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Top broker says buy this mid-cap miner

It’s starting to look like a familiar story. The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is on track to mark its fourth consecutive trading day of losses with the index slumping 0.4% in afternoon trade. Mining stocks are taking the brunt of the selling yet again.

It’s not a big surprise given that the materials sector, which is dominated by miners, has been among the best performers on the market over the past year.

An improving outlook for commodities and balance sheet strength has pushed shares in BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) to near multi-year highs.

There is probably further downside for mining stocks following their outperformance and given that November tends to be a seasonally weak period for our market. But as I wrote today, I think the market weakness will persist till mid-December before bouncing into an end-of-year rally.

This means investors should be actively looking to buy the dips over the next few weeks and there’s one mid cap miner that appears well placed to keep outperforming into 2018 even as it gives up some ground today.

I am referring to mineral sands miner Iluka Resources Limited (ASX: ILU), which enjoyed a recommendation upgrade by Credit Suisse to “outperform” from “neutral” following the miner’s investor day presentation.

The broker said there was lots to be impressed with as management gave bullish commentary on its assets and re-iterated its disciplined approach to capital allocation to boost shareholder returns.

Management has indicated that the market for high-grade titanium dioxide (TiO2) is looking positive due to tightness in supply as pigment producers maximise production. This thematic could last up to two years.

The outlook for Zircon (another mineral Iluka produces) is also positive with management tipping a deficit to emerge due to a lack of investment in new projects and the absence of new discoveries of high quality deposits.

“We believe Iluka has set forth a clear pathway for optimising its suite of assets, which will see production volumes maintained and the ability to capitalise on recovering mineral sands prices,” said Credit Suisse.

The broker has updated its forecasts for Iluka and that has led to a significant increase to its price target for the miner to $11.10 from $9.90.

While that may not seem like much of an upgrade to some investors, Credit Suisse suspects it may have to upgrade its price target further if Mining Area C increases tonnage to 150 million tonnes per year vs. the broker’s more conservative estimate of 130mtpa.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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