Higher Santa Cruz costs weigh on Ivanhoe Electric

A new prefeasibility study (PFS) shows Ivanhoe Electric’s (NYSE, TSX: IE) Santa Cruz copper project in Arizona has become more expensive to build while its economics improved modestly. The stock dropped.

Pre-production capital has risen to $1.43 billion (C$2 billion) from $1.24 billion a year ago, a 15% increase, while the project’s net present value (NPV) climbed to $1.5 billion from $1.4 billion despite the use of a higher copper price. Santa Cruz’s internal rate of return (IRR) slipped to 19% from 20% while the payback period increased to 4.8 years from 4.4 years previously.

Key assumptions in Ivanhoe Electric’s 2026 PFS, which was released Wednesday, include an 8% discount rate and a copper price of $4.75 per pound, which is below current spot prices. Last year’s study used a base-case copper price of $4.25 per pound.

Located in Casa Grande, about 77 km south of Phoenix, Santa Cruz is Ivanhoe Electric’s most advanced project. Led by billionaire founder and executive chairman Robert Friedland, the company is targeting first cathode production in 2029 – a year later than originally planned – to help meet demand for copper, a critical mineral essential for electrical wiring, at a time when Washington wants to strengthen domestic supply of the metal.

De-risking step

Release of the PFS marks “a key de-risking step for Santa Cruz, with the updated engineering, design, development and pricing paving the way for continued development towards first production in 2029,” National Bank Financial mining analyst Andrew Dusome said Wednesday in a note.

Key factors behind the higher capital spending figure include a redesigned access tunnel intended to lower groundwater risk, as well as construction materials and labour inflation, Ivanhoe Electric said.

“Although the refreshed capex came in above our estimates and may weigh on the stock near term, we see this largely offset by the higher life-of-mine production and greater confidence in the development and mine plan,” Dusome said.

U.S.-traded shares of Ivanhoe Electric fell 4.2% to $10.27 Wednesday afternoon in New York, valuing the company at about $1.6 billion. The stock has traded between $7.86 and $21.55 in the past year.

Design changes

Ivanhoe Electric has redesigned Santa Cruz’s mine plan by replacing a roadheader-based underground access system contemplated in last year’s study with a Robbins Crossover tunnel-boring machine. That change has increased average copper production to about 74,700 tonnes a year over the first 15 years from about 72,000 tonnes previously.

The revised plan supports a 24-year mine life, one year longer than calculated by the 2025 study. Santa Cruz holds 140.1 million probable tonnes grading 1.08% copper for contained metal of 1.52 million tonnes copper, according to a new resource prepared this month.

The mine plan leaves room for expansion. Resources outside the current reserves include 1.44 million indicated tonnes of contained copper and another 3.33 million inferred tonnes of contained copper across the Santa Cruz, East Ridge and Texaco deposits, Ivanhoe Electric says.

Life-of-mine cash costs are projected at $1.47 per lb., with all-in sustaining costs projected at $2.28 per pound.

Using a spot copper price of about $6.79 per lb., Santa Cruz’s NPV jumps to $3.5 billion with a 30% IRR and a payback period of three years.

Positive sentiment

Santa Cruz is being developed on about 24 sq. km of private land with surface, mineral and associated water rights. The property benefits from access to rail, highways, power and natural gas infrastructure.

Necessary permits to begin surface construction have been obtained and early development work has begun, Ivanhoe Electric says.

Executives are pursuing project financing, with “advanced discussions” over several alternatives already under way. The company received a preliminary project letter from the U.S. Export-Import Bank in August for potential debt financing of up to $1.1 billion. Its application has now advanced to a second phase of due diligence.

“As one of the most advanced U.S. copper projects with fully domestic cathode production, we continue to expect Ivanhoe Electric to benefit from the ongoing positive sentiment from U.S. government agencies supporting the development of domestic critical metals mines,” Dusome said.