China building boom paints rosy mineral sands picture

7th June 2019
Resources Rising Stars

After the building comes the painting, an odd observation but one that could be profitable for investors prepared to look beyond trade-war headlines and see how the same building boom in China that is helping lift the iron ore price should soon lift demand for titanium dioxide (reports TimTreadgold in The Australian).

Connecting the dots that link the China v US trade war to form a picture that shows increased demand for paint — and other “end of cycle” commodities such as copper — is not hard because it has happened repeatedly in the past.

In the case of titanium dioxide, the basis of paint pigment, the business starts with mining mineral sands such as ilmenite and rutile, with the latter stages of a building boom always driving increased demand.

The share price of Australia’s leading pure-play mineral sands miner, Iluka Resources, is starting to show the first signs of a “paint-driven” recovery, rising 13.8 per cent over the past three weeks, from $8.25 to $9.77.

Interest is also growing in companies with exploration assets, including Strandline Resources, which last month attracted $5.5 million in fresh capital to fund the next phase of design work for its Coburn project in Western Australia and Fungoni project in Tanzania.

Iron ore is the starting point in this the business cycle unleashed by the trade war and China’s response to higher tariffs on the manufactured goods it exports to the US.

In order to maintain strong rates of growth, the Chinese government has embarked on a process of domestic economic stimulation, which has sparked a boom in infrastructure development as well as residential and commercial building.

Steel production in China, which was expected to fall as the US ratcheted up tariffs, has been growing strongly with total steel output in China last month passing one billion tonnes, on an annualised basis, for the first time.

China’s internal economic stimulus has coincided with reduced iron ore exports from Brazil after two mine-dam disasters and fear of more to come, with the result being a surge in the iron ore price to a fresh five-year high of $US108 a tonne.

Events in Brazil are largely seen as the cause of the iron ore price surge, but it’s actually the combination of a Brazilian supply squeeze and Chinese demand combined that is driving the price.

China’s re-stimulated economy is currently in a hectic building phase, but as that progresses commodity demand broadens from the basics such as steel and cement into the finishing material with copper needed for plumbing, titanium dioxide for paint, and zircon for the ceramics in bathrooms, kitchens and as ornamental tiles.

A handful of investment banks and stockbroking firms have woken to what might be called a finishing touches investment theme, which calls for increased supplies of paint, ceramics and copper piping.

Citi, for example, has upgraded its investment assessment of Iluka from neutral to buy, tipping a 12-month share price target of $11.

The starting point for Citi’s look at titanium dioxide was to note that a period of “de-stocking” by pigment producers, which cut prices last year as trade war concerns worsened, has now ended with demand starting to exceed supply.

Like all mineral sands producers, Iluka is seen as a “late-cycle” play, performing at its best when a surge in building reaches the finishing stages.

Aiding the healthy outlook for titanium dioxide is the prospect of supply disruptions, especially in China where tighter environmental regulations saw 400,000 tonnes of capacity (about 5 per cent of global output) mothballed in the three years to 2017.

Another 300,000 tonnes of Chinese capacity is at risk of closure on environmental grounds, albeit at a slower pace, Citi says.

Strandline Resources (STA) 13c

Making the switch from explorer to producer of ilmenite and zircon has been a slow process for Strandline, which once traded as Gunson Resources.

The name change in late 2014 didn’t alter the primary focus of the company, which is the Coburn mineral sands project on the mid-west coast of Western Australia, plus a number of assets across the Indian Ocean in Tanzania.

Potentially, Strandline could see a series of mines developed over the next few years with the small Fungoni project in Tanzania likely to be the first cab off the rank, generating sufficient revenue to pay for bigger projects close to the coast of the East African country.

A relatively small mine, Fungoni is expected to cost $US32m ($46m) to develop and, while likely to only operate for a few years, could generate life-of-mine earnings of $US115m, which is likely to be used to help fund other mines in Tanzania and Coburn in WA.

Coburn will cost an estimated $173m, eventually yielding 49,500 tonnes of zircon a year, plus 109,000 tonnes of ilmenite and 23,500 tonnes of a specialty product called HiTi 90 (which is 90 per cent titanium dioxide).

Not widely researched, Strandline’s story was picked up two weeks ago by analysts at Morgans, a stockbroking firm, which said 2019 would be a year of news and development for the emerging miner.

Fungoni, Morgans said, would be a low-risk starter project with a second Tanzanian project, Tajiri, a step up, while Coburn in WA was potentially a world class mine.

Morgans reckons Strandline, which is currently trading at 12c, could rise as high as 38c over the next 12 months.

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