Ivanhoe Mines Ltd.

Good day and welcome to the Ivanhoe Mines Q1 2022 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to the Manager of Investor Relations, Matthew Keeble. Please go ahead.

Thank you, operator. Hello, everyone. My name is Matthew Keeble, and I'm the Manager of Investor Relations for Ivanhoe Mines, dialing from sunny Cape Town, South Africa. It is my pleasure to welcome you to Ivanhoe Mines Q1 2022 Financial Results Conference Call. We will finish today's event with a question and answer session. You can submit a question using the Q&A box on the webcast page, as well as through the conference operator via your phone line. Given our time constraints, we will likely be unable to answer every question. Our apologies if we run low on time. Please follow up with our IR team with further questions. Before we begin, I'd like to remind everyone that today's event will contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Details of the forward-looking statements are contained in our May 10th press release, as well as via CEDAW and our website at www.ivanhomeminds.com. It is now my pleasure to present our founder and executive co-chairman, Robert Freeland, for some opening remarks.

Robert? Thank you very much to all of our listeners. Most of your management is sitting in Cape Town, South Africa, giving the large Ndaba conference for us. I'm going to be speaking tomorrow morning. We're very happy to present our first quarter 2022 financial results. A lot of the numbers speak for themselves, but I'd like to offer a few comments. The best numbers associated with the copper production of other mines are associated with the fact that we produce less global warming gas per unit of copper produced than our competitors. And that's the same reason why our cash costs are actually dropping. The genetic reason is simply that when you have those big yellow trucks, and you're moving larger and larger volumes of rock in those big yellow trucks, you're addicted to hydrocarbon. And when the hydrocarbon goes up, due to war or any other eventuality, there's no way around it. Your costs have to go up. Kamokagula is a mine powered essentially by hydroelectricity. And within two years, when I'm on the electric fleet, there'll be no exposure to hydrocarbon at all. So we have a very, very good business at $4 a pound copper, lower than we're trading today. And we have an extremely good business even at $3 copper, occupying the bottom of the world's cost curve. We believe as our production continues to grow dramatically, we'll be amortizing an ever larger productive base against fixed overheads. And when our green smelter comes in production late in 2024, cash costs will drop even further. So I want to thank the thousands of people that have worked so hard to make this a sustainable and different mining operation. And given exogenous circumstances having nothing to do with us, there's a sale on now with artichokes, $5 for a dollar at Safeway. So we're going to present our management team and our numbers. We'll put this over to questions. I'm Robert at IVNO.net if anybody would like to email me directly. And with that, let's go on to the next stage of the call. Thank you.

Thank you, Robert. Good afternoon and good morning, everyone, from Cape Town here at the mining in Darbar. If we can move to the next slide. We are very pleased to announce another excellent quarter in our trajectory to become one of the largest copper producers in the world. Samoa Kukula never fails to impress, and in April this year, our Phase II plant achieved commercial production, again, ahead of the original schedule, and even more seamless than anticipated. The combined annualized production from the first and second front will be 450,000 tons after the completion of our deep bottlenecking project, which we announced earlier this year, and we anticipate to complete this in the third quarter of 2023. We are firmly on track to reach the upper end of our 2022 guidance, of 340,000 tonnes of copper in concentrate. Our Phase 3 expansion will further increase copper production to 600,000 tonnes of copper with the addition of a 5 million tonne per annum plant adjacent to the two new mines which we will develop at Kamoa 1 and Kamoa 2. This expansion will be funded from cash flows from Phase 3, our plant, the mines and smelter and that's anticipated to be completed by the fourth quarter of 2024. I will now go to the next slide. And before we go through our financial results, let's just pause for a minute and reflect on our ESG credentials. On the 2nd of May this year, we published our fifth annual sustainability report, highlighting the significant work we do from an environmental, social and governance perspective. As I mentioned in our previous earnings call, we are firm believers in stakeholder capitalism, and to date, our group has created and distributed more than $1.1 billion in national value. From 2020, as our activities ramped up at America Cooler, this national value has increased by 43%, and it will continue to do so as we develop and expand our Tier 1 assets. We currently employ over 12,000 people, of which 97% is local, and we actively set our targets to increase that percentage even further and employ more women across our operations. We have held in excess of 10,000 stakeholder meetings in the 2021 financial year, keeping our communities and host governments informed and addressing queries they may have. As a company, we strive to be a net zero carbon emitter, and at Kamoaka Kula, our high-grade underground hydro-powered mine is well-placed to be an industry leader. I will now hand over to our CFO, David van Heerden, to take you through our quarterly financial results.

