Company Overview - Iluka Resources Limited is an Australian mineral sands exploration, project development, operations and marketing company. It is a producer of zircon and titanium dioxide products of rutile and synthetic rutile, with operations in Australia and Virginia. It also produces ilmenite. It segments include Australia (AUS), United States (US) and Mining Area C (MAC). AUS comprises the integrated mineral sands mining and processing operations in Victoria, Western Australia and South Australia. AUS segment's mining deposits are located at the South West and Mid West of Western Australia (Perth Basin), the Jacinth-Ambrosia deposit is South Australia (Eucla Basin) and in Victoria (Murray Basin). The US segment comprises the integrated mineral sands mining and processing operations in Virginia and rehabilitation obligations in Florida. MAC comprises a deferred consideration iron ore royalty interest over certain mining tenements in Australia operated by BHP Billiton Iron Ore.


ILU Dividend Details



Ongoing pressure for the group’s mineral sands products: Iluka Resources Ltd.’s (ASX: ILU) mineral sands products continued to be under pressure on the back of softness in demand thereof due to slowdown in China leading to oversupply of the group’s products and consequently pricing pressure. Therefore, ILU’s buyers deferred some of their purchases primarily for zircon, while the group’s high grade titanium dioxide products performance is as on track with Iluka’s expectations. Iluka Resources forecasts its Zircon/Rutile/Synthetic Rutile (Z/R/SR) sales to be 5% lower to 645 thousand tonnes as compared to its earlier estimates over 680 thousand tonnes for the full year of 2015. Ongoing zircon sales pressure led to the overall group’s sales and production pressure as ILU estimates its total Zircon sales to reach over 330 thousand tonnes. However, the group’s Synthetic Rutile production in 2015 would offset the lower Rutile production during the year to a certain extent, as ILU expects its total Rutile and synthetic rutile sales to reach 315 thousand tonnes in 2015, based on the shipments delivery in the forthcoming weeks. The group did not increase its volumes like its peers due to the current challenging price environments, wherein its weighted average received zircon price for premium and standard product sales as of November year to date of 2015 reached US$1,005/tonne as compared to US$1,033/tonne in 2014. The weighted average received price for zircon decreased to over US$995/tonne during November year-to-date of 2015. Moreover, Iluka Resources would be incurring a non-cash accounting adjustment during 2015 linked to the rise in rehabilitation provision on the back of ongoing decrease in 15 year Australian Government Bond rate which reduced to over 3% against 4.7% in 2013 leading to a rise in present value of the Australian rehabilitation provision by $47 million. Accordingly, Iluka would incur a $25 million non-cash pre-tax charge in the profit and loss for full year of 2015 while the balance sheet would incur $22 million.
 

Production and sales guidance for 2015 (Source: Company Reports)
 
Focusing on cost efficiency to offset the top line pressure: Iluka Resources is focusing on cost efficiency to offset the falling prices pressure to a certain extent on its performance and accordingly estimates an overall cash costs of production to reach over $30 million, which is below than the earlier 2015 guidance. The group unit cash costs for Z/R/SR reached $565/tonne as of November 2015, which is better than the unit cash costs of $668/tonne during 2014 year end. The group’s unit revenue per tonne of Z/R/SR reached at $1,160 as of November end against unit revenue of $1,030/tonne in 2014 year end. Iluka Resources is also cutting its capital expenditure for the full year of 2015 by about 35% to $75 million to boost its cash flows as compared to its issued guidance of over $120 million. The group was able to decrease its capex for 2015 as they deferred certain costs related to land acquisition and deferred further investments at Metalysis. Accordingly, Iluka estimates a better free cash flow during the second half of the year and have a low debt by end of 2015 year.
 
