Shares in Iluka Resources Limited (ASX: ILU) closed down more than 10% today after the company warned of lower sales volumes and increasing operating costs.
Iluka is a resources and mining company focused on minerals zircon, rutile and synthetic rutile which are used in ceramics, pigments and optical equipment, among other uses. Headquartered in Perth, Iluka has been operating for over 60 years, and currently operates in Australia and Sierra Leone.
What The Numbers Said
Net profit after tax (NPAT) was up 9% for the half year until June 30 to $137 million. Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) fell by 2% to $274 million.
The greater uplift in net profit was attributed to higher sales prices across its product suite which offset lower sales volumes. Zircon and rutile prices were up 19% and 22% respectively during the half year, while sales volumes declined by 31%.
Higher iron ore prices meant that the company reaped a 41% increase in its Mining Area C royalty agreement with BHP Group Ltd (ASX: BHP), which delivered $41.2 million in revenue.
Iluka’s net profit figure was also helped by a deterioration in the value of the Australian dollar (AUD/USD), which depreciated 9% against the U.S dollar through the reporting period.
In addition, the company saw a deterioration in the strength of its balance sheet, finishing the half with $142 million of net debt compared to $2 million of net cash at the end of December.
Perhaps most disappointingly for shareholders, the company announced it would be slashing the interim dividend by 50% to just $0.05 per share.
Outlook Not Great
Commenting on the result, CEO Tom O’Leary said: “While overall profit has increased, the global economic and political environment are headwinds as we move forward in 2019.”
The company had expected an improvement in zircon sales in the second half. However, this is no longer expected to materialise with the company stating that second half sales are now likely to be in line with the first half. On top of this, the company also expects to receive a lower average realised price in the second half.
Management also said that the outlook for unit cost of goods sold for 2019 is now expected to be in the order of $840 per tonne, up from $765 per tonne previously.
Are Iluka Shares Cheap After The Sell-Off?
Despite today’s 10% decline in the share price, I wouldn’t be in a hurry to buy. As with most companies that operate within the mining sector, Iluka is heavily reliant on the prices of a few commodities that will continue to be almost entirely outside the control of management.
I’d prefer to buy into quality companies with competitive advantages that allow them to consistently generate high returns on invested capital for their shareholders.
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At the time of publishing, Luke has no financial interest in any companies mentioned.
