Titanium minerals, also known as mineral sands (ilmenite, rutile and zircon), are currently all the rage and their prices have been soaring. Sierra Rutile has ambitious plans to exploit this growing demand. The worry is that any delays or setbacks to its plans - or a correction in titanium prices - could dampen the mania for its shares, which have risen sevenfold in price in the past 12 months.
- Titanium commodities in demand
- Substantial growth plans
- Past operating challenges
- Constrained output
- May need to raise more capital
- Susceptible to price correction
Titanium dioxide is the white pigment of choice in paint, plastics and paper, and, in smaller volumes, in cosmetics, sunscreen and toothpaste. The key sources of titanium dioxide are ilmenite and rutile. Rutile is also used to produce strong, light, corrosion-resistant titanium for aircraft and spacecraft.
Demand for titanium is now closely linked to demand from developing markets so it is expected to grow well above its historical trend. At the same time, supply looks set to struggle to keep up, given discontinued or delayed projects. These market dynamics support strong prices for mineral sands.
Unusually for mineral sands geology, Sierra Rutile's deposits in southern Sierra Leone are rich in rutile, which is around four to six times more valuable than ilmenite owing to its greater purity. The company extracts mineral sands by dredging material from flooded deposits. Its dredger has on-board processing and pumps material via a floating pipeline to a floating concentrator located on a separate pontoon.
| SIERRA RUTILE (SRX) | ||||
|---|---|---|---|---|
| ORD PRICE: | 67p | MARKET VALUE: | £359m | |
| TOUCH: | 66-67p | 12-MONTH HIGH: | 71p | LOW: 9p |
| DIVIDEND YIELD: | NIL | PE RATIO: | 4 | |
| NET ASSET VALUE: | 17p | NET DEBT: | 16% | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 37 | -7.6 | -3.1 | nil |
| 2010 | 44 | -13.8 | -3.2 | nil |
| 2011* | 55 | -9.8 | -2.0 | nil |
| 2012* | 208 | 135.7 | 25.2 | nil |
| % change | +277 | – | – | – |
Normal market size: 10,000 Market makers: 11 Beta: 1.5 *Mirabaud estimates £1=$1.584 | ||||
One problem is that Sierra Rutile only has one dredger. It used to have two, but an accident in 2008 saw one of these capsize. Having to make do with just one has hit production capacity, resulting in higher unit costs and delayed profits.
Last October, management approved two projects aimed at expanding output and plans a feasibility study into adding a second dredger. One expansion project is to dry mine part of the deposit the company is currently dredging, using front-end loaders, trucks and a mobile concentrator. The second project is to reprocess residual material left over from operations before Sierra Leone's decade-long civil war. Both projects are expected to get into production in 2013 and reach full capacity in 2014. The company is choosing consultants to conduct the feasibility study into the second dredger and anticipates making an appointment before April.
In all, Sierra Rutile expects to spend $45m (£28m) this year on expansion and management is assessing the company's ability to pay for these without raising further funds. Assuming that cash flow from current operations is boosted by higher prices for mineral sands, the company might just be able to avoid raising further capital. However, this is likely to be touch and go, and any topping up may have to be done against the backdrop of a depressed secondary market.
