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Iluka Resources Ltd – H1 FY19 Highlight a Weakening Zircon Market

Jordan Baird

Jordan Baird is the head ASR Wealth Advisers client services desk and has been with the organisation since 2017. He first started investing in his early years. While he believes that investors should leave no stone unturned he has a particular interest in trading based on broad macroeconomic trends along with specific analysis of innovative up-and-coming companies.

Iluka Resources Ltd (ASX: ILU) is a large mineral sands producer (zircon, rutile and ilmenite) mainly used in the manufacture of ceramic tiles (zircon) and paint (rutile and ilmenite). Iluka has mines in Australia and Sierra Leone and it receives royalty payments from BHP Group Ltd in respect of an iron ore mine located in Pilbara. Its market capitalisation is A$3.5 billion.

Iluka Ltd.

What is the FY19 result?

Today (Wednesday 21 August 2019), Iluka released its H1 19 results. The main points are as follows:

  • NPAT of A$137 million, up 9 per cent on H1 18.
  • Underlying group EBITDA of A$274 million, down 2 per cent on H1 18.
  • Mineral sands EBITDA margin remains strong at 43 per cent on H1 18.
  • The interim dividend is 5 cents per share (fully franked), down 50 per cent on H1 18.

The higher profit reflects higher sales prices across the product suite partially offsetting lower sales volumes. In particular, zircon and rutile prices were up 19 per cent and 22 per cent respectively while sales volumes were down 31 per cent from H1 2018. In addition, royalty revenue increased 41 per cent to A$41 million due to strong iron ore prices in the H1 19 and Iluka’s earnings result was favourably impacted by a 9 per cent depreciation in the $US/$A exchange rate.


What is the outlook?

Iluka said that “market conditions for zircon were difficult”. Consequently, zircon sales in the second half of FY19 are now expected to be at the lower end of expectations, with second half sales volumes similar to the first half. In addition, Iluka expects a lower average realised zircon price in the second half. Iluka also announced a reduction in capital expenditure for the remainder of FY19. Iluka’s Sierra Leone mine (which is a larger producer of rutile) continues to face challenges with high costs and high capital expenditure for the development purposes.


What is the market’s reaction?

Today (Wednesday 21 August) Iluka is trading at around A$8.00 per share, down around 7 per cent. This reflects that the H1 19 result is below expectations particularly in respect of the weakening zircon market. Iluka trades at a P/E ratio in the mid-teens and an annual dividend yield of around 3 per cent (fully franked).




This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

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ASR has no position in any of the stocks mentioned.

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