UBS Global Research 21 August 2019 Iluka Resources Limited...

UBS Global Research
21 August 2019
Iluka Resources Limited
Zircon market deterioration more than expected

H1 19 continues the steady decline off the back of falling sales volumes
Iluka reported a softer-than-expected H1 result (A$137m, -23% h/h) as a result of
lower zircon demand driving down revenue and COGS lifting 10% due to higher costs
at Cataby and translation of US$ costs from SRL. Iron ore tailwinds from the 1H 19
lifted MAC royalty revenues; although the benefit may not continue into H2 if iron ore
prices continue to slide. 2019 guidance was lowered for zircon sales to flat H2 19 on
H1 19. This implies ~266kt for 2019 vs 379kt in 2018. Deteriorating market conditions
and increasing costs underpin our 11% to 26% cuts to 2019/20/21e earnings. The
removal of Sembehun from our NPV sees that down 25% to A$8.07ps. Our PT drops in
line with NPV. We look for a resolution in trade tensions as a catalyst for zircon buyers
to return to the market and a potential rebase of ILU’s share price.

Fortunes appear tied to trade tensions
Management first flagged the dampening of demand for Zircon in the MQ, attributing
it to historical seasonality while maintaining optimism that underlying demand was
sound. Lower demand started to hit the bottom line in JQ with the impacts of ongoing
trade tensions and geopolitical uncertainty translating into lower 1H sales. Fast forward
to Aug 19; the robust sales activity has not returned as Iluka had expected and strict
environmental regulations are seeing Chinese buyers seek lower cost inputs. The
declining appetite for Zircon hasn’t just been limited to China, with management
flagging as early as April 19 risks to sales volumes in Europe and India. We are left
pondering how long the trade tensions might continue and how deep demand
reductions can go. Rutile markets continue to be strong, but are only half the story in
Iluka.

Upside exists if Iluka can deliver its growth projects
We have removed Sembehun from our base valuation as Iluka sends it back to the
drawing board. Meanwhile, Balranald has a new field trial approved and the Eneabba
mineral sands recovery project (not in our NPV) which involves the sale of a monazite
rich tailings stockpile could begin construction in Q4 19 with first sales in H1 20.

Valuation: A$8.07ps (prev. A$10.73ps) DCF @ 10% d.r
We lower our price target to $8.10ps (prev. $10.60ps) in line with our revised NPV.