ILU hosts market briefing, provides US$1500+/t LT Zircon price
ILU provided colour on their inducement pricing analysis for Zircon, which they estimate as ~US$1,500+/t required by 2015 (materially higher than broker consensus, which we believe may be US$900-1000/t). Our ILU valuation is based on a long term Zircon price of US$900/t. If we increase this to US$1,500/t, our valuation would rise 55% to ~$10.70ps. This analysis does not include increases to our long term TiO2 prices, or an increase to mine life or brownfield expansions.
TiO2 price rises to add a further leg to price momentum stroy
The end of cap and collar arrangements at the end of CY10 for TiO2, provides ILU the opportunity to change its marketing strategy, inline with the changes made to their Zircon pricing. ILU were typically coy about their TiO2 price expectations for CY11, saying that they expected a "step change". Consensus is expecting +4% y/y to Rutile pricing in CY11, implying upside risk to earnings forecasts.
Buy, consensus upgrades have come but more may be on the way
Risk in our mind remains to the upside in terms of pricing and thus consensus earnings. The market is raising its long term prices for zircon and this is driving increases in Iluka's valuation. We are also positive on the iron ore market, with seasonal lift expected in trade ahead of the Chinese winter, which ILU is exposed to through its MAC royalty.
Valuation: $6.87 (DCF, 10% d.r.)
Our price target of $7.60 is based on our 1 year forward NPV.
ILU hosts market briefing
ILU hosted a mineral sands marketing briefing session today in Sydney, with numerous buy and sellside analysts in attendance. The briefing was also available on a teleconference. ILU covered their marketing approach, their views on the short term and long term market conditions and an overview of how they operate in China.
In summary the briefing was very positive, key conclusions include:
(1) ILU provided colour on their inducement pricing analysis for Zircon, which they estimate as ~US$1,500+/t required by 2015 (materially higher than broker consensus, which we believe may be US$900-1000/t);
(2) Higher long term price expectations and product development are expected to increase ILU?s reserve base and provide option to either increase production or mine life
(3) TiO2 prices are going to increase in 2011 when cap and collar contracts roll off (at the end of CY10). ILU talked about a "step change", did not give magnitude, but on the inducement analysis, they did show prices +30% higher on deriving the US$1500/t, this compares to UBSe of +15% y/y in CY11
Inducement analysis ILU ran a base case scenario that Zircon demand will grow at ~4% CAGR for 2010-2020 based on 8% growth in Chinese demand and 0% growth in the rest of the world. This is inline with historical demand of 4.1% p.a. (2000-2008 CAGR).
In its role as the dominant producer of Zircon (30% global production) as well as the price leader, ILU conducts detailed analysis on the new growth projects that are potentially coming to supply this gap. ILU looks at public disclosures made by various aspiring mineral sands producers and applies their internal judgement based on experience (generally leads to higher capex, opex and longer lead time to development).
ILU believes that US$1,500+/t is required to induce the development of enough projects to meet their 4% demand growth base case scenario.
This is based on a 30% higher TiO2 prices longer term. Holding TiO2 prices constant would increase the Zircon inducement price to ~US$1,750/t.
ILU highlighted that this did not mean that Zircon prices couldn?t exceed and overshoot this price in the short to medium term. They argued that the lead time in bringing projects to market are ~5-10 years from exploration success to production and that customers could drive prices higher to obtain security of supply. So while Zircon prices for Q4 CY10 are over US$1,000/t (UBSe US$1,040), ILU says that ?further price increases are possible for ~5 years?.
The improving long term supply demand dynamics may also necessitate ILU upgrading the price assumptions used in the Reserve calculations, which may lead to the option to either increase production or mine life.
ILU Price at posting:
$7.85 Sentiment: Buy Disclosure: Held
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(20min delay)