Iluka Resources Limited

ILU Details

Latest Quarterly Update: Iluka Resources Limited (ASX: ILU) is a mineral sands company in Australia. The company operates in mining of minerals such as Zircon, Rutile and Synthetic Rutile, mostly located in western part of Australia. The company has reported a mixed performance among its key mineral production in Q1FY21. The company has reported an increase of 39.9% YoY in the production of Zircon to 70.1kt in Q1FY21, due to operation of Narngulu mineral separation plant at full capacity in January 2021. The company has posted a decline of 26.6% YoY in the production of Rutile to 36.2kt in Q1FY21, due to decline in production from Sierra Rutile due to operational challenges. The company has posted a decline of 64.3% YoY in the production of Synthetic Rutile to 19.0kt in Q1FY21, on the back of planned production suspension to manage higher inventory levels. The company has posted an increase in revenues to $344.5mn in Q1FY21 as compared with $232.2mn in Q1FY20 on the back of higher currency conversion rates and an increase in YoY sales for Zircon, Rutile and Synthetic Rutile in Q1FY21.

Q1FY21 Production Update (Source: Company Reports)

FY20 Financial Highlights: The company has registered a decline in its revenue to $947mn in FY20 as compared with $1,193.1mn in FY19 due to lower sales volume. Despite decline in revenues, ILU has reported a net profit of $2,410mn in FY20, mainly on the back of gain of $1,808.1mn from the sale of MAC demerger.

Key Risks: The company is engaged in mining activities and requires regulatory approvals to carry out its business efficiently. Thus, any delay in regulatory approvals may lead to financial losses for the company. Further, adverse climatic conditions may impact the business operations, going forward.

Outlook: As per the company reports, the Eneabba project in Western Australia has completed its Phase1 and shipped 44kt of Zircon-monazite concentrate. The company is expecting to complete Phase2 by the end of 1HFY22. The company is also actively engaged with phase3, under which it will explore the downstream processing of rare earths. The company will take a decision on proceeding with Definitive Feasibility Study (DFS) for Balranald project in mid-2021. The company will commence a hydraulic mining trial for Sembehun in 1HFY21. The company has provided a full year 2021 production guidance in a range of 600-660kt (Z/R/SR). The company expects unit cash costs of production in a range of $785-$820/t (Z/R/SR), unit cost of goods sold to be at $950/t (Z/R/SR) and $95mn of capital expenditure for FY21. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: In the last one month, ILU has increased by ~12.31% and by ~6.33% in the last three months. The current market capitalisation of ILU stands at ~$3.12bn as of 23 April 2021. The stock is currently trading slightly below the average 52-weeks’ price level range of ~$4.88-~$10.42. On the technical analysis front, the stock has a support level of ~$7.21 and a resistance of ~$7.45. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering a turnaround with profits in FY20 and an increase in revenues in Q1FY21. For this purpose, we have taken peers Mineral Resources Ltd (ASX: MIN), Panoramic Resources Ltd (ASX: PAN), Imdex Ltd (ASX: IMD). Considering an increase in revenue in 1QFY21, increase in sales volume due to higher inventory, decent production outlook for FY21, valuation, and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $7.39, up by ~0.135% as on 23 April 2021.

ILU Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Mineral Resources Limited 

MIN Details

An Update on Joint Venture Agreement: Mineral Resources Limited (ASX: MIN) is engaged in mining of Lithium and Iron Ore in Australia. The company has signed a Farm-In Joint Venture (FJV) agreement with Brockman Iron, a subsidiary of Brockman Mining Limited through its subsidiary Polaris. The conditions for JV have been fulfilled by both the parties and it will proceed with transfer of 50% interest in the Marillana Project to Polaris. In addition, 50% of Brockman’s Ophthalmia project will also be transferred to Polaris by including it in Farm-In interest. Polaris will be developing both the projects to produce and export at least final product of 25mtpa of iron ore. MIN will fund the activities for the joint ventures by way of project loan.  

Quarterly Activities Update: The company has posted an increase in total production of iron ore at 4.94mn wet metric tonnes (wmt) in Q3FY21 as compared with 3.43mn wmt in Q3FY20 on the back of additional mining fleet arrived in late Q2FY21. The company has shipped 4.11mn wmt in Q3FY21 as compared with 2.89mn wmt in Q3FY20. Similarly, the company has posted an increase in production of Spodumene to 109,000 dry metric tonnes (dmt) in Q3FY21 as compared with 89,000 dmt in Q3FY20.

Q3FY21 Mining and Exploration Activities (Source: Company Report)

1HFY21 Financial Highlights: The company has registered an increase in its revenue in 1HFY21 to $1,530.5mn as compared with $986.7mn in 1HFY20 on the back of growth in mining service business and an increase in iron ore exports with strong iron ore prices during 1HFY21. The company has registered a decline in profits after tax to $519.3mn in 1HFY21 as compared with $884.0mn in 1HFY20. The company has registered a decline in its cash position at $1,113.4mn as on 31 December 2020 as compared with $1,521.8mn as on 30 June 2020.

Key Risks: The company operates in different countries and deals in foreign exchange prices. Any severe movement in foreign exchange prices may lead to financial losses for the company. The company is engaged in mining activities and requires regulatory approvals to carry out its business efficiently. Thus, any delay in regulatory approvals may lead to financial losses for the company.  

Outlook: As per the company reports, the company is continuing with the construction of 50ktpa Kemerton Lithium Hydroxide plant through its joint venture Albemarle Corporation. The project is expected to be completed by 2HCY21. The company has provided its guidance on shipment of Spodumene Concentrate in a range of 450kt-475kt in FY21. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: In the last one month, MIN has increased by ~26.54% and by ~20.45% in the last three months. The current market capitalisation of MIN stands at ~$8.50bn as of 23 April 2021. The stock is currently trading above the average 52-week price level range of ~$15.66-~$46.65. On the technical analysis front, the stock has a support level of ~$44.69 and a resistance of ~$45.98. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer median, considering an increase in production of iron ore in Q3FY21 and increase in revenues in 1HFY21. For this purpose, we have taken peers Panoramic Resources Ltd (ASX: PAN), Imdex Ltd (ASX: IMD), Iluka Resources Ltd (ASX: ILU). Considering an increase in iron ore prices, increase in production and shipment of iron ore in Q3FY21, construction of 50ktpa Kemerton Lithium Hydroxide plant, valuation, and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $45.87, up by ~1.820% as on 23 April 2021.

MIN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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