Demand for appliances and home building/renovation products during the pandemic has provided one of the less obvious boosts to mineral sands producer Iluka Resources ((ILU)).
Ceramics and paint are the ultimate end products for mineral sands and the company has been a beneficiary of home-oriented consumption. Morgan Stanley notes DIY remains strong in the northern hemisphere heading into the peak spring/summer demand period.
March quarter revenue was 23% ahead of Macquarie’s forecasts because of higher sales volumes of both zircon and synthetic rutile. Iluka has also flagged a US$70/t rise in zircon, expected from the June quarter.
Production from Jacinth Ambrosia was better than the broker expected in terms of both zircon and rutile. There was no zircon and rutile production at Cataby while ilmenite was -68% below Macquarie’s forecasts.
Zircon sales were the big surprise for Citi in what is traditionally a seasonally slow quarter and zircon inventory has now normalised. Zircon volumes beat Morgan Stanley’s estimates, too, but as sales were done at the previous year’s prices it could indicate restocking and perhaps a slower run rate.
The broker also points out Chinese New Year shutdowns were of shorter duration this year, helping volumes, as migrant workers were unable to travel. China’s anti-dumping restrictions have resulted in more tile exports from European producers to the US and India has also replaced some Chinese export share.
Goldman Sachs expects the zircon market to enter a deficit in 2021 driven by a greater than -10% fall in global supply from mine depletion and production cuts. The broker also envisages another increase in the zircon price is possible mid year.
Meanwhile, titanium dioxide demand is robust and pigment price rises are flagged in the mid-single digits. Shaw and Partners points out pigment inventory levels are below average, with extended lead times for some grades. China’s sulphate pigment demand has also been strong.
Sierra Rutile
Sierra Rutile production was down sharply in the quarter because of the suspension of synthetic rutile production in February/March – slated in order to manage inventory levels. As the kiln re-started after a suspension of just two months compared to the 3-6 months the company previously flagged, Sierra Rutile production guidance for 2021 has been raised to 190,000t.
This includes a resumption of the Chemours offtake in line with its contract, and despite the ongoing litigation surrounding the 2020 offtake. The earlier-than-expected restart of rutile production at Sierra Rutile meant sales beat Citi’s forecasts by 31% in the quarter. Still average prices were flat and lower than assumed.
As production declined to 26,000t of rutile in the March quarter and operations continue to experience challenges, Credit Suisse considers it unlikely Sierra Rutile will achieve full year guidance. The company has indicated trouble in obtaining skilled workers in Sierra Leone as fewer expatriates are available.
Production recommenced on April 1 and Morgan Stanley points out Iluka needs rutile production to improve in order to obtain the second half price premiums stemming from a tighter market.
Prospects
Credit Suisse improves 2021 dividend estimates but highlights the number of “unknowns” around the company’s growth options, which include achieving pricing of its 90% monazite concentrate from phase 2 at Eneabba rare earth operations. Monazite sales in the quarter were in line with the offtake agreement in place to underpin phase 1. Phase 2 will start in the first half of 2022.
Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, rates Iluka Resources a Buy with an $8.40 target because of its compelling potential in mineral sands and rare earths.
The broker considers the valuation attractive and notes the business is able to fund its own growth, being net cash. Shaw and Partners observes a fully-integrated refinery has been under consideration for some time at Eneabba and is now progressing towards a final feasibility study.
The broker, also not one of the seven, has a Buy rating with an $8.00 target, believing buoyant global conditions will underpin the company’s balance sheet. Shaw finds the company’s myriad project offerings interesting and prospective, post the de-merger of Deterra Royalties ((DRR)), as well as being potentially financially viable.
The database has one Sell (Credit Suisse), three Hold and one Buy (Ord Minnett, yet to comment on the quarterly). The consensus target is $6.86, suggesting -8.5% downside to the last share price.
