Barry FitzGerald: Mineral sands are a cash cow. Here are 4 stocks flying under the radar

Garimpeiro is getting too old to deal with $US100/oz swings – first to the upside, then the downside — in the gold price in response to Russia’s invasion of Ukraine.

So this week he is retreating to the relative calm of mineral sands where there is no daily posting of prices.

It’s all done by contracts with end users, with the supply deals struck by big producers of the stuff like Iluka (ASX:ILU) providing a benchmark price around which lesser producers strike deals.

Iluka is the world’s biggest titanium dioxide producer (pigments/paints, titanium metal and welding rods) from rutile/ilmenite, and a major zircon producer (ceramics, refractories/foundry and chemicals).

That its share price is up a thumping 36% in the last 12 months to $10.15 ($4.3 billion market cap) says all that needs to be said about the return of strong demand and pricing for mineral sands in response to the post-COVID economic recovery and stimulus spend.

Structural issues are also at play in the mineral sands market.

Existing mines are struggling with falling grades and there has been a lack of offsetting investment in new mines. A long-term supply squeeze is on, particularly for zircon.

As a market leader, Iluka seeks to manage supply to protect itself from precipitous prices falls when demand is weak. Last year’s rebound in demand prompted it to turn the supply taps back on.

The combination of increased production in response to the lift in demand, and the subsequent ability to secure price increases, powered Iluka’s 2021 (calendar year) earnings from mineral sands 83% higher from $342 million to $634 million.

In last week’s profit report, Iluka reported zircon prices increased from US$1,291 per tonne in the 2020 December quarter to US$1,590/t in the 2021 December quarter, with a further price increase of US$220/t locked in for the current 2021 March quarter.

Across in the pigment market, Iluka noted that price increases announced for the March quarter of $US150-$US280/t put prices at 10-year highs (prices vary from region to region).

Goldman Sachs for one reckons Iluka’s share price could continue to run given the strong market conditions for mineral sands. It has a $12.60, 12-month, price target on the stock – 24% higher than the current share price.

Garimpeiro gets physically ill on the thought of paying more than a $1 share for any stock.

He always prefers to look for leverage to the upside that the juniors can offer. So this week he revisits last June’s look at a bunch of mineral sands juniors ready to capitalise on the sector’s boom conditions.

Strandline (ASX:STA, 33.5c)

It was a 21.5c stock last June as the mineral sands market began to turn.

An emerging competitor to Iluka – unless Iluka takes it over – from its zircon-rich Coburn project in WA.

The $338m project is half built and is due to start production in the coming December quarter.

It has a $376m market cap which is interesting given the $104m in annual earnings forecast for Coburn in its definitive feasibility study. Current prices are more than 25% higher than those used in the DFS.

Coburn is the focus but a starter project, and a large scale project, in Tanzania are re-emerging as value-adds to the Strandline story.

Sovereign Metals (ASX:SVM) 40.5c

It was a 63c stock last June and has come back to 40.5c for no particular reason other than the recent general sell-off in equities.

Its Kasiya rutile project in landlocked Malawi is big as they come, and stands as an important future source of ESG-friendly natural rutile as the world frets about the energy required to make synthetic rutile.

The recent appointment to the board of the Rio Tinto (ASX:RIO) guy previously in charge of Rio’s Simandou project in Guinea, Nigel Jones, says something about the scale of the Kasiya opportunity.

Image (ASX:IMA) 24c

The WA producer from zircon-rich deposits was a 17c stock back in June.

It recently reported its cash margins from its concentrate product soared to a record $500/t in the December quarter.

It has picked up a big land package in the historic Eneabba mineral sands province, so bigger things on the way.

That must be the case because its biggest shareholder (23%), the Chinese-controlled Murray Zircon, is trying to spill the board at a meeting on March 24.

The current board is pushing back hard. Fair enough too. If it wants effective control, Murray Zircon should pay all shareholders a control premium.

Diatreme (ASX:DRX) 1.9c

Was a 2.2c stock last June.

Its Galalar high purity silica sand project in north Queensland for the solar PV market remains its main go. But it recently repeated it was looking to extract value from its shovel ready Cyclone zircon project in WA.