which, among other things, require significant amounts of copper and other metals.

The prospects for copper bode well for the corporate profile of Ivanhoe Electric Inc. The company is engaged in exploration and development activities to develop robust sources of copper and other electrical metals on the Santa Cruz property in Arizona, Tintic property in Utah and Hog Heaven property in Montana.

Ivanhoe Electric Inc.'s role is to participate in the U.S. strategy aimed at increasing domestic production of critical minerals such as electrical metals, thereby reducing dependence on the contribution of foreign operators, particularly Chinese operators.

As discussed earlier in this analysis, these critical minerals and electrical metals are needed in increasing quantities to support programs to transform the U.S. economy into a green and sustainable economy through electrification and infrastructure renewal, but at the same time, the US wants neither China nor any other economy to have too much weight in its transformation project.

The Santa Cruz Copper Project is located on approximately 6,000 acres of private land known as west of Casa Grande, Arizona. Ivanhoe Electric Inc.'s land acquisition includes associated water rights, and the area has nearby access to railroads, highways, and transmission lines. The property provides the company with the opportunity to acquire all mineral rights adjacent to surface properties.

An underground copper mine is planned to be constructed in Santa Cruz to produce one million tons of 99.99% pure copper as cathode and 0.6 million tons of copper in a 48% copper concentrate, based on a project estimate of a total of 105.2 million tons of mined mineralized material with a copper content of 1.58% over the entire mine of life.

Production will span a 20-year mine life and a cash cost of $1.36 per pound of copper produced. According to the preliminary economic estimate ((PEA)) of the project, Santa Cruz implies a capital investment of $1.15 billion, while the after-tax net present value of the project is $1.3 billion (or $10.92 per share of Ivanhoe), calculated at a discount rate of 8%, and with an internal rate of return ((IRR)) of around 23%.

The chart below illustrates how Santa Cruz, Arizona's first 10 years of copper production and cost profile may compare to other U.S. copper mines that produced more than 55 million pounds of the payable metal in 2022.

Ivanhoe Electric's goal is to transform the Santa Cruz project into a high-grade copper mine that will support modern, sustainable production of the metal with low environmental impact, as the mineral concentration contains low levels of harmful elements such as arsenic or lead, in line with the global standard strategy to increase the supply of green energy and green raw materials. This means Ivanhoe has the opportunity to develop a source of green copper for markets with premium pricing conditions.

Drilling and technical work is currently underway at the Santa Cruz Project intending to gain greater confidence in the quantity and quality of the indicated mineral resources so that it will then be possible to develop a greater proportion of these resources into the higher mineral resources category of probable mineral reserves. The latter will be part of a pre-feasibility study to be completed in the second quarter of 2025.

Exploration activities target oxide and enriched areas of certain copper mineral deposits at the Santa Cruz, East Ridge, and Texaco deposits. The Indicated Mineral Resources of 2.7 million tonnes grading 1.42% total copper and the Inferred Mineral Resources of 27.3 million tonnes grading 1.39% total copper (using a 0.80% cutoff grade), which support the PEA for the Santa Cruz project but do not include Texaco deposit.

Santa Cruz may have even greater growth potential with the Texaco deposit and there is an opportunity to explore the addition of sulfide copper ore domains at both Santa Cruz and the Texaco deposit.

The Santa Cruz primary sulfide deposit is estimated to have 76.2 million tonnes of indicated resources grading 0.88% total copper and 8 million tonnes of inferred resources grading 0.92% total copper (at a cut-off grade of 0.70%). The Texaco deposit is estimated to have 0.9 million tonnes of copper ore in Indicated Resources grading 1.05% total copper and 35 million tonnes of Inferred Resources grading 1.06% total copper (using a cutoff grade of 0.80%).

The company's other flagship project is the Tintic copper-gold project in Utah , where, thanks to proprietary detection technology and associated software, the company claims to have delineated several large-scale anomalies and that these anomalies are comparable in size to the Bingham Canyon porphyry mine (30 km southwest of Salt Lake City), which with a width of over 4 kilometers and a depth of 1,200 meters, is one of the top mineral deposits in the world and has been the most valuable source of income for the state of Utah compared to other mineral deposits. Rio Tinto Group's (RIO) Bingham Canyon porphyry mine operates 24 hours a day, 365 days a day, and the facility is considered the second largest copper producer in the United States, with a total production of more than 19 million tons since its inception, providing nearly 25 percent of the total U.S. copper production so far. Geological and engineering models suggest that underground mining technology can go another 200 meters deeper and the red metal will still be mined profitably.

The company's third flagship project is the Hog Heaven Project in Montana , located on private land approximately 50 miles south-southwest of the city of Kalispell, Montana.

Specifically, the mineral asset is located in a mining district that has historically had strong production of high-quality precious metals. Silver production has a long history and has been exploited by several operators. However, the potential of the mineral property in terms of copper production has not yet been tested and this is part of a broader picture in which Ivanhoe Electric's exploration team believes that this mining district still has much to offer in terms of mining and exploration performance.

The mineral project is in a joint venture: Ivanhoe Electric and Brixton Metals Corporation (BBBXF) signed an earn-in agreement in 2021 for the Hog Heaven project, which covers 24 square kilometers. Under the earn-in agreement, Ivanhoe Electric can acquire up to a 75% interest in the Brixton property, which includes the Hog Heaven Project, after Ivanhoe Electric makes cash payments totaling $4.5 million to Brixton and spends $40 million on exploration activities by 2032. But after $4.5 million in cash payments plus $15 million in exploration expenses, Ivanhoe Electric will already be set to acquire an initial 51% interest in the mineral property.

Drilling is currently underway in the area with results leading geologists to see potential for establishing underground metal production.

Ivanhoe Electric maintains its operations with a balance sheet that had $249 million in cash and short-term investments as of September 30, 2023, offset by total debt of $114.1 million. In the trailing 12 months through the third quarter of 2023, the company incurred capital expenditures of $56.4 million.

An Altman Z-score of 3.61 indicates a solid financial position, with no risk of financial difficulties in the next few years.

Conclusion

This analysis assumes that a "Hold" rating is the most appropriate recommendation for Ivanhoe Electric Inc. stock during this time of great contradiction in the market.

The company's technology, expertise, and know-how are focused on mining areas for future installation of important production of copper primarily and other metals in Arizona, Utah, and Montana. The aim is to achieve the mineral target with a lower environmental impact and in line with US strategy: Expand domestic procurement of critical metals and reduce dependence on China, a major global exporter. However, the market will decide whether the stock follows the copper metal's long-term growth prospects or is more of a stock that can just benefit from the cyclical nature of the metal's price. In the meantime, the retail investor should stick with the "Hold" rating for two reasons: first, because the stock is seen moving in line with the neutral stance, and second, because these price levels could fall much further in the event of a recessionary cycle.

The strong headwind for the share price is seen to cause damage well into 2024.

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