Iluka Resources Limited is a critical minerals company with a unique asset mix which includes an enviable rare earths segment.
Iluka’s main assets are located in Australia, namely, Cataby, Jacinth Ambrosia, Eneabba, and Sierra Leone, South Africa.
Mineral sands, the company’s main product, has extensive use in high-temperature applications such as refractories, pigments manufacturing, and ceramics, while the rare earth segment would be key to high-performance magnets and other components of an array of electric products including cars, turbines, and batteries.
The company has been in the news of late for its plans to build the country’s first integrated rare earth processing plant in partnership with the Government of Australia.
We like ILU current valuations given the company stated a 20% jump in production growth in mineral sands volumes due to strong project pipeline over the next 3-5 years.
The company’s diversification into integrated rare earth refining is a significant opportunity we like.
ILU is rich in monzonite and xenotime, which are rare earths usually found as by-products of mineral sand deposits.
These metals can be processed into high-value rare earths such as Neodymium, Praseodymium, and TREOs (Total Rare Earth Oxides).
The refining plant will be fed by the company’s existing stockpile from depleted operations at Narngulu, while by-products from operations at Jacinth-Ambrosia and Cataby will continue to replenish feedstocks.
There is also significant scope for rare earths as by-products from operations at Wimmera, not to mention pure-play processing opportunities using feedstock from external sources.
Rare earths such as NdPr (Neodymium-Praseodymium) and TREOs are used extensively in high-performance/high-efficiency magnets for electric motors and wind turbines.
The uptake for these products is expected to skyrocket as the green energy revolution gathers pace.
Projections show a significant rare earth demand-supply mismatch in the years to come, ensuring solid demand for Iluka Resources shares.
To fund the rare earth refining project, the company has received a non-recourse A$1.25 billion from the Australian Government under the Critical Minerals Facility to be serviced at the Bank Bill Swap Rate + 3%.
Out of the total amount, A$200 million is for contingency on account of overruns.
Meanwhile, the company has put up A$200 million of equity along with A$1.27 billion of raw material resources, on which it is entitled to A$81 million/year of royalties, in addition to earnings from operations.
The project has a nine-year life on existing feedstock with average TREO production of 12.4 ktpa and 2.7 ktpa of NdPr, representing a post-tax NPV of A$524 million, excluding terminal value.
However, it must be noted that the prices assumed in the projections have advanced by more than 20% over the past few months, improving the project’s economics.
Significantly, Goldman Sachs said in a recent note:
“We are positive on ILU’s project pipeline and forecast >20% production growth in mineral sands volumes, ~18ktpa of Rare Earths (~4ktpa of high value NdPr) over the next 5yrs. We think ILU’s Eneabba RE refinery is a strategic asset considering it will be only the third significant western world RE refinery”.
The Technicals
- ILU looks to be breaking out of a flat base which goes back to Oct 2023
- Despite a market pullback , ILU outperformed the index by 3% over the last month
- Another bullish sign is that ILU has remained above its 50 day moving average
- Ideally, we want to see the stock break out of that resistance area, potentially retest the buy zone, then continue higher
Trade Action
- Quantity: Buy 800 shares
- Entry: Buy up to $7.60
- Stop Loss: $6.80
- Target Price: No target
