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Danger – falling stocks on road ahead

Iluka Resources Limited (ASX: ILU) has seen its share price crash this morning, falling 22.5% at 2 pm to $9.06. The company announced today that second quarter sales were below expectations, which combined with deteriorating economic outlooks and second half volume requirements appearing lower, will likely see analysts significantly downgrade Iluka’s profit and earnings for 2012.

The news is not really new. Back in January, I mentioned that I was steering clear of the company thanks to lower zircon production and sales levels (which the company reported), despite revenues rising by 75%.

The company also stated that volatility in factors beyond the company’s direct control have increased the difficulty in providing company performance guidance. The move to shorter period sales contracts also means the company has less certainty around long-term revenues and as a result, has scrapped its longer-term forecasts for 2013/2014. Iluka is reviewing its capital expenditure levels and project timing for 2012 and 2013, with the likelihood that some projects will be pushed out into 2014 and beyond.

Falling demand for resources and slumping commodities prices are starting to hurt some of our miners.  Kagara Zinc Limited (ASX: KZL) and Mirabela Nickel Limited (ASX: MBN) have both seen their share prices crash more than 75%, following falls in zinc and nickel prices.

Kagara has been in a trading halt since April 2012, as administrators were called in to restructure the company. Mirabela is struggling to avoid the same fate, and was forced to raise $120m in equity. Investors won’t be happy, with the institutional placement done at 40 cents and the rights issue at 30 cents, and the share price currently around 25 cents. Whether they have thrown good money after bad is yet to be proven.

The Foolish bottom line

Which resources stock will be next to report a profit downgrade? I don’t know, but if I owned shares in any small to medium resources companies with skinny margins and a big lump of debt, I’d be very nervous.

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More reading

  Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.  The Motley Fool ‘s purpose is to help the world invest, better.  Take Stock  is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  Click here now  to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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