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Why I think you should buy Iluka Resources Limited (ASX:ILU) for growth

Credit: Cesar Nguyễn

Gold, Lithium…. Sand? That’s right, sand is shaping up to be one of the most sought after commodities on the market and there’s one Aussie company that’s poised to take advantage. 

Iluka Resources Limited (ASX: ILU) is Australia’s largest mineral sands miner with a market cap of $5 billion. The share price has doubled since October 2016 resulting in a P/E ratio of 33. Whilst relatively expensive, industry developments suggest that the premium may be worth the payment. 

The mineral sands industry is strongly tied to global GDP growth rates and is responsible for the production of Titanium Dioxide. The recent developments in 3D printing technology, reducing production costs, as well as declining numbers of active mines have set the stage for a lucrative supply and demand storm.  

By 2019, Iluka is expected to more than double its current earnings to $0.77c per share securing a much more affordable P/E ratio of 15.2. Interestingly, Iluka has indicated that it may reduce its dividend yield over the next few years in order to reinvest more profits into its operations. 

Given the upswing in mineral sands prices, reinvesting in business operations should be music to shareholders’ ears.

Large brokers have taken note and labelled Iluka as a moderate buy. Additionally, some brokers have also labelled another mineral sand miner, Base Resources Limited (ASX: BSE), as a strong buy. 

Whilst risk may be reduced by holding a larger company such as Iluka, there is potential for increased returns via exposure to smaller mineral sands miners. Base is currently operating on a much cheaper P/E ratio of 5.14 and staring down at the same market developments. 

Foolish takeaway 

Iluka Resources is a fundamentally sound company in a positively developing industry. I believe that earnings potential hasn’t been fully accounted for and that there is value in the current price. I’m also of the opinion that diversification within the mineral sands sector will yield greater returns. 

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Motley Fool contributor MattBreen has no position in any of the stocks mentioned. 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 Scott Phillips.

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