Australia | Jan 30 2018
This story features ILUKA RESOURCES LIMITED. For more info SHARE ANALYSIS: ILU
Iluka Resources maintained strong output of mineral sands in the December quarter while brokers flag substantial price increases for both zircon and rutile over 2018.
-Iluka calls out structural deficit in the zircon and rutile markets
-Temporary reduction in demand for zircon in China
-Does the mineral sands price upgrade cycle have further to run?
By Eva Brocklehurst
Strength in both the zircon and rutile markets have allowed Iluka Resources ((ILU)) to lift its prices in 2017, and further price increases are expected in 2018. Credit Suisse considers 2017 a transformational year and fitting that company exceeded production expectations while hitting guidance for sales volume.
The company should be a significant beneficiary of the price momentum expected in both the zircon and high-grade titanium dioxide markets throughout 2018. The broker notes demand is robust but the supply chain lean, and Iluka has called out a structural deficit in the market.
Morgan Stanley believes Iluka is in a strong position, as both its downstream markets are improving. Competitors have increased zircon prices by US$125/t in the current quarter and the company's next pricing review will be effective from April 1, 2018.
Meanwhile, rutile pricing in the second half of 2017 was 9% higher than the first half. The company has advised customers of an 8% increase in the rutile price effective for the first half of 2018, with contracts now in place for 60% of first half production. Iluka will allow remaining production to be exposed to spot prices over the course of the year.
Supply/demand imbalances have grown in the zircon market, Morgan Stanley observes. Demand growth is being experienced in most geographies. China remains the exception, where environmental controls have forced many plants to shut down, resulting in what Iluka believes will be a temporary reduction in demand as consumers of zircon upgrade and/or relocate facilities.
Pigment inventory remains below seasonal norms, as the combined impact of European plant outages and environmental actions in China dampen supply. Capacity utilisation rates across other plants, many of which are Iluka customers, have increased in the current circumstances and this provides support for rutile and synthetic rutile demand.
Macquarie's analysis is more reserved. Realised prices for zircon and rutile in the quarter were broadly in line with the broker's expectations as was mineral sands revenue. Rutile production stood out, 35% above what the broker had forecast. Ilmenite output was also a positive surprise, 67% above forecasts.
Meanwhile, shipments were lower than Macquarie anticipated, a surprise given the strong production result. Rutile shipments were the weak spot and Macquarie had expected Iluka would reduce rutile inventory during the quarter.
While anticipating price increases in the company's key commodities, the broker believes there is limited upside beyond the near-term spate of upgrades and the stock's valuation premium should start to contract once zircon and rutile price momentum slows.
Sales were lower than Citi expected in the quarter but this is not a great concern, as lower production and depleting inventory mean the shortfall in 2017 can be sold at higher prices in 2018.
Citi make significant changes to its production profile, factoring in an increase in rutile and a decline in zircon production in 2020. Sales are expected to be constrained by production beyond 2019.
While this is not a major issue for rutile, because of the expected increase in synthetic rutile production, it is for zircon, where the broker expects sales will fall to 250,000t in 2020 from 380,000t in 2017. This assumes no changes to the Jacinth-Ambrosia mine plan.
Citi expects a further US$100/t increase in the December quarter 2018 for zircon, and similar increases in 2019 and 2020. With Iluka providing one third of the zircon market and facing declining sales, the risk to zircon prices remains to the upside in the broker's opinion.
Favourable market conditions should continue in 2018, UBS believes, noting the company's observations that demand for product exceeds what it is prepared to supply. The broker believes the mineral sands cycle still has further to run in terms of price and volume.
Site works at Cataby have proceeded on schedule and budget, with the company securing offtake for 85% of synthetic rutile production for a minimum of four years. First production is expected in the second quarter of 2019, with an 8.5 year mine life and annual production of 200,000t synthetic rutile, 50,000t zircon and 30,000t rutile.
FNArena's database shows three Buy ratings, two Hold and two Sell. The consensus target is $9.84, signalling -4.4% downside to the last share price. Targets range from $7.50 (Deutsche Bank) to $11.50 (UBS).
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