Ambrian Partners has begun coverage of iodine and natural gas firm Iofina (LON:IOF) with a ‘buy’ rating and a target price of 40 pence each for its shares.

Shares in Iofina were up 2.4 per cent at 21.25 pence each by 12.52pm today.

In Ambrian’s first note on the company since it was appointed joint broker in early June, it said that the vertically-integrated speciality chemical manufacturer not only provides exposure to the various expanding iodine derivative products markets, but Iofina also offers investors exposure to the growth potential of its proprietary Wellhead Extract Technology (WET).

The WET process, which facilitates efficient and low-cost extraction of iodine from water associated with natural gas and oil production, can be implemented on most onshore oil and gas wells that produce iodine-rich, briny groundwater.

Ambrian said that the WET process business model is scalable with the only limiting factor being access to oil and gas wells. Ongoing efforts that are being made to sign third-party agreements should mitigate this, added the broker.

Meanwhile, a key factor in the broker’s investment case is Iofina’s favourable fundamentals. “As a consequence of tightening supply on a global basis, in combination with steadily increasing multi-industry demand [predominantly for liquid crystal displays and X-ray applications], iodine prices have followed a long-term rising trend, which in recent months has accelerated sharply,” said Ambrian, in its research note. “In Q1 2011 spot iodine prices were being quoted at US$32 to US$34 per kilogram; this rose dramatically in Q2 2011 to US$55 to US$60 per kilogram as a result of constrained supply from Japan (the world’s second-largest producer) following the earthquale, and today they are trading at record highs of around US$100 per kilogram.”

Ambrian said its 40 pence per share valuation was based on a sum-of-the-parts discounted cash flow calculation for current and near-term iodine production, in addition to an estimate of value for Iofina’s integrated chemicals business.

The broker expects revenues to increase from £8.9 million last year to £20.3 million in 2011, with Iofina’s pre-tax loss of £3.3 million for 2010 to turn to a profit of £2.1 million.

Iofina, the iodine and natural gas explorer and producer, revealed a good first half performance, with revenues for the period ahead of last time. It also declared it has been cash flow positive since April and struck an upbeat note on outlook, saying it expects iodine prices to remain robust. 

This is the company’s most significant brine stream secured in so far in California with respect to volume, concentration of iodine and quality of brine water.

Shares in the company rallied 16% on the news.

Warren currently produces 30,000 bpd (barrels per day) of iodine rich brine water from its operations at the unit in Wilmington, CA. The brine has iodine concentrations exceeding 90 ppm (parts per million).

Iodine recovery with the use of Iofina’s WET technology is expected to commence within the next 45 days.
“This agreement represents the achievement of a key milestone for Iofina… The brine stream at Wilmington contains high concentrations of iodine and, while the volume of brine being produced there is already significant, that volume is expected to increase in the months ahead,“ said chief executive and president of Iofina Lance Baller.

While focusing on the development of its Atlantis property, Iofina is also working on the expansion of its third party brine operations, being in regular contact with operators to receive brine samples and perform testing to calculate production costs and potential yields.

The company has so far identified several hundred operations that have tested over 50 ppm of iodine, reaching up to 2,000 ppm. Iofina said that many of these brine streams have significantly higher volume than anticipated, while many are found in geological formations that were not previously known to contain high concentrations of iodine.

“We maintain tightly focused on securing additional third party brine stream deals and look forward to providing further updates for investors when appropriate,” added Baller.
 
Regarding the third party iodine extraction and collection agreement with The Termo Company announced last month, the company said field technology staffs are currently being trained and the extraction will commence the week of 19 April 2010.

Iofina’s interim losses amounted to £2.05 million compared to £317,496 a year ago, while losses per share increased to 2.38 pence from 0.43 pence for H1 2008.

The company reported “substantial progress” made over the past six months, during which period Iofina raised £5 million through equity placing to fund the acquisition of the entire issued capital of H&S Chemical for US$8.5 million in August. The business generated sales of £935,000 and a profit of £157,000 during August, which was its first month of operations with Iofina.

Iofina also acquired some 230,000 net acres at the Atlantis project to raise the total leased acreage in the prospect to 290,000, about ten times the initial 28,000 acres held at the initial public offering in May 2008. The acquisition included 17 shut-in wells, moving the company into initial gas production during H1 with continuous iodine production commencing at the end of July.

An additional 30,000 acres at Atlantis was acquired at no cost with a lease term of 12 months with the possibility to secure ownership if drilling commences before the expiry of the lease.

While acknowledging it was behind the original schedule on the Atlantis project, Iofina said it had taken the necessary steps to resolve the issues before the onset of the next drilling programme, expecting the development of the prospect to be more consistent and the exit rate production for the year end 2009 to be “closely on track.”

“...I believe the company is now on a much stronger overall footing with respect to delivering and executing its strategy and creating increased shareholder value,” said non-executive chairman Chris Fay.

The global iodine market is currently controlled by South American and Japanese companies, leaving the US dependent on imports to meet growing demand from domestic pharmaceutical and industrial consumers.

H&S Chemical manufacturer’s speciality chemicals including, 3-Iodo-2-propynl butyl carbamate (IPBC) which is used in cosmetics, paints and coatings and Methyl Iodide (CH3I) which is a newly approved soil fumigant for high value crops such as strawberries and tomatoes. 

Iofina said the acquisition would provide “a strong strategic platform” to produce and sell iodine derivatives through its own and third party iodine production.

On the operational front, Iofina reported that it had reached continuous commercial production of iodine, and completed its first self contained POD/Cluster WET® unit – its own unique iodine extraction technology.  The iodine and natural gas producer also stated that it was amending its planned drilling programmes to target areas with higher iodine levels, which in combination with possible third party contracts it is discussing, would lift iodine production volumes and cut unit costs from “2010 and beyond”.

“The iodine derivatives market is an area in which our management team has significant expertise and strength. The acquisition of H&S Chemical will provide Iofina with a strategic position in the US where the large domestic blue chip end users of iodine derivatives currently rely heavily on imports from Chile and Japan,” said Chris Fay, Non-Executive Chairman of Iofina. “Furthermore, with the recent acquisition of significant new acreage our iodine production programme is now focused on areas where iodine is present in higher levels which we believe will accelerate our scale-up of iodine production and our goal of becoming one of the few major iodine suppliers globally.”

Iofina raised £15.1 million at 55 pence per share in May, and interim results today confirmed that as of the end of June, the company still has cash resources of £14.2 million. Iofina’s primary task has been to prepare for drilling, which is expected to commence shortly with the onsite arrival of the first drill rig, owned and operated by the company.  Iofina also reiterated its intent to sub-contract its spare rig capacity to nearby gas field developments.  

Beyond gearing up for drilling at its flagship project, the Atlantis Gas-Iodine Prospect in Montana, USA, the company also acquired an additional 28,888 net acres within the Atlantis Prospect, and has a further 13,842 acres pending.  Iofina additionally acquired 30,000 net acres in a new gas and iodine prospect, also in Montana, named Triton.  Iofina intends to joint-venture this project, and confirmed this morning to Proactiveinvestors that it was making good progress in finding a suitable partner.
Since listing, a competent persons report has estimated that the initial 28,000 acres in the Atlantis Prospect to have a gas resource of 155 billion cubic feet (bcf) and 100m Kg of Iodine.

“Iofina is in a strong financial position to begin exploiting both its resource base and to vertically integrate into new associated businesses. We are particularly excited about the imminent commencement of large scale gas and iodine production in the Atlantis Prospect, which will move our business into cash generation.” Stated Iofina’s CEO, David Schneider.