So the point has been raised that ILU is getting punished for weak zircon market, and the question asked how this affects SFX efforts to raise funding for TB? Iluka is the ASX bellwether mineral sands stock, especially regards zircon for which it is the world's largest producer. ILU is the proverbial canary in the mineral sands mine, and all min sand investors should keep one eye on it's performance and commentary. What does ILU's latest half yearly results really tell us?
On the surface the clear negative is a deteriorating zircon demand due largely to the trade war and softening economy in China and world wide. No surprise there, a strengthening market into a trade war and world slow down would have been truly remarkable. In fact, despite lower demand and sales of zircon compared to H1 2018, prices were 19% higher at US$1580/t and ILU has actually extended their zircon reference price out another 6 months until 31 Mar 2020 at an even higher price of US$1580/t. ILU are and have been for some time the world's zircon 'swing producer', which means they trade off sale volume for price stability. 2018 they dipped heavily into zircon stocks and Narngulu re-processed concentrates to meet strong demand, so it is not surprising that sales volumes have walked back as world demand softened and the zircon shortage abated. As we all know and ILU reiterated, the "medium term outlook for supply tightness remains" for zircon.
No surprises there and nothing that detracts from the need for more zircon projects to fill the pending zircon supply deficit. Likewise for high-grade TiO2 feedstock, sales were down in tonnage but prices up 22% compared to H1 2018. In fact, "rutile and synthetic rutile prices expected to increase 6-8% in H2", "market conditions remain strong", and "suggests tight supply conditions." Lower H1 2019 sales of TiO2 product was actually "constrained by production" and not demand despite the trade war and world economic slow down. After a closer read it seems pretty clear that ILU is being smashed on the market (down another 6% as I write to $7.20, down from $11 under a month ago) for company specific problems more than short term deteriorating zircon sales volume (not price) that is a swing producer's lot in life. What demand fluctuations giveth, it takes away!
ILU is caught up in a perfect little storm it seems to me. The valuable Area C iron ore royalties are getting hit hard with the collapsing IO price, which is predicted to keep falling the rest of the year. As a swing producer ILU must absorb nearly all of the worlds softening zircon demand which makes a big hit to revenue and profits, divi gets cut, and price free falls as technical support is removed with all news drivers bad. Then there is the elephant in the report... production issues and rising costs! Principally the recently acquired, ageing and troubled Sierra Leone operations. Lanti dry operations still facing operational issues, and a seeming cost blow out in the new Sembehun deposit growth option forced a revisit of development options via new optimisation studies. Unhappy days after strikes dogged Sierra Rutile last year, now unfeasible capex expansions, and increased mining costs and depreciation at following the project. A picture tells a thousand words and all the troubles are neatly summarised in this slide.
Production costs are up everywhere, and this is the point I want to make regards SFX and the TB deposit. Part of the reason that Zr and high grade TiO2 deficits are forecast into the mid 2020's, together with increasing pricing for both, is that the worlds old mineral sand mines are inexorably becoming lower grade and higher cost. This is a trend we are seeing in the other mega African mines of Richards Bay and Namakwa for example, lower grades and/or higher overburden means higher costs. All that before even considering the increasing strikes and social costs of operating in poor African countries, ILU hardly have a monopoly on strikes and community protests. Higher prices are required to incentivise the development of new mines, and what a motley crew of new prospects ILU have in the production line.
Balranald deposits in Victoria are high grade but too deep for conventional mining and so ILU are pinning their hopes on underground automated mining and back-filling technology which will cost $40M to trial. Americans would call this a Hail Mary, I call it symptomatic of a lack of alternative new mine options. If it works it will probably be expensive and riddled with outages, but there is always a chance to be fair. Otherwise they have the Wimmera deposits also in Victoria which are ultra-fine and only look half a chance of working now that rare earth by-product credits are all the rage. Lots of problems with radioactivity and producing an acceptable zircon spec for customers but again, if the price is high enough with deficit of supply they just might make it work. These two feasibility studies are Iluka's great white hope, in addition to low grade, high overburden satellite deposits around Jacinth-Ambrosia which will also make money so long as the zircon price stays high enough.
I think the higher production costs from Cataby and SR, together with three new projects that all carry high technical risk and/or rely on high product prices to fly, beatifically captures the reality of mineral sand mining over the next few decades. New low cost mines in secure tier 1 jurisdictions just do not exist. Unlike gold deposits which are like finding a needle in a hay stack and can be hiding anywhere, mineral sand deposits are relatively easy to find in coastal surface settings. Discoveries of new mineral sand deposits are simply few and far between as time goes on. In reality, companies are re-visiting long ago known deposits in deeper, darker Africa or previously uneconomic deposits which might finally make sense in a higher price environment. What is rare are lower quartile cost, long life mines, in a tier 1 jurisdiction that produce both high volumes of zircon and ilmenite suitable for high growth, high TiO2 feed chloride pigment market. I only know of one.
Unfortunately this latest ILU half year report explains why ILU have not moved on SFX... they can't afford it lol. Cash flow negative, increasing production costs, and a high capex spend required to expand Sierra Rutile and make sense of the 2016 takeover (too high capex apparently). If the high risk Balranald and Wimmera projects are a failure then look out below ILU holders. WA is finished up in 10 years and that leaves.... not much but a yawning supply deficit and even higher incentive product pricing required to get enough new mines into production and meet demand.
TB is the right project at the right time, if not the perfect market to deal in. Good Luck.
SFX Price at posting:
53.0¢ Sentiment: Buy Disclosure: Held
(20min delay)