Thank you, Marna, and good day to everyone joining the call. As Robert and Marma mentioned, the first quarter of 2022 was another quarter of exceptional operational performance at Kamagakura. And with commercial production of Phase 2 concentrator achieved on April 7th and the de-bottlenecking well underway, we are confident that the impressive trend will continue going forward. But for now, I'm happy to summarize the financial results for the quarter. This call is, of course, just a high-level summary of our quarterly results, and the presentation should be viewed in conjunction with our quarterly financial statements and MDMA for the period ended March 31, 2022. Kamau Kakula sold almost 52,000 tons of available copper and concentrate during the quarter, leading to a Record quarterly revenue of $520 million, up from $489 million in the last quarter of 2021. Higher average prices in the first quarter, and a re-measurement of contract receivables as at March 31st resulted in the increased revenue for the quarter. C1 cash cost continued its downward trend and was $1.21 per pound of fabled copper delivered to China for the first quarter of 2022, but non-cash costs on a later slide. Kamal Kukula's EBITDA for the first quarter was $399 million and increased by an impressive 12% when compared to Q4 2021, driven by the increase in revenue and the decrease in cost per pound. If we move to the next slide, and the slide illustrates how the just-mentioned highlights combine for the Kamoa holding joint venture's profit and how it will ultimately translate into Argonaut shares of the profit attributable to the joint venture partners. The revenue of $520 million in Q1 2022 Includes the re-measurement of contract receivables of $52 million, which represents the effective mark-to-market of provisional sales at the period-ending copper price. Kamakakula's cost of sales for Q1 was $123 million in total and $1.08 per pound of payable copper sold, while cash costs per pound of payable copper produced totaled $1.21 per pound. After deducting GMA, the operating profit for the first quarter of the year was $318 million, and Kamal Kukula's EBITDA, as I mentioned, $399 million. Kamal holding recorded finance costs of $55 million in the first quarter, which is principally the interest in the share of the loans from Aibana HGN, as well as interest on Kamal Kukula's equipment financing certificates. Of the $110 million tax expense, $105 million is deferred tax and does not represent a cash outflow due to the ability to offset expiration and certain development expenditure incurred from inception against taxable income over the first two years following commercial production. The remainder represents the minimum income taxes payable equal to 1% of revenue. The non-controlling interest, of $45 million represents the profit attributable to the DRC government's 20% interest in Kamaukakuna mining complex, leaving profit of $176 million attributable to the joint venture partners. Ivano's share of which equaled $87 million for Q1 2022. If we move to the next slide, which highlights Ivano's consolidated Q1 financial rail loans. And the chart on the deck starts with the last slide ended effectively showing Iverno share profit from the Kamal joint venture of $87 million. Additionally, Iverno earned interest income of $28 million from Kamal holding in the first quarter from share of the loans at the joint venture. During the quarter, the company spent $9 million on the Kapushi project and $6 million on general administrative expenditure. Cost incurred at the Plattery project are the necessary to bring the project into commercial production and will therefore capitalise this development cost in property block equipment. I then recognise finance costs of $7 million in the first quarter, relating money to interest on the convertible notes at the effective interest rate. The $66 million loss on the fair valuation of financial liability in the first quarter represents the change in the deemed fair value of the conversion feature attached to the $575 million 2.5% convertible senior notes, which I will have closed in March 2021. The conversion feature is an embedded derivative financial liability, and the fair value changes principally due to the fluctuations in our share price. And the losses, therefore, resulting from the increase in urbanized share price from in December 2021 to the end of March 2022. The aforementioned items ultimately builds up to urbanized profit for the three months ending March 2022 of $23 million, with the total profit before the loss of the fair value on the financial liability being $88 million for the first quarter. The next slide just breaks down the cash costs of Kamalakakula. The cash cost per pound of payable copper produced for delivery to China continued with its downward trend and was $1.21 per pound for the first quarter. And that's down from $1.28 from Q4 2021 and $1.37 per pound in Q3 2021. The decrease mainly resulted from the month's fixed operating cost range spread over increased production. And it's extremely encouraging to see Kamau Kokula already at the bottom hour, cash cross silence between $1.20 and $1.40 per pound of payroll coverage reduced. As phase two is ramped up, In the second quarter, we might see a cash loss slightly higher, but only slightly, but that's expected. But I'm excited to see what is achieved in Q3 onwards with the possibility of breaking below the bottom range of our cash loss for the year. We remain optimistic. Yeah, with what the year holds, because of the increased copper production from the phase two concentrator, decreasing, what we'll be getting the possibility to increase cash costs further. Cash costs is, of course, a non-GAAP measure, and the reconciliation from cash costs to cost of sales is provided on page 40 of our MDMA.

