Talking takeovers: Is X2 and Ivanhoe on the horizon?


That may be how some react to the mere suggestion X2 Resources – the phoenix of Mick Davis, the former head of Xstrata, who now has nearly $5 billion to spend on mining projects – would seriously consider Ivanhoe Mines and its important but early-stage development projects in South Africa and the DRC as targets.

For what we hear so far is that Davis wants something giant and is already in production. Rumours earlier this year were that he was trying to get BHP Billiton coal assets in South Africa.

Such a deal, were it possible, would require his company's $5 billion piggy-bank and much more with banks coming on board to loan at least another $10 billion or so.

So it might seem unlikely in face of a mega-deal like this, that Davis and his team – mostly former Xstrata management who came with him after Glencore gave him the boot when it took out Xstrata a couple years back – would be on the hunt for anything which doesn't already have massive Caterpillars trucks roaring around a working and world-class mine.

Maybe so. 

But then put aside this prejudice and consider the merits in Ivanhoe for X2 anyway. 

To begin with, what Ivanhoe has is the right scale: two of the largest undeveloped mining assets in platinum and palladium and also copper in the world – the Platreef PGM-gold project in South Africa and the Kamoa copper project in the DRC.

In this, there's another high-profile mining personality at work. Ivanhoe Mines was founded by Robert Friedland, who was a driving force behind Voisey's Bay (sold to Inco in the 1990s) and Oyu Tolgoi (now owned by Rio Tinto).

If Davis were to consider something early-stage it would have to be something of the apparent world-class caliber of Platreef and Kamoa.

Platreef is a massive PGM-project that contains, so far, 214 million tonnes @ 4.1 g/t 3PE+Au and about double that in inferred resources. It has already attracted some $300 million in investments from Asian partners for a 10% stake (quite incredible given the project is not yet at feasibility).

It would be a big mine. Platreef would take $1.7 billion in pre-production capital and once in production churn out just under 800 000 ounces platinum, palladium, rhodium (the 3PEs) and gold a year, according to Ivanhoe in a preliminary economic study.

In terms of economics, Platreef yielded a 14.3% after-tax IRR (albeit at what should now be considered outdated metal prices, with platinum set at $1,700/ounce but trading at $1,265/oz today, for example).

In the Kamoa project, Ivanhoe owns a massive, high-grade copper project where it estimates 550 million tonnes @ 3.04% copper in indicated resources at a 2%-Cu cutoff. It sees Kamoa producing 306 000 tonnes/year on average and requiring $1.4 billion to build. 

So far so good – we have size and top-notch grades (per company estimates). X2's Davis would like that. 

There's also potential attraction here for Davis in unloved metals, and for that matter, jurisdiction. Along with gold, platinum and palladium prices have behaved terribly in recent months. Ivanhoe's share price shows it having slumped over the past couple years from C$4.50 or so a share in early 2013 to near C$1/share in recent trading.

Interestingly, Davis, in interviews, tends to cite counter-cyclical thinking and the commodities super-cycle – one he sees as still intact – as influencing his strategies. PGMs might apply firstly because their prices are deflating and secondly because their fates are intertwined by automobile demand where increasingly China's growing middle-class is the big player. 

As David Davidson, a Paradigm Capital partner and senior analyst who follows Ivanhoe, put it in an email: 

"Davis has never gone with the flow and as a contrarian investing in South Africa and platinum would certainly fit the bill. Platreef is a one of a kind discovery that has the capability to change the face of PGM mining in South Africa." 

And another thing: Davis, a South African, has also noted an interest in looking at assets in his homeland. 

But – and this speculation requires a big but – there's a lot working against the idea of X2 getting Ivanhoe, as much sense as it may have in the imagination.

First, as noted at the outset, there's the issue of patience. Would Davis have enough of it to build a mine rather than buy one?  

(X2 Resources has declined requests for interviews from Mineweb.)

And then there's Friedland. Would he – or how much of the company – would he sell?

Paradigm's Davidson got to the core of the issue here. "Sale of the entire company would be very unlikely as Robert and friends would easily block a hostile," he said, referring to their controlling stakes in the company.

But then that leaves open the possibility of something friendlier – premium laden or in a lower level partnership. 

You never know.  

Maybe it turns out Davis has a hard time making a decent deal on producing assets and he considers the possibilities in the development space. 

If he did, Ivanhoe could be high on the list.


This article appears courtesty of Mine Web. To read more daily international mining and finance news click here.

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