MDL takeover shines spotlight on juniors exposed to soaring mineral sands prices

Mineral sands prices are on a tear, with some up by more ~60% since their trough. And this week’s takeover of Mineral Deposits by its JV partner, combined with the tight supply outlook, means the next league of players such as Strandline and Image are coming sharply into investor focus.

The French have had their way with Melbourne’s mineral sands group Mineral Deposits Ltd (MDL).

MDL put up a good fight. But in the end, all it took was a derisory increase by Eramet in its hostile low-ball bid of $1.46 to $1.75 a share to win the day.

The increased offer was well short of the independent valuation commissioned by MDL of $2.04-$2.52, and it goes without saying Eramet is not paying $1.75 because it thinks that is all MDL is worth.

So we have another example of institutional investors selling off mining assets too cheaply, with short-termism again reigning supreme.

MDL is Eramet’s joint venture partner in a mineral sands mine in Senegal, which is integrated with a titanium and iron ilmenite upgrading facility in Norway.

While the joint venture is long in ilmenite, which is shipped off to Norway, it is also a handy producer of zircon (an opacifier in ceramic glazes) which is shipped to global customers.

Today’s interest is in zircon. After peaking at $US2,800 a tonne in June 2011 (spot), the subsequent demand destruction drove zircon back to $US900/t by the end of 2015.

Zircon has been on the tear ever since. One of the legacies of MDL’s valiant but failed defence against the French was its commissioning of a mineral sands market update by respected industry consultant TZMI.

A handy bit of work it was too remembering that the mineral sands market is as opaque as markets come. The following is what TZMI said about the zircon market:

“Supply remains the greatest cause of uncertainty in the global zircon market, as it is not obvious where future supply will be sourced to meet the ongoing demand requirements of the sector.

“Given the current rate of demand growth in the sector, driven predominantly by the unprecedented industrialisation currently underway in China, and to a lesser extent in India, significant additional supply from new projects will be required to avoid the supply gap from growing in to a larger deficit.”

Last year, there were four consecutive price increases for zircon amounting to $300/t, or 30%. There have been more price increases in 2018 of about $US180/t-$US300/t, according to TZMI.

The net result of that is that reference prices posted by two of the biggest producers, Rio Tinto and Iluka, have increased to $US1,500/t and $US1,410/t (CIF China) respectively. They are actually lagging price increases by competitors, so a move higher still by them to $US1,600/t levels later in the year would not surprise.

Why MDL’s key shareholders have opted to sell cheaply in to the strong zircon market is anybody’s guess. They could now rotate into Rio and Iluka for continuing exposure to one of the few commodities where deficits are a real concern. Good luck to them.

But if its leveraged exposure to the zircon thematic they are after in a post MDL world, they are better advised to go hunting among the advanced mineral sands developers on the ASX.

Two juniors which could be worth watching on that basis are Strandline (STA:14c) and Image (IMA:12c).

Strandline (STA):

Strandline sits in the emerging mineral sands producer category from its dual focus on Tanzania and Australia.

It has two zircon-rich, development-ready projects, the Fungoni project in Tanzania and the Coburn project in WA.

But for the grant of a mining licence, Fungoni would already be on the development pathway.

The delay in receipt of the licence is a result of Tanzania’s overhaul of its Mining Act, with the shake up essentially targeting the country’s gold industry where tax and royalty leakage has been a concern.

Progress is being made, with a Mining Commission recently established to issue licences under the new Mining Act, which may or may not include a requirement for a 16% free-carried interest in projects to be handed to the government.

Again, the overhaul was a response to concerns with the gold industry. So it remains to be seen if the 16% requirement extends to industrial mineral operations such as Fungoni. Regardless of that, the issue of Fungoni’s mining licence is closer than it was.

Fungoni is very much a “starter” project for Strandline in the country. It is a baby step to Strandline’s much bigger ambition to become a major producer in the country, an ambition shared with Rio Tinto, no less, at its joint venture with Strandline in the south of the country.

While the Tanzanian push across multiple projects unfolds, Strandline’s Coburn project stands as one ready-made for the zircon-led recovery in mineral sands.

It has had $30m spent on it over the years by Gunson Resources (which became Strandline through the backdoor listing of the privately owned Jacana).

Strandline is re-working an old definitive feasibility study into its development (construction actually started there before mineral sands prices collapsed).

It is a 20-year project of scale, a company-maker, put another way.

Lots of things have changed since the old DFS (prices, technologies and construction costs). That underpins expectations that the new and optimised DFS will point to a robust investment case to get Coburn into production.

Image (IMA):

Image is fast approaching first production from its zircon-rich Boonanarring project in the North Perth Basin, all of 80km north of Perth.

First production is forecast for the December quarter, with Image keeping things simple by shipping off a concentrate to China rather producing a final product.

It is also a low capex development ($52m) which has much to do with Image’s repurposing of plant and equipment from the since-closed Mindarie mineral sands project in South Australia.

Initial mine life has been put at 8.5 years (based on reserves) but there is good reason to think a 15-year project is likely.

It is forecast to be a highly profitable operation, with an updated bankable feasibility study last November putting the capex payback period at 16 months.

That update included upgraded zircon prices but there is a new one that takes in further price rises. Plug them in as Image did on June 28 and the payback period is cut to 13 months and the project NPV rises from $197m to $235m.

Euroz has been following the stock and back on May 21 when Image was trading at 13c, it nominated a 21c price target.

“The mineral sands market, particularly zircon, continues to look tight and susceptible to further price increases,” Euroz said.

“This should dovetail nicely into Image reaching peak production in CY2020. Forecast CY2020 EBITDA of $100m puts Image on EV/EBITDA of less than 1x which is too cheap should it successfully execute,” Euroz said.