Tight Supply Underpins Positive Outlook for Iluka Resources

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Equity Bottom-Up

We make no change to our AUD 8.50 per share fair value estimate for no-moat-rated Iluka Resources. Evidence of a cyclical recovery continues to grow with the second-half 2017 benchmark zircon price set to rise 13% to USD 1,100 per tonne. The USD 130 per tonne increase is above our expectation for a USD 50 per tonne rise from July 1. While we make no change to our long-term zircon price forecast of USD 1,250 per tonne, we now assume midcycle prices are achieved by mid-2020, six months earlier than our previous estimate. The higher zircon price drives modest earnings upgrades of AUD 0.02 and AUD 0.03 per share in 2017 and 2018, though not enough to change our fair value estimate.With the share price recovery from lows around AUD 5 per share 18 months ago, Iluka is now fairly valued. At fair value, we expect the shares to offer a fair long-term return, close to the company’s cost of capital. While we think evidence for cyclical recovery continues to build, and the timing is imminent, there is a reasonable amount of expectation factored into the share price. That said, Iluka remains good value relative to the other Australian listed mining companies. Mineral sands prices are still close to their nadir and the price recovery is in its early stages. Zircon, used mainly for tiles and porcelainware, and titanium dioxide, used for pigments and paints, tend to perform most strongly in the late stages of an economic recovery. Paints and tiles are generally used at the end of construction, well after steel and concrete, for example.Analyst: Matthew Hodge

We make no change to our AUD 8.50 per share fair value estimate for no-moat-rated Iluka Resources. Evidence of a cyclical recovery continues to grow with the second-half 2017 benchmark zircon price set to rise 13% to USD 1,100 per tonne. The USD 130 per tonne increase is above our expectation for a USD 50 per tonne rise from July 1. While we make no change to our long-term zircon price forecast of USD 1,250 per tonne, we now assume midcycle prices are achieved by mid-2020, six months earlier than our previous estimate. The higher zircon price drives modest earnings upgrades of AUD 0.02 and AUD 0.03 per share in 2017 and 2018, though not enough to change our fair value estimate.With the share price recovery from lows around AUD 5 per share 18 months ago, Iluka is now fairly valued. At fair value, we expect the shares to offer a fair long-term return, close to the company’s cost of capital. While we think evidence for cyclical recovery continues to build, and the timing is imminent, there is a reasonable amount of expectation factored into the share price. That said, Iluka remains good value relative to the other Australian listed mining companies. Mineral sands prices are still close to their nadir and the price recovery is in its early stages. Zircon, used mainly for tiles and porcelainware, and titanium dioxide, used for pigments and paints, tend to perform most strongly in the late stages of an economic recovery. Paints and tiles are generally used at the end of construction, well after steel and concrete, for example.Analyst: Matthew Hodge

Further Evidence of a Cyclical Recovery for Iluka