Barry FitzGerald: Image set for another re-rating thanks to high-grade zircon
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It is a rare event for a new mining project to come in on time and budget let alone hit all of its key targets when it’s up and running.
But that is what Image Resources (ASX:IMA) achieved earlier this year at its zircon-rich Boonanarring project in Western Australia.
The $52m on-budget project was ramped-up to full-scale production in just two months by January this year and has since gone on to exceed all key expectations.
That’s why Garimpeiro mentioned on January 22 that Image was in line for a market re-rating. It was trading at 13c and has since motored on to 27c.
It can be said now that Image is in line for another re-rating, with some key events in the next couple of weeks to provide the trigger.
Funnily enough, the coming re-rating is because Image got some things wrong in its original work on Boonanarring’s development.
It turns out it underestimated the zircon content of the ore, as well as the overall grade of the heavy minerals in the deposit. It also missed a very high-grade section of the deposit in its resource/reserve definition drilling.
It’s all for good and is about to be put right by Image in three key statements – an updated resource estimate, an updated reserve statement, and a recalculation of the project’s financial model.
The resource update won’t matter much, but look out for the new ore reserve statement early next month, and the new financial model which will follow shortly after.
There is a clue as to why they are shaping up as potential game changer events in Image’s current financial forecasts for the project which have it posting earnings (EBITDA) for calendar 2019 of $55-$65m, rising to $90-$100m in 2020, before falling away sharply in subsequent years.
The reason 2020 is currently seen as something of a golden year is because it is the year of peak heavy mineral ore grade.
But what if the new reserve estimate, with the expected substantially higher grade estimate, means that 2020 should be seen as an “average’’ year for Boonanarring — i.e. annual EBITDA of around $100m could be the norm going forward.
So instead of project earnings retreating post 2020, there is the potential for more years of $100m EBITDA.
That potential will need to be confirmed in the coming announcements before anyone gets too excited.
But if it comes to pass, it will be game on for a re-rerating of the stock. Apart from anything else, the market will start asking if a single project can deliver that sort of earnings capacity, what about Image’s other potential cash generators?
It has another five potential projects in the north Perth Basin and has flagged recently that the front-runner is Bidaminna. While Boonanarring is a dry mining open cut operation, Bidaminna is a dredge-mining project.
Bidaminna would tackle lower grades than Boonanarring but would have the benefit of a low cost of mining from its economies of scale.
Image is expected to say more about Bidaminna in the first half of next year.
Apart from the higher grades, Image has also received a tailwind at Boonanarring from the rally in zircon prices.
Prices for zircon – an opaque and hard wearing mineral used in ceramic tiles and sanitary ware – peaked at $US2,800 ($4,104) a tonne in 2011 at the tail end of the China boom.
The end to the China boom, and the demand destruction caused by the 2011 price, saw zircon crash back to $US900/t by the end of 2015. Prices then began to recover, reaching $US1,580/t in the first half of this year.
Goldman Sachs recently forecast prices in the second half to ease to $US1,366/t and like other analysts, it predicts looming supply shortages will drive prices up to $US1,600/t come 2023.
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