Z/R/SR production 690kt, +29% y/y. Sales 651kt, +5.6% y/y
Iluka reported DQ 15 Z/R/SR production of 215kt cf UBSe of 205kt. 2015 production of
690kt (Guid. 680kt; UBSe 680kt), comprised 389kt zircon, 137kt rutile and 165kt SR.
Sales of 651kt exceeded guidance (issued 16 Dec 15) of 645kt (UBSe 645kt) and were
comprised of 346kt zircon, 134kt rutile and 171kt synthetic rutile. ILU had earlier
indicated total Z/R/SR sales may exceed production and may be above 2014 sales,
however the lower guidance reflected more subdued conditions, later in 2015.
Z/R/SR Realised price in line. H2 15 FCF exceeds A$80m - ILU now net cash
The price received for Z/R/SR in 2015 of A$1,136/t (~US$852/t) benefited from currency
translation gains, cf A$1,030/t (~US$930/t) in 2014. Received zircon prices fell in 2H 15
(-5.6% h/h to US$962) as a result of a higher portion of standard grade zircon in the
sales mix. On titanium feedstock, Iluka saw higher sales of SR in 2015 (reflecting the
restart of SR kiln 2); however sales of rutile declined 27% y/y reflecting the end of
mining at WRP in the Murray Basin. ILU also reported a 7% h/h reduction in realised
rutile prices in 2H 15 to US$708/t. Cash costs in 2015 totalled A$385m, a 7% lift y/y
reflecting resumption of mining at Tutunup Sth and SR Kiln 2. ILU reported that it had
achieved a net cash position by 31 Dec 15, implying that in excess of A$80m FCF was
generated in 2H 15, well up on 1H 15 at A$39m and cf UBSe for FCF of A$149m and
net cash of A$43.9m. Over the past 5yrs, ILU has paid out an avg. of 68% of FCF as a
dividend, which implies a final div of ~ A$0.13ps or 70% of A$80m (UBSe 17cps).
Market outlook consistent with recent downstream news flow
Market commentary was mixed this quarter, with Iluka indicating that toward year end,
it observed some peers monetising inventory (particularly zircon) through "imperative
selling", which led to some price erosion and purchase deferrals. ILU noted demand
recovery from zircon customers in Europe and Middle East, although was partly offset
by weakness in the Americas. TiO2 feedstocks continued to face pressure from
oversupply in the pigment market, while oil sector weakness impacted US demand for
sponge and electrode welding.
Valuation: A$8.93ps (DCF, 10% d.r.)
Price target of A$7.00ps, set at 0.8x our NPV for market risk.
ILU Price at posting:
$5.42 Sentiment: Buy Disclosure: Held
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