Iluka Resources Limited

ILU Details

·         Incurred huge impairment charges: Iluka Resources Limited (ASX: ILU) reported a heavy loss after tax of $82 million in the first half of 2017, impacted by $106 million post tax ($151 million pre-tax) impairment of the Hamilton mineral separation plant (MSP), which would be placed on care and maintenance from October 2017. The group expects that Narngulu MSP is enough for processing all Australian heavy mineral concentrate production. This weak bottom line has raised concerns among investors over the stock.
 
·         Rise in production: The group enhanced their full year 2017 production guidance to 795kt against their earlier guidance of 720kt, driven by better zircon production to 310kt as compared to earlier forecast of 275kt. Rutile is expected to be 280kt as compared to their earlier forecast of 240kt. The group maintained their synthetic rutile production of 205kt. They even lowered their capital expenditure guidance to $135 million in 2017 from $260 million in January 2017. Moreover, the feasibility studies for the three Sierra Rutile expansion projects at Lanti, Gangama and Sembehun are progressing well while mining at Jacinth-Ambrosia is to be restarted in December 2017. The group’s Tutunup South mine in Australia continued to produce feed for SR kiln (North Capel) with mining forecasted to finish in the first quarter of 2018. Processing of material is finished in 2018 while potential SR kiln ilmenite feed from proposed Cataby mine (150km north of Perth), is subject to Board approval. SR kiln production was at full capacity in the first half of 2017.Narngulu (Western Australia) as well as Hamilton (Murray Basin) mineral separation plants continued to draw down heavy mineral concentrate inventory from idle or depleted mines.  

H1 2017 performance (Source: company reports)
 
·         Strong cash flow: The group generated a strong free cash flow of $180 million, boosted by a major improvement in their operating cash flow given better market conditions for zircon and titanium dioxide products. Accordingly, Iluka could control their net debt by 40% to $305 million in the first half of 2017. Moreover, they reported a fully franked interim dividend of 6 cents per share, driven by better market conditions for both zircon as well as titanium dioxide products. Iluka’s operating cash flows enhanced $209 million to $194 million while gearing levels reached 23% post the acquisition of Sierra Rutile in December 2016. 

            Controlled net debt (Source: Company reports)
 
·         Stock performance: ILU stock generated returns over 24.8% in this year to date (as of August 15, 2017). The stock delivered over 1% returns on August 16, 2017 despite weak bottom line performance of its FY17 results. This rise was mainly due to the group’s better production forecasts for FY18, controlled costs as well as rise in cash flow. On a side note, the group is in the news owing to the secret inquiry conducted by the miner that indicated the involvement of a leading Sierra Leone presidential candidate, a cabinet minister and high-ranking officials in an international bribery scandal. This is said to be encompassing the mining licenses that have been inherited by ILU in relation with the takeover of Sierra Rutile Ltd. However, the company does not anticipate any impact on its operations because of the matters under investigation by regulatory authorities in Sierra Leone and the UK. We give a “Hold” recommendation on the stock at the current price of $ 9.35

 

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