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Date : 12/04/2021

Iluka Resources



Market Cap : $3.06 Billion

Dividend Per Share : $0.02

Dividend Yield : 0.85 %


52 Week Range : $3.37 - $7.70

Share Price : $7.30

The forward multiples suggest that it is fairly expensive given the outlook for mineral sands, and that the Phase 2 of its rare earth operations will only produce in 2022. We recommend investors to "Hold" thier positions.

Company Analysis

Iluka Resources Limited (ASX: ILU) engages in the exploration, project development, mining, processing, marketing, and rehabilitation of mineral sands. The company operates through Jacinth-Ambrosia/Mid-West, Cataby/South West, Sierra Rutile, and United States/Murray Basin segments. It produces zircon; titanium dioxide products of rutile and synthetic rutile; and ilmenite, as well as activated carbon and iron concentrate products. The company also engages in the exploration of rare earths elements, such as monazite and xenotime. Its products are used in home, workplace, medical, lifestyle, and industrial applications. It has operations in Australia, China, rest of Asia, Europe, the Americas, and internationally.


Located in South Australia, about 800km from Adelaide, Jacinth-Ambrosia is the world’s largest zircon mine. The Jacinth-Ambrosia operation encompasses mining and wet concentration activities with heavy mineral concentrate transported to Iluka’s Narngulu mineral separation plant in Western Australia for final processing. The operation is capable of processing up to approximately 1000 tonnes of ore per hour which equates to approximately 120 tonnes per hour of heavy mineral concentrate.

Processing of Jacinth-Ambrosia heavy mineral concentrate at Narngulu produces the final products of zircon, rutile, and ilmenite. Zircon is used in the manufacture of ceramics, including floor and wall tiles and sanitary ware, as well as in casting and foundry applications. Zircon is also used for the manufacture of zirconium chemicals that have a range of derivative applications, including zirconium metal. Rutile is sold for end use in pigment, welding, and many other applications.


Located 150km off Perth, Cataby is a large ilmenite deposit, with associated zircon and rutile. The mine produces two streams – an ilmenite rich concentrate for cleaning and upgrading to synthetic rutile at Capel, and a zircon/rutile rich concentrate for separation at Narngulu.

Cataby will produce an average of approximately 370ktpa of ilmenite. Chloride ilmenite is a naturally occurring titanium dioxide feedstock with TiO2 content of 58-62%. Ilmenite can be sold directly to pigment and other customers or is used as a feedstock for synthetic rutile production. This material is being processed into approximately 200ktpa of premium grade synthetic rutile at Iluka’s SR2 kiln at Capel; and shipped out of the Port of Bunbury. In addition, Cataby will produce an average of approximately 50ktpa premium grade zircon and approximately 30ktpa rutile. These materials will be processed at Narngulu and shipped out of the Port of Geraldton.

Sierra Rutile

Sierra Rutile is a subsidiary of Iluka Resources. It is a multi-mine operation located in the Bonthe and Moyamba districts, south west Sierra Leone. Sierra Rutile has the world’s largest natural rutile deposit and encompasses two operations at Lanti and Gangama – a mineral separation plant, and a dedicated port facility, respectively. Sierra Rutile’s main product stream is natural rutile and the operation also produces smaller quantities of ilmenite and zircon.

Sierra Rutile has an established operating history over more than 50 years and further mine life of at least 20 years, dependent on future development options. Iluka plans to increase Sierra Rutile’s production from current levels of approximately 150ktpa of rutile. The Lanti Dry expansion and the Gangama expansion are now complete with the capacity of each mine increase from 500-600 tonnes per hour of ore to 1,000-1,200 tonnes per hour.

FY2020 Production

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Source: Iluka

Iluka with all of its mines has the below production numbers. Iluka’s production numbers in 2020 were based on settings in line with market conditions, minimising costs, and improving cash flow. Jacinth for instance returned to production from August, following the pandemic restrictions being lowered. The Cataby mine in Western Australia was fully operational, producing 520 thousand tonnes of heavy mineral concentrate. Of this, 345 thousand tonnes of magnetic material (mainly ilmenite) were trucked to Capel for further processing.

Sierra Rutile faced a number of challenges in 2020. The operation produced 120 thousand tonnes of rutile (down from 137 thousand tonnes in 2019). Output was affected by a number of downtime events, leading to lower mining and processing throughputs.

