Iluka Resources Limited (ASX:ILU) revenues are growing quickly, but lower zircon production and sales levels in 2012 is the warning sign that this may be as good as it gets.
Iluka Limited released its quarterly production report on 12 January 2012.
The 75 per cent increase in revenues from $874.4m to $1,536.7m was mainly thanks to an 83 per cent increase in zircon and titanium dioxide prices.
Full year 2011 sales revenue per tonne of zircon/rutile and synthetic rutile (Z/R/SR) was A$1,480/tonne compared with A$809/ tonne in 2010. This was partially offset by a higher Australian/US Dollar exchange rate (2011 average was 103.2 cents compared with 2010 average of 92 cents).
Full year cash costs of production are estimated at A$537/tonne, which compares favourably with 2010 costs of A$539/tonne.
The company
Iluka is one of the world's largest producers of mineral sands products. The company engages in the exploration, mining, concentration, and separation of mineral sands.
It produces and sells titanium based products (ilmenite, rutile and synthetic rutile) and zircon. The company's products are used in a range of consumer, lifestyle, and industrial applications, including pigment production used in paints, plastics, papers, titanium metal production, welding electrodes, floor and wall tiles, sanitary ware, zirconium based chemicals, and zirconia metal applications.
An analyst favourite
Iluka seems to be a favourite of analysts with 12 out of 14 having a buy rating on the stock. Most of the hype seems to be around the rapid rise in prices for zircon and titanium dioxide (TiO2) with a lack of supply expected to keep prices high in 2012 and 2013.
I must admit to not being a fan of Iluka, based on the cyclicality of the stock and its historical earnings and profits. As you can see from the chart below, profits are heavily dependent on commodity prices and the company has suffered two big losses since 2005.
However, while those commodity prices are high at the moment, Iluka stands to benefit from them.
As mentioned earlier, Iluka is very capital intensive, as you can see from the chart below showing operating cash flow, capital expenditure and free cash flow. In many years, the company has had negative free cash flow, meaning it's heavily dependent on borrowings. Its average net debt/equity ratio since 1998 is 50%.
Should commodity prices fall dramatically, Iluka could find itself in a similar situation to Bluescope Steel Limited (ASX:BSL).
The Foolish bottom line
Iluka is a stock that I'd be very wary of investing in, given its high dependence on commodity prices. There are much better opportunities out there, with less likely risk of losing your investment, such as these ideas below.
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Motley Fool contributor Mike King is highly unlikely to own shares in Iluka Resources. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.