Next slide, please.

This slide just indicates where Kamal Kukula is on the cash cross curve to highlight how exceptional the project is. It's very encouraging to be comfortably first quartile while still having significant further improvements planned.

Next slide, please, Matt.

We have a strong balance sheet and are well positioned for the further development of our projects, with $562 million in cash and cash equivalents on hand, and consolidated raising capital of $615 million. Of our liabilities in $922 million, 752 relates to the 2.5% convertible notes, with these only due in 2036 with possible earlier redemption. Our forecast spend for 2022 is $286 million on flat reef, capuchin, continued exploration, and overheads, and all operating and capital expansion costs at the Marca Kula are expected to be funded from copper sales and facilities in place at the mar. We also expect to receive the second prepayment on the flat reef streams later in the year, which will add $225 million to our cash position at that time. I now hand over to Alex Picard, our Vice President, Corporate Development, and Marlon to provide a brief update on the development of our projects.

Thanks a lot, David, and good day to everybody who is on the line. I will now take you through the key results in terms of operations and projects at Kamal Takula, and then I'll pass back to Marlon to take you through Flat Reef and Kikuchi and our closing remarks prior to the Q&A.

Next slide, please.

So looking first at Kamalakakula phase one, we achieved a record operating quarter during the first quarter with 1.08 million tons milled and over 5.9% copper, which produced 55,600 tons of copper in concentrate. We also achieved a recovery of 87%, which beat 86% from the previous quarter, which is also our design recovery. The phase two concentrator was commissioned towards the end of the quarter, and it achieved commercial production on April 7th, which is around four months ahead of the original schedule. Since then, the phase two concentrator has been performing strongly, and we expect that before the end of this quarter, we will have the same performance level as phase one consistently, which is 10 to 15% above the design capacity in terms of throughput. What this early commissioning and ramp up means is that we were confident to point towards the upper end of our 2022 production guidance range at 290,000 tons to 340,000 tons of copper and calcium traits. Finally, as Marna mentioned, we are well underway with our 50 million dollar decoupling campaign, which takes advantage of the strong performance of the front end of the plant and also the high grades that we're experiencing. and it targets reaching an annualized production rate of 450,000 tons of copper by the second quarter of next year.

Next slide, please. Now, we are firmly looking to the future with phase three of the Kamoaka Cooler project underway.

We recently announced that we will build an upsized concentrator of 5 million tons per annum, which will be located close to the existing Kansoko mine and the larger Kamoa mining footprint, which is just over 10 kilometers to the north of Kukula. In order to supply this new concentrator, we are busy expanding our mining activities at Kamsoko, as well as preparing a new box cut, which will open up the Kamoa 1 and Kamoa 2 ore bodies. We also place contracts to break ground on the Kamoa Kukula smelter, which will be the largest smelter in Africa, with a capacity of 500,000 tons of blister copper. In order to provide power to the Phase III expansion and the smelter, we recently signed an EPC contract with Voice Hydro, which is a leading German hydropower company, for the upgrading of Turbine 5 at the Inga 2 dam, and work from our commencing, which should be ready in time for our Phase III target production by the end of 2024. It's worth adding that all of this work will be documented in a new pre-feasibility study for the most cooler, which will be published later on this year.

