Iluka: Rare Earths Upside Emerging

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Despite a solid second quarter for Iluka Resources, mineral sands pricing remains uncertain. By contrast, the outlook for rare earths looks promising.

-Iluka Resources’ second quarter production beat
-Zircon pricing uncertainty due to US tariffs
-Rare earths boosted by US Department of Defence deal
-Growth prospects via Eneabba and Balranald

By Mark Woodruff

Mineral sands specialist Iluka Resources ((ILU)) reported a strong operational performance in the second quarter to complete the company’s first half, with production volumes of zircon, rutile, and synthetic rutile all exceeding consensus expectations.

While zircon and rutile output has already reached around 60% and 70% of 2025 guidance, Macquarie highlights it wasn’t a one-way good news story with both sales and revenues missing forecasts by respectively -14% and -7%.

Due to heightened uncertainty surrounding US tariff policy, management opted not to provide zircon sales volume or pricing guidance for the third quarter. Morgan Stanley assumes a price decline of around -US$20 for the second half.

Zircon remains exposed to US tariffs, with approximately 50% of US imports sourced from South Africa.

Additionally, Iluka highlighted ongoing headwinds in welding markets, where lower-priced exports of substandard rutile and leucoxene from China continue to exert downward pressure on pricing.

Corresponding with management’s own view, UBS remains tentative around the near-term mineral sands outlook. By contrast, the broker is increasingly positive on the rare earths outlook and the rationale for the Iluka’s development of Australia’s first fully integrated refinery of separated rare earth oxides at its Eneabba refinery in Western Australia.

Positioning Iluka to become a significant supplier of rare earths, complementing its mineral sands business, the project aims to process monazite to produce separated rare earth oxides.

Detailed earthworks have concluded at Eneabba, noted management at the quarterly update, and concrete works continue, with total capex to date of -$570m.

Currently, Iluka produces zircon, an industrial mineral used in ceramics, and high-grade titanium dioxide feedstocks, natural rutile and synthetic rutile, produced by upgrading ilmenite (FeTiO3) through a series of chemical and thermal processes.

Mining and processing operations are located primarily in South Australia and Western Australia, including the Jacinth-Ambrosia zircon mine in SA and the Cataby mine and synthetic rutile kilns in WA.

The company is also expanding into rare earth elements: it has been stockpiling monazite (a rare-earth-rich mineral) and is developing Australia’s first fully integrated rare earths refinery at Eneabba.

As of 2025, products generating the most revenue in descending order are: zircon, including zircon sand and zircon-in-concentrate (ZIC); titanium feedstocks (synthetic rutile and rutile); Ilmenite (mostly sold as a lower-value, bulk titanium feedstock); by-products including monazite and staurolite; and emerging Rare Earths.

Titanium feedstocks like synthetic rutile and rutile contain titanium dioxide (TiO2) and are used as the primary input for producing titanium dioxide pigments and titanium metal products.

Analysts at Barrenjoey explain June quarter production outperformance was primarily due to a surge in ZIC produced from stockpiles and lower-grade materials from the Jacinth-Ambrosia zircon mine. ZIC refers to zircon as part of heavy mineral concentrate (HMC), which is produced during the mining and initial processing of mineral sands. 

Recent transaction by US Department of Defence

Barrenjoey points out stronger NdPr pricing for Eneabba remains the key potential catalyst for Iluka.

Management noted the recently announced agreement between the US Department of Defence (DOD) and US-based MP Materials. This agreement included a price floor of US$110/kg for NdPr products (Barrenjoey’s forecast is US$85/kg), acknowledging higher prices for separated rare earth oxides are vital to building a sustainable Western supply chain.

This development supports Iluka’s pricing approach, having advocated previously for independent pricing mechanisms not linked to the Asian Metals Index.

Canaccord opines the subsequent investment from Apple for the build-out of US-based neodymium-iron-boron (NdFeB) magnet, combined with the DOD announcement, certainly accentuates the potential value of Iluka’s planned entry into rare earths.

Upon commissioning in 2027, Eneabba will be one of few such refineries to exist outside China, capable of processing a range of feedstocks and producing both light and heavy separated rare earth oxides.

