Iofina - Gas, but with a twist

Iofina is developing the Atlantis Project in northern Montana. As well as substantial amounts of gas, the area could also produce 4% of the world's iodine supply.

Iofina is one of AIM's latest entrants. It was incorporated in 2005 and floated in May raising £15m in the process. Its key asset, the Atlantis Project, covers some 40,000 acres in Northern Montana and is placed between two large gas fields, Southeast Alberta Milk River and the marvellously named Bear Paw Uplift. Between them these two fields have produced over 6.5 trillion cubic feet of gas.

Some 200 wells have been sunk in the area covered by the Atlantis Project in the past but the large levels of accompanying water made the extraction of natural gas uneconomic. This is where Iofina comes in. It plans to use a proprietary method called Wellhead Extraction Technology that can access the high levels of iodine that are dissolved in the water. The process has been tested with four wells and now Iofina plans to use the proceeds from its flotation to fund an aggressive drilling campaign of over 1,000 wells which should start before the end of this year.

The wells will be cheap, at around $50,000 apiece, as they will only go down to 1,500 feet and take just three days to drill. Each well could produce around 600 barrels of water a day, which will have to be disposed of once the iodine and gas has been extracted. The current plan is to re-inject the water into deeper formations between 3,000 and 4,000 feet although another alternative is to purify it for agricultural use. The gas produced will be transported via a four-mile pipeline owned by Iofina that ultimately connects to the TransCanada pipeline. Currently this can handle up to 3 million cubic feet of gas per day so it will need upgrading in the next couple of years although the cost of this is expected to be relatively low.

Iofina plans to sink the wells in clusters of 10, and each cluster will have its own iodine extraction plant. House broker Mirabaud Securities reckons each well could produce 15,000 cubic feet of gas a day and 3.5 kg of iodine and peak production will be 13 million cubic feet of gas per day and 1,100 kg of iodine a year in 2013. Using current prices of $8 per thousand cubic feet of gas and $28 per kg of iodine, this implies revenues of $66m with iodine contributing 45% of this.

The first profits could come as early as this year with Mirabaud suggesting a small pre-tax surplus of $0.6m. Cash flow positivity is a few years away though, with the first plus figure predicted in 2012. The money raised from the flotation is projected to cover most of the funding required until this point.

A brief introduction to iodine
While many investors are familiar with the economics of natural gas, those relating to iodine are less well known. Annual production is currently in the region of 28,000 tonnes with 60% coming from Chile and 30% from Japan (where the dual production of iodine and gas has taken place for 50 years). The US has three companies producing a total of 1,600 tonnes a year. So Iofina is not only reckoned to have the US's largest iodine resource but could be responsible for 4% of global supply once the Atlantis Project is running at full tilt.

Demand for iodine comes from various sources and is reckoned to be growing at 6% a year. It?s used in X rays, LCD screens, biocides and for pharmaceutical and nutritional applications. The price of iodine has increased steadily in line with demand over the last few decades and the US imports almost 7,000 tonnes a year which should mean there is a ready market for all that Iofina can produce.

Iofina's chief executive, Dr David Schneider, has 20 years experience producing iodine derivatives. This is a $3b a year market that Iofina may be able to tap to boost its profits still further. The management team, who together own almost 30% of the shares, also includes Dr Christopher Fay. He is the non executive chairman of Expro International and was chairman and chief executive of Shell UK for 5 years in the 1990s.

Expansion and acquisition
There's more to the Atlantis Project than the numbers above suggest though. The forecasts have been calculated on 28,000 out of the 40,000 acres that Iofina currently has the rights to. This smaller area has a contingent resource of 156 billion cubic feet of gas in place and 100,000 tonnes of iodine. The recoverable element is reckoned to be 98 billion cubic feet and 37,600 tonnes respectively.

However, the whole Atlantis Project could cover as much as 300,000 acres and Iofina is looking to acquire additional leases over the remaining area. If the resources elsewhere match those about to be developed the investment proposition becomes a whole lot more tempting!

This could mean Iofina may not remain an independent company for long. The iodine market is dominated by a few big players with the largest, Sociedad Química y Minera de Chile, accounting for a third of the market. The three existing US producers are all Japanese-owned and Iofina could make another tasty morsel.

The shares have powered ahead since they were listed at 55p just a few weeks ago. On the basis of the current resource it's tempting to see them as fairly valued. But the expansion possibilities of the Atlantis Project and an acquisition premium could see the shares advance further.