If you are looking for big returns and don't mind investing in the resources sector, then the ASX 200 stock in this article could be worth considering.
That's the view of analysts at Macquarie Group Ltd (ASX: MQG), which believe that big returns could be on offer for investors over the next 12 months.
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Which ASX 200 resources stock?
The stock that Macquarie is particularly bullish on right now is Iluka Resources Ltd (ASX: ILU).
It is a major producer of zircon and titanium minerals, primarily rutile and chloride ilmenite with core operations in Western Australia. In addition, it also produces rare earths and is building a processing facility.
Macquarie highlights that there has been some big news in the rare earths elements (REE) industry recently. It explains:
NdPr floor price precedent: The first ex-China NdPr price floor was recently established under a 10-year agreement between MP Materials and the US Department of Defense (DoD). The NdPr floor price of US$110/kg for MP is well above the spot price of ~US$63/kg. We view the MP deal as a positive indicator for ILU, as it reinforces ILU's strategy of securing higher prices through bilateral offtake agreements.
The broker also believes that higher prices are just the beginning for this ASX 200 resources stock. It adds:
We believe additional agreements could be secured with continued involvement from the US government to incentivise the development of a reliable rare earth elements (REE) supply chain. Furthermore, European countries may follow suit, taking swift action to establish their own magnet supply chains to meet both civil and defence requirements.
What else?
All the above bodes well for the company's Eneabba phase three (EP3) project and could see its valuation both de-risked and increased. Macquarie explains:
We expect the market to reduce value discount on EP3 despite its complexity. The EP3 project carries an NPV of A$1.7b (valuation date: 3QCY26) based on our long-term real NdPr price assumption of US$95/kg. Our base case assumes an underutilised refinery scenario, only processing the monazite stockpile, with production ceasing in FY35.
However, if NdPr prices were to align with the recently established floor price of US$110/kg (as a scenario), the project's valuation could approach A$2b. Additionally, there is further upside potential in a full-utilization scenario, which would extend the asset's operational life beyond our 9-year assumption.
Time to buy
In light of the above, Macquarie thinks investors should be buying this ASX 200 resources stock.
According to the note, it has reaffirmed its outperform rating and $6.50 price target on its shares. Based on its current share price of $4.75, this implies potential upside of 37% for investors.
In addition, a 2% dividend yield is forecast this year and next, which boosts the total potential 12-month return to 39%.
Commenting on its outperform rating, Macquarie concludes:
ILU remains our mineral sands top pick, supplying ~20% of global zircon and ~10% of high-grade titanium feedstocks. We retain our Outperform rating, with focus on JA extensions, Wimmera100, and Balranald. The recent MP and DoD deal could also reduce valuation discount on the EP3 project, in our view.
