Two Australian sand racers are picking up speed

China’s economy reboot has come just in time for two Australian mining companies engaged in a low profile, high-stakes race in a sand patch.

The sand patch is Western Australia, but in the case of Strandline Resources (ASX: STA) and Sheffield Resources (ASX: SFX) the sand is a mix of high value zircon and titanium-rich ilmenite and rutile.

Strandline is in the final stages of building its Coburn mineral sands project north of Geraldton on the mid-west coast of WA.

Sheffield’s half-owned Thunderbird project is near Derby in the Kimberley region of WA’s north. It has just passed the 50% construction mark.

Long-life suppliers

Both projects will become world-class, long-life, suppliers of essential industrial minerals and both will be selling into the same global market with consumption of zircon dominated by its use as a glaze on ceramics. Titanium dioxide is primarily used as pigment in paint.

A slowdown in China’s construction industry, caused in part by strict COVID lockdown rules, had been rubbing some of the confidence off the mineral sands market but there are signs of a rebound as government stimulus flows into the Chinese economy.

Price rebound

Both Strandline and Sheffield are attracting increased investor attention as they put the finishing touches to their projects, which have strong customer support thanks to Australia’s reputation as a reliable supplier of raw materials unlike rival mineral sands projects in trouble spots such as Africa.

Since the start of the year both Strandline and Sheffield have seen their shares prices rise by more than 50% comfortably outstripping the broader mining market, which is up 6%.

Both stocks have also continued to rise since my last look at the mineral sands sector in early March, a time when the titanium dioxide and zircon markets got a boost from the war In Ukraine.

Sheffield is up from $0.43 on 3 March to a high of $0.57 on Wednesday. Strandline is up from $0.36 to $0.47.

Those moves reflect a common reaction from investors as new mining projects are “de-risked” as construction moves closer to completion and cash gets closer to flowing in rather than out.

Strandline forecast

Strandline, which is more advanced than Sheffield and within sight of first cash flow from the Coburn project, is expected to see its share price continue rising. Shaw and Partners, a stockbroking firm, is tipping a 12-month target price of $0.80.

“The Coburn mineral sands project is currently being commissioned and Strandline is on the cusp of its first cash flow,” Shaw said in a note after the release of the company’s September quarter report.

“The project is now 95% complete and remains on time and on budget.”

“Strandline expects to make its first shipment of concentrate this (December) quarter with each shipment generating around $10 million in revenue at spot prices.”

Sheffield ‘deeply undervalued’

Sheffield is more thinly researched but a company-sponsored report from Bridge Street Capital Partners describes the stocks as “deeply undervalued” and trading at a 70% discount to net present value “despite the fact that it is now positioned to emerge as one of the preeminent suppliers of zircon to global markets”.

The Bridge Street report said Thunderbird, which is half-owned by China’s Yansteel, would begin delivering into what will continue to be an under-supplied market for several years.

“Zircon has been the victim of a lack of exploration success and lack of capital investment by the major suppliers over recent decades. New supply has been driven by the juniors such as Image Resources (ASX: IMA), Base Resources (ASX: BSE) and (London-listed) Kenmare Resources.

Construction progressing

Last week, Sheffield reported that site work was progressing well with steel installation underway and long lead items delivered to site.

“First delivery of mineral sands products to customers remains on target for the first quarter of 2024,” Sheffield said.

Meanwhile, Strandline, in its latest project construction update, said first ore had entered the wet concentrator with mining underway at multiple pits with the focus now “on building stockpiles in preparation for the first shipment”.

Volatile market

Both projects will be delivering into a market shaken over the last six months by uncertainties associated with China’s economic slowdown and pressure in other countries from rising US interest rates.

Base, which operates the Kwale mineral sands mine in Kenya, and Iluka (ASX: ILU) which is Australia’s biggest sands miner, reported demand concerns in their September quarter reports.

“A subdued economic environment in Asia and Europe began to effect conditions for downstream products in most market segments through the quarter, however demand for feedstock held up well,” Base said.

“This allowed further price gains for rutile and stable prices for ilmenite and zircon to be maintained.”

Iluka noted a similar softening of the market for Chinese ceramics and slowing demand from European manufacturers hit by high energy prices.

China’s new stimulus revives sector

Investment banks, in reports written at the end of October, before China last week signalled it would launch a fresh round of property sector stimulus, noted the weaker market but were largely unconcerned about the longer outlook given the tight fundamentals for mineral sands.

Citi said the September quarter was likely to have been the price peak for zircon and titanium minerals in the current cycle.

Goldman Sachs, however, told clients that high grade titanium dioxide and zircon supply remain tight and while prices were flat, they would continue to rise into next year.

Since that comment from Goldman Sachs was published on 28 October the mining sector has enjoyed an industry-wide re-rating thanks to the prospect of more buoyant commodity demand from China which buys half the world’s minerals and metals.

Iluka, as a proxy for the mineral sands industry, has jumped by 20% from $8.45 when Goldman Sachs published its report to $10.39, potentially on its way to the bank’s target price of $12.50.

Sheffield, over the same time, has risen by 12% and Strandline is up by 20%.

Once a family of commodities dominated by Australia, mineral sands have faded from the radar screens of most investors for a variety of reasons, not least a poor environmental reputation caused by mining in fragile coastal setting – the reason the raw material was once called “beach sands”.

Those days of less than careful mining practices have passed.

Sheffield and Strandline a pair of emerging world-class producers with rich mineral sands deposits are expected to succeed in their own right, or become a tempting target for one of the mineral sands majors, a group that includes Iluka and Rio Tinto.