Goldman take: ILU released a very strong March quarter result,...

Goldman take:

ILU released a very strong March quarter result, in a period where historically seasonality issues have generally negatively impacted sales. Production and sales volumes were ahead of GSe across the board, primarily due to good demand but also due to us having forecast a weak Q1. We had anticipated volumes to be made up through the remainder of the quarters and as such, whilst Q1 was a big beat, the impact on our FY numbers was more muted.

Key highlights from the quarter:

• Net debt after the March Q of $403m (vs GSe $486.1m) was a positive given we previously flagged ILU's high debt levels as a negative investment risk.
• Z/R/SR production of 232kt ahead of GSe at 164kt
• Z/R/SR sales of 203kt ahead of GSe at 126kt

We retain our Neutral rating on Iluka.

Our 12-month target price of A$7.25 is based on a methodology consistent with what we use for ILU’s mining peers – a 50:50 split of NPV and EV/EBITDA (average of FY17E/FY18E EBITDA). We use an 8x EV/EBITDA multiple for ILU, a premium to its mining peers, to reflect the more industrial like nature of its product. Last close: A$7.34.

Risks: +ve: a quicker/stronger volume and/or price recovery than we currently forecast. -ve: a slower pick up in zircon demand, stronger AUD and issues with the Sierra Leone operations.