Better third quarter performance driven by declining Australian Dollar: Iluka reported a production increase by 41% yoy to 198 thousand tonnes in September 2015 quarter, as compared to 141 thousand tonnes in September 2014 quarter and 189.3 tonnes in June 2015 quarter, driven by Synthetic rutile production related to the Iluka’s SR 2 kiln production in April 2015. Accordingly, the group delivered a September year to date production increase of 21% to 475 thousand tonnes against 393 thousand tonnes in prior corresponding period, driven by high-grade titanium feedstock production and resumption of production from Iluka’s SR 2 kiln. Meanwhile, Iluka’s revenues rose by 26% yoy to $168.9 million in September 2015 quarter boosted by better volumes on the back of falling Australian dollar coupled with rising proportion of synthetic rutile in the product mix. The group received a better September quarter revenue per tonne of Z/R/SR sold as compared to the June year-to-date revenue per tonne of Z/R/SR at A$1,130/tonne.
 

September quarter performance (Source: Company Reports)
 
Guidance for 2016: Iluka Resources estimates its overall Z/R/SR production for 2016 to be lower than its 2015 production as its US operations would be idle during 2016 while the group is also decreasing its mineral separation plant utilization levels, despite a total year production of its SR 2 kiln. On the other hand, the group expects its sales to be backed by growing drawdown of the completed product and concentrate inventories. Meanwhile, Iluka continues to control its Cash Costs of Production (excluding by-product costs) for 2015 and 2016, with 2015 Cash Costs of Production estimated to reach over $390 million while 2016 cash costs is expected to be lesser than 2014 figure. Depreciation and amortization costs are forecasted to be over $130 million in 2015 while 2016 Depreciation and amortization costs is forecasted to be less than 2015 on the back of decrease in mining activity. Iluka Resources estimates a capital expenditure of over $95 million in 2016 as the group would incur costs related to Metalysis Limited.
 

Western Gawler Project Area (Source: Company Reports)
 
Pursuing exploration opportunities: Iluka Resources is also pursuing growth opportunities and accordingly made a gold farm-in agreement with Doray Minerals to cover Gold Rights at the West Gawler Project. Meanwhile, Doray reported that there is presence of several coincident geochemical and structural targets which might be key for the project area to host significant gold mineralization. Therefore, Iluka Resources issued a notice to get 51% entitlement to E70/2464 under the farm in and exploration joint venture agreement. Iluka is also managing and funding all the explorations related to the Phar Lap Project. (With Monax having 100% stake while Iluka has the option to earn 80%). The group aims to drill three diamond drill holes to a depth of over 500 meters to test three separate gravity anomalies.
 

    Farm in and Joint Exploration Activities (Source: Company Reports)
 
Stock Performance: The shares of Iluka resources have plunged over 32.11% (as of December 22, 2015) in the last six months and declined over 13.13% in the last four weeks due to ongoing tough market conditions’ impact on its production and Z/R/SR realized prices. Iluka Resources management recently further decreased its Z/R/SR production for 2015 as compared to its earlier guidance due to lower Zinc sales despite Synthetic rutile contribution. On the other hand, ILU is controlling its cash costs to offset its top line pressure and estimates a further lower cash costs for 2015 fiscal year against its earlier 2015 guidance estimates. Moreover, ILU is also reducing its capital expenditure for 2015 which would further boost its cash flow. Iluka Resources recently dismissed all negotiations with Kenmare Resources management related to a potential offer by Iluka to acquire entire Kenmare stake. Iluka reported that they would not be able to offer the price estimated by Kenmare shareholders. This move by Iluka management indicates their prudent approach while pursuing acquisitions based growth and the group’s balance sheet would not be under pressure. The shares of Iluka resources thus rallied over 3.93% in the last five days alone (as of December 22, 2015). Meanwhile, the ongoing Australian dollar pressure against the US dollar coupled with the costs control efforts would continue to support Iluka in the coming periods. We believe that the stock would be able to recover and based on the foregoing, we reiterate our “BUY” recommendation for the stock at the current price of  $5.76
 
 
ILU Daily Chart (Source: Thomson Reuters)

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