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Sands of fortune

FEATURE: A niche market, but with favourable supply-demand dynamics and two exciting ways to play the story.

Mineral sands may not appear to be the most exciting of commodities, but a combination of growing demand and constrained supply is expected to drive their prices significantly higher over the near term.

We're talking about ilmenite and rutile, which comprise around 80 per cent of most mineral sands deposits, and zircon, which is the third main component.

Ilmenite and rutile are key sources of titanium dioxide (TiO2). Because of its brightness and high opacity, titanium dioxide is the primary white pigment used in paint, plastics and paper, and in smaller volumes in cosmetics, sunscreen and toothpaste. Rutile is also used to produce strong, light, corrosion-resistant titanium for use in aircraft and spacecraft.

Demand for titanium is correlated to developing market demand, and analysts at RBC Capital Markets expect this to grow well above historical trends. Demand was badly hit during the global financial crisis, but is picking up again as the industry restocks and Chinese demand firms. Pigment producer Du Pont projects that annual demand will grow at a compound rate of between 5 per cent and 10 per cent between 2009 and 2015, compared with an average of just 3.8 per cent between 1980 and 2008.

While demand looks set to rise strongly, supply appears constrained. Leading producers are not expected to increase output in light of rising costs and discontinued or delayed projects such as BHP Billiton's Corridor Sands project in Mozambique.

Two key stocks

Kenmare Resources (KMR)

Because it's already in production, Kenmare should benefit more than most if prices do firm up. The Irish company's principal asset is the Moma mine on the northern coast of Mozambique, which contains considerable reserves of ilmenite, rutile and zircon.

Kenmare has faced a few problems, most notably missed production targets and a breached pond wall last October that flooded a local village. But the company finally seems to be getting its act together. With production now increasing, it raised £179.6m last March to expand capacity by 50 per cent, with ramp-up expected from 2013.

Pathfinder Minerals (PFP)

Pathfinder Minerals is developing the Moebase and Naburi deposits, 50km to the south of Kenmare's Moma mine. Like Moma, Pathfinder's two licences were once owned and explored by BHP Billiton, and are believed to share not only Moma's vast scale, but also its mineral grade. Mineral resources were historically estimated at over 2bn tonnes, giving Pathfinder over 70m tonnes of contained mineral sands.

A scoping study is expected to be completed imminently, which will set out the envisaged mining method, process flow and required infrastructure. In time, Pathfinder's projects could develop into Moma look-alikes, and the value uplift to what is currently a penny share, could be substantial.

The result will almost certainly be that demand growth outstrips supply growth, leaving a market in deficit – potentially as soon as later this year – with a resultant strong upward price trend.

Changing pricing trends are also likely to drive prices higher. Like many bulk commodities, mineral sands are mostly traded on term contracts rather than futures exchanges. Many contracts will be expiring over the next few years, which will allow producers to link output to higher spot prices.

In the meantime, producers have reported that non-contracted product is selling at 20 per cent above contract prices, according to RBC's analysts. As a result, the analysts raised their mineral sands forecasts by up to 25 per cent in March, and added that they see the potential for "some upside surprises in the near term".

According to industry consultant TZ Minerals International (TZMI), the pigments market has become a seller's market. The consultant concludes that the limits of price increases will depend largely on the extent to which suppliers are willing to exercise their newfound freedom.