UBS Global Research 22 February 2019 Iluka Resources Limited...

UBS Global Research
22 February 2019
Iluka Resources Limited
Market remains supportive, but costs are rising

A 3% earnings beat however Sierra Rutile sell-down looks light
2018 underlying earnings of A$301m were 2% ahead of UBSe and ILU declared a final
dividend of A19cps (UBSe A15cps). The major news revealed from the result was the
potential 10% sell-down of Iluka's stake in SRL to International Finance Corporation
(IFC) for a total of US$60m (A$84m) implying a SRL valuation of A$840m compared to
our valuation of A$1,171m. The A$331m valuation differential is equivalent to A78cps,
and all else being equal would reduce our NPV to A$10.82ps. Operational issues at SRL
saw guidance lowered earlier in 2018 while unlawful strike action saw two weeks of
production lost in Q4 18. With cost guidance above, our 2019E earnings drop 16%.

The market outlook is unchanged and in line with our forecasts
Pricing momentum continued in 2018 with the weighted average price of zircon and
rutile up 41% and 21%, respectively. These price increases more than offset small
volume declines (revenue +22% y/y). Iluka have confirmed the zircon price will remain
at current levels for another 6 months in line with our forecasts (contracts due to reset
on 1 Apr 19). We are forecasting the zircon price to stabilise at current levels. We still
see the rutile price as having further to run with a 21% y/y lift in price forecast in 2019.
The next contact period will commence on 1 Jul 19 with the price achieved likely to be
announced at the JQ result.

2019 guidance comes in a little softer than expected
2019 Z/R/SR production guidance of 720kt (732kt achieved in 2018), is slightly below
our estimate of 732kt. Rutile production for SRL of 150kt is targeted in 2019 compared
to our forecast of 170kt. 2019 capex guidance is A$330m (A$312m spent in 2018),
well below our estimate coming in today of A$520m (likely reflects timing of SRL
spend). The 2019 production profile will be impacted by Cataby commissioning in Q1
19, mining at JA moving from Jacinth North to Ambrosia in Q4 19, decommissioning of
Lanti dredge in Q1 19 and the Lanti and Gangama expansions to be commissioned
from mid-2019.

Valuation: A$11.11ps (prev. A$11.60ps) DCF @ 10% d.r.
Buy rating retained, but PT drops to $11.00ps (prev. $11.50ps), set in line with NPV.