ILU - Iluka Resources Limited - Strawman: ASX share price, valuation, research and discussion

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#Bull Case

will1231

Added 4 months ago

Goldman Sachs has revised its list of highest conviction stocks going into 2025 - and one of the new inclusions is Iluka Resources (ASX: ILU)

GS states that Iluka Resources leads global zircon production with a 30% market share, operating in an industry where the top 3 producers control 65% of output. Beyond zircon, which supplies ceramics and chemical industries, Iluka is a major producer of high-grade TiO2 feedstock for paint manufacturing, holding a 20% market share. The company is also expanding into rare earths, constructing an Australian refinery to supply Western manufacturers with both light (Nd & Pr) and heavy (Tb & Dy) rare earths — critical components for magnets used in electric vehicles, wind turbines, robotics, and electronics.

They believe that the zircon market is one of the best structural supply-side stories in commodities currently due to decline in the current industry and lack of new investment in new mine supply and believes the company to be a major beneficiary given its world-leading market share of 30% and forecasts the company's EBITDA to double by 2028.

The Australian Government recently approved $400 million in additional funding for Iluka's Eneabba Rare Earth refinery in Western Australia, bringing total government funding to $1.65 billion. The refinery is now fully funded and construction of the 3-4ktpa (NdPr) facility will begin in the first quarter of 2025, representing a significant milestone for the company. The development of Eneabba will be a strategic and highly valuable Western World critical mineral asset and only the fifth rare earth refinery outside of China, according to Young.

From a valuation perspective, Goldman Sachs believes the stock is undervalued for several reasons.

· Iluka is trading at 0.55x NAV or $9.34 per share

· The stock is pricing in almost no value to the rare earths refinery and Wimmera rare earths project

· The stock is trading at approximately 5x EBITDA (next twelve months) vs. key rare earth peers trading at 16x and mineral sands players at 6x

· Iluka is trading on a free cashflow yield of 14% in 2025-26 without the rare earths refinery capex and is in a net cash position

· At the current share price, it makes sense for Iluka to announce a share buyback, funded by free cashflow from mineral sands

Currently Iluka trades around $5.14 but GS believes there will be a significant re-rating to around $7.70/share

#quarterly

stale

Chagsy

Added 2 years ago

ILU released its latest quarterly yesterday.

The full announcement can be found here

but in summary it was another solid result in terms of revenue, but the volume of both production and sales is down.

Importantly, ILU has been selling off stockpiled product for the last 12-18 month. This is one of ILU's strengths (as per previous straws) it has the capacity to be the provider of last resort in the mineral sands market - my comparison was to Saudi Arabia in the oil market. So when prices are a bit crap, it keeps producing unprofitably until prices recover and then makes hay.

It has now made all the hay. The stockpiles are sold, and it become a higher risk proposition where any hiccup in production can crash forward estimates. They are also funnelling profits into the Eneabba rare earths project, so the recent high dividends are not likely to last IMHO.

For me, this result validates my decision to sell out after the last bumper dividend in September. They may well do well from here, but I think that my thesis of benefiting from the sales of their stockpile into a buoyant mineral sands market is now over. The thesis for ILU is now quite different. Their main resource has a limited LOM and they are transitioning into the Rare Earth space.

It is priced cheaply on a trailing PE of 8.7 but this is unlikely to be the case for a forward PE now the stockpiles are gone and the mineral sands prices will come under pressure in a likely global recession.

That said, the market put an extra 2% on the SP.

