Australia | Nov 18 2011
– Iluka updates on market conditions
– Mixed outlook, short-term zircon market softness, TiO2 market still tight
– Brokers adjust models and price targets
By Chris Shaw
Minerals sands play Iluka ((ILU)) yesterday provided a briefing on both market conditions and production expectations, brokers responding by updating their models for the company.
From a market conditions perspective, Citi notes Iluka sees some short-term softness in the zircon market, which is a reflection of opaque demand from China. Medium-term Citi expects the market will remain in deficit, one that should grow over time given constraints to existing supply and a lack of new projects.
Post the update on zircon market conditions JP Morgan has trimmed its price forecasts by 14% in 2012 and by 12% in 2013, though the broker's long-term price forecast is unchanged at US$1,100 per tonne. Citi has been less concerned and has actually lifted its price expectations from the first quarter of 2012 to reflect the fact the market is likely to remain in deficit.
With respect to TiO2 (titanium dioxide), JP Morgan's price forecasts are unchanged. The broker sees some upside to consensus estimates given expectations of still solid medium-term market dynamics. The TiO2 market is expected to be in deficit until at least 2015.
UBS agrees there is upside risk to TiO2 price expectations, especially as management at Iluka is likely adopting a conservative stance with respect to market commentary. UBS's numbers suggest a 20% price rise for TiO2 in the first half of 2012, with scope for increases of 40-50% based on higher pigment prices.
More company specific was production guidance offered by Iluka, which UBS notes was slightly higher than expected with respect to volumes through FY13. Even factoring in higher long-term costs and capex, UBS has lifted earnings estimates by 3% in FY12 and by 7% in FY13.
This leaves UBS forecasting earnings per share (EPS) for Iluka of 123c this year, rising to 239c in 2012 and 238c in 2013. Following other changes to broker estimates post the update, consensus EPS forecasts for Iluka according to the FNArena database now stand at 122.3c this year and 263.5c in 2012.
Post the update, RBS Australia left with the view Iluka's commitment to prudent investment criteria means potential for substantial dividends being paid in future years. Factoring in a 50% payout ratio, Iluka offers a yield of 9% in 2012 and 10% in 2013 on RBS's numbers.
Even allowing for such payouts, RBS expects Iluka would have enough cash to pursue expansion options. Management has indicated it would return cash to shareholders if no suitable investment options were identified.
Deutsche notes management has laid out a clearer path to maintaining its market dominance, this involving kiln restarts, deposit extensions, project optimisation and ongoing exploration. Iluka's resource should be lifted at an update next February, while Deutsche also sees scope for better conversion of resources to reserves from the current level of around 30%.
Post the update there has been only a single change in rating for Iluka, this courtesy of RBS Australia with a downgrade to Hold from Buy. RBS suggests while at current levels there is around 10% share price upside to meet its valuation, current market uncertainty suggests mining stocks are unlikely to run up to fair value in the shorter-term.
Others in the market have continued to look at longer-term upside potential from ongoing mineral sands market deficits, so the FNArena database shows a total of six Buy recommendations compared to just two Hold ratings.
The consensus price target for Iluka according to the database now stands at $20.34, up from $19.94 prior to the update. Targets range from Deutsche Bank at $18.20 to Citi at $25.00.
Shares in Iluka today are weaker and as at 11.15am the stock was down $1.03 or 6% at $16.07. This compares to a trading range over the past year of $7.38 to $19.46. The current share price implies upside of around 24% to the consensus price target in the FNArena database.
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