Next slide, please.

This slide really just quotes the phase one and phase two debottlenecking program, as well as the phase three expansion into context. So we're targeting to ramp up to from approximately 400,000 tons of copper annualized today to around 600,000 tons of copper production by the end of 2024. This will rank Kamoa Kukula as the third-largest copper producer in the world, but our target is to ultimately become the second-largest producer through a Phase IV expansion.

Next slide, please.

Finally, moving next door to Kamoa Kukula, we are advancing the work program at our vast, 100%-owned Western Corland Exploration Grounds. With the recent onset of the dry season in the DRC, we are recommencing in full our drill campaign to explore four high-priority drill targets identified during the last year. We have an initial budget for this year of $25 million, which includes over 90 kilometers of drilling across the license package, which will be four to five drill rigs in operation.

I'll now hand back to Marna to take you through our other activities. Thank you.

Thanks, Alex. We also published an update on our efforts at Platte Reef yesterday, and you can read that press release on our website. But we completed the equipping of Shaft 1, and on 22 April we initiated the first blast on the 950-metre level to commence lateral development toward the ore body. Shaft 1 will serve as Platte Reef's initial production shaft, and is approximately 450 meters away from the first high grade area of the ore body. Other parts also took delivery of its first battery electric mining fleet and plans for an initial five megawatt solar plant is well underway. The remainder of the spend for 2022 is approximately $150 million with groundbreaking for the initial 770,000 ton plant expected within the next month. Phase one mine production is expected to commence in the third quarter of 2024. And then over to our Kapushi project. The Kapushi project economics are extremely compelling at current wind prices. Underground early works have commenced and we are in the process of recruiting key personnel for the construction of the plant and the operation of the mine. Our financing and off-take discussions are advancing with a number of interested parties, and we are targeting an accelerated return to production within the next 18 to 24 months. And then some concluding remarks. In summary, we are confident in our team's ability to bring you the world's next diversified major mining company. With our production success at Kamoa, and our established track record in exploring for Tier 1 assets, we are sure to continue our story of growth and discovery. That's our concluding remarks today. I will now hand back to Matt Kiesel to facilitate the question and answer session for today. Thank you.

Thank you, Marna.

And we will now move on to the question and answer portion of the day. Operator, do we have any questions waiting on the line?

And if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that's star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. And we'll go first to Andrew Mishcock with BMO Capital Markets.

Good morning, good afternoon, depending on time zones. Congratulations on a very strong start to the year and a good trajectory for Kamoa Kakula. I wanted to look forward to Phase 3, and in your release, you're guiding for something just over $480 million of kind of a placeholder budget for Phase 3 for the balance of the year. I was wondering if we could get a few general comments on how that could possibly be spread out over the balance of the year, and what the general components of that expenditure for this year are.

Thanks, Andrew.

This is David here. I'll take that one. And the first part of your comment is, I think, important that this is effectively just a provision amount, a placeholder budget for what is expected at this point in time to be spent during this year. And that will obviously be re-looked at as the previous study is completed and expected in the first quarter. The majority of that cash flow we do expect to only flow in the latter part of the year. Some of the expenditure are less than $100 million in Q2 with the reminder. pretty weighted towards the end of 2022. But those funds are effectively being made available to the project team to ensure they can drive the timelines of Phase 3. And then a split between the smelter and continued work on Inga 2, but underground mining, but then also some allocations to general infrastructure and very early works on the concentrator.

Okay.

I think that's a fair answer, and I guess we're going to get a little bit more detail here going forward in this, I guess, Q3 or maybe a little later for the PFS. Just One last kind of conceptual question on Phase 3. A lot of the improvements that you guys are working or de-bottlenecking or optimizing that you're working on for Phase 1 and Phase 2, are those going to be directly reflected into the Phase 3 PFS? Or should there be some concept of ability to exceed the 5 million tons that was headlined there? recently for the Phase III capacity?

Maybe I'll take that one, Andrew.

