Strong Outlook For Iluka Despite Soft Start

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The first quarter can be soft for seasonal reasons and mineral sands producer Iluka Resources has assured the market that sales remain in line with historical averages.

-Commissioning of Cataby progressing, Wimmera fines being assessed
-Sluggish zircon market post Chinese New Year
-Expansion work in Sierra Rutile should assist with achieving guidance
 

By Eva Brocklehurst

Mineral sands producer Iluka Resources ((ILU)) had a slow start to 2019 but brokers are generally comfortable guidance can be achieved. The company has pointed out the first quarter can be soft for seasonal reasons and sales remain in line with historical averages.

First quarter production was mixed overall, with a seasonally weak zircon market, a planned outage for synthetic rutile kiln maintenance and a delay in shipments affecting sales volumes.

Commissioning of the Cataby project in Western Australia is progressing and heavy mineral concentrate will be transported to Capel in April. Zircon output was higher than Macquarie expected at both Jacinth-Ambrosia and Cataby, while rutile volumes were lower at Cataby and Sierra Leone.

Cataby also produced much lower ilmenite than the broker had expected for an early ramp-up phase. With construction now complete at Cataby, the company expects total capital costs in the mid $250-275m range. The project is forecast to produce 50,000tpa of zircon, 30,000tpa of rutile and 370,000tpa of chloride ilmenite.

The company has also commenced a feasibility study on the extraction and processing of monazite-rich tailings at Eneabba (WA), a new project that Macquarie suggests offers upside risk to base case forecasts. The study is due for completion in the September quarter. Iluka Resources is also continuing to assess the Wimmera (Vic) fines project.

Shaw and Partners believes the stock is ripe with potential, given its market position, balance sheet, well-timed acquisitions and a handy iron ore royalty. The broker emphasises the mineral sands product is not commodity-based, although acknowledges a demand/price tailwind is a pre-requisite for outperformance.

Shaw and Partners is more positive on the titanium dioxide segment (pigments) relative to the zircon aspect (glazes). The broker, not one of the eight stockbrokers monitored daily on the FNArena database, retains a Buy rating with a $13 target.

Zircon

Ord Minnett points out a sluggish market post the Chinese New Year lead to weaker zircon sales figures. Still, the company has maintained 2019 guidance and signalled subdued Chinese zircon demand, as global trade issues weigh on sentiment.

UBS remains hopeful this is simply about seasonality, although warns developments bear watching. Still, inventory is low outside of China and premium zircon supply is tight. Macquarie expects the company will add or subtract volumes in order to keep prices level.

Titanium Dioxide

For the titanium dioxide market the company has noted strength in the demand for pigment, and in the first quarter was unable to satisfy customer requirements for high-grade feedstock and ilmenite. Ord Minnett suspects Iluka will make a decision about re-starting the SR1 kiln shortly, providing titanium dioxide volume to meet the increased demand.

A step up in production is required to meet guidance for the remainder of 2019 after 154,000t was produced in the March quarter. UBS notes this is especially the case for Sierra Rutile (Sierra Leone). Morgan Stanley, however, suggests production is generally in line with 50% of its first-half forecasts.

Commissioning of the second Gangama concentrator will commence in May. Coupled with an improved performance of the Lanti mining unit, this should assist with achieving guidance. Credit Suisse expects volumes will pick up in the second half at Sierra Rutile following the expansion works.

Macquarie believes the market is benefiting from supply shortages and there is emerging upside risk to second half estimates as well as price assumptions in 2020 for both rutile and synthetic rutile. Morgan Stanley also points out its channel checks, which suggest potential for higher retail prices in the second half, appear supported by the company's commentary.

The database has four Buy ratings and two Hold. The consensus target is $10.46, signalling 15.4% upside to the last share price.

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