30-Apr-2020: Hartleys: IMAGE RESOURCES NL (IMA): Operations tracking ahead of guidance
Hartleys have an "Accumulate" call on IMA and a $0.26 valuation and price target. IMA closed at $0.15 today.
Excerpts:
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.]
