Royalty Spin-Off Sparks Rally In Iluka Shares

By Glenn Dyer | More Articles by Glenn Dyer

Despite lower dividends, investors loved the full-year figures from Iluka Resources yesterday, with the company revealing a $300 million full-year loss due to an asset write-down and tax.

Iluka directors declared a fully franked final dividend of 8 cents per share, bringing full-year dividends to 13 cents per share.

That was down sharply from 2018’s 20 cents a share full payout and a final of 10 cents a share.

But that’s not why the shares were in strong demand yesterday. Instead of the P&L account, it was the news that Iluka plans to spin off its iron ore royalty stream in a deal that could see over $1 billion in extra value created for Iluka shareholders, as well as a continuing smaller stake in the flow of cash.

But that gain wasn’t based on an appreciation of the results but the decision by the company to spin off the royalty flow from BHP’s Mining Area C (MAC) in the Pilbara which generates tens of millions of dollars in income a year for Iluka.

“Iluka Resources Limited (Iluka) announces that it intends to demerge its Mining Area C royalty business, subject to shareholder and other approvals. The decision follows a review of the optimal capital and corporate structure of Iluka’s two principal businesses – its mineral sands business and the Mining Area C royalty business (the Review).

“The Review considered a range of options and ultimately concluded that structural separation of the two businesses by way of the demerger is the optimal structure to deliver sustainable value,” the company announced yesterday in addition to its full-year results.

The proposed demerger will see an ASX listed Australian royalty company (RoyaltyCo) created with its cornerstone asset being the royalty over the BHP-operated Mining Area C iron ore operation (MAC Royalty).

Iluka said yesterday the MAC Royalty generated EBITDA of $85 million in 2019 and has delivered $881 million EBITDA since the first production in 2003.

“RoyaltyCo will have a strong growth outlook given that Mining Area C annual iron ore production is expected to more than double to 145 million wet metric tonnes per annum by 2023, once BHP’s South Flank expansion is completed,” Iluka said yesterday.

Iluka will retain a minority shareholding interest of 15% in RoyaltyCo, “as an additional source of financial strength.”

That news overshadowed the results and lowered dividends.

On underlying basis the full-year performance was more normal. The mineral sands miner said underlying net after-tax profit fell to $279 million, down from $301 million in 2018.

Underlying Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) rose from $600 million to $616 million over the same period.

Revenue fell 4% on prior year to $1.193 billion, reflecting what the company described as “mixed market conditions”.

For the current year, the company says it expects to produce 280 thousand tonnes of zircon, 230 thousand tonnes of rutile3 and 225 thousand tonnes of synthetic rutile. It said uncertainty created by the coronavirus outbreak may impact zircon demand, especially in China.

“Iluka will monitor the situation closely and will adjust operational settings if appropriate over the course of the year.”

The company did not offer sales guidance for the year.

Iluka shares rose 7.1% to $10.10, driven by news of the planned spin-off.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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