Fluormin
Fluormin, formerly known as Maghreb Minerals Plc, is focused on the development of assets in the fluorspar sector. The Company has a portfolio of fluorspar assets in South Africa, Kenya and Tunisia.
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Fluormin aims to become major mover in fluorspar market
Very few people will have heard of fluorspar, fewer still will understand its importance in the modern world.
However it is all around us. The mineral, also known as calcium fluoride, is used in the manufacture of aluminium, to produce Teflon that coats non-stick pans and to create the fluorocarbons used in fridges and freezers.
It provides the fluorine found in toothpaste and is even a critical ingredient in the anti-depressant Prozac.
The dynamics of the fluorspar market are interesting and changing all the time.
China is the biggest producer, but output that used to be exported is increasingly being consumed domestically by manufacturers.
Indeed, analysts predict the People's Republic may even become a net importer in the next five years.
The rise in the value of acid grade fluorspar in the past two years reflects this changing supply and demand profile as it has gone from US$200 a tonne to above US$600.
It has edged back a little to stabilise around US$500 as the global recovery has foundered.
It is against this backdrop that AIM-listed Fluormin (LON:FLOR) is developing its business with the intention of becoming a major mover in the market for fluorspar.
Formerly called Maghreb Minerals, its focus was lead and zinc mining until the sale of those assets to Glencore over the summer.
Fluormin is now the embodiment of a strategy put together by the American hedge fund Firebird, which has spotted an opportunity in the fluorspar market.
Major shareholder Firebird is hoping to emulate the success it had in uranium where it bought companies, private and quoted, as well as positions in the physical material itself.
It was one of the first to spot that uranium stockpiles were being depleted and demand was outstripping supply.
As we have seen, the same dynamic is at work in the fluorspar market.
Annually around 5.5 million tonnes are produced. However the majority of that goes directly to chemical companies that own the mines.
It means only around 850,000 tonnes of acid grade fluorspar is traded openly on the market.
It is worth saying here that there are two forms of saleable fluorspar - Acidspar, which accounts for the majority of global production, and lower-grade Metspar. Flourmin produces the former.
It owns the Witkop mine in South Africa, as well as a 20 per cent stake in Kenya Fluorspar (KFC), and has a trading arm.
Its trading operation is a crucial part of the business as it helps the group understand better current and annual requirements of its customer base.
Eventually it should allow Fluormin to become a price leader in what is an opaque market.
It is a strategy used to good effect already by Glencore, the big daddy of the commodity world, which combines its production and trading expertise to great effect.
Sallies (including the Witkop mine) and KFC are all part of Fluormin's business acquired from Firebird in an all-paper transaction, which gives the hedge fund a 66 per cent interest of Fluormin.
Fluormin now has around 63 per cent of Sallies, which is still clinging to a weak listing on the JSE, and is in the process of "squeezing out" the minority investors in that company.
Steady state production from Witkop is expected to be 140,000 tonnes of Fluorspar a year. However, output is likely to be closer to 70,000 tonnes in 2011, according to the broker Westhouse Securities.
Through Witkop, KFC and its FluorOne trading operation, led by Jeffrey Kofsky, Fluormin has exposure to 350,000 tonnes of the total 850,000 tonnes of fluorspar freely available on the open market.
This is already a powerful market position. However the plan is to strengthen it further by acquisition, according to joint chief executive Al Gourley.
He wants to take advantage of this rising demand, particularly from the emerging BRIC nations, voracious consumers of cars and white goods that require fluorine.
And of course supply is constrained with only five major projects potentially coming on stream in the next few years.
Finance has been a problem for projects targeting a commodity that has traditionally been low margin and cannot be hedged.
However the economics are changing decisively in Fluormin's favour. At US$450 a tonne the company will achieve a 30 per cent operating margin and generate around US$20 million annually in cash, according to Westhouse.
An obvious first move in the consolidation game would be to take full control KFC.
After all KFC is on the lower portion of the cost curve at US$150 a tonne, while Witkop is at the upper end at more than US$300.
"KFC is a natural opportunity for us to grow," says Gourley. "What we are trying to build is a horizontal player in what has been a vertical integration play.
"In terms of acquisitions there is only a small handful. One has to be persistent and have access to capital."
One of its other potential sources of growth arose from its transition from Maghreb to Fluormin and its disposition of two former base metal mines in Tunisia to the base metals arm to Glencore.
In the transaction, it negotiated a potentially very lucrative deal, which entitles it to the fluorspar by-product from the mines at the incremental cost of producing it (which is expected to be nil or very minimal).
Gourley explains: "Our own scoping study suggested originally that we would produce approximately 20,000 tonnes (of fluorspar).
"We don't doubt that Glencore will double or triple the mining rate because it is Glencore.
"So it is largely down to exploration as Glencore needs to double or triple the resource to justify the mining rate.
"Finger crossed. If they succeed it could be a very valuable asset to us in a few years' time."
The past two weeks has seen the share price jump by 50 per cent as the penny has finally begun to drop with investors.
The managerial talent is there. Gourley, a lawyer by trade, has a background in fundraising and mergers & acquisitions, while co-CEO Mark Bolton brings big mining company experience from First Quantum Minerals. Kofsky, the marketing director, has two decades as a fluorspar trader.
And, as we have seen, the market opportunity is significant.
Even after the recent spike, the current 60 pence share price singularly fails to reflect the value of the business today, let alone its potential.
City firm Westhouse Securities values the Sallies business at US$102 million, or 118 pence a share. "The company's fundamentals suggest that it is hugely undervalued at current prices," says analyst David Navas.
Gourley adds: "I think when the world normalises, when the European crisis is behind us, when GDP growth returns, I think we could see a dramatic spike in the fluorspar price.
"I think the next 18 months should be exciting for the company and we will likely see, as with rare earth minerals, more and more investors coming to understand fluorspar and the investment opportunity."
Other Fluormin news
- RNS Release - Q3 Update
2012-04-26 - Fluormin receives first payment of US$6.5 million for KFC stake sale
2012-04-26 - RNS Release - Director/PDMR Shareholding
2012-04-06 - Fluormin considering options to reduce costs at Witkop fluorspar operation
2012-04-02 - Fluormin sees improvement in South Africa power and water issues
2012-02-23
