Iluka to demerge BHP iron ore royalty to new company

Image: BHP

Iluka Resources has taken steps to demerge its royalty business at the BHP-operated Mining Area C iron ore project in Western Australia after a company review.

The company plans to establish an ASX listed company RoyaltyCo that will separate the Mining Area C project royalty from its mineral sands business.

Mining Area C will be RoyaltyCo’s cornerstone asset, subject to shareholder and other approvals.

Iluka chairman Greg Martin said after a thorough review, the Iluka board considered that a demerger represented the optimal way to unlock value for shareholders.

“… by establishing two unique pure-play ASX listed companies with separate management teams, (they) are able to pursue independent strategies and growth opportunities,” Martin said.

“The business characteristics, capital intensity and risk-return profiles of Iluka and RoyaltyCo differ and hence will likely appeal to different types of investors, with the proposed demerger presenting an opportunity for Iluka shareholders to determine their preferred level of exposure to each business.”

Iluka states it will retain sufficient financial flexibility to support its mineral sands project pipeline following the demerger.

The company will own a 15 per cent interest in RoyaltyCo, which will be headquartered in Perth, Western Australia as an additional source of financial strength.

Iluka received an earnings before interest, tax, depreciation and amortisation (EBITDA) contribution of $85 million last year from the Mining Area C royalty, up 53 per cent from 2018 thanks to strong increases in iron ore prices.

The annual iron ore production is expected to more than double to 145 million wet metric tonnes a year by 2023 once BHP’s South Flank expansion is completed.

Meanwhile, Iluka’s revenue was down by 4 per cent last year on the prior period to $1.19 billion due to mixed market conditions.

This is a result of an 18 per cent decline in zircon, rutile and synthetic rutile sales volumes.

“Market conditions were mixed in 2019. Subdued business sentiment, emanating from persistent trade and other geopolitical tensions, weighed on the zircon market particularly,” Iluka managing director Tom O’Leary said.

“The flexible approach in Iluka’s marketing strategy, however, enabled us to meet revised guidance.”

The result announcement coincides with Iluka declaring a temporary suspension of its operations at Sierra Rutile in West Africa due to a community disruption.

Iluka expects this to be resolved and operations to resume in days.

“However, in light of our results announcement today, Iluka considers it appropriate to disclose this development to the market even though it would otherwise be premature,” Iluka stated in an ASX announcement.

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