Ticor's mineral sands play

While we can't promise a similar result with Ticor, the company certainly has potential.

Capitalised at a mere $329m, it's a long way from being a resource giant but it has undergone a transformation that echoes Portman's recent restructure. Over the past few years Ticor has divested its non-core assets (coal interests) and developed the infrastructure to ramp up production of pigment and titanium feedstock.

Titanium feedstock is used in alloy materials for spacecraft, missiles and ships while pigment is used in paints, enamels, plastics and even skywriting. Both are called mineral sands.

Diverse market

Clearly, this is a market more diverse than Portman's iron ore mining. Not only does it entail more processing but prices are volatile too, which explains our high share price risk rating.

What attracted us, though, on top of $20m in cost savings planned for its successful Australian operation, is its recent expansion offshore. The company has taken a 40% stake in a South African joint venture project with Kumba Resources for $230m, gaining management control in the process.

The project consists of three mineral deposits already capable of producing the titanium and pigment products of ilmenite, rutile and zircon. Production is increasing and smelter construction has begun, with production scheduled to begin by March 2003. By 2005, it's expected to reach capacity and pump out 250,000 tonnes of mineral sands.

CEO Rod Ruston is clearly pleased with progress, as is the King of the Zulus, who recently dropped in. This acquisition will make Ticor the world's third largest titanium feedstock producer after Rio Tinto and Iluka.

In issue 95/Jan 02 (Sell - $4.58) we placed a sell on Iluka. Why, then, are we prepared to recommend Ticor as a speculative buy?

We're attracted to the activism of Ticor's board that includes a willingness to take sensible risks to develop long-term projects. Ticor's finances are also in good shape and, on the face of it, the stock looks cheap compared with Iluka.

Cheap valuation

How cheap? How about a 22% discount to book value and a PER of 5.7 (actually closer to 6.8, once you take out the effect of abnormals).

If Ticor can achieve the earnings growth it's aiming for and commodity prices improve a little, there's plenty of room for share price growth.

On the other hand, if these events don't eventuate (a not unlikely possibility) Ticor's balance sheet is capable of carrying the strain. Its net debt-to-equity is a low 17% and operating cashflows generate more than $50m, although we do expect debt to increase somewhat with funds earmarked for the African project.

With Iluka increasing its stake in Consolidated Rutile to over 50%, no doubt it will be keeping an eye on Ticor's progress. Anglo American snapped up a 10% stake in Ticor's joint venture partner, Kumba Resources recently, which led to more rumours.

At these price levels there's handy support from a 6.1% dividend yield and, with good development potential, there's every chance Ticor will do well. SPECULATIVE BUY.