Company Overview - Iluka Resources Limited is an Australia-based mineral sands exploration, project development, operations and marketing company. It is the producer of zircon and titanium dioxide products of rutile and synthetic rutile, with operations in Australia and Virginia. It operates through the following segments: Australia (AUS), United States (US) and Mining Area C (MAC). The AUS segment comprises the integrated mineral sands mining and processing operations in Victoria, Western Australia and South Australia. The US segment comprises the integrated mineral sands mining and processing operations in Virginia and rehabilitation obligations in Florida. The MAC segment comprises a deferred consideration iron ore royalty interest over certain mining tenements in Australia operated by BHP Billiton Iron Ore.



Analysis - Iluka has reacted well to the changing market dynamics in the industry and undertook several initiatives like controlling production costs, driving focused management, improving production.  The company has built a strong marketing capacity, distribution network as well as logistics. Iluka has built a distinct zircon and titanium dioxide sales team with domain expertise to offer value added services to its customers in the related fields. The company has developed over 14 global points of distribution, through sales and marketing offices and warehouses to give flexibility to its clients with regards to product availability and delivery arrangements. No product was delivered out of specification during 2014, indicating the group’s dedication towards quality, given the firm’s 53 product offerings with different specifications. The firm has set up a China Technical Centre to serve its present and potential zircon customers and chloride pigment producers. 


Sales by sector and region (Source: Company Reports)

Iluka has been expanding its geographical reach with a diversified customer’s base across China, Europe, and America etc. According to the management’s expectation, the demand for high grade titanium dioxide is witnessing recovery, while zircon has variable demand, going forward. Meanwhile, zircon based products are witnessing stable demand from Europe. Coming to China, ceramics-related customers demand is expected to be stable, while zirconium chemicals producers has operating utilization of over 70% to 80% levels and a steady demand for exports.  As per America, the firm’s sales are subduing on the back of cut down of Virginia’s operations. The demand for the firm’s high grade titanium dioxide products has been growing from pigment makers and most of the firm’s high grade ore sales are contracted this year. Demand for specific grades of rutile has improved in welding. On the other hand, the low grade titanium feedstock is oversupplied in the market, pressurizing the ilmenite prices.
 
Consequently, Iluka Resources is also seeking to improve its production efforts through internal production options. The firm intends to develop the Balranald mine in the Murray Basin and views Cataby as the prospective major chloride ilmenite feed source for its synthetic rutile production. The group has conducted an early stage feasibility work at the Sonoran, Typhoon and Atacama deposits around the Jacinth-Ambrosia operation in South Australia. On an overall note, Iluka estimates an improved overall production this year, as compared to 2014.


Zircon; Rutile Production Guidance (Source: Company Reports)
 
 
Investments in Related Firms to Strengthen/Expand its Market Opportunity

The group has been continuously exploring development opportunity within the mineral sands industry and related fieldsfrom over a year. Accordingly, the company has invested in Metalysis Limited, a UK based developer of a potential disruptive technology that can generatetitanium powder straightfrom rutile and synthetic rutile. The firm has an equity holding of 18.3% and has the rights to raise its stake to 24.9% during IPO. 


Metalysis value addition to Iluka (Source: Company Reports)
 
In addition, Iluka entered in to a joint venture with Vale S.A. in Brazil for the Tapira Project. The partnership involves development on the titanium asset mineralization with Vale’s current phosphate mining operations in Minas Gerais. The phase 1 agreement which is due on 2015, involves geological, technical evaluations, market assessment and pilot plant design. After that, activities like PFS, DFS, pilot plant and commercialization will be planned.
 
Iluka Resources is also preparing for a potential acquisition of Kenmare Resources, and proposed to offer 0.016 new Iluka shares for each Kenmare share to Kenmare shareholders. Accordingly, the value is estimated to be over $363 million, and Kenmare shareholders will hold 9.6% of the combined entity. Iluka expects that the combination with Klemare would help the firm to build production flexibility, product range and further build marketing capacity.  
 
Strong Balance Sheet and Funding Capacity
 
Despite the poor operating results, Iluka has generated a $196 million of free cash flow during 2014 and achieved a gearing ratio of 3.9%, with net debt being $59 million. The firm has a solid funding capacity of over $925 million for its potential projects. The company is also a good dividend player, with the management declaring a dividends of 19 cents per share in 2014, accounting 40% of free cash flow in spite of decreased earnings.

 
The company has been controlling its production and cash production costs over some time, and was able to decrease its gross cash costs by 30% since 2011.The firm achieved to maintain its EBITDA margins above 30%, in spite of market fluctuations.  However, the unit cash costs have increased despite lower production levels. Iluka wants to overcome any related inefficiencies associated with unit cash costs in future, to further drive its margins. 


Production and cash production guidance (Source: Company Reports)
 
Iluka has also decreased its capital expenditure costs since two years and intends the same during 2015. The firm incurred a capital expenditure of $66.9 million in 2014 mainly used by Metalysis. For 2015, the firm expects to incur over $120 million for Tapiara project and other projects. Meanwhile, the firm has over $800 million inventory levels, and expects it to be higher in the coming years due to a longer logistics chain and growing proportion of small lot sales for customers across world. 


Inventory levels (Source: Company Reports)
 
The firm has been making management changes to be more focused on the development opportunity within the mineral sands industry and related fields. Iluka’s top level management executives Chris Cobb, Alan Tate and Doug Warden have assumed new roles since June 1^st, 2015. To boost the bullish sentiment on the stock, the firm has bought more than 1 million shares from the market at an average price of approximately $8.56.

 
Conclusion
 
The shares of Iluka Resources have been under pressure for the entire 2014, posting a slump of over 30% as compared to the S&P ASX 200 of over 1.6%. However, this decline was in line with the market expectations, given the unfavorable market for resource companies. But, 2015 year has been good for Iluka, and was able to generate outstanding year to date returns of 26.2% as compared to 0.32% delivered by S&P ASX 200. Meanwhile, the poor first quarter results, and investors’ concerns on strike at Kenmare has dragged the stock over 16.6% lower, in the last four weeks, amid other reasons. However, with the possible strike end at Kenmare, improving production by Iluka, solid balance sheet, dividends, improving market conditions, focused management and strong liquidity will drive the stock higher in the coming months.


Iluka Daily Chart (Source - Company Reports)
 
Based on the foregoing, we give a “BUY recommendation to the stock at the current price of  $8.00.
 

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