Booming mineral sands prices illustrate shortage-of-everything scenario driving commodity prices

Industry giant Iluka shows how resources shares and commodity prices have diverged of late while juniors such as Strandline now offer even greater leverage.

Broad structural supply issues at a time when the world’s energy and automotive industries are being remade suggests the “hard” asset qualities of commodities in an inflationary environment will shine through as the year unfolds.

Mining equities have nevertheless failed to escape the tech-heavy sell-off in equity markets in recent days. As Warren Buffett might suggest, the equities sell-off means stocks are cheaper than they were, and if their story is right, there could be value to be had.

There are signs of that creeping into mining equities, with investors bidding stocks higher from their recent lows, with the notable exception being the gold space, where the coming interest rate rises have taken the shine off things.

The diversified mining leaders BHP and Rio Tinto were the first to bounce off their recent lows and other mining stocks can be expected to follow, again with the exception of the gold space, for the time being at least.

While it is not a big component of the mining market, the minerals sands sector stands as a prime example of where the producers have been hit by the shakedown in equity markets even though industry conditions are the best they have been for 10 years or more.

Prices for mineral sands have been going gangbusters for a host of structural supply issues at a time of strong demand across the main applications in ceramics (zircon) and pigments (titanium dioxide), as well as rising strategic applications (metals, rare earths from monazite).

Iluka (ILU) dominates the ASX mineral sands space and was the major beneficiary of the dramatic improvement in prices in the past 12 months.

Its share price rose by than 50% in the period, carrying its market cap to $4.33 billion, remembering that the performance is all the more impressive because of Iluka’s spin-out in late 2020 of its iron ore royalty business into Deterra (DRR), now a $2.24 billion company.

It can be taken as read that if the Iluka share price is on fire, the mineral sands market is on fire. Still, the broader sell-off in equities in recent days has seen the stock sold off from a high of $11.23 earlier this month to Thursday’s $10.14.

The 9.7% price fall is despite Iluka confirming on Tuesday that demand for zircon and titanium dioxide remained “strong” and “robust” respectively.

More to the point, and despite all of the uncertainty in equity markets and the Chinese property market, Iluka has been able to put away a zircon price increase for the March quarter of $US220 a tonne.

In the pigment market, over which it has less influence, Iluka noted that price increases announced for the March quarter of $US150-$US280/t put prices at 10-year highs, although prices do vary from region to region.

Finally, a point of interest for anyone contemplating a bathroom renovation. The trend out of Europe is for large format ceramic tiles. And large means large, with single floor to ceiling tiles and upwards of one metre square floor tiles all the go.

The fashion trend has implications for the zircon market which gives tiles their glaze, with Iluka reporting that large format tiles generally have a higher zircon loading of 400-1,050 g/m2 compared with smaller formats (200-600 g/m2 ).

Apparently, the increased loading is a ‘’function of their aesthetics”. So go big with the tiles in the bathroom reno and you’ll literally be bathing in the good fortunes of the mineral sands producers.

Strandline:

The strongest leverage to the strong conditions in mineral sands resides with the junior developers.

Strandline (STA), which is more than half-way through the $338 million construction of its fully-funded Coburn project to the north of Geraldton in WA, is a case in point.

Brokers with an understanding of the mineral sands market have target prices on the stock that are more than double Thursday’s closing price of 29c.

A week ago, it was a 37c stock. Again, the only reason for the fall has been the broader equity market sell-off, leading to a suggestion that the on-going strength of the minerals sands market means the stock’s lower level won’t last long.

Coburn is set to become a globally significant mineral sands producer, making it a potential takeover target for Iluka apart from anything else.

First revenue is possible in the December quarter, initially from concentrates, with the full product suite to follow once a mineral separation plant is completed.

The near-term production profile comes as spot prices are massively higher than assumed for the long-run in the project’s definitive feasibility study.

In the DFS, zircon was pencilled in at $US1,470/t (FOB). Spot prices are currently $US2,400-$US2,600/t. For rutile, the DFS used $US1,100/t. Spot prices are $US1,700-$US1,800/t. For ilmenite, the DFS used $US270/t compared with the current spot price of about $US400/t for the chloride type.

All that is exciting stuff for Strandline as first production approaches. Having said that, the DFS price assumptions made for a robust project anyway, with EBITA forecast to average $A104m over an initial life of mine of 22.5 years.

That sort of earnings capability and durability, at much lower prices than are currently the case, is interesting stuff for a company with a market cap of $325 million.

And the current market cap does not include any value for Strandland’s mineral sands projects in Tanzania – Fungoni and Tajiri.

They were once Strandline’s main go until the Coburn opportunity came along, and the Tanzanian government sought and won a new deal with miners in the country, one that gives the country a 16% free-carried interest.

Fiscal terms remain the same and the new compact with the government means development and strategic planning is to be fired up again.

The smaller Fungoni will be the first to be developed and it has to be said that end-users around the globe will be cheering it on, such is the concern out there about new supply coming forward.