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In the news: MYCELX Technologies

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FROM THE BROKING DESK
As previously flagged, we have Tim Carstens of Base Resources*† in London this week. He’ll be available from Tuesday 12 July till Friday 15 July; unsurprisingly, we’ve had a lot of interest in this, but if you haven’t arranged a meeting let us know and we’ll see what we can do. The company’s initial 4QFY16 numbers saw record sales volumes for rutile and ilmenite, achieved with a backdrop of improving titanium feedstock markets, with ilmenite prices particularly strong. Jim Taylor and Imogen Whiteside covered this in Base Resources — June Quarterly Operations Update, 8 July 2016.
With ilmenite pricing, production volumes and sales figures all on the up, this was a strongly positive quarter for Base. Sales volumes (+61% QoQ) were particularly impressive, hitting record levels, with the company’s Chinese inventory being reportedly entirely sold down. Meanwhile, production also increased across all lines from the prior quarter, as the zircon circuit reached its 78% design capacity. The company has guided towards FY17 production of 88,000-95,000t of rutile, 450,000-480,000t of ilmenite and 35,000-40,000t of zircon. These figures exceed our steady-state projections, both in terms of volume (~594,000t vs. 550,00t) and estimated basket value (~US$233/t vs. US$221/t).
Base’s exceptional share price performance — a rise of 200% YTD — has come amid improving sentiment in the mineral sands space. Ilmenite led the TiO2 feedstock price recovery. Due to supressed ilmenite prices, many pigment producers are reported to have switched from higher-grade (rutile) to lower-grade (ilmenite) feedstocks where possible. Healthier pigment end-markets have therefore had the greatest positive impact on ilmenite pricing, with a US$15/t improvement to US$75-80/t being reported during 2Q16. The company has fully sold its ilmenite production through to September, when it hopes further price increases can be realised.
We maintain our BUY recommendation, with a target price of A$0.22. Given our pricing assumptions of US$120/t for ilmenite, US$950/t for rutile and US$1,150/t for zircon (from US$75-80/t, US$675/t and US$750/t currently), we value the Kwale Project at US$302m at a 10% discount rate. After factoring in exploration upside, G&A and net debt, we arrive at a NAV for Base of US$123m, which translates to A$0.22/share.

COMPANIES
MYCELX TECHNOLOGIES*†

LON:MYX | 31.5p | US$7.6m | Buy | TP : 80p
Half-year Trading Update
MYCELX Technologies has announced a trading update ahead of its 1H16 results, which are due to be announced on 14 September. The company indicated that revenues for 1H16 should be in line with expectations, which point to a FY16 base-level revenue estimate of US$8m from existing contracts only. Crucially, the company has also delivered on its commitment to achieve cash neutrality from operations over the past 12 months, with cost control measures continuing to be monitored closely.
During 1H16 the company also established a strategic marketing agreement with Schlumberger Cameron, covering the marketing and distribution of MYCELX products into the upstream market. A particular focus of the collaboration will be to gain market share for the new RE-GEN product line (a back-washable deep-bed filter, capable of treating extremely high produced water volumes and particularly suitable for EOR applications). The company considers that it would be premature to provide earnings guidance in relation to the Schlumberger agreement at this juncture, and is therefore planning to provide a progress update at year-end.
COMMENT: As we have previously mentioned, the agreement with Schlumberger should be highly material in terms of providing a step-change in the scale of the distribution platform for the company’s products. Schlumberger is the world’s largest oilfield services company, with a trans-global in-country presence to provide to the upstream industry, and a market cap of US$110bn, dwarfing peers such as Halliburton (US$39bn).
Despite oil service stocks as a group having outperformed the S&P 500 (by 3%) over 1H16, correlated with the oil price rally that commenced in mid-1Q16, we anticipate new investment-driven recovery is only likely to gain momentum from 2017. The US$50/lb milestone was passed in early June this year, representing a 95% improvement from the late-January low of below US$27/lb. US output has hit its lowest levels since June 2014, and now stands at 8.4MMbpd vs. the June 2015 high of 9.6MMbpd. However, a combination of a weaker-than-expected erosion of US stockpiles and a reported 300,000bpd MoM OPEC production rise (propelled by Nigerian and Libyan recovery and Iranian and Saudi Arabian production boosts) have combined to put pressure on the price rally in recent weeks.
2016 YTD Brent Oil Price

Despite continuing upstream market volatility, we underline that MYCELX’s base case revenue run rate for 2016E relates to existing contracts only, owing to the company’s ‘razor blade’ business model. The company should be cash neutral at this turnover, with any new contract wins or material sales, which we anticipate would be accelerated through the Schlumberger agreement, serving to strengthen the balance sheet. On the back of the company’s maintained 2016E revenue guidance, we restate our Buy recommendation, with a DCF-based target price of 80p.

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