Iluka’s main products, zircon and rutile, may not be well known, but their application in paint pigment and ceramics makes them essential raw materials. The company is expanding into other rare earth materials that have applications in much faster growing industries, particularly for permanent magnets used in electric vehicle batteries and wind turbines.
Investment View
The rare earth strategy is providing an investable growth option for ILU to supplement the steady but less sexy mineral sands business. The upgrading of the Eneabba refinery is integral to the strategy and is on track to achieve the Phase 3 element. The addition of ore sourced from the newly minted Northern Minerals agreement is an incremental benefit to the large stockpile already at Eneabba.
The chunky rise in rutile and zircon prices has provided a timely boost to earnings just as ILU steps up its diversification into rare earths. The strong balance sheet provides the financial confidence that the existing and future investment options can be executed.
ILU’s existing operations have been operating at maximum capacity and its inventory is near its lowest point in a decade reflecting the strong demand environment.
The real question for investors is what additional premium, if any, will the rare earths strategy attract to the share price? ILU is not starting from scratch in this diversification and has government funding to assist in the development. Unlike the lithium industry, which is central to battery technology for electric vehicles, ILU’s rare earths products are key factors in the essential permanent magnets used in EVs. Excluding the $465m current market value of the DRR stake, ILU is being valued at 5.1x EV/EBITDA for FY23f on consensus forecasts, well below long-term average.
China is the world’s largest user of zircon and rutile products. The country is in the process of kick-starting its economic growth after the pandemic and is likely to provide a boost to demand for these commodities.
Our conclusion is that although the rare earths investment payoff is on the horizon, it could be quite meaningful. In the meantime, ILU can benefit from a lower USD and China’s reinvigorated economic growth.
With its core commodities back in demand, a strong balance sheet capable of funding developments and optionality in rare earths, we think there is clear upside to ILU’s share price.
Iluka's Business
Zircon and Rutile in demand. ILU’s core products have proved to be steady earners, notwithstanding a soft period throughout the pandemic. Rutile and its synthetic variant are the raw material from which titanium is extracted for use in paint pigment, titanium metal and welding. Zircon is used in a range of industrial applications, particularly ceramics, for its properties in resisting heat, water, chemical and abrasion impacts.
Rare Earths diversification. In the last year, ILU has embarked on a more dynamic pathway by establishing itself as a player in the rare earths market. ILU already has a rare earth refinery situated at Eneabba in WA.
This plant has a large tailings deposit that contains monazite and xenotime, two materials that are used in permanent magnets for electric vehicles. They are also used in wind turbines and other electronics devices.
ILU has completed and commissioned a second stage development at Eneabba that is producing a 90% monazite concentrate and a zircon-ilmenite concentrate. The development is set to go to Phase 3 following a Final Investment Decision taken in April last year after the Australian Government provided a $1.25bn non-recourse loan under its Critical Minerals Facility. Construction is underway and Fluor Corporation has been appointed to conduct the Front End Engineering and Design (FEED).
Partnership with Northern Minerals. Supplementing the Eneabba expansion, ILU has entered an agreement with Northern Minerals (ASX listed: NTU). ILU has invested in NTU in return for exclusive access to its xenotime feedstock that will be processed at Eneabba. NTU’s Browns Range resource has been around for 16 years, but NTU has lacked the funds required to commercialise the deposit.
ILU has invested $20m into NTU with potential for a higher stake in the future once the main Wolverine resource (at Browns Range) begins first production in 2026. Wolverine has a Mineral Resource of 61,492 tonnes of TREO (total rare earth oxides) in 6.44mt @ 0.96% TREO.
The Australian Federal Government, on the advice of the Foreign Investment Review Board has blocked NTU’s biggest shareholder, Yuxiao Fund from increasing its stake to 19.9% from 9.92%.
Prices boosting earnings. Mineral Sands (Z/R/SR) revenue has been increasing due to high demand resulting in higher prices. ILU’s average price received in FY22 for zircon was US$1,943/t, up 37% from FY21. Rutile prices are up 23% to US$1,550/t. The strong price environment has generated sufficient cash flow for ILU to now be in a net cash position on the balance sheet ($492m as at 31 Dec 22). A lower Australian dollar has also been beneficial to earnings.
