How far can Iluka go now?

Yesterday’s price hike for Iluka Resources (ASX: ILU) came as a bit of surprise — up 4.7% to close at $10.91 when the S&P/ASX 200 Materials Index (ASX: XMJ) managed just 1.7% and the S&P/ASX All Ordinaries Index (Index: ^AXAO) (ASX: XAO) was marginally down. At one stage it was up more than 5%.

And that was in the face of yesterday’s pre-market June quarterly production report that revenue from its mineral and sands operations had dropped 42% in the first half of 2013 after lower prices and falling demand forced it to cut production.

Clearly, the market liked what it heard, despite it ostensibly being bad news; perhaps because there was renewed optimism about how the company’s management was positioning itself for demand to return after a downturn that included cutting 200 jobs in March.

And it wasn’t all bad news. Iluka, the world’s biggest zircon producer, said prices appeared to have stabilised and had even increased slightly towards the end of the financial year. Rutile and synthetic rutile prices had continued to slide, but apparently in line with its expectations.

The biggest fillip seemed to be growing confidence in how the company had been handling its zircon trade with China, the world’s biggest importer of zircon, which is used among other things to glaze tiles.

Iluka had been lowering production and reducing its inventory, but now forecasts sales to exceed production. There were signs of stronger demand not just in China but also in North America and even modest indications in Europe, it said.

At its May 22 annual general meeting the company did not expect positive cashflow in the first half. Expectations of a reversal of that in the second half will now be heightened and it will make for an interesting interim report on August 22.

From humble beginnings Iluka had steady growth until late 2005, after which it trailed off to mid-2010. Regaining its top price late that year, it went on a stellar run-up from around its current trading price to two years ago an all-time high of $19.46. It fell dramatically from April to July last year, most notably when it plummeted 24% in just one day (July 9) to $8.88. It was punished for saying it was no longer able to provide longer-term forecasts, partly due to moving to short term sales contracts.

Foolish takeaway

Iluka can be a volatile stock and it’s not for the feint-hearted, relying heavily on demand from China. It could retrace some of yesterday’s jump, but in a recovering global economy it also could extend gains for years to come.

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Motley Fool contributor Andrew Ballard does not own shares in any company mentioned. 

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