Predictions from the mining world are usually confident, and often wrong. All too frequently, the industry - from analysts to bankers and company directors to journalists - is dominated by bullish, pumped-up sentiment made at the expense of reflection and in the face of volatility. This isn't for want of information; invariably, data on the consumption, production and storage of minerals is meticulously tracked. But estimating how all of these currents will coalesce around a planet of diverse actors to spit out next month's prices is another matter. In fact, it is usually impossible.
With this in mind, we approach with caution one mining sub-sector currently lighting up chat among London's natural resources watchers. That area is mineral sands, also known as heavy minerals, the category of ore deposits found around the planet in fossilised shorelines. Within these typically low-grade ore bodies are the titanium dioxide minerals rutile, ilmenite and leucoxene, which are mainly used as pigment in the manufacture of paint and plastics, and zircon, which is used in the manufacture of ceramics.
In terms of the volume of output, this is a niche area of the mining world. According to Australia-based Iluka Resources (ASX:ILU), the industry's largest producer, mineral sands account for less than 1 per cent of the global resources sector. But it's a well-represented field on London's junior market, with Base Resources (BSE), BlueJay Mining (JAY), Kenmare Resources (KMR) and even minnow Savannah Resources (SAV) all vying for investors' attention. Rio Tinto (RIO), a more diversified and widely held main market peer, is also one of the world's largest producers of titanium dioxide feedstocks through its ownership of mineral sands projects in South Africa, Mozambique, Madagascar and Canada.
A market turn
That pack was even larger last year, before Iluka acquired Aim-traded Sierra Rutile in an A$393m (£215m) all-cash transaction. The deal was an interesting turning point in the mineral sands market, and arrived as the Aim group was ramping up production at Gangama, a freshly commissioned high-grade project with almost two decades of mine life ahead of it. Major chemicals companies had also announced quarter-on-quarter increases in pigment prices, which Iluka saw as a market bottoming.
Why such assurance? Apart from its strong oversight of a sometimes hidden pricing market, Iluka pointed to a drawdown in stocks, growing end-use applications for titanium dioxide and a decline in supply. The key dynamic for the latter point is the rate of closures of relatively high-cost iron ore mines in central China, where ilmenite is a byproduct. Notwithstanding the rise in iron ore prices over the winter, analysts at Mirabaud believe the 30 per cent fall in ilmenite stocks at Chinese ports in 2016 shows that unwanted supply is steadily being reduced. Pricing discipline could also help, particularly in the zircon market, as competitors step away from the dogfight that resulted in unsustainable contracts at the start of last year.
Another reason mineral sands companies are confident of higher prices is the lack of technical substitutes for titanium feedstocks in their end markets. And because the minerals make up a small proportion of the final cost of the products they are used in, offtake negotiations should favour miners, at least theoretically.
But will higher prices stoke a flood of new supply? Base Resources managing director Tim Carstens reckons not. "There aren't any mines to restart," he says. "The supply shortfalls are coming out in the next 18 to 24 months, and even the best of the new mines are barely viable at current prices."
BlueJay, black swan?
What should investors make of a company like BlueJay Mining, then? The Greenland-focused outfit, formerly known as FinnAust, is also going great guns this year after announcing that its Pituffik mine will not only be up and running within a year, but probably sits on the highest-grade ilmenite deposit on earth. On its own, Pituffik's near-term production may not have a large impact on global supplies, but the discovery puts a big question mark over the industry's future. That's because a geological survey published by the Danish and Greenland governments in the last fortnight has suggested the region in which Pituffik is located could be home to 17bn tonnes of pure ilmenite. If those figures are true, Greenland could soon find itself at the top of world titanium feedstock reserves, and the strategic priority of miners.
IC VIEW:
Single-project risk is a theme among London's mineral sands stocks. With the exception of Rio Tinto - whose titanium dioxide division contributed just $86m to the group's $5bn earnings in 2016 - all are reliant on operations continuing without a hitch. Valuations can be tricky, too, as each project differs in its mineralisation, grade, mine plan and offtake agreements. Given this opacity, one method of equalising the discrepancies is to look at miners' revenue to cash costs multiple, which sits as a proxy for profitability. If Greenland's super high-grade reserves are to be believed, long-term investors in the sector would do well to focus on both this metric and grade, and not merely higher prices in 2017. A rising tide may well lift all boats, but this is a market where the waters can easily fall.
