Iluka Resources: Constrained Mineral Sands Supply Still a Significant Tailwind

We maintain our AUD 11 fair value estimate for no-moat Iluka ILU after incorporating the company’s latest guidance. We now forecast average zircon production of roughly 295,000 metric tons, up from around 280,000, from 2023 to 2025. Our forecast includes the company’s production of zircon in concentrate, a lower-grade product that Iluka uses as a source of flexible supply to the market and also generates satisfactory returns from its low-grade zircon stockpiles. We now forecast average synthetic rutile production of about 320,000 metric tons, modestly down from 330,000, but continue to forecast average rutile production of around 70,000 metric tons from 2023 to 2025.

Despite economic uncertainty, mineral sands supply remains tight. Iluka has pushed through higher zircon prices to its customers and has also signed take-or-pay contracts for roughly 60% of its synthetic rutile production over the next four years. While synthetic rutile has a lower titanium dioxide content than natural rutile, tight supply of the latter has driven Iluka to reopen its Synthetic Rutile Kiln 1 at Capel. We think elevated prices will encourage customers to substitute or use less of Iluka’s products where feasible. However, we think the impact is manageable, given strong demand and Iluka’s efforts to balance the market. Iluka can flex its zircon in concentrate production depending on market conditions, and price increases are managed to ensure customers can bear them. The company also acts as the market leader, willing to increase inventory and even curtail production in a downturn to moderate cyclical mineral sands demand.

The balance sheet remains strong, with net cash of AUD 430 million at the end of March. This will help Iluka fund its growth pipeline while continuing to return excess cash to shareholders. It also provides the flexibility to build inventories when the next downturn comes. We forecast 2023 fully franked dividends of AUD 0.30 per share, representing a 2.8% yield.