Company Updates

The Iluka share price has had a spectacular run post the recovery from the crash in March 2020. The most noteworthy announcement during the last few months was the demerger of Deterra Royalties from Iluka. This demerger has allowed Iluka shareholders to hold on to a 20% interest in Deterra – which used to be the most profitable segment of Iluka. Therefore, it can be seen as a strategy to make the most of Deterra by allowing it to be a separate entity and not be bogged down by the costs and hiccups associated with the running of Iluka.

As Chinese demand slowed down for mineral sands, Iluka cut production in Jacinth-Ambrosia and Cataby. Sierra Rutile on the other hand was the result of Iluka unable to operate the mine for long periods due to pandemic induced lockdowns. All these headwinds reduced when China’s quick recovery from the pandemic resulted in an increase in economic activity mainly in the construction and infrastructure sector. While copper, iron ore, and the likes are the first set of commodities required in construction, mineral sands are required in the latter phase – the finishing phase if you will, where they are used in the production of flooring products such as tiles.

Along with an increase in demand, Iluka now has several projects in the exploration and/or development stage. Again, the development projects have a global footprint – in Australia, Sri Lanka, and Sierra Leone. The Eneabba Operation of Western Australia is extraction, processing and sale of a historical monazite-rich mineral stockpile that is currently stored in a former mining void. The Phase 1 of this project produced a 20% monazite-zircon concentrate and sales began in Q3 of 2020. The monazite produced contains high value rare earth elements. Over 80% of the value of the rare earth oxides at Eneabba are derived from neodymium, praseodymium, dysprosium, and terbium. Phase 2 of the operations will look to further separate monazite and zircon streams and look to produce 90% monazite concentrate and zircon products. These developments have had the Iluka share price soaring high in recent months.

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Industry Analysis

The mining and processing of zircon and titanium dioxide products such as ilmenite, rutile, etc constitutes the mineral sands industry. Iluka produces close to 28% of the world’s zircon and 13% of the world’s titanium dioxide. Tronox and Rio Tinto are the other big players in this industry. The bulk of the demand comes from densely populated Asian countries and as always, China is the largest market for the producers. With use case scenarios such as paints, PVC pipes, fittings, etc, the demand is expected to expand over the coming years mainly in countries such as India, Korea, and Japan given that government infrastructure.

The Australian Mineral Sands mining industry generates revenues of over $3 billion annually and has been growing at a low 1.5% growth rate. The exports of mineral sands from Australia are forecasted to increase by over 4% year-on-year over the next 5 years. The increased demand has forecasted the growth rate to be 3% over the next 5 years and reach $3.5 billion in revenues. During this period, however, the price of these minerals is expected to stay rather flat given the demand and supply forces that are in play.

The other industry that Iluka is gaining traction is the very lucrative Rare Earth Metals market. Rare earths are commodities, and their price is determined by supply and demand forces. Rare Earths are a group of 15 elements in the periodic table known as the Lanthanide series, plus Yttrium and Scandium. Rare Earths are used in the manufacture of many things we use every day – from smart phones to cars, electrical appliances, medical equipment, and importantly, hybrid and electric vehicles. Appliances in military and defence and military jets are also another area where rare earths are used. They are often called the vitamins of the modern industry as they improve technologies. For instance, a single smartphone contains 8 different rare earth materials. An electric vehicle contains an average of 1 kilo of rare earth metals. The green application of rare earth metals for its magnetic properties is underpinning the demand and long-term growth.

The magnet rare earth oxide demand is estimated to grow at CAGR of 9.7%. The value of these commodities is estimated to reach US$16 billion by 2030. During this time, the price of these magnet rare earth oxide is estimated to grow at about 6% CAGR. Magnet applications are expected to contribute over 40% of total demand for rare earths by 2030.

There is an expected under-supply of rare earth metals, and this is estimated to cause global shortages at current levels of production. Electric vehicles will really trigger a substantial increase in rare earth prices. They believe that prices could double from $50 per kilogram to $100 per kilogram in 2024 and to meet the rare earth demand in EVs, it will require about five times as much rare materials as we vehicles with a combustion engine and it is estimated.

