Sand miners on the move but risks are high

A near doubling in the price of Iluka Resources (ASX: ILU) and a sharp upward move by Astron Corporation (ASX: ATR) has restored investor interest in titanium minerals and zircon, but before buying into one of Australia’s oldest mining industries it is worth looking at how tricky it can be.

What’s driven Iluka up from $4.50 at this time last year to $8.60 is a combination of improved demand for what it mines, the potential to add rare earths to its product range, and trouble in the African mineral sands industry.

Astron, a much smaller company, has outperformed Iluka with a 150% share price rise from $0.20 at the start of the year to $0.51 thanks to a corporate reorganisation which will see it quit a Chinese mineral processing business so it can focus on the Donald project in central Victoria.

Other ASX-listed companies with an interest in the titanium minerals and zircon business have been less conspicuous, with the exception of Mineral Commodities (ASX: MRC), which has dropped by 48% since the start of the year thanks to operational issues and management upheaval.

But, overriding everything in the business of titanium minerals and zircon is that while it seems to involve a simple mining process of sifting sand to extract the heavy and valuable minerals it is anything but simple, even if rivals (hard rock miners) call sand mining “gardening”.

Sand mining challenges

The challenge for the sand miners starts with the location of orebodies, generally close to the coast, and the mining process which earned the industry a bad name in the 1950s and 60s because of the damage done to coastal dunes.

Stradbroke Island off the coast of Queensland became an early environmental hot spot which tarnished the reputation of the miners, leaving a history which dogs every new mining proposal and explains why the industry swapped its original name of “beach mining” for “mineral sands mining” before settling on the mouthful of “titanium minerals and zircon”.

Challenges at the start of the mining process are bookended by the challenge of marketing titanium minerals, which are mainly used as pigment in paint, and zircon, which is mainly used as a glaze on ceramics, with major industrial consumers being the only customers and with no “terminal” market such as that enjoyed by copper, zinc and other metals.

The sales process means that a sands miner must line up buyers, and agree on prices, before plunging into a business which can be buffeted by extreme demand (and price) shifts.

Minerals sands market recovery

Like most other commodities, demand for titanium minerals and zircon has recovered strongly after last year’s Covid-caused slowdown. Macquarie Bank has upgraded its zircon price forecast for next year by 14% to US$1,643 a tonne (A$2,188/t) and lifted rutile prices (a primary titanium ore) by 4%.

Supply issues are also benefitting Australia-based sand miners with the Iluka-controlled Sierra Rutile (in the African country of Sierra Leone) on notice that it might be closed or sold later this year because of a poor operational performance, and an even bigger operation in South Africa abruptly closed last month.

Losing supply from Rio Tinto’s (ASX: RIO) mines and processing centre at Richards Bay north of Durban is a major setback for everyone involved, including South Africa itself because the reason for the shutdown is domestic violence, which has morphed into a form of terrorism that included the machine gun assassination of a mine manager.

Small cap miners set to benefit from price rises

If Richards Bay remains closed indefinitely, then the effect on prices for titanium minerals and zircon could be significant and, while Iluka with a market value of $3.6 billion is not a small cap, higher mineral prices could trigger a re-rating of small sand miners, such as Strandline Resources (ASX: STA).

Decades of work lie behind Strandline, which previously traded as Gunson Resources with the Coburn mineral sands project as the primary focus, along with a number of African assets.

High environmental hurdles delayed Coburn and frustrated the previous management team in an example of the challenge in developing a sand mining business close to the coast such as where Coburn is located just south of Exmouth Gulf in Western Australia.

With strong government support and funding in place, construction work is finally underway at Coburn with first ore scheduled for processing in the final quarter of next year.

With sales (offtake) contracts in place for all output, Coburn is expected to generate solid profits over its initial 22.5-year life with investor interest likely to grow as construction milestones are passed leading to an improvement in a lacklustre share price which has been stuck around $0.20 for much of the past 12 months, valuing the company at $212 million.

WA’s second new mineral sands developer Sheffield Resources (ASX: SFX) is a business which has struggled as hard as Strandline to get to the starting gate but only after forming a 50/50 joint venture with a Chinese partner to guarantee funding and offtake sales.

The primary asset in Sheffield is the half-owned Thunderbird mineral sands deposit near Derby in the far north of WA, a location which has presented a logistics challenge.

The deal signed earlier this year with China’s Yansteel has also led to the creation of a joint operating business called Kimberley Mineral Sands.

Trial mining has demonstrated the ease of access to the near-surface orebody with ongoing work on design and sourcing of equipment leading to an expected final investment decision later this year, a step which could restore interest in the stock which has fallen by $0.05 (13%) this year to $0.33, valuing the company at $112 million.

Larger focus on Australian and African projects

An early mover by an Australian company in the Chinese mineral sands business, Astron Corporation has recently announced plans to demerge its Chinese assets and focus on mining in Australia and Africa.

The primary local interest is the Donald project which Astron acquired in 2004 from Rio Tinto, which shifted its titanium and zircon business to Canada and South Africa.

With demand for mineral sands picking up, Iluka likely to quit Sierra Rutile later this year, and security issues potentially keeping Richards Bay offline for some time, Donald’s day might have arrived.

Some investors certainly see it that way with Astron shares charging higher (up 155% since the start of the year) though at $0.51 the company is still valued at a lowly $63 million.

Operator of the profitable Kwale titanium and zircon mine near the coast of Kenya in East Africa, Base Resources (ASX: BSE) is looking to expand its operations close to an existing processing plant near the port of Mombasa, and develop a new sands mine at Toliara on the island of Madagascar.

Unusual for a small mining stock, Base is a dividend payer while also being able to retain funds to help fund for the large-scale Toliara project.

Despite its solid operational record and dividends, the company has not been a sparkling stock market performer and while valued at $340 million its share price has been stuck around $0.28 since the start of the year, perhaps burdened by Australian investor unease with African-focused mining companies.

Image Resources (ASX: IMA) is a low-key WA-based sands miner which is currently working the small but high-grade Boonanarring mine close to Perth.

Despite its profitability (and a $0.02 per share dividend paid in April), Image has not been a stock market star, trading consistently around $0.19 which values the business at $186 million.

Perhaps one reason for the lack of interest is that the current mine is expected to be worked out in about 15 months with operations shifted to the Atlas orebody, one of 12 small potential developments on its tenements.

Sovereign Metals (ASX: SVM), potentially a world-class producer of high-value rutile, is preparing the Kasiya project in the southern African country of Malawi for development just as a global shortage of the heavy mineral (especially rutile) drives the price higher.

Work so far has established a resource of 644 million tonnes of material containing 1.01% rutile, with a richer core of 137m/t at 1.41% rutile, grades which match or a better than the Sierra Rutile project of Iluka Resources.

More rutile is likely to be discovered as exploration continues because drilling so far has only covered 43% of what Sovereign calls Kasiya’s “mineralised footprint”.

Well served by infrastructure, including a railway, power grid and sealed roads, the added appeal is that Malawi is mining friendly and keen to attract international investment.

The ongoing works program at Kasiya includes aggressive drilling with the aim to complete a scoping study later this year.

On the market, Sovereign has been an unrecognised star performer in the mineral sands sector, with its share price up by 75% from 36c to 63c since the start of the year, with the latest price valuing the company at $263 million.