Wary investors could be forgiven for avoiding a small cap company wholly dependent upon the oil industry, couldn’t they?
The dramatic decline in crude prices has seen swathes of operations rendered uneconomic; seen new investment come to a standstill; and the recently booming areas of North America have arguably seen the worst of it.
Well, Iofina is not really an oil services business at all.
It is a commodity producer in its own right
The company takes waste water and brine, a largely unwanted by-product of most onshore oil fields, as a feed stock and through its proprietary IOsorb processing plants the company makes iodine - a commodity used in animal feeds, chemical manufacturing, chemistry and in medicine.
Whilst it’s true that Iofina is dependent on oil producers (specifically those in Oklahoma where its plants are based) there are good reasons why this is not exactly a creaking co-dependent relationship.
Well not about to run dry
Firstly, and right now most importantly, the supply of waste water is not running out anytime soon, though it is subject to occasional fluctuations.
Back in December, Iofina said that recently suppliers have been diverting water from the company to their own fracking operations.
That contributed to an easing off in the production of crystalline iodine in the final weeks of the year, but by the middle of January the company had returned to “more normalised levels”.
Iofina’s five plants in Oklahoma take waste water from just one quarter of the producing oil fields that are still in operation, hence why the well doesn’t run dry very often and, when it does, it doesn’t last for too long.
Speaking of the oil producers, Iofina's chief executive and president Tom Becker admitted: “We are dependent upon them; they represent the largest single industry in the state of Oklahoma, and they’re not going to go away. We only take a fraction of the water that they’re producing, so we still have plenty of brine being supplied to our plants both now and moving forward.”
Cutting its coat according to the cloth available
Aside from crude prices, Iofina has had it is own problems - not least a five-year long decline in the price of iodine.
Iodine prices have slumped from more than US$90 a kilogram in 2011 to around US$20 a kilogram.
The company has cut around 35% off its cost base, and has gained some additional leeway though a restructuring of its finances.
In September, it completed a US$20mln debt restructuring, which removes uncertainty over its balance sheet and opens up a fresh US$10mln facility.
Funds from the new credit line are earmarked for investments into future expansion plans.
In addition to the temporary brine supply issues mentioned above, Iofina has also had to deal with water quality issues at its IO#3 plant.
Even with these minor niggles, the company still produced almost 19 tonnes of crystalline iodine in the first quarter of 2017 (Q1 2016: 124.6 tonnes).
These issues are likely to continue into the second quarter, although the group reassured investors that, like in the first three months, they would only have a marginal impact on overall production.
Iofina still expects to produce between 215 and 230 metric tonnes of crystalline iodine in the first half of the year, even without further contribution from IO#3.
Elsewhere, the firm’s IOsorb plants have performed well so far this year and are producing iodine at expected rates, while its Iofina Chemical division benefitted from strong demand for non-iodine halogen derivatives.
Recovery on horizon
The firm has highlighted that the company’s short-to-medium term outlook sees iodine prices beginning to recover. Higher cost, mining-based production should start coming offline soon.
“Right now iodine prices are still fairly low,” Becker said. “Potentially we see some other issues going on in Chile that may limit supply. So we expect to see iodine prices going up rather than going down.
“Once we see that happening we’ll be ready to do some expansion plans.”
This, really, is where the crux of the investment proposition is for Iofina.
As iodine prices recover and rally, Becker expects Iofina to be among the first to respond to new growth opportunities. That’s because that as many competing producers are miners their operations are more expensive to run and any new operations have a high capital cost of entry.
Becker says Iofina can build new plants for around US$2.5mln to US$3mln, and such a plant could deliver between 150 and 225 tonnes of additional capacity - which would be a 25-40% increase to Iofina’s existing operations.
Each plant could be built in just four to six months from breaking ground, Becker added.
Without revealing a formal roll-out plan or timetable, Becker explained that, iodine prices allowing, the company would likely seek to establish at least one new plant as part of its next growth phase.
“There are potential sites that we’ve already lined up with operators. We’re just looking for the economic triggers to move on that. And the debt facility allows us to do it.
“What we won’t do is build three or four plants all at the same time.
“We would likely build one plant at a time, increasing capacity by about 150 to 200 metric tons at a time.
“When exactly it happens is going to depend on the economic conditions in the iodine market.”