It's Alex here. So just in terms of what will be in the PFS, just to be clear, you'll see 9.2 million tons per year from Phase I and Phase II. So that will be at the fully debottleneck rate. And then there will be an additional 5 million tons from Phase III, bringing the total to 14.2 million tons. In terms of maybe what you were asking about, you know, phase three and can you expect some additional performance on top of that 5 million tons? Look, it's a bit too soon to say. I mean, there is the potential there because some of the front-end components of that 5 million ton mill will already be able to operate at double the rate to accommodate a later phase four expansion. So there is the ability to really push the front end of the circuit and then figure out what else we need to do at the back end of the circuit to produce more copper. And we obviously had a good experience on phase one and phase two, but it's too soon to really give guidance on that.

Okay. Well, it's good to hear that you have all kinds of capacity, and then we'll wait to see what the team does. I'll step back and let others ask questions. Okay.

And once again, to ask a question, that's star one. We'll go next to Greg Barnes with TD Securities.

Yes, thank you. Alex, jump ahead a little bit. I think you just said that you're going to potentially build in enough infrastructure to double the capacity of phase three. Is that what phase four is going to look like five million times a year at that location?

Hi, Greg. It's basically the same as what we did with phase one and phase two. where the crushing circuit, so the very front end is sized for 10 million tons per annum. And then that's the point at which it splits into two parallel circuits of ultimately 5 million tons each. So that'll be phase three and later on phase four. But it does mean that when phase three is operating, we have a greater capacity in terms of crushing.

Okay, so phase four is going to effectively be mining from Kamoa then. every 5 million tons a year will really be bringing ore from other locations to that new mill or that parallel mill at Kamoa.

It should be fed primarily from the different ore bodies that were opening up at Kamoa. So just remembering there's Kamsoka where we're mining already, but then there will be two larger mines at Kamoa 1 and Kamoa 2, which are fed from the same twin decline system. And then later on, we'll figure out where Cucula West fits into the mix because we do have some slightly higher grades at Cucula West. So you'll have seen in the press release there was a reference to the fact that later on we will start to develop declines into Cucula West to try and get a head start on that whole body as well. But Cucula West material will probably more naturally report to the Cucula mill.

And just coming to inflation, we've heard a lot about that from other mining companies through this early season and obviously seem to be a bit insulated from that. But are you seeing cost pressures from various inputs, reagents, what have you, feeding through?

Do you want to take this one, David? Thanks.

I might as well. Thank you, Alex. No, I think if you look at our continued decrease in our cash trust, I think we are handling it well. But, I mean, we're definitely not immune. And processes are being put in place just to limit the effect specifically on fuel, et cetera. And I think one thing that has... as well as just the fact that the hydropower, the price of the hydropower is fixed. So I think that's just one additional benefit we do get from actually getting that power. But, yeah, we're definitely not immune, but I think the performance has been really exciting, and, you know, I think to look forward to, I think, good numbers for the remainder of the year. Grinding media reagents, things like that. If you have stores on hand or you have long-term contracts at fixed prices, things like that that help you a little bit from cost inflation out there.

Yeah, exactly.

It's sort of a mix in having the right amount of inventory on board possible future supply issues at certain places has been helping us. Okay, great. Thank you.

We'll go next to Dalton Barreto with Canaccord.

Thank you. Good day, everybody. Two questions from me. First question, given the recent flooding in Durban, You know, and it's obviously highlighted a lack of investment as a sport, given the challenges there. As you guys go through these phased expansions at Kamoka Kula, how are you thinking about the egress part of the situation?

Thank you. Sorry, Dalton. I just missed the last part of your question there. How are you thinking about egress, getting product out? Okay, I'll take the question and then perhaps others can chime in.

The first thing to say about the recent issues at Durban Port was that they didn't really have a material impact on our operations and also remembering that our revenues are recognized when the material leads to the mine gate under the terms of our Phase 1 and now Phase 2 offtake agreement. What it does mean is that you might be paying a little bit more at the margin to have you know, material in a warehouse somewhere waiting for shipment. But on that front, you know, we've also been doing a lot of work together with CITIC and Dijon and all of our logistics service provider partners in order to streamline the Kamoaka Cooler concentrate logistics operation as a whole. So we're looking at things like warehousing capacity in Zambia and also, you know, trying to spread the load through different ports on the African continent. And longer term, we are also still very keen supporters of the Western Line project to the Angolan port of Lubito, which will completely change the face of the whole logistics chain in the DRC, and it will really reduce the bottleneck there. And then I think the other thing to bear in mind is that's also one of the key advantages of this melter, of course, is that we, instead of shipping 1.3 million tons of wet concentrate in bags. Instead, that becomes 500,000 tons of ballistic copper, which is obviously less than half the volume, but also much easier from a handling point of view.

