Ann: Iluka Zircon Reference Price Increase, page-10

We’ve some more very positive news from the mineral sands space. Whenever I talk with investors about mineral sands, their primary concern is invariably related to what will happen to pricing after the strong performance seen over the over the past year and a bit. Well, Iluka Resources, the market leader, has announced that it will increase its Zircon Reference Price by US$130/t to US$1,100/t effective 1 July 2017. Most of the recent price strength has come from ilmenite, while zircon and rutile have been treading water, so this development is extremely welcome and should reassure investors that the supply-demand equation in mineral sands remains very much in our favour.
This good news follows the announcement by Base Resources*† about its Kwale Phase 2 (KP2) approval. We highlighted this in Jim Taylor’s report Base Resources — Enhanced Economics from Phase 2, 23 May 2017, where he increased his price target the company.
In summary, the KP2 Project will increase throughput and offset declining grades. This will come with slightly higher capex, but this is more than offset by efficiency gains and the NPV impact of bringing production forward. With the end of the mine life brought forward on the basis of existing reserves, the likely life extension from exploration at Kwale has become even more significant.
Increasing target price from A$0.43 to A$0.49 and maintaining our Buy rating. Project NPV10 has increased from US$377m to US$404m. This assumes long-term mineral sands prices of US$180/t for ilmenite, US$1,050/t for rutile and US$1,150/t for zircon. The NAV comprises: an NPV10 for the Kwale Project of US$404m, US$20m for exploration at Kwale and a G&A adjustment of US$(31)m, giving an operational NAV of US$393m. After adjusting for net debt, this gives an NAV for Base of US$270m (as of end-March 2017). This is equivalent to A$0.49/share.
Upside risks to our target price. Pricing continues to surprise on the upside. Higher sales volumes next quarter would provide leverage to further gains. A maiden resource from the SW Sector (due 1QFY18) may add to mine life. For reference, a one-year mine life extension would provide a 13% net increase to our target price. Furthermore, the Kenyan general election in August 2017 is expected to ease community tension and allow exploration to resume on the NE Sector.

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