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

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.

The post Goldman Sachs says Iluka shares are a strong buy with 40% upside appeared first on The Motley Fool Australia.

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More reading

• 5 things to watch on the ASX 200 on Thursday
• Mineral Monday: What you need to know about rare earths and which ASX shares are cashing in on them
• Here’s why analysts rate these ASX 200 mining shares as buys
• Iluka share price lifts off on rare earths refinery progress

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.

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