Regarding the balance sheet, Citi highlights operating cash flow from Mineral Sands doubled in the period from the second half of 2024 to the first half of 2025, reaching $115m.

Group net debt, including the non-recourse debt associated with the refinery, stood at $502m on June 30.

The June quarter in more detail

Full year production guidance for ZIC was achieved by June 30, resulting in a favourable impact on unit cash costs of production for the half, explains Macquarie.

The analyst considers it prudent to sell a higher proportion of lower-value ZIC into a soft market, as this approach aligns with management’s value-over-volume strategy. After producing around 30kt in the current half, accelerating the rundown of this material, the company expects only minimal ZIC production in 2026.

Total revenue of $289m was broadly in line with Citi’s forecast and marked a 15% improvement on the March quarter.

While Iluka’s mineral sands (zircon, rutile, and synthetic rutile) revenue of $280m exceeded the UBS forecast for $250m, driven largely by the stronger ZIC sales, this broker remains cautious on the market outlook, noting tariff uncertainty continues to hinder buyer restocking and suppress overall demand.

Revenue per tonne of $2109/t missed the consensus forecast by only -0.8% on sales mix. Lower-than-expected prices for zircon and rutile were offset by higher prices for synthetic rutile, explains Morgan Stanley.

Given Mineral Sands’ capex rose to -$223m, free cash flow for the segment was -$192m negative, explains the broker, and the Rare Earths refinery also recorded negative free cash flow of -$179m.

The second quarter realised zircon price was down -7% on the March quarter and it’s not clear to Citi whether zircon prices have bottomed out.

Disappointingly, sales volume came in -8% below the consensus forecast, reflecting customer shipping schedules for rutile and synthetic rutile, with management guiding shipments to be weighted to the second half.

Barrenjoey explains when lower sales are combined with lower-than-expected average zircon, rutile, and synthetic rutile sales prices, an -8% revenue miss eventuates.

Overall unit costs came in below 2025 guidance as a result of strong production.

Unit production costs of US$1,138/t were -13% lower than market expectations and remain well below 2025 guidance of US$1,370/t.

The first half unit cost of goods sold (COGS) metric of US$1,241 was in line with consensus and below guidance of US$1,330/t.

Balranald

Iluka has several growth projects in progress. Notably, its Balranald development in the Murray Basin of New South Wales is a rutile-rich deposit that, due to its depth, is being mined via a novel remotely operated underground mining technology.

The deposit also contains zircon and meaningful quantities of rare earth minerals.

A definitive feasibility study completed in late 2022 confirmed the project’s viability, and Iluka’s Board approved a final investment decision in February 2023.

As part of the June quarterly update, management noted construction work is on schedule at the project. Stope development has begun for stope 1, the first stage of the underground mining process.

Mined ore will be processed on site to produce heavy mineral concentrate, which will then be transported to Victoria by road, and further processed at Iluka’s facilities in Western Australia.

Balranald is on track for second half 2025 commissioning.

Outlook

Iluka remains Macquarie’s top pick in for mineral sands exposures under coverage, with the added bonus of a rare earths project underway.

While Eneabba and Balranald remain on schedule, UBS notes project execution risks persist, particularly at Eneabba, which is still in the early stages of development.

Of the five daily monitored brokers in the FNArena database who research Iluka Resources, two have Buy or equivalent ratings, two are on Hold and Ord Minnett is at Accumulate, in between Buy and Hold in its particular rating system. The latter is yet to refresh its research following the operational update.

The average target of the five increased to $5.62 from $5.43 after the update, implying around 4% upside to the $5.41 closing share price on July 24.

Outside of daily monitoring, Barrenjoey has an Overweight rating and $5.40 target.

Canaccord Genuity lifted its target to $5.85 from $4.40 in reaction to the update and upgraded to Buy from Hold after revising its long-term mineral sands pricing assumptions to align with consensus.

Contributing to the target rise, this broker also de-risked the net present value (NPV) of the Eneabba project, reflecting a more favourable outlook for rare earth element pricing.

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