Iluka ILU resources: Well placed to withstand cyclical downturn in mineral sands market

  • Moat rating: None
  • Fair Value estimate: $9.20 per share
  • Share price February 21: $4.74 
  • Star rating: ★★★★★

Iluka Resources' 2024 adjusted net profit after tax (“NPAT”) is down one third on last year, at about $230 million. Prices and volumes fell while unit cash costs rose, though the weaker AUD/USD exchange rate benefited. Inventory again increased on weak mineral sands demand, impacting cash flow.

Why it matters: The result is better than we expected, with unit cash costs lower than our estimate.

  • We still forecast average zircon volumes of about 270,000 metric tons over our five-year forecast period. Once ramped up, likely in 2027, its Balranald project will produce an average of 50,000 metric tons of zircon for a decade, helping compensate for likely lower production at its other mines.
  • We now assume synthetic rutile kiln 1, or SR1, stays on care and maintenance until mid-2026. Our forecast is now for average synthetic rutile volumes of about 300,000 metric tons over our forecast period, down from 320,000.

The bottom line: We make retain our AUD 9.20 fair value estimate of no-moat for Iluka. Declining zircon and titanium dioxide feedstock prices along with increased capital expenditure to complete its Eneabba rare earths refinery are the key reasons we think the shares trade around half fair value.  

Big picture: Our forecast 2025 dividends are about AUD 0.07, being just its share of dividends from its 20% stake in wide-moat Deterra.

  • But we expect dividends to rise over our forecast period as free cash flow from its mineral sands business improves. This is driven by lower capital expenditure as its Balranald project is commissioned, likely later this year, and as earnings recover along with the mineral sands market.

Long view: With near-term demand for both zircon and titanium dioxide feedstocks soft, competitors are discounting their products, impacting prices.

  • Yet we still think both markets are attractive long term, due to likely restrained supply particularly of the high-quality zircon and high-grade titanium dioxide feedstocks produced by Iluka.

Whitehaven coal WHC: Share buyback recommences, with more likely along with higher dividends

  • Moat rating: None
  • Fair Value estimate: $9.60 per share
  • Share price February 21: $5.65 
  • Star rating: ★★★★

Whitehaven Coal reported solid fiscal 2025 first-half earnings. Adjusted earnings before interest, taxes, depreciation and amortisation (“EBITDA”) of $960 million was up 52% from a year ago. This was driven by contributions from the Blackwater and Daunia metallurgical coal mines acquired from BHP, though partially offset by higher unit costs and lower volumes and prices in the New South Wales thermal coal business. The group declared an interim fully franked dividend of 9 cents per security and will soon commence an $72 million share buyback.

We maintain our $9.60 fair value estimate for no-moat-rated Whitehaven. The shares appear significantly undervalued, trading at a 40% discount to our valuation. As such, we view the share buyback as accretive. We think the discount is due to lower near-term thermal and metallurgical coal prices on concerns about slower global economic growth from trade tensions and soft China end-user steel demand, respectively. Some investors are also hesitant to invest in coal.

With the completion of the sale of 30% of the recently acquired Blackwater mine to a couple of Japanese steelmakers due to occur March 31, the USD 1 billion in proceeds will only strengthen Whitehaven’s already sound balance sheet. Net debt currently sits at around $990 million, or about 0.6 times adjusted trailing 12-month EBITDA.

The group will consider updating its capital-allocation policy at the fiscal 2025 result due in August. We assume its updated policy will be to target a payout of 20%-50% of adjusted earnings from all its mines, not just its New South Wales mines as is the case currently. For now, we assume the midpoint, split half and half between dividends and buybacks. Given the depressed share price, we prefer the percentage allocated to buybacks be higher. However, we understand the need to cater to both Australian investors who prefer fully franked dividends and non-Australian investors who are unable to use franking credits and so prefer buybacks.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.