Investment Thesis

All things considered – the demand and supply side for mineral sands, Iluka had a fairly positive result for FY2020 – ending December 2020. Mineral sands revenue was $947 million. Synthetic rutile sales volumes were down largely due to the contractual dispute with Chemours – who is a major customer of Iluka. Zircon prices reduced in the first quarter as the pandemic unfolded but then were largely stable as a result of Iluka’s market and operational discipline. Rutile prices increased, reflecting the ongoing tightness in this segment. Mineral sands EBITDA margins remained strong at 36%.

Mining Area C royalty revenue for 2020 was $81 million, with Iluka receiving royalty payments to September, prior to the separation and listing of Deterra Royalties. Iluka entered the rare earths market in July via first sales from Phase 1 operations at Eneabba. Revenues from non-mineral sands products, including monazite concentrate, were $106 million, up 65% from 2019. The Underlying group EBITDA was $423 million. Free cash flow was $36 million, with operating cash flow down on the previous year due to lower revenues. Free cash flow includes $71 million investment in capital expenditure, $98 million 2019 final tax payment and $14 million in JobKeeper subsidies, which will be voluntarily returned in 2021. Yes, there was negative growth across all line items – revenues down 20.6%, EBITDA down 35.6%, NPAT down 45% and Free Cash Flow was down 74% during the period. However, the market expected these declines and hence the stock price stayed up and even rose higher as demand data coming through showed an increase.

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Iluka also generates 41% of its revenues from Jacinth-Ambrosia, 31% from Cataby, 23% from Sierra Rutile, and 4% from The Murray Basin in the USA. Going forward, a rebound in demand and fairly flat prices means that our models reckon that Iluka’s performances are set to rise. The addition of the Rare Earth segment will be critical to offset some of the losses from decline in mineral sands sales. We expect Iluka to operate with their usual EBITDA margins of around 43%-44% in a couple of years. To sum it up, the going is fairly smooth for Iluka. The demand is back as infrastructure spending will increase and the addition of rare earth adds another steam of revenues. What we do not know yet is how much rare earth Iluka can produce once at full capacity.

Iluka’s balance sheet shows immense strength. At the end of FY2020 – that is, December 2020, the firm had $50 million in net cash and $500 million in total debt facilities that mature in July 2024. The undrawn funding facilities stands at $462 million and gives the firm lots of wiggle room in unforeseen circumstances. The current ratio and quick ratio – measures of short-term liquidity suggest Iluka is not in any danger either. While a quick ratio of 0.65x does raise a few eyebrows, the firm has a significant inventory position due to the volatile demand during the pandemic. However, with demand rising, we expect the inventories to be sold-off.

Iluka is capitalised by only 4.5% debt and the remaining 95.5% is by equity.

Mining at Jacinth will continue in 2021 after a return from the Ambrosia deposit in August last year. Production settings at the Narngulu mineral separation plant have been increased as a result of improving zircon markets and the reduction in Iluka’s zircon inventories. While production at Sierra Rutile was impacted severely by COVID-19 related downtime issues, delivering operational and cost improvements, and building consistency will be a focus over the year ahead. Current 2021 production estimates are for Iluka to produce 285 thousand tonnes of zircon, 200 thousand tonnes of rutile, and between 115 and 175 thousand tonnes of synthetic rutile.

Capital expenditure in 2021 is expected to be around $100 million, including execution of Eneabba Phase 2; commencement of the Balranald DFS, maintenance and equipment upgrades at Cataby; the hydraulic trial and development capital related to Sembehun; and progression of studies and sustaining capital spend across sites. The total production of mineral sands was 702kt in 2019, 585kt in 2020, and in 2021, it is expected to be in the range of 600-660kt.

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Based on current market capitalisation and projected earnings, Iluka is trading 18.13x forward P/E and 7.29x forward EV/EBITDA. The market is richly pricing Iluka at the moment given its projected growth in revenues and earnings in 2021. As we mentioned earlier, we expect EBITDA margins to improve, however, still remain close to 40% in FY2021.


Iluka looks to have found a spark with Rare Earth Metals production. The mineral sands business is fairly low growth, but a boost in demand is expected as infrastructure spending across global markets increase. The firm has a very healthy balance sheet as well. The forward multiples suggest that it is fairly expensive given the outlook for mineral sands, and that the Phase 2 of its rare earth operations will only produce in 2022. We recommend investors to “Hold” their current positions.


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