ILUKARESOURCESILU.AXDOWNBEATOUTLOOKANDPRODUCTIONCUTS0830

1、40.672315.724 august 2012asia pacific/australiaequity researchdiversified metals & miningiluka resources (ilu.ax / ilu au)ratingprice (24 aug 12, a$)target price (a$)outperform* v9.60(from 17.80) 13.50resultsmarket cap. (a$mn)yr avg. mthly trading (a$mn)4,019.521,260downbeat outlook and producti

2、on cutslast months trading (a$mn)projected return:capital gain (%)dividend yield (net %)total return (%) 56.452-week price range 18.9 - 8.1* stock ratings are relative to the relevant country benchmark.target price is for 12 months.v = stock considered volatile (see disclosure appendix).research ana

3、lystsmatthew hope61 2 8205 4669matthew.hopecredit-paul mctaggart61 2 8205 4698paul.mctaggartcredit-martin kronborg61 2 8205 4369martin.kronborgcredit-total return forecast in perspective ilus 1h12 gross profit of $325mn was driven by high prices for theproduct it was able to sell. the forward sales

4、view remains opaque andour assumptions are largely unchanged. our cash-level earnings remainfairly steady, but we have major changes to bottom line npat, driven by animproved understanding of ilus accounting for non-cash inventory change.we have reduced our target price to a$13.50 (from $17.80) by a

5、pplying a20% discount to a revised dcf. our rating remains outperform. ilus high level commentary on the market was not encouraging andreinforced our impression that building construction (that drives zircon andtio2 demand) remains weak in china and europe. looking from currentweakness towards winte

6、r, we now no longer expect demand to pick up until2013. ilus production response is to leave ja hmc at the mine site, cuttingtransport costs and potentially zircon inventories, with 2h zircon productionguided to 120kt. it will also cut syn-rutile output by slowing kiln 2 in the wa. iluka is the worl

7、ds largest producer of zircon and second largest inhigh grade tio2 feedstocks. ilu was the first-mover in shrugging off long-term contracts and repricing at higher levels. mineral sands have nowproven to be exceedingly volatile with zircon and premium grade tio2feedstocks taking the brunt of the dem

8、and downturn. ilu is highly exposed. catalyts: ilus next production report is due in october. a novemberconference is the typical negotiation forum for buyers and sellers of tio2product, and any material change arising from the conference would beannounced to the market. our dcf sum-of-the-parts for

9、 ilu is $16.70 ($18.70 previously).financial and valuation metricsyear12/11a12/12e12/13e12/14e100%revenue (a$mn)1,536.71,470.92,478.12,948.350%0%cs tgtsh prc*meanebitda (a$mn)ebit (a$mn)net income (a$mn)898.9674.7506.11,024.7830.3611.41,638.01,463.31,104.51,962.61,776.61,346.8eps (cs adj.) (ac)121.5

10、3146.03263.80321.67-50%change from previous eps (%)n.a.-2.315.818.212mth volaility 52wk hi-locs target return*consensustarget returnshare priceconsensus eps (ac)eps growth (%)p/e (x)n.a.1,325.47.9112.3020.26.6199.4080.63.6222.6021.93.0performance overabsolute (%)relative (%)1m12.36.83m-25.0-32.912m-

11、41.3-44.5dividend (ac)dividend yield (%)p/b (x)net debt/equity (%)75.007.82.6net cash61.446.42.2net cash200.0020.81.7net cash200.0020.81.4net cashrelative performance versus s&p asx 200.see referenceappendix for a description of the chart. source: credit suissesource: company data, asx, credit s

12、uisse estimates, * adj. for goodwill, notional interest and unusual items. relative p/e againstasx/s&p200 based on pre gw in aud. company pe calculation is based on displayed eps currencyestimates, * consensus, mean range from thomson reutersdisclosure appendix contains analyst certifications an

13、d the status of non-us analysts. u.s.disclosure: credit suisse does and seeks to do business with companies covered in its research reports. as a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. investorsshould consider

14、this report as only a single factor in making their investment decision.credit suisse securities research & analyticsbeyond informationtmclient-driven solutions, insights, and accessccxxx%xxx224 august 2012figure 1: financial summaryiluka resources (ilu)year ending 31 decin audmn, unless otherwi

15、se statedshare price: a$9.6024/08/2012 20:33earnings12/10a12/11a12/12e12/13e12/14eratingoutperformc_epequiv. fpo (period avg.)mn418.7416.4418.7418.7418.7target pricevs share pricea$%13.5040.63c_epeps (normalised)eps_eps growth%8.5121.51,325.4146.020.2263.880.6321.721.9dcfa$16.70c_ebebitda margin%26.