Valuation of $6.48

stale

Bear77

Added 4 years ago

Scroll down for the latest update - which is at the bottom. Iluka (ILU) are a major global player in mineral sands, specifically zircon, rutile and synthetic rutile (Z, R, & SR in their reports). Rutile is composed primarily of titanium dioxide. Titanium is the 9th most abundant element in the earth’s crust and 4th most abundant metallic element. In its natural state it is generally found as rutile (titanium and oxygen) or illmenite (titanium, oxygen and iron). In addition to being major global players in the mineral sands industry, ILU own a royalty over all iron ore produced in BHP's Mining Area C (MAC), which also includes the South Flank deposit currently being developed - and scheduled for first ore production in 2021. ILU received AU$56 million from that royalty in 2018. That's passive income for which no effort is required on their part., March 2019: ILU have just moved into a net cash position (no net debt) as at December 31st 2018 after a very good year on the back of better zircon and rutile prices. 15-Sep-19: Those mineral sands prices have since fallen, based on global growth concerns - and so ILU shares have become cheaper. If you're going to buy them, below $8 is a good level in my opinion. 15-Mar-20: Iluka has recently announced that they are planning to demerge their MAC (Mining Area C) Royalty into a separately listed company, which they're calling RoyaltyCo at this point, with existing shareholders to receive shares in that new company allowing them to decide whether they want to keep them or sell them. Once that demerger is completed Iluka will be a pure Mineral Sands play, rather than a Mineral Sands company with a large royalty interest in all of the iron ore produced by BHP in Mining Area C - which includes their new South Flank development due to come online next year. This announcement is positive and will release value for shareholders. The Iluka SP initially rallied due to that announcement and then dropped back down again due to COVID-19 and the deteriorating global growth outlook (and the associated reduced demand outlook for mineral sands). I'm still a holder. I still think this is a good investment, especially at these prices. However, the road back from here - from a share price perspective - will depend on how long it takes for this coronavirus to become part of accepted everyday life, rather than the full-blown pandemic that it is right now. And that - in terms of months - or years - depends on a few different things, and is hard to predict with any conviction of certainty. Taking a longer term view, I think iron ore demand will be OK next year, particularly if China stimulates via further fixed asset investment, but Mineral Sands demand might be hit harder and take longer to recover. However, all things considered I reckon I'll stick with Iluka. I'm just lowering my TP a little. Update: 14-Sep-20: I'm raising my TP back up to $10.80 (from $10). The EGM for the vote to demerge the MAC Royalty into a new listed company, to be called Deterra Royalties, is now scheduled for October 16, and assuming it is voted up, every eligible ILU shareholder will receive 1 Deterra share for every 1 ILU share they hold (and get to keep the ILU shares too of course). Deterra Royalties is set to commence normal trading on Tuesday 3rd November. This is a good time to be holding a royalty that covers all of the iron ore produced in Mining Area "C" (MAC) which includes BHP's huge new South Flank mine. Value is going to be released here, and there will be some people buying into ILU between now and the 23 October ex-entitlement date. I hold ILU already of course. OK, Update time - 11-Mar-2021: I've sold out of ILU and out of DRR now. ILU closed today at $6.70 and DRR closed at $4.13. The combined total is $10.83, so they did exceed my $10.80 target price. - that I set back in September (2020) before the demerger had occurred. All Australian resident ILU shareholders received one DRR share for every ILU share held. Obviously now that the demerger has happened, ILU is worth less, as they do not own the MAC iron ore royalty any more, they are now a pure-play mineral sands company. I am therefore lowering my target price for ILU to $6.48 (60% of $10.80) and my TP for DRR will be $4.32 (40% of $10.80). ILU is trading a little over that $6.48 TP now, and DRR is trading a little under my $4.32 TP for them. The market was underwhelmed by DRR's first report and dividend, as I expected they might be, as the real money won't flow until BHP's South Flank ramps up to full capacity this year and next year. The DRR dividends will increase substantially as a result of that big lift in royalty income from BHP to DRR, however that is yet to come, and people are looking for other ideas in the meantime. I'm neutral on mineral sands currently, so I'm not looking to buy ILU now that the the demerger (of the MAC Royalty into DRR) catalyst has already occurred. And I'll look at DRR again probably around January next year.

Valuation of $8.00

stale

Chagsy

Added 4 years ago

Copy and pasted from latest cuffelinks newsletter. I have just bought not he strength of their assessment and possibility of zircon price re-rate. Iluka Resources Limited (ASX:ILU) Nominated by Perpetual Investments A company we believe is good value is Iluka. Iluka is a mineral sands producer with its main products being zircon, and rutile/synthetic rutile. 2020 was a particularly tough year for Iluka with the downturn in demand for zircon due to COVID-19 but the company is well positioned to leverage the expected recovery in demand in 2021+. However, in October it spun off its iron ore royalty business (Deterra) in which it still holds a 20% stake (worth about $500 million). We expect that the company will have net cash of just under $300 million by the end of 2021 and we think that the business will generate about $500m EBITDA in 2021 (it did more than $500 million in both 2018 and 2019). Putting this all together, you have a company with a $2.4 billion market cap where if you strip out the cash and the Deterra stake the adjusted market cap/enterprise value is $1.6 billion which will generate pre-tax free cashflow of $400 million which is an eye-watering 25% pre-tax free cashflow yield. We like commodities with concentrated supply side dynamics as it will generally result in more sensible pricing and when there is a spike in demand the underlying commodity price tends to skyrocket (as we have seen in iron ore recently). The last time there was such a phenomenon for mineral sands was in 2010 and 2011 which saw zircon and rutile prices double. [9] Over this period the ILU share price increased almost 5-fold and was one of the top three performing stocks in the ASX200 in both 2010 and 2011. Our 25% pre-tax free cashflow yield does not forecast this scenario but in a macro environment of synchronized global growth it is not out of the realms of possibility that we could see mineral sands prices to spike. Another optional upside comes from its rare earths opportunity. Rare earths are set to experience a significant increase in demand as one of the major uses is in magnets for electric motors used in electric vehicles, wind turbines and other applications that benefit from the push towards renewable energy and decarbonisation.

