Ceramic tile craze boosts mineral sands demand BARRY FITZGERALD March 22, 2010
While Iluka predicts pressures on zircon supply, Diatreme looks to develop its Eucla Basin deposit.
THE Chinese are crazy for ceramic tiles. So much so that on most recent estimates, they are laying an amazing 2.8 billion square metres of tiles on an annual basis. And as the ''floor space'' in the country rises exponentially in line with the massive urbanisation that is under way, the figure is only going to get bigger.
All that has to be a good thing in the demand and pricing outlook for zircon, the mineral sand that gets used in ceramics - tiles, sanitary ware, tableware and the like.
It is also useful stuff in the making of refractories and has high-end applications in TV screens and metals used in nuclear power plants and elsewhere.
Demand for zircon collapsed last year by as much as 25 per cent in response to the global financial crisis. Strangely, however, the price of the stuff remained well above 2008 pricing levels.
Now that the worst of the GFC has passed, experts on mineral sands consumption patterns reckon that the recovery in demand witnessed in the back half of calendar 2009 should gather pace in 2010.
That is particularly so for zircon - which is good news for the world's biggest producer, Iluka, with its 34 per cent market share.
Iluka (ASX: ILU) reckons that because zircon is a co-product in mineral sands developments and its demand growth has been historically greater than for the titanium dioxide group of mineral sands (ilmenite and rutile), supplies of zircon could come under further pressure if titanium dioxide volumes do not pick up.
Now that its mineral sands operations are focused on the zircon-rich Eucla Basin and Murray Basin, Iluka would say that.
But given zircon prices have recently improved from $US750 a tonne to more than $US800 ($A873) a tonne, there is no doubt that if you are in the mineral sands business, it is better to be long in zircon than in ilmenite/rutile.
Iluka is a $1.7 billion company, so it is not in Garimpeiro's normal ambit.
However, before moving on to something that is, it is worth pointing out that there is a growing recognition that Iluka has a major asset outside of the mineral sands business - its royalty on iron ore production from BHP Billiton's Mining Area C operation in the Pilbara. It is an asset that is seriously undervalued by the market.
The royalty has been generating $50 million annually for Iluka from production by BHP of some 40 million tonnes of iron ore annually. There is good reason to think that BHP could take production to 80-100 million tonnes in the years ahead, such is the demand for iron ore.
Under that scenario, the Iluka royalty could be worth $700 million to $1 billion. That does not leave much in the group's current market capitalisation for the mineral sands business, one currently ranked the No.1 in zircon and No.2 in titanium dioxide production.
It also says that the market and/or Iluka are going to have to move soon on adjusting the iron ore royalty valuation from its current $400 million to at least $700 million. If there is no movement, Iluka will fall to a cheap takeover bid from a state-owned Chinese group before long. Iluka has said previously that a trade sale of the iron ore royalty would have horrendous tax implications.
So a spinoff to shareholders from an in-specie distribution of the royalty or a float is on the cards. With iron ore prices currently twice last year's contract price of about $US60 a tonne, the pressure for some action on the valuation discrepancy is set to grow in the months ahead.
TONY Fawdon's Diatreme Resources (ASX: DRX) is a zircon stock that is more in keeping with Garimpeiro's ambit.
It closed on Friday at the princely price of 10� a share for a total market value of about $20 million. Fawdon has some big plans for the company in the West Australian sector of the zircon-rich Eucla Basin.
A recently released scoping study into a $311 million development of the group's Cyclone mineral sands deposit found that an operation processing 9 million tonnes of mineral sands for a yield of 280,000 tonnes of mineral-sands concentrates had the potential to post an annual average profit of $50 million.
The positive scoping study results have prompted Diatreme to launch prefeasibility studies into a development of Cyclone by 2014.
Latest work at the property has also raised the potential for a project sweetener from the processing of mineralisation grading up to 4 per cent heavy minerals in the overburden material covering the deposit. So far so good. The only problem for Diatreme is that it has not got the money to develop Cyclone. And it is not exactly flush with cash. So it will need to secure some equity funding to keep up the pace of work at Cyclone before long.
As mentioned above, at least the improved outlook for the mineral sands market - and zircon in particular - means that Diatreme's finance requirements will be easier to meet than they were just 12 months ago.
The zircon count at Cyclone at 33 per cent of the heavy-mineral suite is not as high as the 50 per cent count at Iluka's operation in the South Australian portion of the Eucla Basin.
But it is still exceptional in world terms and means that Cyclone will be of interest to end-users keen to secure long-term supplies of the stuff.
It is for that reason that Fawdon is open to the idea of an end-user in either China or Japan becoming a joint venture partner at Cyclone by assuming its development cost needs.
While it will be a long time before the world is short of titanium dioxide supplies, it is a different story with rutile, with some analysts tipping a 350,000 tonne-a-year shortfall by as early as 2015.
DRX Price at posting:
9.2¢ Sentiment: LT Buy Disclosure: Held
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