16、758.569.766.166.6iluka resources limited is an australia-based company.the principal activities of thec_dpdps8.075.061.4200.0200.0company consists of exploration,mining,concentration & separation of mineralsands,production of ilmenite, rutile,synthetic rutile & other titaniferous concentrate

17、s etc.c_papayoutfranfrankingc_fcfree cfps%c93.80.014.761.773.2145.842.1100.0108.675.8100.0209.562.2100.0339.6profit & loss12/10a12/11a12/12e12/13e12/14ec_taeffective tax rate%9.630.0sales revenue874.41,536.71,470.92,478.12,948.3valuationebitdadepr. & amort.ebitassociatesnet inter

18、est exp.other233.1(219.0)14.10.0(30.9)69.5898.9(224.2)674.70.0(8.0)66.81,024.7(194.5)830.30.0(1.5)55.51,638.0(174.7)1,463.30.048.166.51,962.6(186.0)1,776.60.081.965.5c_pep/ec_ebev/ebitc_ebev/ebitdac_divdividend yieldc_fcfcf yieldc_pbprice to bookxx%x112.6304.53.

19、66.41.61.520.835.41.4profit before tax52.7733.5884.21,577.91,924.0returnsincome taxprofit after taxminoritiespreferred dividendsassociates & othernormalised npat(3.8)48.9(0.0)0.0(13.2)35.7(218.9)514.6(0.0)0.0(8.5)506.1(262.9)621.3(0.0)0.0(9.9)611.4(473.4)1,104.5(0.0

20、)0.00.01,104.5(577.2)1,346.8(0.0)0.00.01,346.8c_roreturn on equityc_i_n profit marginc_i_s asset turnoverc_as equity multiplierc_roreturn on assetsc_roreturn on invested cap.%33.020.634.41.522.437.746.836.857.747.038.173.2unusual item after

21、tax0.035.60.00.00.0gearingreported npat35.7541.7611.41,104.51,346.8 c_genet debt to net debt + equity21.8net cashnet cashnet cashnet cashc_nenet debt to ebitda1.3net cashnet cashnet cashnet cashbalance sheetcash & equivalents12/10a30.112/11a320.712/12e448.012/13e605.012/14e c_i_eint cover (ebitd

22、a/net int.)1,190.1 c_i_eint cover (ebit/net int.)7.50.5112.484.3692.4561.0-34.1-30.4-24.0-21.7inventoriesreceivables200.9164.8376.2256.1514.7282.1428.1541.7251.5 (c_c_capex to sales606.4 (c_c_capex to depreciation%13.485.69.3101.012.4154.24.7111.68.3218.7other current assets0.02.6current as

23、setsproperty, plant & equip.intangiblesother non-current assetsnon-current assetstotal assetspayablesinterest bearing debtother liabilitiestotal liabilities395.81,425.17.1111.91,544.11,939.9103.8342.7368.8815.3953.51,430.46.763.21,500.32,453.8136.7164.0618.4919.11,247.41,428.26.549.91,484.62,732

24、.1135.3149.0601.7886.01,577.41,370.66.549.91,427.03,004.4164.620.9460.4646.02,050.51,428.66.549.91,485.03,535.5186.021.3460.4667.7msci iva (esg) rating bbb3.82.8credit suisse viewtp esg risk (%): -3.9tp risk comment: we include rehabilitationprovisions in our tp based on environmentalrequir

25、ementsnet assetsordinary equity1,124.61,124.61,534.71,534.71,846.01,846.02,358.42,358.42,867.82,867.81.8environmentsocialgovernanceminority interestspreferred capitaltotal shareholder fundsnet debtcashflowebitnet interestdepr & amorttax paidworking capitalotheroperating cashflowcapex0.00.01,124.

26、6312.612/10a14.1-29.4219.0-1.5-136.2112.7178.7-117.20.00.01,534.7-156.712/11a674.7-10.9224.2-12.5-233.7107.7749.5-142.50.00.01,846.0-299.012/12e830.30.7194.5-270.3-166.048.4637.6-183.00.00.02,358.4-584.112/13e1,463.348.1174.7-614.6-143.666.5994.3-117.00.00.02,867.8-1,168.812/14e1,776.681.9186.0-577.

