Independence Group NL (ASX: IGO) is suffering from free falling commodity prices, and its share price has been hammered down to $2.25 per share, a level not seen since the Global Financial Crisis in 2008.
The company owns some high-quality, long-life assets with exploration upside that beg the question; is now a good time for resources investors to buy shares?
Sirius Resources
Independence Group recently completed its acquisition of Sirius Resources and its world-class Nova nickel-copper deposit, which is on schedule to start production late in 2016 or early 2017 at a cost of around $440 million.
Nova is expected to be one of the lowest-cost nickel mines in the world, with C1 cash costs around US$1.50/lb and all in sustaining costs (AISC) around US$2.10/lb. Annual production is expected to be around 26,000 tonnes of nickel and 11,000 tonnes of copper with an initial mine life of 10 years.
Using crude estimates and the current nickel price of US$4.10/lb, Nova should deliver an annual net profit of around $100 million.
Tropicana
Independence owns 30% of the Tropicana gold mine with its joint venture partner AngloGold Ashanti Limited (ASX: AGG) (CHESS) owning the other 70%. The gold mine will produce around 400,000 ounces over an initial life of 10 years and recently hit full production.
During the 2015 financial year, Independence Group's share of Tropicana production was 150,000 ounces at an AISC of A$795/ounce that delivered net profit before tax of $76 million.
Although commodity prices have been volatile, the gold price has been relatively stable around US$1,100/ounce or A$1,500/oucne. At these prices, Tropicana should provide around A$80 million profit per year to Independence Group.
Long
Independence Group owns 100% of the Long nickel mine located in Western Australia. During FY15, the mine produced 10,000 tonnes of nickel at an average cash cost of A$4.01/lb and reported $32 million profit before tax.
The nickel price has declined around 50% since last year and it is likely the Long mine will report a loss during FY16 despite changes to the mining plan aimed at reducing costs by up to 15%.
Jaguar
The 100% owned Jaguar underground mine produces around 37,000 tonnes of zinc and 8,000 tonnes of copper annually.
The average cash cost at the Long mine is around US$0.60/lb zinc and when compared to the current zinc price of US$0.70, it is unlikely to make a significant profit during FY16.
Foolish takeaway
Independence Group owns the world-class Nova deposit and has a 30% stake in the Tropicana gold mine. Once Nova is in full production, these assets could deliver an annual profit of around $150 million at current commodity prices, which is significant given the current market capitalisation of Independence Group is only $1,100 million.
Depending on the movement of commodity prices over the next 18 months, the business may choose to scale back or cease its operations at Long and Jaguar to improve group profitability.
Independence Group's operations have exploration upside which could extend the mine life and increase the value of the business, particularly at Nova and Tropicana.
The business carries minimal debt (except that required to bring Nova online) and produces good cash flows, placing it in a strong position to weather the current commodity price storm and is definitely worthy of a closer look for long-term resources investors.