Makes sense.

But the Angola option is still very much off the table.

Oh, absolutely. I mean, it's not something that's going to happen in the next year, but it's definitely still

ongoing in the background. Okay, great. And then my second question is on flag rates. Given the implications to PGM and ECHO markets for the fall of the Russian and Ukrainian situation, is there an opportunity for you guys to accelerate SHAF2?

I mean, look, I think in terms of the engineering that we put out in our feasibility study, We were sort of pointing towards shaft two being a 2027 project, which then allows you to phase the expansions of the two concentrators to get up to 5.2 million tons thereafter. You know, what I can say is the team on the ground, now that we've moved from that kind of feasibility stage into really the detailed nitty-gritty of the engineering phase, You know, we're looking at everything we can in terms of whether we can accelerate that syncing, looking at different syncing methodologies like RAID boring instead of blind syncing. And we have that optionality in terms of having the access from the bottom of SHA-2 and not just the top of SHA-2. But it's, you know, it still takes time. And I don't think we're guiding that it's going to be any quicker, but we're really working hard at it.

Okay, but it sounds like the constraint is an engineering problem, not a capital question.

No, yeah, exactly. I mean, exactly. You can move a certain amount of meters in a day when you're sinking a shaft, and regardless of how much capital you throw at it, that's one blast or two blasts a day.

Understood. Thank you very much. That's awesome. And at this time, there are no further questions.

Thank you, operator. We will step over and take a look at our webcast questions and pick a couple of the most popular inquiries and answer a few of those before we wrap up. So, first and foremost, I think we'll start off, one of the more popular questions is about the drilling program at Western Foreland, and in terms of timelines, the number of drill rigs, and when results can be expected. I'll turn that over to management, and if anyone would like to pick up some details on the Western Foreland drilling, that would be great.

I'm happy to take that one, Matt.

I mean, I can't add too much more beyond what we went through in the presentation, but, you know, really, the first quarter, we weren't doing a whole lot in terms of drilling meters. It's always difficult to get out there during the wet season, and we're also... moving out to the sort of more remote parts of this huge land package, remembering that it's almost 170 kilometers of strike along the entirety of the western forelands. But now that the wet season is over and we're firmly moving into the dry season, that's where we're really going to accelerate our drilling activities through the, well, I guess the winter in the southern hemisphere. And as I mentioned, we're looking at four to five rigs as the sort of provisional budget. But obviously, you know, I think people are very familiar with our approach when it comes to exploration that we, you know, we won't fail to stretch that budget if we start to explore a trend that we become very interested in and we'll certainly move in more rigs at the right point in time.

That's great. Thanks, Phil. Sorry, Matt, I don't hear you right now. You might be on mute. Please stand by. Sorry about that, guys. A little bit of an interruption in the call.

This one more of a broader macro question maybe for Robert. Talking about building the next large diversified miner, it seems Ivanhoe has a large portfolio, but what about outside? acquisitions, and the potential of looking at new exploration opportunities.

Well, our lives and our minds is already with industry leading exploration opportunities. So, we have nearly hundreds of proposals coming to our attention monthly, and we keep our mind open about all manner of things. So certainly the door is wide open, and if anybody has any great ideas, I'm robertavadio.net. I'm the fourth stomach of the cow. If you have a great idea to get through the first three stomachs, I'll take a good look at it, and we'll see if our board is interested in finding anything that's better than what we already have. I'd rather doubt it, but we keep an open mind. Thank you.

Thank you, Robert. And with that, we're wrapping up on the 45-minute mark. So, operator, I think we'll wrap the call up for today. Thank you very much, everybody, for attending, and we look forward to talking to you soon.

This does conclude today's conference. We thank you for your participation.