Australia | Jul 25 2018
This story features ILUKA RESOURCES LIMITED. For more info SHARE ANALYSIS: ILU
Strong sales volumes for Iluka's mineral sands in the first half amid forecasts for robust pricing and tight supply over 2018 have impressed brokers.
-Contracted prices for rutile lift 14% for the second half
-Further upside to realised zircon prices expected
-Demand running well ahead of supply over 2018
By Eva Brocklehurst
Iluka Resources ((ILU)) is enjoying a strong trend in selling prices. The June quarter demonstrated the benefit of higher prices and an unwinding of working capital as cash was built up. Sales of 439,000t for zircon, rutile and synthetic rutile in the first half exceeded most estimates.
The company is almost back to a net cash position less than two years after the debt-funded acquisition of Sierra Rutile. First half revenue was up 21% despite lower sales volumes and adverse currency rates, which suggests to Shaw and Partners that the underlying commodity price trend is favourable.
Zircon prices are up 47% from the first half of 2017 and rutile up 20%. Contracted prices for rutile in the second half of 2018 have increased 14% and zircon markets remain tight. The company has implemented an increase in the zircon reference price to US$1410/t.
Credit Suisse was impressed with the the sales volumes in the first half and a lift in rutile pricing for the second half is expected to ensure the company's natural rutile prices rise to US$1033/t.
In addition, the broker expects further upside to realised pricing in the second half when the company begins a new contract period for zircon and forecasts Iluka to lift the benchmark price to a conservative US$1650/t.
The broker estimates 21% EPS growth in FY18, to reflect higher forecast sales volumes in conjunction with higher prices, and changes to FY19 estimates and beyond predominantly reflect revised pricing.
Nevertheless, the higher prices are starting to bring on more supply and Indonesia's monthly rates are up around 80%. Iluka estimates Indonesian exports have increased to 4400t per month. Higher prices have been accepted by end users with no evidence of substitution, Shaw and Partners observes, although thrifting has become more common in the ceramics and foundry industries.
Production of zircon, rutile and synthetic rutile was in line with Citi's estimates. Compositionally, zircon was better and offset lower rutile production, which was beset by issues with the Sierra Rutile dredge and finalising commissioning of the Lanti dry mining unit. Overall, production guidance of 690,000t for 2018 appears conservative to Citi.
Meanwhile, the company is experiencing strong demand for its high-grade titanium feedstocks and sales are being limited by production outages. Disruptions for other high-grade titanium feedstock producers have affected confidence, Shaw and Partners notes, but are yet to be translated into shortages down the value chain.
All second half high-grade feedstock is either under contract or allocated to customers with supply requests. Morgan Stanley points to some commentary which signals the rate of increase in pigment demand is moderating but notes that China recently announced price increases of US$60-80/t.
Demand is running well ahead of supply and mineral sands inventory, which is rapidly depleting, is largely in the domain of Iluka. Shaw and Partners believes this price and demand cycle should continue into 2019.
This environment should afford Iluka the opportunity to liquidate all its inventory, and be reflected in favourable free cash flow. The broker, not one of the eight monitored daily on the FNArena database, has a Buy rating and $13 target.
Credit Suisse believes further positive price momentum should play out in both zircon and the high-great titanium dioxide markets throughout 2018 and into 2019 because of the favourable supply/demand dynamics. Iluka remains the broker's key large cap mineral sands exposure in the Australian market.
FNArena's database shows four Buy ratings and one Hold (Macquarie). The consensus target is $12.74, signalling 10.8% upside to the last share price.
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