ILU has two main operating mines. The Jacinth/Ambrosia mine is in South Australia and produces rutile, zircon, ilmenite and monazite concentrate. The Cataby mine in WA also produces zircon and rutile plus synthetic rutile. ILU’s synthetic rutile kilns at Capel in WA saw the re-start of SR1 in 2H22 adding 110ktpa of product.
Markets for ILU’s key products are improving. While ceramics remains the dominant industrial use for zircon, it is increasingly being used in high tech applications such as photovoltaics. The supply of zircon is characterised by declining grades with impurities such as uranium and thorium making some supply ineligible for key end markets. New projects are also scarce due to quality issues.
ILU is the largest producer of natural rutile and is a major producer of synthetic rutile. These products are high-grade titanium feedstocks due to their high titanium content. The pigment market still dominates demand for titanium oxides. Titanium is also used extensively in welding and as a metal especially in aircraft parts and the aerospace industry more generally.
Monazite and xenotime are rare earth baring minerals produced as by-products of ILU’s mineral sands operations. The rare earths in ILU’s monazite are essential for the permanent magnets used in electric vehicles and the generators used in wind turbines.
Further down the track, ILU has a large scale mineral sands resource at Wimmera in Victoria (Murray Basin) that can potentially also supply material to the Eneabba refinery. It contains a long term supply of ceramic grade zircon and rare earths. The resource contains higher levels of uranium and thorium, but the company is working on a novel processing technology to make it commercial.
Sitting in behind Wimmera (SA) in terms of development is the rutile-rich Balranald deposit also in the Murray Basin of Victoria. Balranald could provide a significant development option with its high quality zircon, rutile and ilmenite (a feedstock for synthetic rutile).
Global Factors
The re-opening of China’s economy to the world is a net positive for ILU. China is the world’s largest manufacturer of tiles in which zircon is a key material. We cannot be sure of the demand outlook from China, but ILU does have many other markets in which to sell its product.
Movements in the AUD against the USD will also affect commodity prices and therefore ILU’s earnings. A weaker USD, all other things being equal, is a mild positive factor for ILU.
The access to an increasing amount of ilmenite, which is used to manufacture synthetic rutile, is a feature of ILU’s outlook. SR pricing is done on a commercial basis and is not disclosed but we do know that earnings from SR are modest compared to the raw materials of rutile and zircon.
Valuation
ILU is currently trading around 9x FY23f EPS. Global listed peers in the titanium industry (Tronox TROK.K, Chemours CC.N, Venator Materials VNTR.N) trade at similar PE multiples.
For ILU, the early stage nature of its rare earths business adds to the difficulty of fairly valuing that aspect of the business though over time, it will clearly add value. Arafura Rare Earths (ARU) has recently funded its Nolans rare earths (NdPr) project in the Northern Territory with the company now valued at $1.1bn before it has even delivered its first ore in mid-2025. ARU has an offtake agreement with Hyundai/Kia for 40% of its target production, with other customers also interested.
Non-Chinese rare earths businesses are attracting a great deal of attention given the application of the products in EV manufacturing among other high-tech applications.
The mineral sands business has a longer track record indicating a fair multiple of earnings around 6.0x (EV/EBITDA basis). The last two years earnings have been distorted by the demerger of the Sierra Rutile business and some asset impairments. Consensus earnings forecasts imply an FY23 EV/EBITDA multiple of 5.1x, including the DRR stake.
ILU’s 20% stake in DRR has a current market value of about $465m or $1.06 per share.
Risks to Investment View
Demand for mineral sands and rare earths may not reach anticipated levels or may be supplanted by other materials and technologies. ILU is subject to operational risks and costs that might rise more quickly than expected.
Recommendation
We initiate our coverage with a Buy recommendation.
Figure 1: Sales volume (kt)
Figure 2: Weighted average price received (US$/t)
Figure 3: ILU Net Profit FY22 (A$m)
Figure 4: Mineral Sands FY22 EBITDA (A$m)
Figure 5: ILU is currently trading at the lower end of its PE ratio range since pre-COVID
Figure 6: EV/EBITDA multiple is averaging 6x since 2018
