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Iofina plc: THE INVESTMENT CASE

Iofina poised to expand once iodine prices rally

A new debt deal and the prospect of improving markets bode well for the AIM group's continuing recovery.
One of Iofina's plants in Oklahoma where it produces iodine from brine water taken as by product from oil fields
INVESTMENT OVERVIEW: IOF The Big Picture
Iofina's IOsorb plants convert oil field waste into iodine.

Wary investors could be forgiven for avoiding a small cap company wholly dependent upon the oil industry, couldn’t they?

The dramatic decline in crude prices has seen swathes of operations rendered uneconomic; seen new investment come to a standstill; and the recently booming areas of North America have arguably seen the worst of it.

Notwithstanding the recent agreement by Opec and non-Opec oil producers, it would be easy to assume now is a terrible time to be a service provider.

Yet, Aim-quoted Iofina plc (LON:IOF) has almost doubled its share price since April, despite the shares taking a knock following December’s trading update, which revealed a bit of a slow-down in production.

What gives?

Well, Iofina is not really an oil services business at all.

It is a commodity producer in its own right

The company takes waste water and brine, a largely unwanted by-product of most onshore oil fields, as a feed stock and through its proprietary IOsorb processing plants the company makes iodine - a commodity used in animal feeds, chemical manufacturing, chemistry and in medicine.

Whilst it’s true that Iofina is dependent on oil producers (specifically those in Oklahoma where its plants are based) there are good reasons why this is not exactly a creaking co-dependent relationship.

Well not about to run dry

Firstly, and right now most importantly, the supply of waste water is not running out anytime soon, though it is subject to occasional fluctuations.

In December, Iofina said that recently suppliers have been diverting water from the company to their own fracking operations.

That contributed to an easing off in the production of crystalline iodine in the final weeks of the year, but the company is confident production will return to normal levels soon.

Put simply, Iofina five plants in Oklahoma take waste water from just one quarter of the producing oil fields that are still in operation.Figuratively and literally, the well is not about to run dry.

Speaking of the oil producers, Becker admitted: “We are dependent upon them; they represent the largest single industry in the state of Oklahoma, and they’re not going to go away. We only take a fraction of the water that they’re producing, so we still have plenty of brine being supplied to our plants both now and moving forward.”

Cutting its coat according to the cloth available

Aside from crude prices, Iofina has had it is own problems - not least a five-year long decline in the price of iodine.

Iodine prices have slumped from more than US$90 a kilogram in 2011 to around US$18.5 a kilogram.

The company has cut around 35% off its cost base, and has gained some additional leeway though a restructuring of its finances.

In September, Iofina completed a US$20mln debt restructuring, which removes uncertainty over its balance sheet and opens up a fresh US$10mln facility.

Funds from the new credit line are earmarked for investments into future expansion plans.

Recovery on horizon

The firm has highlighted that the company’s short-to-medium term outlook sees iodine prices beginning to recover. Higher cost, mining based production should start coming offline soon.

“Right now iodine prices are still fairly low,” Becker said. “Potentially we see some other issues going on in Chile that may limit supply. So we expect to see iodine prices going up rather than going down.

“Once we see that happening we’ll be ready to do some expansion plans.”

This, really, is where the crux of the investment proposition is for Iofina.

As iodine prices recover and rally, Becker expects Iofina to be among the first to respond to new growth opportunities. Because many competing producers are miners their operations are more expensive to run and any new operations have a high capital cost of entry.

Becker says Iofina can build new plants for around US$2.5mln to US$3mln, and such a plant could deliver between 150 and 225 tonnes of additional capacity - which would be a 25-40% increase to Iofina’s existing operations.

Each plant could be built in just four to six months from breaking ground, Becker added.

Without revealing a formal roll-out plan or timetable, Becker explained that, iodine prices allowing, the company would likely seek to establish at least one new plant as part of its next growth phase.

“There are potential sites that we’ve already lined up with operators. We’re just looking for the economic triggers to move on that. And the debt facility allows us to do it.

“What we won’t do is build three or four plants all at the same time.

“We would likely build one plant at a time, increasing capacity by about 150 to 200 metric tons at a time.

“When exactly it happens is going to depend on the economic conditions in the iodine market.”

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