27、2133.365.51,666.1-244.0stock local sector country global sectorsource: msci iva ratingshare price performance20.0018.0016.0014.0012.0010.008.00capex - expansionarycapex - maintenance6.00acquisitions & investasset sale proceeds9.00.03.90.01.20.00.00.00.00.04.002.00otherinvesting cashflowdividends

28、 paid0.0-108.20.00.0-138.6-117.00.0-181.8-313.00.0-117.0-592.20.0-244.0-837.40.0015/08/201115/10/201115/12/201115/02/201215/04/201215/06/201215/08/2012equity raisednet borrowings0.0-116.40.0-182.0-0.6-6.70.0-130.60.00.0ilu.axxjoother-9.8-21.3-8.80.00.01 month3 month12 monthfinancing cashflowtotal ca

29、shflow-126.2-55.7-320.3290.6-329.1126.7-722.8154.5-837.4584.7absoluterelative12.3%6.8%-25.0%-32.9%-41.3%-44.5%adjustments-0.50.0net change in cash-56.2290.6127.3157.1585.0source: reuters 52 week trading range: 8.14-18.88source: company data, credit suisse estimatesiluka resources (ilu.ax /

30、ilu au)324 august 2012downbeat outlook and production cutswith sales and cash costs already revealed in the quarterly reports, most items comprisingthe gross profit in ilus result were known, so this part of the result was in-line. but npatwas not, due to the large accounting entries for inventory b

31、uild-up.what we were looking for from the result and conference call were:an update on the mineral sands demand outlook,ilus production response,the mac royalty income, andthe accounting lines that ilu uses to book its inventory build.there were two conference calls on the day. the second was to exp

32、lain to mystifiedanalysts and investors, ilus arcane accounting policies that will swing the npat in thefuture, as hefty mineral sand inventories move in and out of the accounts.update on mineral sands demand outlookilus ceo was not keen to elaborate on the demand trends for mineral sands seen since

33、ilu downgraded sales guidance in early july. most of the commentary was high-level andbackward looking, referring to the junq. ilu suggested that china building activity mayhave been lower than government statistics suggest. weakness in europe continued withboth domestic and export markets reporting

34、 soft demand. us demand was mostly stable,but there was some evidence of softening manufacturing output in q2.nevertheless, we probably dont need ilus guidance to figure out that the demandenvironment remains difficult.zircon: demand looks set to remain feeble for the rest of the yearchina iron ore

35、and steel prices are currently in free fall, which is not a signal of a robustconstruction sector. that country will probably require some major stimulus projects to pickup the economy and this is most likely after the october leadership transition. constructiontends ease into winter in china anyway

36、, so chinas zircon demand looks set to remainweak for the remainder of the year. there remains few signs of life in europe and noapparent prospect of industrial production picking up, so the worlds alternate zircondemand engine remains stalled.the downturn in zircon was so sharp that we remain confi

37、dent that there is a large cyclicalcomponent. ultimately we expect demand will return in 2013 weaker than previously,but a substantial uplift on weak sales this year. we consider part of the reason thatdemand is so volatile is due to the steady high price that producers are maintaining. ifthere is n

38、o flex in the price to respond to demand, then the flex will occur on sales for thedownstream to manage working capital.ilu noted that china had seen advanced tile-making technology catch up with the tilemanufacturers in that country. this reduces zircon demand, but ilu could not quantifywhat propor

39、tion of zircon demand had been lost to thrifting and substitution. it suggestedthe technology changeover was complete.tio2: no change of heart from pigment producerswe can watch pigment makers to see that the tio2 sector remains flat. the constantstream of pigment maker announcements of quarterly pr

40、ice increases that occurred in2011, has been replaced by a complete silence. kronos announcement was an exception,recently announcing a price increase, but this was for regions outside the core markets ofeurope and us. if pigment makers are not seeing demand strength, then their orders forfeedstocks

41、 will be weak to non-existent.iluka resources (ilu.ax / ilu au)424 august 2012the tio2 sector is the one that concerns us the most from ilus perspective.weak demand for rutile and synthetic rutile is largely a result of the northern hemispheresummer painting season being weak. pigment makers have be

42、en left with high inventoriesand are trying to destock. one way to do this is to cut out the high grade feedstocks rutile and syn-rutile (+90% tio2) while maintaining a base load of lower grade slags(86% tio2). this decision was particularly easy in 2012 given a large proportion of slagproduction re

43、mains under low-priced legacy contracts, whereas ilus rutile and syn-rutilecontracts are short-term with extreme prices.step forward into 2013 and the picture becomes confused. we are likely to see the two bigchloride slag-makers change pricing to shorter-term contracts as they have previouslysignal

44、led, and they will try to win higher prices. this change may make ilus prices forrutile and sr less extreme relative to the market. however, on the negative side, we haveseen one big western pigment consumer licence its chloride technology to chinesepigment maker henan billions, with an off-take agr

45、eement, hence demand for westernpigments may be easing. we are not certain what feedstock henan billions would use, butbelieve its more likely to be chinese chloride slag (manufactured from ilmenite sands thatare found in parts of china) than ilus rutile or syn-rutile.meanwhile, reformulation of pai

46、nts to cut over-use of pigments is on-going and somepigment consumers are starting to mix chinese pigment with western product. the oldmodel global pigment demand matching global gdp, reflected by production from thebig five producers who buy from ilu seems to be over. it seems clear that china isbe

