price turnaround on the cards

Iluka (ILU).

About 10% of Iluka’s stock is shorted at the moment, making it one of the most shorted companies on the ASX. After a dismal May to July run, where the share price fell almost 50%, some investors are evidently expecting the slide to continue – but the newsletters disagree.

Iluka produces mineral sands – a quick way to say zircon and titanium-based products called rutile and synthetic rutile – which are used for all sorts of things like paint colouring, precision engineering, solar cells, ceramics and refractoring. The company says demand generally follows GDP, so the general global slowdown, and that of China, is hitting Iluka as many other resources companies at the moment. A sales volume update in July took almost $3 off the share price in one hit, as the company made it clear demand had fallen away and reduced guidance accordingly.

That said, first-half results were in good shape, and the thing about mineral sands is that supply is highly constrained as well. This reduces some of the commodity price risk other miners face at the moment, but has also recently sent prices very high. Net profit for the company was up 88% to $274.4 million on the corresponding 2011 half, on 16% increased revenue. Capex is being cut back to save while demand is weak, and development has been delayed.

However the newsletters view all of this as a well-managed company using its strength to invest and grow counter-cyclically. The company is versatile, so can quickly ramp up production when needed, and operates with very low debt. Earnings per share almost doubled for the half, and the dividend rose 5c compared with the prior corresponding half to 25c.

This is a company with a good supply of a limited product, a strong balance sheet, and the ability to invest in technology and exploration while short-term demand is weak. The medium-term outlook remains excellent, however, and the newsletters see the recent months of price decline as a real opportunity to buy.

Investors are advised to buy Iluka at current levels.


Read more at EurekaReport: http://www.eurekareport.com.au/article/2012/9/3/share-market-reports/collected-wisdom#ixzz25TC2zVKd