Goldman Sachs says Iluka shares are a strong buy with 40% upside

This resources share could be a strong buy according to Goldman Sachs…

| More on:
A group of people in suits and hard hats celebrate the rising share price with champagne.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you’re looking for exposure to the resources sector, then Iluka Resources Limited (ASX: ILU) shares could be worth considering.

That’s the view of analysts at Goldman Sachs, who believe the mineral sands and rare earths producer could be one of the best ASX 200 resources shares to buy right now.

What did the broker say?

According to a note out of the investment bank this morning, the broker has reiterated its conviction buy rating and $13.80 price target on the company’s shares.

Based on the current Iluka share price, this implies potential upside of 40% for investors over the next 12 months.

Why is Goldman bullish on Iluka’s shares?

Goldman has named three key reasons for its bullish view on Iluka shares. These include its valuation, its mineral sands and rare earths production growth, and the state of zircon and TiO2 feedstock markets.

In respect to its valuation, it commented:

Trading at 0.65x NAV (A$14.6/sh). We think the market is ascribing only some value to ILU’s Wimmera and Eneabba RE projects and the high grade zircon Balranald development project. We think ILU is undervalued (on c.4.5x EBITDA NTM) vs. key rare earth (c.13x) and mineral sands/pigment (c.5x) industry peers.

As for its mineral sands and rare earths production growth, the broker highlights the company’s strong production growth outlook. Goldman expects this to be a big boost to earnings in the coming years. It said:

We are positive on ILU’s project pipeline and forecast >40% production growth in mineral sands volumes, c.18ktpa of Rare Earths (~3.5-4ktpa of high value NdPr), and a >60% increase in EBITDA over the next ~5 yrs to 2027.

Finally, Goldman Sachs notes that the Zircon and TiO2 feedstock markets entered a supply side driven deficit in 2021. And with the markets remaining tight, its analysts see ongoing upside risk to prices in the second half of 2022.

The c.1.1Mt global zircon market entered a deficit in 2021 on our estimates, driven by a >10% fall in global supply on mine depletion and production cuts, and a strong rebound in global demand for ceramics. The Top 3 global zircon producers control 65%-70% of supply. We expect ILU to announce a further US$125/t zircon price increase from 1 July 2022, which should increase ILU’s realised price to around US$1,870/t.

We also believe the 7Mtpa TiO2 feedstock market has entered a deficit on stronger global pigment demand and expect at least a further US$180/t (+15%) increase in both rutile and synthetic rutile prices for 2022.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Broker Notes

A woman sits crossed leg on seats at an airport holding her ticket and smiling.
Travel Shares

Own Flight Centre shares? Here’s what to expect from its FY22 results

Here's what to expect from Flight Centre's FY 2022 results...

Read more »

A man leans forward over his phone in his hands with a satisfied smirk on his face although he has just learned something pleasing or received some satisfying news.
Blue Chip Shares

Brokers say BHP and this ASX 200 share are buys

Here are two ASX 200 shares rated as buys....

Read more »

A female broker in a red jacket whispers in the ear of a man who has a surprised look on his face as she explains which two ASX 200 shares should do well in today's volatile climate
Broker Notes

Goldman Sachs tips huge returns for the Goodman share price

Goldman Sachs says Goodman's shares could rise materially..

Read more »

A male broker wearing a dark blue suit and tie puts his finger to his lips to signal a secret tip about the Xero share price
Resources Shares

‘Clearly under the radar’: Expert reveals hidden gem ASX share he’s holding

One fund manager lets slip a stock about to go crazy that no one else knows about.

Read more »

Broker Notes

Why these 2 ASX shares rocketed 40% last month

The rise in value of these stocks was no fluke, as one expert is holding onto them for further gains.

Read more »

A woman looks in anticipation at her laptop, watching eagerly.
Technology Shares

The Appen share price is down 20% in a month. Is it going lower?

Will Appen's shares continue to slide?

Read more »

Young woman using computer laptop with hand on chin thinking about question, pensive expression.
Broker Notes

Is the Beach Energy share price a buy following its post-reporting sell-off?

Are brokers still optimistic after slamming the company's earnings and guidance? We take a look.

Read more »

A man in his office leans back in his chair with his hands behind his head looking out his window at the city, sitting back and relaxed, confident in his ASX share investments for the long term.
Broker Notes

Why this broker sees plenty of upside for the ResMed share price

ResMed shares could be in the buy zone...

Read more »