Small Caps | Aug 01 2016
Confidence is growing in Mineral Deposits as the production improvements at the company's two main operations ramp up
-Mineral Deposits cash flow increasing amid supportive market conditions
-Deep discount of MDL stock appears excessive to Ord Minnett
-Company's focus on costs, margins and consistent production
By Eva Brocklehurst
Brokers are gaining confidence in minerals sands producer Mineral Deposits ((MDL)) as its key joint ventures have kicked off significant production improvements in the June quarter.
Ord Minnett raises its recommendation to Speculative Buy from Hold and its target to 70c from 29c, based on the observation consistency is improving at the company's operations and cash flow is increasing. Moreover, supportive market conditions and joint venture agreements are reducing the funding risk.
The broker expects investor confidence to improve if the company can deliver two consecutive quarters of better performing operations. The financial risks are high but the deep discount reflected in the stock price relative to valuation appears excessive, in Ord Minnett's view, given momentum is shifting in a positive way in terms of both pricing and performance.
The company's contributions to TiZir (50% owned) interest payments are underwritten by joint venture partner, Eramet, and the broker believes the company can manage to balance the funding risk associated with the high debt load.
TiZir has achieved its first half of positive earnings since completion of construction at Grande Cote, Senegal, (90% owned by TiZir). Major maintenance was undertaken in February and production is now expected to recover to levels of a year ago.
Ord Minnett expects Mineral Deposits' earnings to rise to $22m in the second half from $1.8m in the first half, on the back of higher prices and as Grande Cote and the Tyssedal (Norway) upgrading facility ramp up.
Tyssedal Titanium And Iron, in which Mineral Deposits has a 50% holding, produced its first chloride-route titanium slag and high-purity iron ore in January after a four-month shutdown. Production in the June quarter of titanium slag was close to previous levels.
Morgans also expects a lift to nameplate output at Grande Cote over 2016, generating positive earnings in the December half, and in the full year. Heavy media concentrate (HMC) was at 75% of previous levels for the half and the broker models have increased efficiencies in the December half.
The company's focus is, appropriately in the broker's view, on costs and margins, which includes maintaining throughput and plant availability for consistent production. Morgans, too, notes funding from Eramet to contribute to TiZir obligations substantially reduces the risks during a weak commodity market and as as plant optimisation continues.
The broker anticipates increased production in the December half and stronger cash flow. Pigment prices have firmed and supply constraints are expected to lead to better ilmenite and rutile prices. Morgans retains an Add rating and 96c target.
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