Spotting recovery potential

Day trader Michael Taylor has spotted a former disappointment where luck could be turning

November 10, 2021

We have had COP26 these past two weeks. The UN Climate Change Conference where hundreds of global leaders and other people more important than us fly in on their private jets to ‘come together’ and lecture us all about climate change. I understand why many politicians may need to fly private for their own safety, but it does stink of a bit of “Let them eat cake” as we’re told to make smarter choices regarding our cars, eating and energy habits.

That said, there is a definite theme towards protecting the planet. Whether you believe in climate change or not it doesn’t matter – that’s where the money flows are starting to go. My article a few weeks back ‘A trading play on long-term energy trends’ (29 September 2021) on Yellow Cake (YCA) has already seen a significant strengthening in the thesis. Uranium has continued to rise, Rolls-Royce (RR.) is developing mini nuclear reactors, and China is planning at least 150 new nuclear reactors.

The London rental market is also going well despite many people saying Londoners would leave never to return. If they did, they’ve been replaced, as there is plenty of activity for companies such as Foxtons (FOXT) and Savills (SVS). London is getting back to normal and with hospitality companies performing strongly it suggests there is still plenty of pent-up demand – especially coming into the strong Christmas quarter.

Some things will never change. People will always like to go out and have dinner, and drink with their friends and work colleagues. Changing habits for the environment will take some time. That said, if you can spot the trend and find a good way to play it then the returns can be fabulous. For example, long-term investors in Agronomics (ANIC) will be feeling pleased with themselves. The company listed at 5p per share in 2019 and is now printing over 32p. I hold exposure to this via warrants (no equity downside) I received from the equity placing (now sold) and so I’m excited to watch this develop.

It's always interesting to learn about new companies that are doing new things, often with new technologies, as it’s like a puzzle to try and complete. Only the puzzle is constantly changing and adapting.

One company that I’ve taken a starter position in and intend to follow developments at is Iofina (IOF).

Iofina produces iodine and is one of the lowest-cost producers of iodine globally. Historically, this company has been a dog and has created little value for shareholders. To put this into perspective, almost the entire shareholder register is showing a loss.

The previous management team (so I’m told by current chief executive) decided to expand in a way that was not as strategic as the current board are attempting. This led to high debt and, when the iodine price fell, lots of cash was sucked into the interest payments paying off the debt rather than being invested into the business.

But Iofina’s fortunes appear to be turning. The company refinanced its debt in September by paying $5m down from its existing cash reserves and managed to achieve better interest rates. It is now paying no more than 4 per cent on smaller debt, rather than the 7 per cent it was previously paying.

Alongside this, Iofina is also growing its production of iodine. For those who don’t know what iodine is (I didn’t until I researched the company), it’s made from brine water which is a waste product from the oil & gas industry. It’s used in lots of industries such as pharmaceuticals, disinfectants, as well as for X-rays and LCD displays. The company is now looking to build plants near to these sources of brine water to limit supply disruption. In this case, that means Iofina is reliant on a strong oil & gas industry in Oklahama in order to maintain its supply to make iodine.

But this is all helped by the fact that the iodine price is now rising. Last year in June it was around $33, and spot prices are now pushing $40 with management believing higher prices are possible.

What I like about Iofina is that it has a combination of fundamental and technical factors aligning.

Chart 1 shows the company’s meteoric share price rise in 2013 and since then it’s been a one-way street to the downside.

Chart 2 shows the company’s share price performance since the autumn of 2019.

I’ve marked a line of support at 11p because we can see the stock tested this level thrice before rallying. I see this as significant support and if the price falls through this level I wouldn’t want to be long. I have a starter position and intend to add to my position only if the stock goes through the resistance built around 16p.

Looking at the company’s income statement for the half-year period, we can see that the $1.1 million US government loan has been forgiven and recognised as income. I’d strip this out and then assume no half-on-half growth in production (conservative) and also no increase in the iodine price (iodine prices have already risen). This would give the company a net income for the full year of $5 million or around £3.65 million.

The company’s market cap is currently just above £27 million giving Iofina a PE ratio of just above 7. Granted, this could be the market factoring in the risk of supply, but I’m happy to back the chart now and see what happens.