UPDATE: Goldman Raises Mineral Sands Forecasts on Tighter Markets, Costs

--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 [e-mail]