AE Portfolio Aggressive Holding Iluka Resources Ltd (ASX: ILU, OTC: IKLAF, ADR: ILKAY) has issued its second full fiscal year 2012 downward production guidance revision, a move that sent the share price tumbling in May 8 trading on the Australian Securities Exchange (ASX).

We made our initial case for the company in the March 2012 In Focus, The New Iluka and the New China, after it reported blowout 2011 results and declared a final dividend for the year of AUD0.55 per share. We added it to the Portfolio because of its key position in a solid niche market, poised as it is to serve a centuries-long demand for tile in Asia that will only get stronger with the Middle Kingdom’s shift to a domestic demand driven growth model. It is an Aggressive Holding precisely because management was, paradoxically, quite clear about a murky short-term outlook.

The stock closed at AUD16.70 (USD17.01) on the ASX on Friday but fell 16.1 percent to AUD14.01 (USD14.18) as of Tuesday’s close Down Under. Monday’s slide to AUD15.95 (USD16.29) was driven by general fear aroused by weekend elections in France and Greece. Tuesday was all about this latest guidance revision.

My view is this second leg down will prove as irrational in the long term as Monday’s, presenting opportunity for aggressive investors to lock in a 5 percent-plus yield on a stock backed by a business that’s tied into a durable growth trend and a management team committed to maintaining a generous dividend. Iluka Resources remains a buy up to USD18 for aggressive investors who can tolerate a lot of volatility.

The announcement, released before the open Tuesday morning in Sydney (Monday evening on the US East Coast; Sydney is 14 hours ahead of us), follows a Feb. 23, 2012, revision to guidance Iluka had issued as part of its Key Physical & Financial Parameters, 2012-2014 document.

The substance of the guidance changes is as follows:

• Iluka reduced its zircon production target for 2012 from the previously advised approximation of 500,000 metric tons to about 430,000 metric tons while maintaining its high-grade titanium dioxide production level.
• Lower zircon production is likely to mean an increase in unit cash costs of production from initial guidance of approximately AUD650 per metric ton of zircon/rutile/synthetic rutile (Z/R/SR); the impact of fixed costs and some operating inefficiencies could push this figure to about AUD700 per metric ton of Z/R/SR, an increase of approximately 8 percent.
• Iluka now forecasts zircon sales for the full year to be 400,000 metric ton compared with the previously forecast 450,000 metric tons.
• Management is raising its capital expenditure budget from AUD220 million to approximately AUD260 million, as it “brings forward” expenditure related to the Cataby project in Western Australia and adds new funds for the Balranald project in New South Wales.

There is no change to guidance for titanium dioxide production and sales from that issued at the beginning of the year, with market conditions and sales forecasts in line with expectations. Iluka expects its Z/R/SR sales volumes to be approximately one third/two thirds weighted between the first half and second half of 2012.

Based on the revised zircon sales and assuming current pricing, Iluka’s total revenue mix is expected to be approximately 50 percent to 55 percent titanium dioxide, with the remainder zircon and byproducts.

Iluka cautioned that changes to its unit cash cost estimates should be considered in light of estimated revenue per metric ton of Z/R/SR of approximately USD2,300, based on prevailing prices. Even at the higher forecast cost level of AUD700 per metric ton Iluka is still on track for a “material increase” in margins for 2012 over 2011.

The company also maintained its guidance for operating cash flow, which was AUD706 million in 2011 but will be “higher” in 2012. This is a strong positive as it relates to Iluka’s ability to sustain its new, higher dividend level established during and in the aftermath of what was a transformative 2011 for the company.

Iluka had stated on several occasions that it expected a soft quarter or two of zircon demand based on the impact of murky global economic conditions on customer confidence and business conditions in various markets. Management also cited the potential effects of various government policy measures globally and the need for a destocking period, especially for ceramics manufacturers.

Iluka was quite up front about the fact that it expected it would take some time to develop a “clear view” on 2012 zircon demand and how it would develop through the year.

Management noted in its May 8 update that, after a slow first quarter, zircon sales volumes improved in April. This positive momentum stems from better conditions in its key China market as well as in the US. Optimism for a full global recovery is tempered, however, by the tumult in the eurozone, where political upheaval and instability that’s now creeping into the larger economies up risks to the downside. A shift from austerity to growth should be a positive, but the global economic outlook remains far from clear.