Iluka’s Strong 2022 Result Driven by High Prices Offsetting Rising Costs

No-moat Iluka’s ILU 2022 result was impressive, driven by higher mineral sands prices and a weaker AUD/USD rate, partially offset by lower sales volumes and higher unit costs. Adjusted net profit after tax, or NPAT, nearly doubled to about AUD 600 million, or AUD 1.41 per share. Adjusted EBITDA increased 45%, to about AUD 950 million. The AUD 300 million adjusted EBITDA increase was mainly due to higher average realized mineral sands prices (up AUD 400 million) and a weaker Australian dollar (up AUD 110 million), partially offset by lower sales volumes (down 170 million) and higher unit costs (up AUD 90 million). Ignoring Sierra Rutile, which the company demerged and spun off to shareholders in June 2022, total sales volumes for zircon, rutile and synthetic rutile fell 13%, to about 630,000 metric tons. EBITDA margins increased as higher mineral sands prices more than offset a 21% increase in unit cash costs.

We modestly reduce our fair value estimate to AUD 10.50, from AUD 11 previously, with the shares trading close to fairly valued. Higher forecast near-term unit costs offset the inclusion of production from its West Balranald project, which the company will start building later in 2023. We forecast a modest 5% increase in zircon, rutile and synthetic rutile sales volumes to about 660,000 metric tons in 2023. Our forecast 2023 NPAT is about AUD 370 million, or AUD 0.88 per share, with the reduction compared with 2022 driven by higher cash unit costs. Iluka will pay a fully franked final dividend of AUD 0.20 per share in March, two thirds more than the AUD 0.12 paid last year and bringing total 2022 dividends to AUD 0.45 per share fully franked. This represents a payout ratio of about 32%, which we think strikes an appropriate balance between returning cash to shareholders and funding the growth pipeline. After generating about AUD 440 million in free cash flow, Iluka’s balance sheet remains strong, with net cash of AUD 490 million.