VRX Silica Ltd (ASX:VRX) is seeking to meet the growing demand for high quality silica sand driven by renewable energy and energy conservation themes.
Silica sand is used in glass manufacture and as a component in foundry moulds.
The company is aiming to establish silica sand export operations at Muchea near Perth in Western Australia.
Perth-based broker Hartleys has initiated coverage on VRX with a speculative buy recommendation and a 12-month price target of 18 cents per share. Following is an extract from their report:
Top shelf resources, infrastructure
The company estimates resources of 413Mt at 98.7% SiO2 in 3 project areas, including 191Mt at 99.6% SiO2 at Muchea near Perth.
Resource boundaries are contiguous over up to 5km east-west and up to 20km north-south, averaging 10m thickness from surface.
The projects will have convenient access to existing rail to port transport routes. VRX proposes building processing plant and export capabilities at each of Arrowsmith and Muchea capable of exporting up to 2Mtpa at each location.
The pre-production capital cost of each project is estimated at A$25M.
The company intends to finalise bankable feasibility studies for three projects (Arrowsmith North, Arrowsmith Central and Muchea) in the September 2019 Quarter.
Low-iron silica sand - getting scarce and in demand
About 31Mt of silica sand and quartz were consumed by China for plate glassmaking in 2018.
Significantly for VRX, among other factors, a boom in solar panel manufacturing has led to an apparent shortage of low-iron silica sand needed to make low-iron plate glass.
From a near zero base earlier this decade, Chinese solar panel manufacturing consumed about 3Mt of low iron silica sand and quartz in 2018.
High quality silica sand sources in the region have been strained as a result. Regional supplies developed to meet the new demand have run into environmental limitations, land use competition and depletion.
In recent years Australian silica sand exports have approached 3Mtpa, comprising 2Mtpa from Cape Flattery in Queensland and 1Mtpa from a handful of operations in WA.
WA’s silica sand exports have doubled since 2015. All existing Australian export operations are foreign owned.
In April 2019, in response to distribution of its product range, VRX received letters of interest from 20 potential Asian customers for 1.7Mtpa and 0.9Mtpa, glass quality and foundry quality silica sand respectively.
Hartleys assumes glass grade sand from Arrowsmith and Muchea will account for about 70% of combined Muchea and Arrowsmith annual revenue, and that low-iron glass grade silica sand from Muchea will make up about 40% of combined revenue.
Looking over the hurdles - Speculative Buy
Subject to significant permitting hurdles still to be negotiated, VRX has the requisite resource quality and infrastructure access to deliver into an apparent breach opening up in the silica sand export trade into Asia.
We have to surmise most aspects (particularly volumes and prices) of this trade, but on balance we think the opportunity is real and substantial.
We initiate with a Speculative Buy recommendation and a 18cps 12-month price target.