Mineral sands and soon-to-be rare earth operator ILU hosted its AGM on Wednesday, reiterating the positive commentary from its latest quarterly, highlighting early signs of improving conditions i.e. It believes that overall demand has “turned the corner.” The market welcomed the commentary from MD Tom O’Leary, although he did go off-piste somewhat, spending a fair bit of time accusing China of rigging the prices of rare earth to satisfy its long-term ambitions towards the market. He went as far as to issue a stern warning as China seeks to “weaponise” the supply of vital materials to force down prices to unviable levels for Australian miners. Mr O’Leary believes no rare earth producer in the Western World is economically viable in the current market.
- “China’s dominance of the rare earths industry, which in the case of heavy rare earths is near-total, is achieved through production supremacy and its influence over pricing,” – Tom O’Leary.
- Our concern is that Mr O’Leary’s comments are borne out of frustration because China, not ILU or Australia, is the “gorilla in the room.” i.e. He has no control over the price of rare earths and, hence, future profitability.
- A comparison could be drawn with how Indonesia is driving down the nickel price with its “dirty” production, which has left IGO Ltd (IGO) down -13% year-to-date.
We want to look at the two main moving parts regarding ILU, with the stock reaching our initial $8 target. Since we went long in February, we’ve said, “We continue to see the stock trading between $6 and $8 through 2024.” Hence, our initial question is, should we now take profit and allocate the funds elsewhere?
- We bought ILU on valuation grounds after it had almost halved, regarding it as an excellent proxy for an economic recovery in China; this is starting to slowly play out, which is reflected to a certain degree by the +18% bounce by Chinese equities.
Iluka is planning Australia’s first fully integrated refinery for the production of separated rare earth oxides only 270km north of Perth, with the development underpinned by a $1.25 billion Federal loan. The company disclosed in February that the plant’s price tag had ballooned to between $1.7b and $1.8b, which is at least $500 million more than the original maximum estimate. They also flagged a delay in the first production from 2025 to 2026, which is not ideal with them currently locked in talks with Labor as they go cap in hand looking for more taxpayers support – it feels to us that they do want to “have their cake and eat it too” as they’re not prepared to sell their 20 per cent stake in $2.5 billion spin-off Deterra Royalties to help meet the funding shortfall on Eneabba. Perhaps Mr O’Leary’s China rant is an effort to garner favour with the government around funding – an election is looming and ESG support is a vote winner.
We remain cautious about the NdPr price in the short term, although admittedly based on limited visibility into the Chinese market. Our best interpretation is not great, which has been echoed by Tom O’Leary, but in a market that is growing ~8% pa this decade, we ultimately remain optimistic around an eventual recovery in price. However, it feels premature to chase rare earth investment at this stage of the cycle. For example, Lynas is down over -7 % year-to-date in a positive market.
- We believe ILU remains a bullish proxy for China based on an improving outlook for Mineral Sands, but we’re not convinced it’s time to aggressively be long rare earths—MM is long ILU in our Active Growth Portfolio.
MM is long and cautiously bullish toward ILU
Add To Hit List
