Buy this dirt cheap ASX 200 mining stock for a 40%+ return

Goldman Sachs thinks this miner is severely undervalued.

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When it comes to investing in the mining sector, the obvious choices are BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO).

And while these ASX 200 mining stocks are high quality businesses, it doesn't necessarily mean that they will generate the biggest returns if buying at current levels.

Whereas one mining stock that could is Iluka Resources Limited (ASX: ILU).

In fact, this often overlooked miner could be dirt cheap according to analysts at Goldman Sachs.

What is the broker saying about this ASX 200 mining stock?

Firstly, in case you're not familiar with Iluka, let's take a look at what it does.

Iluka is a leading producer of zircon and high-grade titanium dioxide feedstocks (rutile and synthetic rutile). It is also developing Australia's first fully integrated rare earths refinery at Eneabba in Western Australia. It notes that this will make it a globally significant supplier of separated rare earth oxides.

Goldman recently attended the annual global Zircon Industry Association (ZIA) conference and was pleased with what it heard. It notes that the premium zircon market is tight and the overall market is balanced after a ~40kt surplus in 2023.

In light of this, it feels the ASX 200 mining stock is undervalued at current levels. So much so, it thinks that some assets are being ascribed little value. It said:

Trading at ~0.7x NAV (A$10.2/sh) and pricing in long run zircon of ~US$1,250/t CIF (real) compared to spot (Aus & South Africa) premium zircon at ~US$2,000-2,100/t (CIF) or essentially getting Eneabba & Wimmera Rare Earth projects for a ~50% discount to NPV. We also think ILU is undervalued based on NTM multiples (on ~6x NTM EBITDA) vs. mineral sands/pigment (~8x) industry peers.

The broker is also positive on the company's exposure to rare earths. It adds:

We think ILU's Eneabba RE refinery is a strategic asset considering it will be only the third significant western world RE refinery. Despite the recent capex increase to A$1.7-1.8bn we continue to think the economics are attractive when including the large Wimmera project (GSe A$0.93bn capex, 30yr life project with heavy rare earths and ~70ktpa of zircon) as feed in the base case with a long run NdPr price of ~US$70/kg (real $, from 2028) required to deliver a ~15% IRR on our estimates.

Big returns

Goldman has a buy rating and $9.90 price target on the ASX 200 stock.

Based on the current Iluka share price of $7.03, this implies potential upside of 41% for investors over the next 12 months.

In addition, its analysts are forecasting dividend yields of 3% in FY 2024 and 6% in FY 2025.

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 positions in and has recommended Goldman Sachs Group. 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.

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