Aim-traded miners of niche minerals in far-flung parts of the world rarely attract runaway valuations. But the major markdown in shares in Sierra Rutile (SRX) is unwarranted for two important reasons. Firstly, the stock has still not recovered after the Ebola crisis that gripped west Africa in 2014, despite the fact that the outbreak had little impact on the company's operations. Secondly, the price of rutile - the crystal-shaped white pigment titanium dioxide mineral mined by the company - looks set to stage a recovery following a collapse from 2013 highs. These factors, together with a major ramp-up in production, mean Sierra Rutile could soon see a return to profitability, putting the shares on an undeservedly low rating versus forecast earnings.
- Stabilisation of rutile prices
- Production ramp-up
- Low valuation
- Unwarranted Ebola discount
- Frontier market
- No dividend
Ebola wreaked havoc in Sierra Rutile's home country of Sierra Leone, killing almost 4,000 people. Sierra Rutile did not see any cases of Ebola at its plants, but was affected in a small way by supply chain issues and inflation caused by the outbreak. The company and its shareholders supported non-governmental organisations (NGOs) and the government to organise treatment and screening programmes and help arrest the spread of the disease. The World Health Organisation has now declared the outbreak over.
As the outbreak unfolded in 2014, Sierra Rutile's shares lost 60 per cent of their value and have since failed to recover. The other reason the market sold out in that period was the collapse in rutile prices. Between 2011 and 2013, exceptional price increases caused by a supply deficit and surging demand in Asia led to panic buying and a build-up in inventory levels. But after reaching highs of $2,600 (£1,840) per metric ton, the rutile price has fallen sharply as the market remains flooded with ilmenite, another feedstock to the pigment market. This has sent rutile prices down to $851 a tonne in 2015, and the price is expected to average $777 this year, according to Sierra's broker, Numis.
Recently, the major pigment producers have announced quarter-on-quarter price increases, providing encouragement that the market has finally started to stabilise and could start recovering from next year. Sierra Rutile is very well geared to a recovery in prices, for several reasons. Most importantly, the grade of the miner's rutile is around double the industry average, which means it is a rare candidate for high-grade feedstocks to the premium titanium market, and explains why Sierra's share price outperformed its peers during the 2011-13 bull market.
The company is also ramping up production, which should bring costs down. Last month it completed construction of the Gangama dry mine at its 8.3m tonne rutile deposit in the south-west of Sierra Leone, putting it on course for a forecast increase in production from 138,000 tonnes this year to 197,000 tonnes in 2017, which should help lower all-in operating cash costs to $557 a tonne and more than double cash margins.
SIERRA RUTILE (SRX) | ||||
|---|---|---|---|---|
| ORD PRICE: | 22p | MARKET VALUE: | £133m | |
| TOUCH: | 22-22.5p | 12-MONTH HIGH: | 29p | LOW: 15p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 8 | |
| NET ASSET VALUE: | 29¢ | NET DEBT: | 26% | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2013 | 123 | 10.5 | 1.9 | nil |
| 2014 | 118 | -8.9 | -1.8 | nil |
| 2015 | 106 | -9.5 | -2.5 | nil |
| 2016* | 108 | -12.0 | -3.0 | nil |
| 2017* | 182 | 31.0 | 4.0 | nil |
| % change | +69 | - | - | - |
Normal market size: 5,000 Market makers: 7 Beta: 0.72 £1=$1.43 *Numis forecasts | ||||
