Is the glass half-empty or half-full for Iofina investors?

If one were to view the share price or read the bulletin boards, it seems to be all doom and gloom surrounding Iofina (IOF.L) at the moment. It began as a slow decline in the share price following the operational update on 20th November, accelerated last week on news that the iodine price was softening and became a bloodbath today when news broke that the Montana Department of Natural Resource Conservation (“DNRC”) Water Resources Office has issued a preliminary determination to deny Iofina’s application for a water extraction permit.

On the surface, this looks like a string of bad news and it is easy to see why the share price has reacted negatively, especially with a seemingly large number of private investors running leveraged positions. It is at times like these that I believe solid research combined with a calm mind throws up an excellent investment opportunity.

Let’s take a closer look at those three things the market is perceiving as negative:

1. The operational update on 20th November told us three things. First, that the build for IO4 and IO5 would not be completed until Q1 2014 (I subsequently gather that both could be completed in January). Second, that the three existing plants had achieved record iodine production (although precise numbers were not given). And finally, it was reiterated that the company were considering the feasibility of locating IO6 near to IO2 based on the surplus brine stream at that site (the subtext here is that IO2 is a very high brine stream site). Out of these three points I personally perceive one to be slightly negative (although a month delay for plant build is well within tolerance for execution risk) and the other two to be positive, albeit masked in a layer of ambiguity.
2. I think it was last week that the Financial Times ran a story about the iodine price falling below $50 per kg. Interestingly, I have spent some time this week researching the reason for that fall and was planning to write a full article about it today before events took over. Suffice to say, the Chile producers appear to have caused the price decline through their internal competitive actions with it would seem, the aim of taking out some of the producers with higher opex. Rather than being bad news, this rather plays into Iofina’s hands on several fronts. Firstly, if some existing suppliers go out of business or shut down production, when IOF start producing surplus iodine in 2014 there will be sufficient demand – and it seems unlikely the iodine price will remain low throughout 2014. Secondly, Iofina are currently immune from short-term fluctuations in the iodine price because they are currently selling most of their iodine via Iofina Chemical as added value derivative products, with pre-agreed contract pricing in place. And most importantly, Iofina are the lowest cost iodine producer in the world by some margin which taken to the extreme, will see them as the last man standing in a price war.
3. And that brings me to the water extraction permit which we discover today has been denied initially and Iofina have 15 days in which to submit additional information to support their application. This is a non-core activity, so any revenue generated by water extraction should be seen as a bonus. This said, it could become a lucrative sideline and the water application will possibly/probably be granted once the additional information is submitted. Investors should also be aware that this water extraction permit application is separate to the rights swap that Iofina have in place with the US Fish and Wildlife department. It is my understanding that this swap can be instigated now or in the future with minimal permitting required.

It’s funny how market sentiment reacts to surface level information while those investors who are well researched see opportunity where others see a risk. Much depends of course of one’s time horizon. The Share Knowledge Virtual Growth Portfolio took a battering today and only has a week to recover, although it should still remain in positive territory at year end. However, investors with a longer time horizon could be looking at a bargain on a 3 month, 1 year and 2 year view. I don’t believe the fundamental story at Iofina has changed at all, other than to become significantly de-risked compared to 12 months’ ago, although I accept that there have been some blips and course corrections throughout the year.

Maybe I am an eternal optimist but I believe Iofina’s glass is half-full and investors who bought today will look back in 12 months’ time to see they managed to bag a bargain.         

Disclosure – I own shares in Iofina.