MARKETS SPECTATOR: Another look at Iluka

Disappointing guidance has brokers rethinking Iluka but there is agreement that there is still value in the mineral sands miner.

Citigroup has slashed Iluka’s price target by 35 per cent but reiterated its buy recommendation.

Following yesterday’s trading update from the mineral sands miner, the combination of lower sales guidance and weaker prices have driven significant downgrades to Citigroup’s estimates.

The miner said that sales of zircon and synthetic rutile would be at the bottom end of the previous guidance range while sales of rutile would be much lower than expected. On top of this, prices have tailed off considerably into year end, particularly in the zircon market where demands for Iluka’s high grade products have been hit significantly.

Looking ahead, given the de-stocking and move to shorter-term pricing/volume contracts in both key markets, forecasting 2013 volumes comes with significant risks.

Nonetheless, "we think prices are close to bottoming, so when and what the volume recovery is will increasingly become the key stock driver”.

"Short-term risks remain, but leverage to any demand pick up/beginning of restocking cycle and valuation appeal, drive our 'buy' recommendation and $11/share target price, which was previously $16.80/share”, Citigroup noted.

Elsewhere, JPMorgan also reiterated its overweight recommendation on the stock and $11.50 price target. It noted that Iluka shares were trading at a material discount to its net present value estimates, and the broker had a positive longer term view on the mineral sands industry.

However, JPMorgan does expect pricing headwinds to continue in the next three to six months, which may deter investors looking for signs of pricing stabilisation prior to buying the shares.

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Source: Iress

From a technical perspective, we can see that Iluka has seen a vicious sell-off over the last 12 to 18 months which has wiped out a huge part of the 2010 to mid-2011 rally. Now, the stock finds itself at major support at around the $8 level, where it needs to stabilise and hold.

If it were to decisively break down below this level then the stock could very well see another period of re-rating, probably heading back towards the $4 to $6 range.

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