Iluka's Murray adventure
Recommendation
But there's been another factor that partly explains the 21% share price rise since we first suggested you sell the stock in issue 88/Sep 01 (Sell - $3.80).
As with Orica, Coles Myer and Mayne Group , after many years of poor performance a new MD arrived, bringing renewed hope and a charging share price. These parallels also reveal a little more about this paradox.
No matter the ability of the new broom (or, in Orica's case, Broomhead), one person cannot change the dynamics of an industry. Poor businesses in poor industries tend to stay poor businesses, well after the initial enthusiasm has died away.
Typical problem
But, unlike Coles Myer and Mayne, Iluka, despite being an atypical miner, faces a typical mining problem. It has very little pricing power.
Sensibly, the company is trying to change this by monopolising supply. But this, in our view, only adds to the risk. Before explaining why, let's look at the minerals themselves.
Iluka's expertise lies in mineral sands like titanium and zircon. Titanium minerals are used in paints, sunscreens and high-tech metals while zircon is used in chemicals and ceramics.
After a takeover offer for Basin Minerals in June, Iluka has recently moved to full ownership. With it came pole position for the exploration and development of the Murray Basin region in southern Australia, the current hot spot for mineral sand miners. Sons of Gwalia is also in on the act.
Managing Director Mike Folwell is very bullish about the region's prospects and is keen to get the development rolling. It's expected to start in early 2004, with phase one costing $140m. Given the weak state of Iluka's financials, we expect a new share issue to raise funds.
Whilst this may be the production boost we've been looking for, we're wary. By talking up the prospects for a particular development, the share price rises, and the company concerned can get away with issuing fewer shares.
Crusade
Newcrest Mining is on a 'potential' crusade to raise $1bn for its Telfer gold mine and, in our opinion, could be considered a case in point. Iluka could be considered another.
Now, in two years time we may be thoroughly embarrassed should Iluka be successfully mining the Murray Basin. But that's not really the point. An intelligent investor ought to steer clear of speculation where possible.
Why load yourself with that added funding and construction risk when there are better alternatives? In this industry, we prefer mineral sand miner Ticor . It's well into the construction phase of its expansion in South Africa and has money in the bank.
Otherwise, Sons of Gwalia is far less speculative and offers a similar 4.2% dividend yield. It's also more diversified with tantalum and gold operations.
Despite the stock's 10% slide since issue 107/Jul 02 (Steer Clear - $5.08), Iluka isn't compelling. Don't get swayed by the potential and look for BETTER VALUE ELSEWHERE.