expectations of 1h & 2h 2012

Terrible day today for ILU. Is it warranted?

Figures below are for 1H12 and estimates for 2H12. Assumptions are:

(1) Actual and forecast sales volumes from company announcement today, 9 July 2012.
(2) Royalty from mining area C in a range of 20% less than 2011 (low case) to same as 2011 (high case)
(3) Tax rate of 30% (same as last year)
(4) Unit cash costs estimated 5% higher in 2H 2012
(5) Capex in 2H12 about 85% of 1H12.
(6) Dividend payout ratio 40%
(7) Interest nil.
(8) Depreciation & amortisation same as forecast in May 2012
(9) Other costs same as forecast in May 2012
(10) Prices in 2H12 10% lower than 1H12

Volume Z/R/SR 1H12: 273 kT
Unit cash costs Z/R/SR 1H12: $710 per T
Revenue Z/R/SR 1H12: $2,255 per T
Total revenue 1H12: $617m
Total cash costs 1H12: $194m

Volume Z/R/SR 2H12: 237-447 kT
Unit cash costs Z/R/SR 2H12: $755 per T
Revenue Z/R/SR 2H12: $2,000 per T
Total revenue 2H12: $474m - $894m
Total cash costs 2H12: $179m - $337m

Item_______________1H12___________2H12
Revenue............$617........$474-$894
Unit cash costs....$194........$179-$337
Capex..............$120...........$100
Mining Area C....$ 35-$ 44.....$ 35-$ 44
EBITDA...........$338-$347.....$230-$501
D&A............... $ 85...........$ 85
Other............. $ 12...........$ 12
EBIT.............$241-$250.....$133-$404
Interest...........$ 0...........$ 0
Tax..............$ 72-$ 75.....$ 40-$121
Earnings.........$169-$175.....$ 93-$283
Shares..............419...........419
EPS.............$0.40-$0.42...$0.22-$0.68
DPS................$0.16......$0.09-$0.27

EPS for full year 2012: $0.62 - $1.10

As you can see, one of the problems with the guidance given today is the quite large range in volume output for 2H12, with the low case being almost half the volume of the high case. This results in an earnings range of almost 3:1 from the low to the high case.

It is difficult to predict the near future. On the one hand, the world economic situation may be on the edge of a significant recenssion, with central banks unable or unwilling to provide much stimulus. OTOH, we have seen the nadir and the rest fo the year will be a recovery of sorts. Hence the rather wide range in forecast volumes.

I've been somewhat pessimistic with forecast costs. also, being an optimist, I lean rather more towards a gentle recovery from here rather than a meltdown.

So I work on an EPS for 2012 of around about $1, with a dividend of about $0.40.

ILU still has the advantages of nil debt, a large percentage of the world's supply with little more coming on to the market in the next few years. As always, I think the market is likely to over-react and drive the price down too far.