--Goldman Sachs raises long-term mineral sands forecasts
--Cites tightening fundamentals, increased costs
(Adds details on forecasts, comments on supply and demand,
background on market trends)
By Rhiannon Hoyle
The prices of mineral sands, such as zircon and rutile, will
need to stay high in the long term for miners to have an incentive
to bring expensive new projects to market, Goldman Sachs Group Inc.
(GS) said Wednesday.
The sector has benefited from a rally in prices over the past
two years, with mineral sands prices climbing to record highs, and
tightening fundamentals as well as rising capital expenditure and
operating costs will likely keep prices from falling to previous
levels, it said.
The U.S. investment bank has lifted its long-term zircon
forecast--an estimate for the mineral's price from 2017 onward--to
US$1,600 a metric ton from a previous forecast of US$1,223/ton and
its rutile forecast to US$1,050/ton from US$615/ton. Zircon is
mostly used to manufacture ceramics such as tiles and tableware,
while rutile is mainly used to produce white pigment for paints,
plastics and paper.
"The markets for both zircon and titanium dioxide [products,
such as rutile and ilmenite] have tightened appreciably due to a
combination of buoyant demand, [which has been] China-led, and
supply constraints," Goldman Sachs said in a research note.
"Operating costs have risen, and capex requirements for
greenfield [projects and brownfield] capacity additions have
surged," it said.
The bank forecast the zircon market to move from a surplus of
122,000 tons last year to narrowing surpluses in 2012-2014--to
45,000 tons, 18,000 tons and 8,000 tons, respectively. This will be
helped by rising consumption in China as well as growing demand
elsewhere in Asia.
"The global supply deficit for mineral sands has led to an
increase in the number of potential new projects. However, our
initial analysis suggests that the incentive prices for these
projects to be developed economically will be considerably higher
than our current long-term price deck," the bank said.
It subsequently raised its 12-month price target on Iluka
Resources Ltd. (ILU.AU)--the dominant zircon producer, with around
a third of global market share--to 24 Australian dollars (US$23.90)
a share from A$23 a share.
"The market is, in our view, overly focused on near-term
earnings risk without appreciating sufficiently the earnings per
share growth" from this year forward, Goldman Sachs said.
In an address to shareholders last month, Iluka's Managing
Director David Robb supply constraints are ongoing, with the
industry having reported no major discoveries since 2004 "and
certainly nothing comparable to the mainstay provinces in Australia
and South Africa on which the industry has relied for so many
years." Iluka's cash cost of production rose to A$628.90/ton in
2011 from A$543.80/ton in 2010.
Still, the long-term forecasts represent a dip from current
levels following the recent jump in prices. In its annual report,
Iluka announced that it had received a weighted average price of
US$1,890/ton for zircon in 2011, up from US$1,100/ton in 2010. For
rutile, it received an average of US$1,050/ton, up from US$550/ton
in 2010.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com