47、coming a big player in western pigment supply. we cant really predict how the situationwill play out or what role ilu and its premium grade chloride products will play in the futuremarket.ilus production response to a quiet demandilu has always indicated it will match its production to market demand

48、, but probably didnot expect that demand would be quite as weak as it actually is. the response to theupdated sales guidance of early-july will clearly influence ilus financial outlook.zircon: ja hmc will remain at the mineilu lowered zircon production guidance to 120kt for the second half (330kt fu

49、ll-year)as all ja concentrate will be stockpiled on site rather than be processed. otherfinished products from the same mine will likely be lower as a result, but no specificguidance was issued.tio2: cut synthetic rutile outputfor tio2, ilus response is to reduce feed rates and output at sr kiln 2 a

50、nd use thekiln for further product testing and grade optimisation. furthermore, reactivation of srkiln 1 will be pushed back until at least late 2013 (we already assumed 2014).costs and capexunit cost per ton at $709/ton z/r/sr which is expected to increase to $790/ton z/r/srin 2h12 as production of

51、 finished products decrease. actual guided costs of $300mn islower than previously expected as transport and processing of ja material falls awaycut capex guidance for fy12 from $260mn to $185mn deferrals and re-scheduling ofnon-essential expansions, e.g. cataby, balranald and sr3 kilnd&a guidan

52、ce of $85mn ($105mn in 1h12) for 2h on lower murray basin chargesiluka resources (ilu.ax / ilu au)524 august 2012earnings changesour earnings decrease by 2% in fy12 on a lower benefit from change in inventory(p&l accounting item), offset by lower costs as production of finished goods from jaare

53、cut. our fy13 and fy14 earnings are up 16% and 19%, largely from reversing aninventory charge we had forecast earlier.we have adjusted fy13 sales slightly as we assume a slower sales recovery fromcurrent weak demand. our 2012 numbers remain unchanged (midpoint of guidancerange).zircon production cut

54、 to 330kt (from 424kt) on new company guidance. we assume nofinished product from ja and instead forecast 200kt of hmc stockpiling at the mine.we assume ilu will once again begin processing material in 2013, but do not currentlyforecast any major stock drawdowns.lower fy12 sr production to 261kt (fr

55、om 306kt) on lower output from sr2 and sr3lower rutile production to 232kt (from 245kt) and ilmenite 280kt (365kt) with no outputfrom ja.figure 2: changes in earnings1h12f2012f2013f2014fpricesnewoldchgnewoldchgnewoldchgnewoldchgaud/usdzirconrutilesynthetic rutileilmeniteus$us$/tus$/tus$/tus$/t1.032,

56、5002,4002,0503251.032500240020503250%0%0%0%0%1.032,5002,4002,0503381.03250024002050337.50%0%0%0%0%0.972,5002,4002,0503500.972500240020503500%0%0%0%0%0.942,5002,4002,0503000.942500240020503000%0%0%0%0%productionzirconrutilesynthetic rutileilmenitektktktkt209104131177209103.61312150%0%0%-18%3302322612

57、80424245306365-22%-5%-15%-23%415263295285428278320287-3%-5%-8%-1%4492814152994492814152990%0%0%0%saleszirconrutilesynthetic rutileilmenitektktktkt878510121987851012190%0%0%0%2501701953502501701953500%0%0%0%415269305285428284330287-3%-5%-8%-1%4492874252994492874252990%0%0%0%financialsrevenueoperating

58、 costsgross profitchg in inventoryebitdanpatepsa$mna$mna$mna$mna$mna$mna/share663(338)32518147026466663(341)3224197124411090%-1%1%-57%-34%-40%-40%1,471(667)8043141,0966111491,471(759)7114191,1026221500%-12%13%-25%-1%-2%-2%2,478(738)1,740(14)1,7291,1052642,601(791)1,810(280)1,525949228-5%-7%-4%-95%13

59、%16%16%2,948(891)2,058(13)2,0521,3473222,948(915)2,034(280)175011342720%-3%1%-95%17%19%19%pex3.03.5fcfa/share(11)15-169%1099614%210251-16%34029515%p/fcfx(45.6)31.38.810.03.2dividendsa/share20200%614247%2001905%2002000%dividends yield4.2%4.2%6.4%4.4%20.8%19.9%20.8%20.9%net

60、casha$mn-117-91219%29924323%584823-29%11691221-4%source: company data, credit suisse estimateshigher gross profit in 2h12 due to lower cost guidance for 2h ($300mn, from$383mn). lower costs are a result of no transport or separation costs for ja hmciluka resources (ilu.ax / ilu au)624 august 2012which will remain at the mine in 2h. this results in a higher