#Ex-entitlement for DRR shares

stale

Bear77

Added 5 years ago

23-Oct-2020: Just a quick note that Iluka (ILU) has today gone ex-entitlement for their demerger (spin-out) of their MAC iron ore royalty into a new company called Deterra Royalties Limited (ASX: DRR). All shareholders who are on the ILU share register today will receive one DRR share for every ILU share they own. Obviously, anybody buying today will be added to the ILU share register tomorrow, and will miss out on the free shares in DRR. Hence, the 40% to 50% fall in the ILU share price today.

Further Details can be viewed here: https://www.iluka.com/getattachment/2d4847b2-f9fd-477f-9d62-1aec66251cbc/deterra-royalties-demerger-briefing-presentation.aspx

[I hold ILU shares.]

#Company Reports / Reviews

stale

Bear77

Added 5 years ago

29-Apr-2020: Quarterly Review to 31 March 2020

#Company Reports / Reviews

stale

Bear77

Added 5 years ago

29-Jan-2020: Quarterly Review 31 December 2019

Things I found interesting:

Cash is building:

Net cash as at 31 December 2019 of $43 million (31 December 2018: net cash $2 million), reflecting free cash flow of $140 million in 2019 while investing $198 million in capital expenditure.

Review of Corporate and Capital Structure of Mineral Sands Operations and Mining Area C Royalty

As previously announced on 31 October 2019, Iluka has commenced a formal review (the Review) of the corporate and capital structure of Iluka’s two principal businesses – mineral sands operations and the Mining Area C royalty (MAC).

Work continues on the Review, and as previously stated the company expects to provide an update on the Review at the announcement of the Full Year Results.

2019 Full Year Results

Iluka is scheduled to release its 2019 Full Year Results on 20 February 2020. An investment market conference call will take place on the day.

Dial-in details for the conference call will be on the Events page of Iluka’s website in due course: www.iluka.com/investors-media/events

. . . . . .

The value of the MAC (Mining Area C) royalty will increase materially when BHP's new South Flank mine comes online next year, because Iluka is entitled to a royalty on every tonne of iron ore produced by South Flank (which falls within Area C). ILU are currently looking at a variety of options that include (but are not limited to):

Divesting (selling) the royalty, which would likely result in a large special dividend to Iluka shareholders;
Spinning off the royalty into another seperate listed business - which would result in Iluka shareholders being given shares in that new business, which they could sell or keep as they wish; or
Keeping the royalty as a passive source of income that is entirely independent from their mineral sands business.

Option 3 has been Iluka's preferred option to date, but they're now at least prepared to entertain the idea of spinning the royalty out or selling it. I suspect that may have been at least partly as a result of some activist investors (such as Sandon Capital - SNC) who have been pushing for a divestment or spin-off because they believe that the Iluka share price doesn't adequately reflect the value of the MAC royalty - but really just covers the Iluka mineral sands business.

South Flank construction began in July 2018 with first production of iron ore anticipated in 2021. The project is expected to produce ore for more than 25 years.

What is the MAC Royalty (that Iluka own) worth? Joseph Kim from Montgomery Investment Management had a go at working it out in July 2019 - see here: https://www.livewiremarkets.com/wires/how-valuable-is-iluka-resources-mac-royalty - and his estimates vary from $1.5 billion up to $6 billion. He believes it is likely to be between $1.5 billion and $2.2 billion - using a DCF (discounted cash flow) approach. Iluka (at $9.54) has a current market capitisation (market cap) of just over $4 billion.

I suspect that Gabriel Radzyminski at SNC is correct (along with others) in saying that the Iluka SP does NOT adequately reflect the combined value of both Iluka's Mineral Sands business AND the MAC Royalty.

Roll on Feb 20th !

Disclosure: I hold ILU and SNC shares.