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Ivanhoe Mines up against a challenging environment, as financing dilutes shareholders

Ivanhoe Mines (TSE:IVN) had its price target cut by analysts at Dundee Capital Markets, who pointed out increased dilution following Zijin Mining's C$105 million investment into the company, as well as concerns over the need to raise significant additional funds.

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Ivanhoe Mines (TSE:IVN) had its price target cut by analysts at Dundee Capital Markets, who pointed out increased dilution following Zijin Mining's C$105 million investment into the company, as well as concerns over the need to raise significant additional funds.

On Monday, Ivanhoe said that China's Zijin Mining Group will buy  76.8 million shares at C$1.36 apiece, and will end up owning about 9.9 percent of the company's outstanding shares.

Ivanhoe, which has three base metals projects in Africa, said proceeds would be used for working capital and general corporate needs. 

The private placement was priced at a premium --- 62 percent higher than Ivanhoe's stock price at the open on Tuesday, and a 40 percent premium to Friday's closing price.

While Dundee said that it is positive to see Ivanhoe secure financing with a large player, analyst David Charles noted that the transaction will dilute shareholders by increasing the amount of shares outstanding by 11 percent. 

"Our NAV goes down by 6% from $3.80/sh to $3.59/sh. This follows the last financing in May which was a $150M bought deal at $1.50/unit for 1 share + 1 warrant exercisable at $1.80 for 18-months," Charles wrote.

He also noted that while Ivanhoe owns "three world class deposits, it will nonetheless need to raise significant funds to build its three projects in a challenging environment."

The broker reiterated its neutral rating on the company, and lowered its target price to $1.50 per share from $1.60 previously due to the dilution.

Zijin has acquired extensive interests across a broad range of commodities over the past 23 years, and is one of the largest gold producers in China, as well as the country's second largest primary copper producer and a major zinc producer. On top of its properties in China, it also has a portfolio of producing assets in Australia, Russia, Tajikistan and Kyrgyzstan, while developing projects in Canada, the DRC and Peru.

Ivanhoe's executive chairman, Robert Friedland, and Zijin, agreed yesterday to continue to explore additional opportunities to collaborate on the advancement of Ivanhoe's three properties, which Dundee's Charles said means the Chinese miner could potentially invest as a joint venture partner in either asset.

Ivanhoe owns or has a major stake in the Kamoa copper discovery and the high grade Kipushi zinc, copper and germanium mine in the DRC, as well as the Platreef platinum project in South Africa's Bushveld complex.

The major investment is slated to close around April 20, subject to government approvals. 

Ivanhoe ended the third quarter with $223 million in total liquidity. With a cash burn of  $40 to $50 million per quarter, together with Monday's announcement, Dundee estimates Ivanhoe could now have pro-forma total liquidity of $250 million --- "which is enough for four to five quarters at the current burn rate."

Ivanhoe has been conducting a strategic review for some time now, which has included the assessment of all options, such as spin offs, sales or joint ventures, as well as project or corporate-level debt and/or equity investments.

Shares of Ivanhoe closed at C$1.09 on Monday in Toronto, up more than 12 percent on the day, and some 6.9 percent year-to-date.

Quick facts: Ivanhoe Mines Ltd.

Price: 3.53 CAD

TSX:IVN
Market: TSX
Market Cap: $4.21 billion
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