This month we added two ASX shares to our Global Best Stock Ideas list (available to Morningstar Investor subscribers).

Iluka Resources Ltd (ASX: ILU)

We added minerals sands and soon-to-be rare earths producer Iluka. Mineral sands prices are in a cyclical downturn, driven by reduced demand from slower global property and construction markets, which likely explains the undervaluation.

However, we think demand will recover, with prices supported by likely long-term structural supply challenges for high-quality zircon and titanium dioxide feedstocks. Its rare earths refinery at Eneabba could also be valuable as prices increase, driven by the West’s attempts to reduce dependence on China.

We expect it will receive minimum prices for its neodymium-praseodymium oxide similar to the price floor of USD 110 per kilogram received by competitors MP Materials and Lynas, with ramp-up likely from around mid-2027. With net debt, excluding nonrecourse refinery debt, of around $250 million as of the end of September 2026, backed by inventories, its sound balance sheet means Iluka can ride out the cyclical downturn.

Business strategy and outlook

Iluka is a mineral sands miner. Major mines are Jacinth-Ambrosia in South Australia and Cataby in Western Australia, and production from its Balranald mine in New South Wales started in 2025. Relatively low operating costs for zircon are supported by Jacinth-Ambrosia, but its reserve life is less than a decade. Like the industry, Iluka is facing a declining grade profile at its mines, but a constrained outlook for supply should support prices.

Mineral sands prices and volumes are the primary drivers of our fair value estimate. Iluka’s focus is on managing volumes and the resulting impact on prices. Efforts to maintain margins and prices mean sales volumes can fall in periods of weak demand as Iluka shoulders part of the responsibility for balancing industry supply, but the company can also flex production to increase market share or liquidate excess inventory as prices rise. Primary products are split between zircon (used in tiles and ceramics, refractories, chemicals, and so on) and titanium dioxide feedstocks, rutile and synthetic rutile (used for pigments in paints, coatings, plastics, and paper).

Iluka is building a rare-earth refinery at Eneabba that will utilize its existing monazite stockpile as initial feedstock. The refinery will also be able to process feedstock from third parties as well as from Iluka’s Balranald mine and its potential Wimmera project.

Maintenance capital expenditure is relatively modest, but expansions and reinvestment to prolong life are generally pursued when Iluka sees a need for new demand and the potential for reasonable returns on investment.

Due to the mineral sands industry downturn, net debt for its mineral sands business was about $270 million as at the end of June 2026. It had an additional $880 million in nonrecourse debt then, to help build the rare-earth refinery. Iluka maintains a conservative balance sheet with no net debt in the mineral sands business on average through the cycle. This should provide the capacity to finance inventory build when necessary and invest through the cycle. Management values returns to shareholders, primarily through dividends, but will flex depending on investment needs.

Sonic Healthcare (ASX: SHL)

The downside risks to Sonic’s near-term earnings are more than offset by the stock’s material discount to our fair value estimate. Protracted integration of the HWE contract in the UK and the underperforming US unit are being addressed with urgency, with restructuring benefits already coming through in the US.

Adverse earnings translation from unfavorable currency movements is temporary and masks solid organic growth across the group (excluding US). Regulatory changes in Switzerland and Germany remain uncertain. But adverse regulatory developments hurt smaller competitors more than Sonic.

Longer term, they drive consolidation to Sonic’s benefit, as it is the pathology leader in these markets, with the scale, operating efficiency, balance sheet, and medical leadership culture to take advantage of any negative government funding reforms. The balance sheet is equipped to weather the near-term headwinds, with net debt/EBITDA at just 2.2, well below the 3.5 covenant limit, supported by $1.6 billion available in cash and undrawn facilities.

Business strategy and outlook

Sonic Healthcare provides laboratory medicine/pathology and diagnostic imaging radiology. It is the third-largest private provider of laboratory medicine globally, behind Quest Diagnostics and Labcorp. Strategy focuses on being a low-cost provider and gaining cost advantage over competitors through scale. This has mostly been pursued through acquisitions, buying smaller operators to expand its market share in geographies where it operates. The firm emphasizes medical leadership, recognizing referring doctors as the primary customer, focusing on improving their experience and efficiency.

Sonic has grown via acquisitions in multiple regions, first in its home market Australia, where it’s the largest operator with over 40% of the pathology market and 10% of the diagnostic imaging market. Pathology operates under a hub-and-spoke model, whereby multiple collection facilities feeding centralized laboratories, acquisition synergies procurement, and IT integrations mean most acquisitions are accretive.

The same roll-up strategy is used internationally, and Sonic is now the largest private pathology provider in Germany, the UK, and Switzerland, and a major provider in Belgium, New Zealand, and the US. In most international markets, pathology providers face similar pressures, with government reimbursements lagging testing costs. We see consolidation in Europe and the US as likely, as smaller operators are eventually outcompeted by larger providers with lower costs per test.

Sonic is navigating lower testing volumes since the end of the covid-19 pandemic, and higher labor costs fueled in part by postpandemic inflation. Profits peaked at $1.5 billion in fiscal 2022 and more than halved to $0.5 billion in fiscal 2024, similar to fiscal 2018 levels. This, alongside concerns about potential German healthcare and reimbursement reform leading to cuts to payments for pathology tests, has weighed on the shares.

We forecast group profitability improving, driven by rationalization of its US anatomical pathology operations, increasing testing volumes in the UK from its new Watford laboratory, and cost savings from the integration of the acquisition of LADR in Germany.