Company Reports

Commodity prices generally fell in the September-ending quarter, except for gold. Concerns about weak China end-user steel demand affected iron ore and other steelmaking commodities, while base metals prices fell on worries over slower economic growth in China and elsewhere.

Iluka Resource’s first-half 2024 adjusted EBITDA of about AUD 260 million fell 28% on last year due to lower prices and sales volumes, and higher unit cash costs. Nonetheless, it was better than we expected. The main difference to our expectations was zircon sales of around 110,000 metric tons compared with our estimate of about 160,000 metric tons for the year. China’s weak residential property sector along with slower Western real estate markets due to higher interest rates means mineral sands markets are subdued. Yet the industry remains disciplined, with producers managing production to maintain a balanced market and support a relatively stable pricing environment. For its part, this has seen Iluka reduce sales and build inventory in recent years, which it is now starting to draw down to meet solid demand.

Iluka is a global mineral sands miner. Major mines are Jacinth-Ambrosia in South Australia and Cataby in Western Australia. Relatively low operating costs for zircon are supported by Jacinth-Ambrosia, but its reserve life is less than a decade. Like the industry, Iluka is facing a declining grade profile at its mines, but a constrained outlook for supply should support prices.

Shares of most of our global mining coverage fell during the quarter, and the average price/fair value estimate has fallen modestly to 1.05 at July 8, 2024 from 1.07 last quarter. While our coverage is close to fairly valued on average, there is a wide dispersion, with no-moat mineral sands miner Iluka the cheapest, trading 30% below fair value at that date. Mineral sands prices are lower, on reduced demand from China’s property sector. Rising interest rates and slowing housing markets in the West are also a near-term headwind. However, longer-term, maturing mines and a lack of large, high-grade, undeveloped resources are likely to support mineral sands prices. Its proposed rare earths refinery in Eneabba is an option, on elevated rare earths prices and potential Western tariffs on Chinese production.

Base metals prices surged earlier in the June quarter of 2024 before partially reversing due to concerns over China’s economy. Iron ore prices are broadly stable despite China's struggling property market and weak infrastructure spending, leading to questions over China's steel demand. After updating our commodity price assumptions, no-moat Iluka is the cheapest miner we cover, trading 31% below its unchanged fair value estimate of AUD 9.50.

Commodity prices diverged in the quarter. Despite solid China steel production, iron ore and metallurgical coal prices are down, while copper rose on supply issues and hopes of faster global growth. However, prices are elevated compared with history and cost-curve support.

Iron ore prices are lower on concerns over China steel demand due to its struggling property market and weak infrastructure spending. However, gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 51. It remains the cheapest miner we cover, trading 27% below fair value.

Demand growth from China has been the main driver of rising commodity prices in the past two decades. More recently, though, most commodity prices have fallen from highs set with Russia’s invasion of Ukraine, the subsequent sanctions on Russia, and the rerouting of supply chains. Prices, nevertheless, are generally elevated versus the 20-year average, as well as relative to cost support.

No-moat Iluka Resources’ adjusted 2023 EBITDA of roughly AUD 610 million was down roughly 30% on 2022 but 17% higher than our forecast. The AUD 270 million decline in adjusted EBITDA reflected lower sales volumes and higher unit costs, partially offset by a weaker Australian dollar, with prices stable. Adjusted net profit after tax of about AUD 340 million, or AUD 0.81 per share, fell 42% on last year. Iluka’s mineral sands business generated negative free cash flow of AUD 70 million, driven by higher inventory and a large one-off tax payment. Along with lower earnings, this meant the fully franked final dividend of AUD 0.04 per share represented just Iluka’s share of the dividends it received on its 20% stake in wide-moat Deterra Royalties. Total dividends of AUD 0.07 per share fully franked were down 84% on last year.

Iluka is a global mineral sands miner. Major mines are Jacinth-Ambrosia in South Australia and Cataby in Western Australia. Relatively low operating costs for zircon are supported by Jacinth-Ambrosia, but its reserve life is less than a decade. Like the industry, Iluka is facing a declining grade profile at its mines, but a constrained outlook for supply should support prices.

