Australia | Apr 20 2007
By Greg Peel
Like mineral sands through the hour glass, so are the days of Iluka’s life – a company with so much potential and so little to show for it.
The champagne corks must have popped at mineral sands miner Iluka Resources’ (ILU) head office this quarter, as the Murray Basin finally provided its first production. In all, brokers found Iluka’s March quarter production either in line or ahead of expectation, but unfortunately this success pales when one considers other factors.
Iluka’s production guidance for 2007 may well be met, but its profit guidance is looking very dodgy. At $90-100m, management guided off the basis of an average 2007 exchange rate of US$0.75. With the Aussie now over US$0.83 and looking strong, guidance looks due for a rethink.
Brokers agree that adjusting to exchange rate reality could wipe 30-40% off Iluka’s bottom line. And while production was comforting, Iluka is suffering the same fate as every other Australian resource company – rising costs and restricted sales due to port congestion.
Iluka is one of those stocks that splits resources analysts, showing, as it does, a 4/4/2 B/H/S ratio in the FNArena database. The ratio includes one downgrade to Sell this morning. A lot of that has to do with differing views on the direction of the zircon price.
But there is more to it. Credit Suisse is the most enthusiastic of the group, having set a target of $8.01 which is 36% above yesterday’s close. While CS acknowledges the currency risk, the analysts also trot out a series of longer term contingencies. These include potential land sales and the divestment of the Narama JV, as well as production potential at Eucla and North Murray, and even uranium exploration at Eucla. A planned dividend reinvestment plan is also considered as a positive.
On the flip side, Macquarie analysts have gone for the jugular. When new management downgraded guidance in February, Macquarie analysts dropped from Outperform to Neutral. Today they dropped to Underperform. This was most specifically to do with their new exchange rate assumptions. Earnings forecasts were slashed by 36% and 47% in 2007 and 2008. The target fell from $6.20 to $4.80, establishing a new bottom mark.
That leaves us with a database average target of $6.52 – still 11% above yesterday’s close. But the target price spread is nearly 50% of that average.
While all brokers acknowledge the currency risk, most are content simply to point that out rather than act on it. This is because they haven’t yet officially shifted their 2007 exchange rate forecasts, or are waiting for their US head office counterparts to do so, or both. While Macquarie provided the only ratings change, JP Morgan provided the only other target price change – from $6.00 to $5.43.
JPM’s change, however, was more about increased cost assumptions than currency risks.
If an Aussie dollar well over US$0.80 is not just a blip – and no one seems to think it is – stand by for some serious de-rating of Iluka, and also of a wealth of other Australian resources stocks, as soon as analysts see fit to “officially” adjust their exchange rate assumptions. Just as belated upgrades in commodity prices usually spur the opposite.
Maybe that will be the cue to tap into Iluka’s long term potential.