Iofina (IOF)

Although it appears in the Oil & Gas sector, Iofina is more of an oil-and-gas-services-speciality-chemicals-producer. It has small interests in water and natural gas assets but iodine production is the core of its business. It removes the element from the salty waste water that is a by-product of shale oil and gas production.

Iofinas main products include IPBC, an iodine biocide used in paint, wood protection and personal care products. Methyl iodide is a soil fumigant that also has use as a vital catalyst in acetic acid manufacture. Other products are used to disinfect and sanitise, for etching silicon compounds for semiconductor and electronic components and to determine the density of minerals in the gem industry.

For oil and gas producers the brackish by-product of their process constitutes a significant cost. The average oil well yields about 7.6 barrels of salt water for every barrel of oil. Iofina can turn this wastewater into cash flow which is a very attractive business model for the oil and gas producers.

The market for iodine products has been dominated by Chilean and Japanese operators for over 50 years, due to naturally occurring sources of iodine. Iofinas directors are looking to challenge this by becoming the worlds leading producer of iodine, being the only independent iodine producer in the USA and controlling the largest currently known reserves in North America. It has developed its own patented process, Wellhead Extraction Technology (WET), allowing low cost production and high operational efficiencies in contrast to other large iodine/gas fields in Mobara, Japan. It costs Iofina around US$10-20 per kg compared to other major producers operating expenditure of US$20-40kg. WET units can be deployed to producers sites. Alternatively Iofinas WET IOsorb plants can be used to process larger volumes, up to 30,000 barrels per day.

The full-year results released on 7th May showed a narrowing loss to US$1.2m, from US$2.8m, and the first positive year of EBITDA of US$194,849. It had strong iodine chemical sales in the first half of 2013. Revenue was higher at US$18.6m, compared to US$16.1m previously.

Investec raised its price target on May 7th from 164p to 230p with a buy target. First Columbus put out their first research note stock on the same day with a 239p target saying, if Iofina can successfully execute its strategy, the Company is likely to become a major global iodine producer in the next few years.

Iofina trades on the Alternative Investment Market (AIM), so the usual caveats of illiquidity and volatility apply, as well as being ineligible for an ISA. Its market capitalisation is around £265m, meaning it is a relatively small company. Risks include the price of its core product, iodine. First Columbus expect the price to remain strong with a range of US$55-65 per kg to continue into 2014.

There has been a lot of progress in the the last couple of years. 2012 saw the build and commissioning of its first plant based on its WET IOsorb technology. The next plant has already been commissioned. The shares have risen strongly, although any further gains are unlikely to be at the same rate. However, it still has potential as a high growth company making good use of waste products form the oil and gas industry. Therefore, whilst this view does not constitute a personal recommendation and any advice given to individual clients would vary according to their personal risk profile and objectives, we rate Iofina a speculative buy at the time of writing.

Robert Kilner, Stockbroker

All prices quoted correct as at 8th May 2013.

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