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Iofina plc: THE INVESTMENT CASE

Better times ahead for Iofina as iodine prices recover

A cash flow model - assuming one new IOsorb plant is added each year between 2019 and 2021 - gives a price target of 35p/share
oil well
INVESTMENT OVERVIEW: IOF The Big Picture
Iodine extraction from brine that comes from oil wells

Iofina plc (LON:IOF) is seeing light at the end of the tunnel after one of the worst slumps in the iodine sector for fifty years, says broker finncap.

The iodine extraction group has had to cope with a price that fell below US$20/kg in the first half of 2017, but has improved since to around 25/kg currently.

WATCH: Iofina maintains production despite tough winter and fewer plants

Finncap expects the recovery to continue given steady demand growth and competitor capacity expansion problems in Chile with the result prices might reach US$30/kg in 2020.

The broker adds that management has performed an excellent job in the face of the 'brutal' industry downturn by cutting costs, improving efficiencies and honing its iodine extraction technology.

Now that market conditions are picking up, Iofina is one of the lowest cost producers globally and with better prices can generate strong profit and free cash flow going forward.

Operational improvement

Some of Iofina’s installed IOsorb iodine plants struggled historically with erratic brine volumes and low iodine concentrations.

To remedy this, management has sought to improve water access and relocate underperforming plants.

A decision will be made this summer on the last of the five plants to be assessed.

Growth at last

Finncap estimates that with its actions already Iofina has halved unit production costs and if you add in a growth factor, the numbers become compelling.

Each new WET IOsorb plant will be able to generate after-tax cash flow of US$1.2-1.8mln at US$25-30kg and return its investment in less than two years.

A cash flow model - assuming one new IOsorb plant is added each year between 2019 and 2021 - gives a price target of 35p/share and an enterprise multiple of under eight in 2021.

By-product boosted

The company’s proprietary IOsorb processing plants take wastewater and brine, a largely unwanted by-product of most onshore oil fields, as a feedstock and from them makes iodine - a commodity used in animal feeds, chemical manufacturing, chemistry and in medicine.

Iofina’s five plants in Oklahoma take wastewater from just one-quarter of the producing oil fields that are still in operation, hence why the well doesn’t run dry very often and, when it does, it doesn’t last for too long.

At 18.9p, Iofina is valued at £23.5mln.

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