The Motley Fool

Spotlight on Iluka Resources

Iluka Resources (ASX: ILU) is a major producer of mineral sands and has a current market capitalisation approaching $5 billion. The company is the largest producer of zircon in the world, with roughly a 33% share of the market, and also the second largest producer of titanium dioxide products. The firm exports these products to over 35 countries.

So what are mineral sands used for?

Zircon is hardly front of mind for many people, however many developing regions have a preference for tiles as a floor covering. In fact approximately 75% of all floor coverings in China are tiles. That adds up to some serious demand for zircon which is an important input for ceramics, such as tiles, sanitary ware and tableware.

Titanium dioxide is used in the production of titanium pigments which are pure white. The end product has multiple applications including for protective coating on houses, car paints and sunscreens as well as plastics, paper and textiles.

Iluka’s key market position

Like most miners, Iluka has been negatively affected by the slowdown in Chinese demand for resources. However, unlike many miners which ramp-up production in response to lower prices, Iluka’s significant market share affords the company the opportunity to take a different approach.

The fall in demand has led Iluka to run production at just 30% to 40% of capacity and allow inventories to build. The company has also reduced its workforce by around 30% and managed to reduce total cash costs by 20%. These measures have helped the miner keep the earnings before interest, tax, depreciation and amortisation margin at 30% — an impressive margin considering mineral sands demand are at what management views as the low point in the cycle.

Foolish takeaway

After a difficult 2012, which led to Iluka’s share price plummeting from near record highs around $19 to less than $8, the share price has regained some ground this year to trade close to $12.

Looking back over the longer-term horizon, Iluka’s share price has performed significantly better than the overall market. In the past 10 years, while the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has returned 65%, Iluka has returned 173%. Iluka’s share price performance is well above the return from an investment in Rio Tinto (ASX: RIO) of 81.5%, although not as good as the return from an investment in BHP Billiton (ASX: BHP), which has returned 235%.

Iluka’s strong market position in mineral sands is obviously a factor in its outperformance of the wider market in the past decade. At current prices the market looks to have already priced in an anticipated improvement in earnings which probably makes Iluka one for the watch list at present.

Interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

NEW. The Motley Fool AU Releases Five Cheap and Good Stocks to Buy for 2020 and beyond!….

Our experts here at The Motley Fool Australia have just released a fantastic report, detailing 5 dirt cheap shares that you can buy in 2020.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading over 40% off it's high, all while offering a fully franked dividend yield over 3%...

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click here or the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.