Treasure Chest: Iluka’s Zircon Danger

This story features ILUKA RESOURCES LIMITED. For more info SHARE ANALYSIS: ILU

By Greg Peel

After a soaring, rare earth-style rally over the past couple of years the global price of zircon has been under pressure as demand from China's ceramic sector weakens. China's economic growth is slowing and Beijing is placing direct fiscal pressure on property market development, reducing demand for housing construction staples such as kitchen, bathroom and floor tiles.

Taking price and volumes into account, Goldman Sachs suggests the zircon price has now peaked. Goldman expects 2012 sales volumes to fall short of 2011 numbers although ongoing supply discipline (production control) among the world's three major producers should see the zircon price hold up at US$2500/t. The question is, however: how long can this “little OPEC” in the zircon market stand firm before sales weakness in the second half of this year forces one to bail out and up its production volumes?

One of the three is Australian mineral sands miner Iluka Resources ((ILU)). The issue for the company, Goldman posits, is as to whether current Chinese destocking is simply representative of a shorter-term demand dip that will lead to a shortage and a subsequent restocking phase, or is representative of a more insidious global oversupply of zircon which could lead to a downward price spiral.

Goldman's analysts favour the demand dip argument.

Aside from zircon, Iluka's major products are rutile and synthetic rutile which are the feedstocks for the production of titanium oxide – the pigment that puts the “white” in “white good”. While fingernails have been bitten across the world as zircon prices drift, Goldmans points out that over the next three years TiO2 feedstocks are likely to become an increasing driver of earnings and returns growth for Iluka.

Iluka's feedstocks are already “sold out” for 2012 and there is no change to Goldman's ongoing positive outlook.

TiO2 feedstocks trade on a term contract basis and as each quarter passes more of Iluka's legacy supply deals, set at lower prices, roll off. While Iluka boasts production expansion potential its global rivals do not and there are no new significant mineral sands projects on the horizon. Like their rare earth counterparts, zircon and rutile are abundant but rarely found in concentrated quantities.

Goldmans also cites forecast growth in Chinese construction completion as a factor in its positive view on Iluka. So positive, in fact, that the broker has this week added Iluka to the Metals & Mining group within its Conviction List. By 2013 the analysts expect Iluka to be paying a dividend yield in excess of 20%.
 

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