Emerging mineral sands producer Sheffield Resources (ASX:SFX) has witnessed a bit of a share price uptick today on speculation that it may be in talks with heavyweights like Iluka Resources (ASX:ILU) and Rio Tinto (ASX:RIO).
The Australian reported this morning that Sheffield had started the process to sell a stake (20-49 per cent) in its Thunderbird project in Western Australia.
That wasn’t the most exciting part (mostly because everyone knew that already); it was more the little tidbit of speculation from The Australian that advisor UBS had struck up talks with the likes of $3.9 billion Iluka Resources and $37.6 billion Rio Tinto.
That little gem sent Sheffield’s share price up nearly 14 per cent to an intra-day peak of 49.5c.
However, RBC Capital Markets mining analyst Paul Hissey got a little excited about the news.
“Although SFX has communicated its intentions to pursue a strategic partner, this news headline caught our eye as it may suggest some progress towards finding a partner which could inject capital and therefore de-risk the financing aspect of this operation,” he said in a research note.
RBC estimates Sheffield will need equity funding of about $175m for its Thunderbird mineral sands project, but with a joint venture partner like Iluka or Rio that would likely reduce the need for such a big capital raising.
“Any exchange of ownership for capital should improve the residual equity funding requirement (RBCe: A$175m), and may make the project more palatable for equity investors, given difficulty to date in securing funding to accompany the existing debt facility,” Hissey said.
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Equity cash the last hurdle
Sheffield’s feasibility study shows Thunderbird is a low risk, modest capex project that generates strong cash margins from production over a mine life of 42 years.
It is fully permitted and construction ready – Sheffield just needs the remaining cash to build it.
Sheffield has already locked in US$175m of debt funding from Taurus Funds Management and a $95m loan from the federal government’s Northern Australia Infrastructure Facility (NAIF).
Thunderbird will produce zircon and titanium dioxide (TiO2) products from a conventional open pit mine.
Zircon will account for over 60 per cent of Sheffield’s revenue.
Zircon is a found in mineral sands — old beach sands that also contain ilmenite and other minerals. Its primary use is in the ceramics industry to make things like tiles and plates opaque.
But it also has a high melting point and is corrosion resistant, making it useful in the manufacturing process for foundry moulds, refractory bricks and molten metal moulds.
And it’s increasingly being used in new-age electronics, as well as engines and spacecraft.
Ilmenite is the main source of titanium dioxide, a white pigment used in paints, fabrics, plastics, paper, sunscreen, food and cosmetics.
At one point American doughnut giant Dunkin’ Donuts even used titanium dioxide to make the powdered sugar on its donuts appear whiter.
Under-investment, rising demand the perfect recipe
“Recent under-investment in the mineral sands space coupled with increasing demand for zircon and TiO2 products should support an improving price profile,” Hissey said.
“The current funding impasse for SFX demonstrates more generally the risk-aversion for investors in the mining space despite valuation support.
“To that end, endorsement from a strategic partner could not only provide funds to push ahead, but also demonstrate the viability to the broader market.”
First production from Thunderbird is expected between the final quarter of 2020 and the first quarter of 2021.
Sheffield already has contracted buyers for all of its stage one zircon and 50 per cent of its stage one ilmenite products.