The S&P/ASX 200 Index (ASX: XJO) is down 0.1% on Friday, but don't blame this rocketing ASX 200 mining stock.
The outperforming stock in question is rare earths miner Iluka Resources Ltd (ASX: ILU).
The miner, if you're not familiar, produces zircon and high-grade titanium dioxide feedstocks (rutile and synthetic rutile). And it's getting a big lift today.
Iluka Resources shares closed yesterday trading for $3.98. In late morning trade on Friday, shares are swapping hands for $4.90 apiece, up 23.1%.
While that's a fantastic intraday gain, the analysts at Macquarie Group Ltd (ASX: MQG) believe the Iluka share price remains materially undervalued at current levels.
Here's why.
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Surging ASX 200 mining stock could keep racing higher
In Macquarie's Critical Minerals Preview report, published today, the broker said that Iluka Resources remains its top pick, "supplying ~20% of global zircon and ~10% of high-grade titanium feedstocks".
Macquarie retained its outperform rating on the ASX 200 mining stock, noting that "Balranald commissioning and EP3 construction [are] key near term catalysts".
Iluka's Balrnald Critical Minerals Project is located in New South Wales. On completion, the project will become a significant global source of high-grade mineral sands and rare earth elements.
And Macquarie expects that Iluka is poised to beat consensus revenue estimates.
The broker stated:
Versus consensus, our Z/R/SR sales for ILU are 8% higher with stronger zircon (+17%) offset by weaker rutile (-3%) while synthetic rutile is largely in line. Despite lower prices, our forecast revenue is 4% above VA consensus.
Macquarie added:
While we have modelled sequentially stronger sales for zircon (+16%) and synthetic rutile (+63%) in the June quarter, we expect rutile sales to be 28% lower. Our forecast SR shipments of 55kt assumes a roughly even distribution in the year under the 200kt take or-pay contract for CY25.
We anticipate average realised prices for Z/R/SR to be 5% higher QoQ. However, we note our prices are 2% below consensus at A$2,184/t, reflecting the potential difference in rutile and synthetic rutile prices
Connecting the dots, Macquarie has a price target of $6.50 per share on the ASX 200 mining stock. That represents a potential upside of 32.7% from current levels. And that's after factoring in today's 23.1% intraday gains.
What are the risks?
No share market investment comes without its risks. Especially if you're gunning for 33% returns from an ASX 200 mining stock.
Summarising the risks to its bullish outlook for Iluka Resources, Macquarie said:
Movements in zircon and rutile prices and variances in our production and cash cost assumptions present the key risks to our earnings forecasts and valuation. We also make assumptions on Phase 3 production costs and end-product realisations. Variance in these estimates vs actual outcomes are key risks to our earnings forecasts and valuation.
Iluka is scheduled to report its quarterly results on 23 July.
