How Iofina surged by 150%

Iofina has had its problems. The company strips the iodine out of brine - a byproduct of oil and gas production - before energy companies get rid of it, but iodine prices have been on the slide, and an earthquake in Oklahoma last year, which triggered restrictions on fracking there, threatened production.

Thankfully, the firm has hit first-quarter targets, and an "encouraging" update has caused the share price to double.

Production of crystalline iodine from Iofina's five IOsorb plants dropped to 124.6 metric tonnes (MT) in the first three months of 2016. That's down from 127.9MT a year ago, although that was from six plants, over 5.5MT of which came from the now closed IO#1 plant.

During what are traditionally "more challenging" winter months due to cold weather, net iodine production from the firm's Oklahoma operations increased year-on-year. The like-for-like increase is 1.5% and the reported decline 2%. What's more, management has reaffirmed its production target of 250-270MT in the first half of this year.

In reaction, Iofina's share price traded as high as 11.25p Monday, a three-month high and up from 4.5p on Friday. It's good news, but long-term shareholders will still be nursing heavy losses. Iofina floated in May 2008, after raising £15.1 million at 55p a share, and peaked at around 250p in 2013 amid a production ramp-up and bid speculation.

"Not only is this performance in line with first-half output guidance, we see it as a particularly good operational result given that the Oklahoma Corporation Commission (OCC) has been implementing plans to reduce brine volumes injected into a 10,000 square mile area of North West and central Oklahoma," says Raymond Greaves, an analyst at house broker finnCap.

According to plan

We asked Iofina's chief executive Dr Tom Becker how he's managed to hit targets. "We're just executing our business plan," he told us. "We're way more established than we were 18 months ago and have become a more stable producer of iodine. We're on track, and output should increase in the spring when the weather warms up."

Crucially, Iofina has also put to bed fears about the availability of brine following that OCC decision. "Even with the OCC restrictions and a slowdown of new well drilling rates in Iofina's core area, there remains an abundance of brine for the company's current plants and potential future sites," said Iofina.

"There's always a risk, especially with regulation, but we're only taking a fraction of brine currently produced by our partners," Becker told us.

Obviously there's nothing Iofina can do about pricing. Chile and Japan produce most of the world's iodine, so prices rocketed when the tsunami hit Japan in 2011. But they've dropped sharply since as supply comes back.

However, at $25/kg, Becker has seen "signs of price stabilisation". The supply/demand equilibrium is coming back into balance and a recent weakening of the US dollar versus the yen and Chilean Peso has helped.

Greaves estimates Iofina's cash cost of production at about $22.5/kg, "so Iofina should still be profitable, even at these levels. We are not making changes to forecasts".

Currently, the broker still forecasts sales of $20.6 million (£14.4 million) in 2015 versus $25.8 million the year before, although losses at the cash level should have shrunk from $0.7 million to $0.2 million. At the pre-tax level, Iofina is still expected to have lost $3.6 million last year before finally making a pre-tax profit in 2017.

Greaves reckons the shares are worth 18p. They may be one day, but the iodine price will have to improve to make it happen.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.