USB Global Research
19th April 2018
Iluka Resources Limited - Projects and upgrades continue to roll out
Z/R/SR production lifts 8% q/q and beats UBSe by 2%
Iluka delivered a solid quarterly production result of 181.5kt Z/R/SR, 2% ahead of UBSe. The 8% lift q/q can be attributed to the Eucla Basin returning to full capacity and the 22% decline y/y is due to the closure of Murray Basin. Rutile production of 44kt missed our expectations for 51kt largely as a result of the Sierra Rutile dredge being out of operation for the last 2 weeks of March; despite this 2018 guidance has been maintained at 160kt. MQ Z/R/SR revenue of A$249m on sales of 205kt implies unit revenue of A$1,219/t (UBSe A$1,221/t). Net debt reduced over the quarter to A$108m (A$183m as at 31 Dec 17), we forecast net debt to lift as Cataby progresses.
A number of operational transitions are coming…
On the operational front, Tutunup mine has ceased production meaning the SR kiln will now operate on third party ilmenite and stockpiles until the Cataby mine starts. Cataby remains on schedule and budget with first production anticipated in Q1 19. Iluka is looking to bring mining at Ambrosia forward to 2019 (prev. 2022) to offset grade and production decline, which could see a ~20% lift in production at Jacinth-Ambrosia which was previously forecast to average 225ktpa over 2018-20. The costs associated with this decision are to be disclosed following completion of a detailed feasibility study in mid-2018.
Supportive zircon pricing is incentivising new supply
Iluka noted while there is limited scope for supply increases from existing mines short term they are starting to see artisanal mining of zircon recommence in Indonesia given the supportive price environment, with a 33% increase in Indonesian exports in the MQ to ~3.5kt per month. Despite this supply remains tight with Iluka having recently secured an US$180/t lift in price to US$1,410/t for the 6 months to 30 September 2018. In the feedstock market plant closures in China and Europe and supply disruptions have demand for Iluka's high grade products increasing. The majority of H2 18 rutile sales are uncontracted and spot prices remain at a premium to contract.
Valuation: A$11.40ps (prev. A$11.38ps) DCF @10% d.r
Our price target lifts to A$13.00ps (A$11.50ps) and is set at a 15% premium to NPV (prev = NPV) to reflect ongoing tightness in the feedstock and zircon markets from supply disruptions.
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