Mineral sands prices have risen sharply this year and are tipped to continue climbing on the back of a supply deficit. This has underpinned share price gains for emerging producers such as Sheffield, Strandline and Image, which stand to benefit handsomely as their projects progress in parallel with growing demand.
There has been nowhere to hide in recent weeks in the mining space, with both base and precious metals letting the side down.
But there is a happy bunch of mining investors out there. They’re the ones that in the back-half of last year picked up that the ever-opaque mineral sands sector was in recovery mode after five years of misery.
Zircon in particular has been a star performer among the full suite of commodities.
For a while there, the king of the ASX mineral sand stocks, Iluka (ILU), was strutting its stuff on the back of mineral sand price increases and was very much the go-to stock.
But then its share price came unstuck on a number of issues related to its near-$500m acquisition two years ago of what was an otherwise well-timed deal in Sierra Leone.
Poor old Iluka. The interest here though is in the bunch of juniors which thanks to some hard work and a dose of good luck, are poised to capitalise on the return of strong demand and prices for mineral sands, particularly for zircon.
While Iluka’s share price is not in a happy space at the moment, mineral sand developers such as Sheffield (SFX), Strandline (STA) and Image (IMA) have been beacons in an otherwise depressed mining sector.
Still, it is best to let Iluka as the sector leader give a feel for what has been going on with demand and prices.
Both are benefitting from looming supply shortages because of under-investment during the tough times, ongoing resource depletion and supply-side disruption like that at Rio Tinto’s mega big Richards Bay operation in South Africa.
In its profit briefing with analysts and investors back on August 16, Iluka said it had “continued to see a strong and we believe sustainable price environment across our product suite”.
“As disclosed with our full year results back in February, we implemented a $US180 per tonne increase to our zircon reference price effective for six months across the second and third quarters of 2018 and we've announced today a further $US170 per tonne increase to the zircon reference price effective for six months from October 1,” Iluka said.
Some market watchers reckon Iluka is low-balling its reference price. They point to higher spot prices of $US1,600/t. But then again, Iluka is not in the spot market.
More to the point is that the projects that Sheffield, Strandline and Image are bringing into production were based on much lower price decks, and they are zircon rich.
It’s what has underpinned their stellar share price performances while the rest of the mining market has headed south.
And it looks as if there is more to come as some key approvals come their way (Sheffield and Strandline), or as first production approaches in a hurry (Image).
Sheffield was a 43c stock in September last year and is now trading at 93.5c, with various broker price targets starting at $1.50 and heading north.
Sheffield’s Thunderbird project on the Dampier peninsula has long been known to have Tier 1 potential but the market’s rating has been held back on three fronts – mineral sands prices, environmental approvals and native title clearance.
It has now got ticks on the first two and it recently secured a favourable native title ruling which could result in all the necessary approvals to proceed being in place within three or four months.
RBC Capital has a $1.50 price target on the stock and reckons first production is possible in early 2020.
Blue Ocean’s Steuart McIntyre placed a $2.20 price target on the stock back on July 23 when it was trading at 76c.
He said that the outlook for premium zircon was particularly compelling with a 30% supply deficit forecast over the next few years.
“In our view , Thunderbird has the right combination of world-class scale (3.2bn tonnes), very high grades (0.9% zircon, 3.1% ilmenite), low strip (0.78:1), and long life (42 years) that make it a Tier 1 development project,” McIntyre said.
He also mused that Sheffield is “highly likely to be a takeover target” because of its Tier 1 credentials, the premium zircon supply shortages and Sheffield’s market discount to his $850m NPV on Thunderbird.
Strandline was a 6c stock last November and has since motored to 17c as it sets about becoming a mineral sands producer in Tanzania and Australia.
News flow in coming months is expected to be strong on both fronts.
In Tanzania, Strandline is waiting on a mining licence for the smallish Fungoni project. Its grant has been delayed by Tanzania’s overhaul of its mining laws but there was the recent news that it was now in the works.
A definitive feasibility study into Fungoni’s development pointed to a robust project with low capital expenditure of $US30m. A 12-month construction period was forecast, and capex payback was put at 18 months.
It is seen as very much a “starter” project as Strandline is working up a number of larger-scale opportunities along its dominant tenement position in the north of the country to its own account, and in a joint venture with Rio Tinto in the south.
The company is not fussed by the delay in the mining licence as it plans to be around in the mineral sands business in Tanzania for decades to come.
In the meantime, Strandline’s big Coburn project in WA is building up a head of steam.
Strandline is now refreshing the 2013 definitive feasibility study into its development and it is expected to capture significant capex and opex savings.
Strandline itself has said previously the refreshed DFS would capture the “value left on the table” in the original DFS, which was penned during the last fling of the mining construction boom.
Coburn has already had $30m invested in it and has all of its approvals in the bag. And although it did not proceed last time because the mineral sands market was tanking, the previous DFS nevertheless did point to a robust project.
Given zircon in particular is doing the right thing demand and price-wise (23% of the mineral assemblage), there is every chance the revised DFS will surprise to the upside.
Zircon’s price bounce is shaping up as a beautiful thing for Image as it works towards first production from its $52 million Boonanarring project in the North Perth Basin in the December 2018 quarter.
That has been reflected in the group’s share price moving from 8c in October last year to 14c, with a re-rating on the cards once Image hit its production target at the zircon-rich project.
Seventy per cent-plus of its revenues will come from zircon, raising expectations the project will quickly become a free cash-generator of some real substance.
Image updated the economics of the project in late June in response to the then known rise in zircon prices. The project’s net present value increased from $197m in November last year to $235m, and the capex payback period was reduced from 16 months to 13 months.
The main reason for the project’s low capex is Image has repurposed plant and equipment from the since-closed Mindarie mineral sands project in South Australia.
Boonanarring is also a simple project in that it will produce a concentrate for sale to China under offtake agreements rather than producing final individual products. The strategy means lower capex and less complexity in the ramp up phase of the project.
Strandline got it's Fungoni Mining Licence this morning. You beauty! Very underrated company that seems to be massively undervalued by the market.