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$3.5 billion.
What is the FY19 result?
- Mineral sands EBITDA of A$531 million, down 2.5% compared with the correspond period.
- Mining Area C royalty EBITDA of $53 million, up 53% compared with the correspond period.
- Underlying group EBITDA of A$274 million, down 2 per cent compared with the correspond period.
- Underlying net profit after tax of $279 million, down 7.3% compared with the correspond period.
- Reported net loss after tax of $300 million due to the write down of the value of Iluka’s Sierra Leone assets as previously announced.
- Final dividend is 8 cents per share (fully franked), down from 19 cents in FY18.
What are the key drivers of this result?
Mineral sands revenue for 2019 was relatively strong at $1,193 million (down 4.1% on FY18), with lower sales volumes being largely offset by price increases as average 2019 received prices for zircon and rutile increased 10% and 20% respectively relative to 2018. Production costs were higher in FY19 relative to FY18.
Mining Area C royalty payments for 2019 were $85 million, up 53% from 2018, due to strong increases in iron ore prices.
Demerger of the Mining Area C royalty
Iluka announced plans to demerge its Mining Area C royalty business, subject to shareholder and other approvals. This means that Iluka will become solely a mineral sands miner and a Mining Area C royalty business will be held in a separate entity. Iluka believes that the structural separation of the two businesses by way of demerger is the optimal structure to deliver sustainable value. The demerger is expected to be completed in 2020.
What is the outlook?
Iluka’s management did not provide specific earnings guidance. However, Iluka expects zircon production to fall 13% and rutile production to increase 20% in FY20. Zircon prices are expected to remain soft while rutile prices are expected to remain firm.
What is the market’s reaction?
Iluka’s share price increased by 8% to A$10.20 in response to today’s announcements. This rise reflects a positive market reaction to demerge Mining Area C royalty business rather than to the subdued FY19 profit results. Iluka is relatively cheap while trading at a forward P/E ratio in the mid-teens and an annual dividend yield of around 2 per cent (fully franked).
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
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