Iluka buries its targets

Iluka Resources has downgraded forecast sales volumes for 2012 after a weak first six months. It is an indication of the risks of investing in resource stocks. Iluka is citing pessimism about problematic political and monetary responses to weak global economic conditions, most notably in Europe.

The combined zircon, rutile and synthetic rutile forecast of 510-720,000 tonnes is down 23-45% from the May 8 estimate of 935,000 tonnes. A big drop. Deutsche Bank has a hold and a price target of $12.45, but acknowledges this is very speculative:

Scenario analysis shows a range of values from c. $6.00/sh to $16.00/sh Given the large uncertainty in volumes and prices in the macro environment and the surfacing of substitutes and thrifting, we have run a series of scenarios.

Indeed. Take your pick. Merrill Lynch has a buy and a price objective of $14.00: The low earnings mulotiple of about 5 times is low and the company has room to move on margin compression:

Unit costs of ~$700/t vs. unit revenue of $2,400/t. Iluka has a myriad of options to address any margin compression i.e. can idle plant, shut mines, have options around  grade strategy – can slow plants NOT stop. So could have some modest change to  costs. There is plenty of flex on kiln restarts as well and on capex as well. Iluka could  feed a lower cost source of ilmenite. Iluka’s robust financial position – net cash and CF  positive -and interesting valuation metrics i.e. ~5x PE means Buy rating retained.

Iluka has a strong global position in mineral sands focused on zircon, rutile, synthetic rutile and ilmenite. Pricing depends on emerging economy demand and is volatile. Free cash flow was negative with high capital spend through 2008-09 but turned strongly positive with staggering price rises in 2011. That is a measure of the volatility in the stock. As CEO Dave Robb indicated, it is a play on the health of the global economy.

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