Iluka Resources Limited

ILU Details

Letter Received from the Australian Government: Iluka Resources Limited (ASX: ILU) explores sand minerals such as Rutile, Zircon, and Synthetic Rutile in Western Australia. It has a 20% stake in Deterra Royalties Limited (Deterra), a resource focused royalty firm. As of 11 May 2021, the market capitalisation of ILU stood at ~$3.75 billion. On 10 May 2021, ILU received a letter from the Australian Government regarding its project Eneabba in Western Australia. The letter states that the Eneabba project’s development is in-line with the Government’s minerals policy goals. Setting up a rare earth oxide production facility will lead to more jobs, economic development, and a secure supply of critical minerals in Australia. The company is in talks with Export Finance Australia (EFA), seeking a non-recourse loan facility and finance on the project. The Eneabba refinery, once developed, would be used to process third-party rare earth concentrates along with ILU’s monazite subject to the signing of commercial contracts. ILU will continue to engage extensively with the EFA and the Critical Minerals Facilitation Office regarding Eneabba’s project development.

First Quarter (Q1FY21) Result Highlights: The company reported an increase in revenue to $344.5 million in Q1FY21, up by 48.4% YoY due to better AUD to USD conversion rates and higher sales on a pcp basis for Zircon, Rutile, and Synthetic Rutile in Q1FY21. For Q1FY21, ILU registered an increase in the production of Zircon to 70.1Kt, up by 39.9% YoY, reflecting the Narngulu mineral separation plant operating at its total capacity in January. Rutile and Synthetic Rutile output declined by 26.6% and 64.3%, respectively, on a pcp basis. For Sierra Rutile, the result was lower due to operational issues, and for Synthetic Rutile, production was planned to be suspended for February and March for inventory management.

ILU reported sales of 11Kt of monazite concentrate in sync with its purchase contract in place. It incurred an evaluation and exploration expenditure of $2.4 million in Q1FY21.

Production & Sales, Q1FY21 Highlights (Source: Company Reports)

Key Risks: ILU faces the risks of exploration and mining, seeking timely regulatory approvals from the authorities. It is exposed to the pandemic environment, and probable delays on projects /exploration activity caused due to it.

Outlook: As per Phase 1 of the project, ILU has sold 44Kt of Zircon-monazite concentrate in FY20 and estimates to sell a similar amount in FY21. Phase 2 is underway, with commissioning planned for 1HFY22. The company is also undertaking a feasibility study for Phase 3 and estimates to complete its main aspects in 2021. Phase 3 will explore the downstream processing of rare earth. For Sembehun and Sierra Rutile, ILU has a new mining method - hydraulic mining in place and scheduled for a field trial in May. At the Balranald project, work on the Definitive Feasibility Study (DFS) scoping is underway, and ILU will decide to advance with it in mid-2021. ILU has provided complete production guidance for FY21 in the range of 600-660Kt (Z/R/SR). However, it estimates production of synthetic rutile to be 190Kt in FY21 as per Q1FY21 results compared to 115-175Kt given in the FY20 presentation. It has estimated the unit cash cost of production between $785-$820/t (Z/R/SR), the unit cost of goods sold to be at $950/t (Z/R/SR), and capital expenditure of ~$95 million for FY21.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (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: The stock of ILU gave a positive return of 30.07% in the past three months and a positive return of 68.84% in the past six months. The stock is currently trading higher than the 52-weeks’ average price level of $4.880-$10.420. The stock of ILU has a support level of ~$8.508 and a resistance level of ~$8.932. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at some discount than its peer average, considering its lower production of Rutile, Synthetic Rutile in Q1FY21 and the risk of pandemic causing project delays on the projects, production suspension and its challenges. For this purpose, we have taken peers like Panoramic Resources Limited (ASX: PAN), Imdex Limited (ASX: IMD), Mineral Resources Limited (ASX: MIN) and others. Considering the increase in revenue and sales units for Q1FY21, higher production for Zircon and total capacity production at its Narngulu plant, estimated guidance for FY21 production and unit cash cost, and valuation, we give a ‘Hold’ rating on the stock at the current market price of $8.780, down by 1.127% on 11 May 2021.

ILU 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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