Barry FitzGerald: The day zircon pays off for Image Resources
It is a good time to be joining the ranks of mineral sands producers thanks to the strong recovery in prices in the last couple of years.
And when the transition to producer status is as smooth as they come, all the better.
That’s the position Image Resources (ASX:IMA) finds itself in. Not that it has been reflected just yet in the company’s share market price, which last traded at 13c.
But a re-rating of the group is unlikely to be far off as the company is close to ticking off its last major de-risking event – the achievement of positive project cash flow at the end of the current quarter at its zircon-rich Boonanarring project, 80kms north of Perth.
Selling zircon to China
On its way to achieving the positive cash flow target, Image recently announced the first bulk shipment of 10,000 tonnes of zircon-rich heavy mineral concentrate to its Chinese customers.
The size of the shipment was bigger than originally planned because the start-up of the repurposed Boonanarring treatment plant – it was moved over from a former South Australia operation – has got off to a flying start.
Image said ore processing rates during December “substantially exceeded” planned rates in what was the first month of the ramp-up period.
It said processing rates reached more than 80 per cent of design capacity on multiple days and the average rate for the month was 73 per cent of design compared with the expected rate of 60 per cent of design.
“Early January ore processing rates continue to exceed ramp-up period budgeted rates, with heavy mineral concentrate inventory levels beginning to build for a second shipment currently scheduled for mid-February,’’ Image told the ASX.
Brokers are in love with the new look
The smooth start-up caught the eye of Perth-based broker Euroz.
“Commissioning has gone very well and is a real credit to the team at Image,’’ Euroz said.
It has a 23c a share valuation on the stock, and a price target of 25c.
“Image continues to trade at a large discount despite the excellent progress to date. The project has now been significantly de-risked but it is yet to be reflected in the price,’’ Euroz said.
Thanks to strong zircon prices, Boonanarring is forecast to be a strong earner for Image with its modest capitalisation of $125 million.
Euroz is forecasting earnings of $53m in the 2019 (calendar) year, rising to $115m in 2020. The apparent disconnect between Image’s market value and its earnings capacity reflects a number of factors.
When is the re-rate??
While things have been going well at Boonanarring, the market is probably waiting for confirmation of positive cash flow being achieved before the end of the quarter, and then the achievement of steady state production at projected rates, before getting serious about a re-rating.
The 2018 woes for the king of the ASX-listed mineral sand producers, Iluka, at its African operations has not helped sentiment to the sector, and then there are concerns that mineral sand prices might be topping out on China’s economic slowdown.
Zircon, an opaque and heard wearing mineral used in ceramic tiles and sanitary ware, peaked at $US2,800 a tonne in 2011 when China’s love affair with tiling everywhere in their apartments was at its peak.
The boom price caused demand destruction, driving zircon back to $US900/t by the end of 2015.
But the price has staged a strong recovery in the last couple of years, with Iluka recently lifting the price it charges to $US1,580/t, and US producer Tronox holding its price flat for the first half of 2019 at $US1,630-$US1,650/t.
UBS for one sees prices holding at $US1,600/t or above throughout 2019.
Image could not be more pleased, having originally scoped the Boonanarring development as a robust one at much lower prices.