Near-term iron ore prices are higher on strong China steel production. Gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 54. It is the cheapest we cover, trading 30% below fair value.

Iluka is a global mineral sands miner. Major mines are Jacinth-Ambrosia in South Australia and Cataby in Western Australia. Relatively low operating costs for zircon are supported by Jacinth-Ambrosia, but its reserve life is less than a decade. Like the industry, Iluka is facing a declining grade profile at its mines, but a constrained outlook for supply should support prices.

Commodity prices diverged in the quarter with strong China steel production driving iron ore and metallurgical coal prices up, while base metals prices dropped on worries of a Western recession. Even so, prices are elevated versus history and cost-curve support.

Strong China steel production is supporting prices for steel inputs despite recession concerns. Otherwise, changes to our commodity price assumptions are mixed, led by higher near-term iron ore prices and lower near-term thermal coal prices. We think thermal coal miner Whitehaven Coal and minerals sands miner Iluka are the cheapest we cover. Both trade at 29% discounts to our AUD 9.50 and AUD 10.50 per share fair value estimates, respectively, with Whitehaven’s down 3% on lower near-term thermal coal prices, partially offset by a weaker Australian dollar. Peer New Hope is also down 3% to AUD 6.10 per share. Iluka’s estimate is unchanged, with a weaker Australian dollar offsetting lower synthetic rutile prices.

Iluka is a global mineral sands miner. Major mines are Jacinth-Ambrosia in South Australia and Cataby in Western Australia. Relatively low operating costs for zircon are supported by Jacinth-Ambrosia, but its reserve life is less than a decade. Like the industry, Iluka is facing a declining grade profile at its mines, but a constrained outlook for supply should support prices.

Commodity prices have generally stabilized after falling on concerns that China’s reopening would underwhelm, along with worries over a recession in the West. Even so, they remain elevated versus history and cost-curve support. The Russian invasion of Ukraine and subsequent sanctions on Russia support energy prices and reinforce the importance of energy security.

No-moat Iluka’s 2023 first-half result was similar to our expectations, except the AUD 0.03 fully franked interim dividend. It was lower than we expected and roughly 90% down on last year, impacted by higher inventory and a large one-off tax payment as well as lower earnings. Adjusted net profit after tax fell 29% to about AUD 200 million, or AUD 0.48 per share. Adjusted EBITDA declined 22% to roughly AUD 370 million on a 50% margin, down from 57%. The AUD 100 million decline in adjusted EBITDA reflected lower sales volumes and higher unit costs, partially offset by higher realized prices and a weaker Australian dollar.

We maintain our AUD 11 fair value estimate for no-moat Iluka 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.

No-moat Iluka’s 2022 result was impressive, driven by higher mineral sands prices and a weaker AUD/USD rate, partially offset by lower sales volumes and higher unit costs. Adjusted net profit after tax, or NPAT, nearly doubled to about AUD 600 million, or AUD 1.41 per share. Adjusted EBITDA increased 45%, to about AUD 950 million. The AUD 300 million adjusted EBITDA increase was mainly due to higher average realised mineral sands prices (up AUD 400 million) and a weaker Australian dollar (up AUD 110 million), partially offset by lower sales volumes (down 170 million) and higher unit costs (up AUD 90 million). Ignoring Sierra Rutile, which the company demerged and spun off to shareholders in June 2022, total sales volumes for zircon, rutile and synthetic rutile fell 13%, to about 630,000 metric tons. EBITDA margins increased as higher mineral sands prices more than offset a 21% increase in unit cash costs.

No-moat rated Iluka Resources has rapidly emerged from last year’s challenges with soft product demand and sales volumes. The near- to medium-term outlook appears much stronger now than we previously thought. We had expected the overhang of inventory, built up through the period of COVID-19-induced weakness, to unwind over a couple of years, but it mostly unwound in the first half of 2021. The increase in sales volumes, along with robust prices, underpinned the 14% increase in first-half 2021 net profit after tax to AUD 129 million compared with the first half of 2020.