Strong finish to CY19 with a stronger CY20 to come
Image Resources (IMA) produced 68.6kt of Heavy Mineral Concentrate (HMC) in the DecQ (66.3kt SepQ), rounding out a strong maiden year of production in CY19 of 270kt, which was in the middle of Company guidance of 260-280kt (upgraded for a second time in SepQ). Mining and processing tonnes were in line with the previous quarter with the Company processing 0.86mt at a Heavy Mineral grade of 8.3%. Encouragingly the Company finished the DecQ with a record month of HMC production of ~32kt in December, which bodes well for a strong start to CY20.
The Company has upgraded production guidance for CY20 and CY21 to 300330kt (previously 280-300kt) and has lifted sales guidance to match production at 300-330kt for both years. Assuming CY19 sales price of A$616/t of HMC for CY20/CY21 IMA will generate A$180-200m in revenue each year (CY20 prices should actually be >A$616/t due to increased zircon content).
Cash and stockpiles building, debt falling
IMA finished the quarter with A$49.9m in cash (A$35.8m SepQ) and A$56.5m in debt (A$68.4m SepQ) implying free cash flow of A$26m, improving its net debt position to A$6m. The strong cash flow was largely a result of the Company completing 62.5kt of sales in the DecQ along with receiving a further A$12.3m from a concentrate shipment completed late in the SepQ. The Company remains on track to be in a net cash position early in the MarQ, which opens the door to refinance/early repayment of its debt in CY20, which the Company has previously mentioned. IMA added ~10kt of HMC to its stockpiles in the DecQ finishing the quarter with ~57kt of stockpiles which the Company estimates is worth more than ~A$30m.
Model adjustments, Maintain Accumulate recommendation
We have adjusted our model for increased production and sales guidance for CY21, along with a small rise costs in CY20 due to strip ratio changes and one-off land purchases. We note that zircon prices (+80% revenue) have continued to weaken in recent months, this has been partially offset by an increase in titanium feedstock products prices (rutile and ilmenite). This has resulted in us reducing our forecast received price for zircon in CY20.
As a result of these model change Hartleys now forecasts production and sales of 315kt of HMC, which should generate net cash flow of ~A$65m. IMA has 3 years of mine life left at Boonanarring before relocating to the Atlas deposit for another 3 years. We believe that the Company will require exploration success to regain positive share price momentum in the short term. Potential for mine life extensions have recently been demonstrated through encouraging exploration results from the Northern Extension Area (NEA) along with the newly identified mineralised shoreline named 50mRL Strandline. In the short term mine life extensions are most likely to come from Boonanarring South.
Our valuation remains the same at 28cps and our 12-month price target has increased to 32cps, previously 31cps. In our valuation we assume a production profile in line with the updated guidance from the Company plus some exploration success at Boonanarring. We maintain our Accumulate recommendation.
Hartleys have an "Accumulate" call on IMA and a $0.26 valuation and price target. IMA closed at $0.15 today.
Operations tracking ahead of guidance
Image Resources (IMA) started CY20 strongly, producing 83.9Kt of HMC in the MarQ compared to 68.6Kt in the DecQ, and is tracking above its guidance for CY20 of 300-330Kt of HMC. The increased production was largely due to the expected lift in the HM grade from 8.3% to 9.7% HM, with processed ore increasing from 863Kt to 985Kt. The Company has maintained its CY20 guidance for production (300-330Kt HMC), AISC costs (A$340-370/t of HMC) and perhaps most importantly sales volume (300-330Kt) despite tracking below this rate to date.
Shipments key to unlocking IMA’s value
As previously flagged, IMA only completed two of its three planned shipments in the MarQ. This was due initially COVID-19 impacting its offtake partners operations in China and then shipping congestions in the Bunbury port, pushing a shipment from late March into early April. This resulted in IMA only selling 44.8Kt of HMC, with a shipment of 24.3Kt HMC taking place in early April. The Company has increased its HMC stockpile to 96.5Kt of HMC from 56.9Kt, which is worth ~A$65m if we assume average realised price for the MarQ of A$659/t. We note that IMA has previously mentioned the potential sale of its HMC product outside of China, which in our view significantly reduce off taker risk however this is yet to materialise. We maintain our view that selling its HMC product to its offtake partners remains one of the largest risks associated with IMA.
Zircon market uncertain
We note that ~80% of IMA’s revenue is from its zircon within its HMC product. The outlook for the zircon market would appear to be weakening given the global uncertainties associated with COVID-19, this resulted in a softer zircon price during the MarQ. Despite the weaker zircon price, the Company reported a realised HMC price of A$659/t compared to A$661/t in the DecQ. The falling zircon price was supported by rising TiO2 feedstock prices and a weaker AUD/USD (although this negatively impacted the debt position as its denominated in USD). We would expect IMA’s HMC price to reduce in the coming quarters given current global uncertainties. Mine shutdowns have the potential to aid the weak zircon market, including Richard Bay Minerals owned by Rio Tinto which has been shut down for the 2nd time in 12 months.
We maintained our Accumulate recommendation
Whilst operationally IMA has exceeded expectations since commencing production in December 2018, the zircon market has weakened in that same time. This has seen shipments to its offtake partners delayed and a build-up of IMA’s zircon rich HMC stockpile to 96.5Kt at the end of the MarQ. The Company finished the MarQ with cash of A$41.2m and debt of A$53.4m for net debt of A$12.2m (up from A$6.6m DecQ). This implies a cash outflow of A$5.6m. We estimate that the delayed shipment reduced cashflow by ~A$16m. Our valuation is reduced to 26cps from 28cps and our 12-month price target has decreased to 26cps, previously 32cps. Our valuation assumes production and sales in-line with Company guidance along with some exploration success at Boonanarring, extending its mine life by 2 years to 5 years at Boonanarring. We maintain our Accumulate recommendation.
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[I don't hold IMA shares.]
Update from Hartleys: "IMAGE RESOURCES NL (IMA) Ahead of guidance, again"
Brief Business Description: High grade mineral sands producer, with operations 80km north of Perth. The Boonanarring zircon dominant project commenced production in December 2018 and has successfully ramped up to nameplate capacity.
Hartleys Brief Investment Conclusion: The Company is currently generating solid cash flow from its operations which have been assisted by higher than expected grades.
Michael Scantlebury, Associate Analyst, Ph: +61 8 9268 2837, E: email@example.com
Trent Barnett, Head of Research, Ph: +61 8 9268 3052, E: firstname.lastname@example.org
Analyst has a beneficial interest in IMA shares.
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Disclosure: I don't hold IMA shares. I hold ILU shares, a much bigger and more established player in the same space (mineral sands). IMA do look interesting however.