New Supply on the Way: We have independently assessed the new...

New Supply on the Way: We have independently assessed the new projects in Zircon that we think will return the market to balance by 2013, and potentially into surplus. Our assessment of Long Term marginal cost of production is now US$1,100/t from US$800/t following our review of new projects. This is lower than the US$1,300/t used by Iluka and the price of up to US$2,000/t used by industry consultants TZMI by 2020.

Price Target and EPS Updated: We have adjusted our price target that is now A$7.29/share from A$5.40/ share. This is due to the uplift on our long term Zircon price assumption. We adjusted near term prices and EPS estimates for Zircon to reflect our analysis of near term supply side deficit in Zircon. Our price target is below market consensus by 16% and our EPS estimates are below consensus by 21% for 2011e and 5% for 2012e.

Stock Reflecting Zircon at US$1,500/t: We estimate the long term margin cost for zircon at US$1,100/t. The Iluka share price in our view is reflecting a long term zircon price of US$1,500/t, and 4Q0 contract prices are US$1,000/t. This price level corresponds with the industry consultant TZMI price forecast in 2020, and we note that TZMI does not forecast a normalisation of price over the next decade. We think prices will normalize due to new projects coming on line and the market returning to balance.

Next catalyst: Iluka is due to report 4Q10 production on
January 19, 2011 and 2010 earnings on February 25, 2011.

Investment Thesis
Iluka has multiple late-cycle product streams in the niche titanium dioxide and zircon markets.
It is leveraged to industrial mineral prices, and has near term currency hedging (that expires at the end of 2010) to protect margins from fluctuation in the AUD against the USD.
Ilukas primary product, Zircon, is leveraged to Chinas urbanization and we expect titanium dioxide use in China to increase as its industrialization advances.

Key Value Drivers
TiO2 and zircon prices.
Operating costs.
Production volumes.

Potential Catalysts

Contracted prices weaker than market consensus.
Stronger than consensus A$ to US$ that reduces margins.
Slower-than-expected de-stocking from customers that in turn slows a re-stocking cycle.
Weaker-than-expected demand from the US and the OECD.

Key Risks

Stronger-than-expected prices and production.
Weaker-than-forecast AUD against the USD, increasing margins.
The supply/demand balance tightens more than expected due to demand and constrained supply.