The New Criterion: the new breed of zircon producers

Tim Boreham

Independent Investment Research

While resources pundits regard copper as the commodity most reflective of the world’s economic strength or otherwise, the more obscure zircon arguably is an even better guide.

On zircon’s recent price strength, investors shouldn’t be fretting about a global recession or – more pertinently – a Chinese downturn.

A component of mineral sands, zircon is used widely in ceramics (as a tile whitener) and for heavy duty industrial applications such as nuclear reactor liners and jet turbine blades.

It’s also used to make artificial diamonds and is even being talked about as a future battery metal material.

With the depletion of some of the bigger deposits and with few new finds of note, the zircon price is on a tear: up from a recent low of $US950/t ($1340/t) in mid 2016 to $US1650/t now.

Australia is the biggest zircon producer, accounting for 35 percent of global output, followed by South Africa with a 28 percent share. Consultant TZMI expects zircon demand to grow by 2.8 percent a year to 2026, from the current 1.2 million tones. At the same time, supply is expected to decrease by decreasing by 4.3 percent a year.

 “It’s a good time to be in the zircon business,’’ says Diatreme Resources head Neil McIntyre. “We see constrained supply: mines are maturing so there’s a strong window for new projects to meet that shortfall.”

The earnings turnaround is already apparent at Iluka Resources (ILU, $8.98) our biggest mineral sands producer, which posted a June half net profit of $126m compared with an $81m loss previously.

But after years of development and promises, three other local minnow developers are poised to become producers at the right time.

Peaking the excitement scale is Sheffield Resources (SFX, 85c), which for a small cap is in the enviable position of fully owning Thunderbird, one of the biggest mineral sands discoveries in the last three decades.

On the Dampier Peninsula in northern WA, Thunderbird is rated as a 680 million tonne resource with 76.8mt of heavy mineral sands, mainly zircon and ilmenite (from which the paint pigment titanium dioxide is derived).

Thunderbird is close to being ‘go’, at least for the $463m first stage:  a $US175m debt facility has been arranged – although it’s non binding at this stage – and the Northern Australian Infrastructure Fund is chipping in $95m.

Management is currently negotiating an engineering, procurement and construction contract, which is expected to be fixed price in order to minimise risk.

The company targets production by the December quarter of 2020, with initial output of 122,000t  increasing to a substantial 809,000t by 2025.

A bankable feasible study in March ascribed a net present value to Thunderbird of $US507m, but that was when rutile traded around $US1380/t.

Meanwhile, Image Resources (IMA, 12c) last week announced commissioning of its full-owned Boonanarring mineral sands project in the North Perth basin, 80 kilometres north of the capital.

For mineral sands, the region is like what Kalgoorlie is for gold: both Iluka and US titanium giant Tronox in the area, which lies on an ancient beach. And the project’s proximity to Perth means the project will be a cheaper drive-in drive-out than a costlier and less hospitable fly-in fly-out one.

  “The company has been working diligently over two years to move a company into production,” Image chief Patrick Mutz told the recent Australian Microcap Investment Conference.

Indeed, If Image can get its ducks in a row – and they look to be falling in place – Boonanarring could be producing by as early as Christmas, based on a simple dry shoveling operation.

The company is fully funded, not only to complete construction but we have the funds for the working capital through the commissioning to ramp up to positive cash flow.

Rutile is the key ingredient in mineral sands, which in Image’s case means an exotic mix of zircon, rutile, leucoxene and ilmenite.

While zircon will comprise 30 percent of the heavy mineral concentrate produced, it is expected to account for three quarters of the projects revenues.

On paper at least, the project economics look compelling.

Updated in June, the bankable feasibility study values the project (net present value) at $235m, with a project cost of $52m and a payback period of 13 months.

The project is forecast to produce earnings before interest of tax of $278m over the life of the project, although zircon’s further price strength mean these numbers could be conservative.

The company envisages annual output of 220,000t of heavy mineral sands, containing 60,000-70,000t a year of zircon.

In comparison, Iluka expects to produce about 335,000t this year.

Overall, Boonanarring is rated as a 19.8mt resource, grading 7.2 percent heavy minerals.  As Mutz proudly notes, that’s more than twice the grade of a typical deposit globally.



“In addition there’s very little trash heavy mineral (in the concentrate),” he says. “Heavy mineral content is not all saleable and sometimes (the saleable content) can be as low as 30 percent”.

Still in WA, Diatreme Resources (DRX, 2c) is further down the evolutionary curve with its Cyclone project in WA’s Eucla Basin, also a well known mineral sands address.

But once again, Diatreme could be timing its run with a Winx like perfection.

Diatreme expects a long-awaited definitive feasibility study, presumably confirming the robust economics of the 80,000 tonnes a year (of zircon) operation, to be released “imminently”.

Only one of three discoveries of size over the last decade, Cyclone is rated as a 138mt deposit at an average grade of 2.3 per cent.

Management has targeted production by 2020, with a 10mtpa operation sustaining a 14 year mine life.

The mine is based on slurrying the ore to a wet concentrator plant, trucking the produce to the Forrest rail siding on the transcontinental rail line and then freighting it to Port Pirie.

 “As we enter the final stage of the bankable study we are looking at options for offtake and venturing or processing in China,” McIntyre says.

Diatreme is not just a mineral sands story: it owns a silica sands project in Far north Queensland, Cape Bedford, which is expected to start mining the 21mt resource as a simple quarrying operation.

Down the road from the world’s biggest silica mine, the Mitsubishi owned Cape Flattery, Diatreme will tap the buoyant demand for these sands in construction, notably high end glass.

Both Image and Diatreme management argue their shares are undervalued given the progress there companies have made. “We’ve been in an orphan period in which no one cares about you because you are spending money but don’t have anything to show for it,” Mutz says.

Sheffield shares have retreated sharply after hitting $1.20 in early October, despite talk that Thunderbird would make for better economies if it were in the hands of a major.

In other words, Sheffield is a takeover target.

In all the case of all three stocks, investors should be aware that once a developer turns miner and starts digging dirt, the shares tend to underperform because the stock is being valued on the drudgery of reality rather than blue sky.

Pundits who believe in the minerals sands story could well consider Iluka: rather than reveling in the buoyant prices, the shares have slumped 30 percent since late August because the company’s costs guidance for the calendar 2018 year were higher than expected.

Iluka’s $3.65 billion market cap compares with $218m for Sheffield, $123m for Image and $23m for Diatreme.

Tim Boreham edits The New Criterion

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.



Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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