Morgans, which instituted coverage early in February with a 45c price target (incidentally the price it listed at in July 2022) and an Add recommendation, has been quick to increase its target price upwards to 55c while Euroz Hartleys has maintained a speculative buy and 48c price target.
Hannam & Partners is the most bullish by far, flagging a year-end target price of 64c.
So what could be behind this growing confidence?
At least part of it comes from the company’s eye-catching performance for the full-year ended 30 December 2022.
It is hard to argue with a 38% increase in revenue to $254m due to an almost 9,000t increase in rutile production over the previous year to 136,000t and higher rutile prices which in turn delivered net profit of $75.6m and earnings before interest, taxes, depreciation and amortisation of $57.8m.
And while the results highlight the strong performance of its Area 1 mine in Sierra Leone, the company is already taking steps to deliver long-term growth through the larger Sembehun project with a Definitive Feasibility Study and Environmental, Social and Health Impact Assessment due for completion in late 2023.
Sembehun is already the subject of an attractive Pre-Feasibility Study which placed a US$337m capex estimate and cash costs as low as US$535/t when zircon co-product credits are included.
Rutile bulls charge
Morgans certainly thinks that the company is on the right track, noting that it had delivered a solid financial result with a “relentless” focus on operating performance and maximising the mine life of Area 1 amidst a constrained rutile market.
It added that this strategy of maximising cashflows from Area 1 through the pursuit of efficiency gains and mine life extension is sound and enables the company to build the balance sheet strength to help fund development of Sembehun.
With Proved and Probable Ore Reserves of 174Mt grading 1.5% rutile, 0.9% ilmenite and 0.1% zircon, Sembehun is one of the largest and highest grade rutile deposits in the world, which goes a long way towards understanding why its development is such a big deal.
It is worth noting that Iluka had booked a US$290m impairment of its Sierra Rutile assets back in late 2019 due in part to not being able to put any meaningful value on the Sembehun as it did not have a defined development plan after discarding earlier plans for being too costly.
As such, it will be a significant coup for Sierra Rutile if its DFS succeeds in estimating attractive economics, a goal that eluded Iluka.
Euroz Hartleys added that at the current share price of 24c, the company remains a very cheap stock though it expects to trade below fair value due to the perceptions of sovereign risk.
Likewise Hannan & Partners says the company’s maiden set of annual results as a newly demerged entity demonstrates solid cash flow despite higher than expected costs.
It noted that upcoming catalysts such as the near-term Reserve and Resource update as well as Sembehun DFS could provide further evidence of the sustainability of profits.
Longer-term strength
A large part of Sierra Rutile’s strength comes from being a leader in the natural rutile sector, supplying some 20% to 25% of the world’s supply of the titanium mineral.
Natural rutile is a high quality titanium feedstock used for pigment, aerospace applications and welding.
An ongoing supply deficit has meant that prices of natural rutile have increased by 50% since the COVID-19 outbreak, though the company noted that in the short-term, it could see a softening in realised sales price.
This is due to concerns that rising interest prices could reduce demand for housing, which will in turn reduce demand for paint pigment.
However, it added that in the medium-term, the continued tight supply of rutile globally and elevated energy costs would continue to prop up the price of competing products produced from lower quality materials, which will in turn support realised prices of natural rutile.
