Iluka Resources Limited

ILU Details

Notice to Discontinue Operations at Sierra Rutile: Iluka Resources Limited (ASX: ILU) is engaged in the production of mineral sands. The company’s segments include Jacinth-Ambrosia/Mid-West, Cataby/South West, Sierra Rutile, Mining Area C and United States/Murray Basin. ILU’s subsidiary Sierra Rutile has given a six month notice to the government of Sierra Leone on 19 May 2021, to discontinue its operations effective 19 November 2021. Sierra Rutile is likely to evaluate the productivity through cost reductions. The company may also evaluate the feasibility for development at Sembehun group of deposits. Moreover, the company is likely to identify third parties interested in the development of next phase at Sierra Rutile. Sierra Rutile may cancel the suspension of its operations on identifying higher productivity with profitability at Sierra Rutile. The company has withdrawn its production outlook of 145kt of rutile for 2021. Sierra Rutile contributes ~23% to the total mineral sands segment revenue.

Sierra Rutile Contribution (Source: Company Reports) 

FY20 Financial Highlights: The company has registered a decline in revenue to $990.6mn in FY20 against $1,232.9mn in FY19. The company has seen a turnaround with profits to $103.5mn in FY20 against a loss of $359mn in FY19. The cash on balance sheet is declined to $87.1mn as on 31 December 2020 against $97.3mn as on 31 December 2019.

Key Risks: The company is exposed to liquidity risk. The company’s financials may be impacted due to lack of liquidity to pay off its debt. The company operates in multiple countries. Any severe movement in foreign exchange prices may lead to forex losses for the company.

Outlook: ILU expects a recovery in Zircon and titanium dioxide market conditions with signs of recovery. The company expects a production of 285k tonnes of Zircon, 200k tonnes of Rutile and between 115k-175k tonnes of synthetic rutile in 2021. ILU expects a capital expenditure to be ~$100mn in 2021. 

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: The stock of ILU gave a return of ~5.12% in the last one month and a return of ~5.40% in the last three months. The current market capitalisation of ILU stands at ~$3.45bn as of 20 May 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$4.880-~$10.420. On the technical analysis front, the stock has a support level of ~$6.6 and a resistance of ~$8.15. We have valued the stock using an EV/Sales Value multiple-based illustrative relative valuation method and arrived at a target price with a correction of low single-digit downside (in % terms). We believe that the company can trade at some discount as compared to its peer average, considering the notice to discontinue operations at Sierra Rutile and COVID-19 uncertainties. For this purpose, we have taken peers Mineral Resources Ltd (ASX: MIN), Panoramic Resources Ltd (ASX: PAN), Rio Tinto Ltd (ASX: RIO). Considering a decline in revenue and cash in FY20, profitability issues with Sierra Rutile, associated business risks and valuation, we suggest investors to book profit and give a “Sell” rating on the stock at the current market price of $7.80, down by ~4.412% as on 20 May 2021.

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

Base Resources Limited

BSE Details

An Update on Q3FY21: Base Resources Limited (ASX: BSE) is engaged in production of mineral sands in Australia. The company is engaged in the operation of the 100%-owned Kwale Mineral Sands Operation (Kwale Operation) in Kenya. BSE has reported an upward trend for ilmenite and Rutile prices in the Q3FY21. The company has secured higher prices for Zircon for Q421. The company has reported completion of PFS for Kwale North Dune and concluded that the site is not viable to mine due to low heavy mineral grade and high land acquisition costs. The company is in discussion with the government of Madagascar on Toliara Project fiscal terms. The company has reported higher sales for Ilmenite and Rutile to 97,179 tonnes and 26,074 tonnes respectively in Q3FY21. The company has reported an increase in ore mining to 4.69mn tonne in March quarter 2021 against 4.29mn tonne in the same period previous year.

Mining Performance During Q3FY21 (Source: Company Reports)

1HFY21 Financial Highlights:  BSE has registered a decline in sales revenue to US$72.76mn in 1HFY21 against US$83.46mn in 1HFY20. The company has incurred a loss of US$6.33mn in 1HFY21 on the back of higher costs. The company has reported a decline in its cash position to US$99.60mn as on 31 December 2020 against US$162.55mn as on 30 June 2020. The company has reduced its non-current borrowings to nil as on 31 December 2020 against US$48.94mn as on 30 June 2020.

Key Risks: The company is exposed to the risk of movement in the commodity prices. Any severe movement in the prices of commodity may impact the financials of the company. The company operates in multiple countries. Any severe movement in foreign exchange prices may lead to forex losses for the company.

Outlook: The company has upgraded its production guidance for FY21. BSE expects Rutile production in a range of 70k-80kt in FY21, no change from previous guidance. Ilmenite is likely to see a production in a range of 300kt-320kt in FY21, increased from a previous guidance of 270kt-300kt. Zircon may see a production in a range of 26kt-28kt in FY21 against previous guidance of 23kt-27kt for the same year.

Stock Recommendation: The stock of BSE gave a return of ~-5.08% in the last one month and a return of ~-6.66% in the last three months. The current market capitalisation of BSE stands at ~$323.95mn as of 20 May 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$0.140-~$0.330. On the technical analysis front, the stock has a support level of ~$0.241 and a resistance of ~$0.301. On a TTM basis, the stock of BSE is trading at a price/book value multiple of 0.8x, lower than the industry median (Metal & Mining) of 2.8x. Considering an increase in mining ore output in 3QFY21, Higher mineral recovery in 3QFY21, reduction in non-current borrowings to nil, and valuation on TTM basis, we recommend a “Hold” rating on the stock at the current market price of $0.28, up by ~1.818% as on 20 May 2021.

BSE 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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