Aussie midcaps are a good hunting ground for fast-growing sectors such as minerals sands and rare earths. One example is producer Iluka Resources, writes Pendal analyst JACK GABB

• Mid-cap miners offer diversity
• Iluka a leader in mineral sands mining
• Find out about Pendal Midcap Fund

WHEN you put sunscreen on your face, reload your printer with new ink or paint a wall at home, you are probably benefiting from the mining of mineral sands.

Mineral sands are old beach, river or dune sands that contain concentrations of rutile, ilmenite, zircon and monazite.

They have a variety of uses from paint and paper through to toothpaste, sun cream and ceramics — and the biggest mineral sands producer in Australia is ASX-listed Iluka Resources.  

Iluka is a holding in Pendal Midcap Fund, which focuses on the 100-biggest companies outside the ASX50 – a good hunting ground for fast-growing sectors such as mineral sands and rare earths.

Iluka was formed in 1998 through the merger of RGL and Westralian Sands. Between them, the companies have been mining mineral sands for more than 70 years.

“Three competitors control 60 to 70 per cent of zircon supply and Iluka is the number one player in the market,” says Pendal Aussie equities analyst Jack Gabb.

Zircon is particularly attractive because one of the three top players – Rio Tinto – has had challenges mining mineral sands at its Richards Bay site in South Africa, Gabb says.

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Zircon prices have historically been highly cyclical, and Iluka has been able to stockpile the mineral to better manage peaks and dips, Gabb says.

In more recent years, zircon prices have gained steadily amid tight global supply.

“Spot pricing can still be volatile, but Iluka has started to fix prices for three to six months, and that provides more price stability than we’ve seen historically.  

“We like the demand environment. It’s been stable over the past few years and demand in China is rebounding.”

“On the titanium dioxide feedstock side — which goes into paint and the high-end welding market — there’s been record pricing announced and we’re seeing some pigment plants restart in China and Europe.

“Demand in the US remains more muted, but we see tight supply continuing to support feedstock pricing.”

Iluka’s management team have been headed by Tom O’Leary for nearly seven years and has been relatively stable.

Push intro rare earths

Company management is very experienced in mineral sands and the company is now pushing into rare earths, Gabb says.

Rare earths are a group of 15 metals used in a range of goods, from smart phones and computers to batteries of electric vehicles.

While mining mineral sands and rare earths is similar, processing is different — though there is some overlap in the first part of the process involving cracking and leaching.

“These is certainly some risk in Iluka getting up to speed in processing rare earths. But the management team have proven themselves capable of delivering projects in the past and we expect that to continue.”

Gabb says the key risks around Iluka involve project delivery.

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“There’s a lot of growth coming through on the mineral sands side and also in their foray into rare earths. They are building a $1.2 billion project in Western Australia so there is delivery risk particularly around inflation,” Gabb says.

“This will be only the third rare earths separation facility outside China. It has a lot of strategic value, but it also means that there is a relative paucity of experienced people who know how to run a rare earths separation plant,” he says.

“The mineral sands business is a steady business that Iluka has grown up doing. It’s a stable source of free cash flow for the business and has a great industry structure. Iluka’s push into rare earths is new, but it’s very strategic and diversifies the business.”

About Pendal MidCap Fund

Pendal MidCap Fund features 40-60 Australian midcap shares.

The fund is managed by Brenton Saunders, a portfolio manager with Pendal’s Australian equities team. He draws on more than 25 years of expertise in resources, derivatives, investment banking and private equity. He is a member of the CFA Institute.

The fund leverages insights and experience gained from Pendal’s access to senior executives and directors at ASX-listed companies.

Pendal operates one of Australia’s biggest Aussie equities teams under the experienced leadership of Crispin Murray.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal MidCap Fund here

Contact a Pendal key account manager here