Iluka Resources Ltd (ASX: ILU) is a large mineral sands producer (zircon, rutile and ilmenite) mainly used in the manufacture of ceramic tiles (zircon) and paint (rutile and ilmenite). Iluka operates mineral sand mines in Australia and Sierra Leone and it receives royalty payments from BHP Group Ltd in respect of an iron ore mine located in Pilbara. Its market capitalisation is A$4.1 billion.
What are the key features of the HY20 result?
Iluka’s net after tax profit for HY20 is $133 million, a fall of 17.5% on HY19. Underlying mineral sands EBITDA in HY20 was A$177 million (down 17.5% on HY19) while the Mining Area C royalty EBITDA was $48 million (up 16% on HY19) due to the higher iron ore price.
Total zircon/rutile/synthetic rutile sales volumes declined 20% in the HY20 to 242 thousand tonnes, reflecting the impact of COVID-19 on demand in zircon markets, as well as lower than expected sales to contracted customers for synthetic rutile. Sales prices for zircon (premium and standard) recorded some erosion from 2019 levels while rutile prices increased 7% from HY19, reflecting ongoing contractual arrangements. Iluka’s earnings were positively impacted by a 7% depreciation of the $US/$A exchange, increasing the $A value of predominantly $US denominated sales.
Iluka decided not to pay an interim dividend in respect of HY20 earnings given current economic uncertainty.
Demerger of the Mining Area C royalty
Iluka continues to progress plans to demerge its Mining Area C royalty business, subject to shareholder and other approvals. Iluka expects that this issue will be considered by shareholders in October 2020. If shareholders approve the demerger, this means that Iluka will become solely a mineral sands miner and the Mining Area C royalty business will be held in a separate entity (called Deterra Royalties Ltd). Iluka believes that the structural separation of the two businesses by way of demerger is the optimal structure to deliver sustainable value.
What is the outlook?
Iluka’s management did not provide any specific update on earnings and production guidance for the remainder of 2020 in today’s announcements.
Iluka announced that the Phase 2of Eneabba project (which produces an upgraded monazite feedstock) has been approved. The cost of this project is $35 million. This confirms the next step in the company’s incremental approach to entering the rare earths market.
What is the market’s reaction?
The market’s reaction to Iluka’s HY20 result announcement is neutral. Iluka’s share price is trading at around $9.60 (14 August 2020). Iluka is relatively cheap while trading at a forward P/E ratio in the mid-twenties.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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