20/02/2020 - 12:33

Iluka to demerge iron ore royalty

20/02/2020 - 12:33

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Mineral sands company Iluka Resources is planning to demerge its BHP iron ore royalty business into a new ASX-listed entity, while at the same time announcing its 2019 full-year results.

Iluka to demerge iron ore royalty
The proposed RoyaltyCo demerger will be headquartered in Perth. Photo: Iluka Resources

Mineral sands company Iluka Resources is planning to demerge its BHP iron ore royalty business into a new ASX-listed entity, while at the same time announcing its 2019 full-year results.

The proposed demerger will establish RoyaltyCo, with its cornerstone asset being Iluka's royalty over BHP’s Mining Area C iron ore operation in the Pilbara (the MAC Royalty). 

RoyaltyCo, to be headquartered in Perth, will also hold four smaller royalty interests, Iluka said.

It will be chaired by non-executive director Jenny Seabrook, who has been with Iluka since 2008, and led by chief executive Julian Andrews, who joined the company in 2017 as head of business development.

The demerger will be completed through an in-specie distribution of shares, whereby Iluka shareholders will receive one share in RoyaltyCo for each existing share in Iluka.

Gresham Partners and Macquarie Capital have been appointed as financial advisers to the proposed transaction, and Herbert Smith Freehills as legal adviser and Greenwoods as tax adviser.

RoyaltyCo will join several other ASX-listed companies, such as High Peak Royalties and Fitzroy River Corporation, which specialise in investing in mining royalties.

Iluka chairman Greg Martin said the proposed demerger would establish two unique pure-play ASX-listed entities with separate management teams, able to pursue independent strategies and growth opportunities.

“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,” Mr Martin said.

Iluka managing director Tom O'Leary said the MAC Royalty was of sufficient scale to form the cornerstone asset of a royalty investment business.

Following the proposed demerger, Iluka said it would retain sufficient balance sheet flexibility to support the capital investment required for its projects pipeline.

It said RoyaltyCo had a strong growth outlook, with annual iron ore production at BHP’s Mining Area C expected to more than double to 145 million wet metric tonnes per annum by 2023.

In 2019, the MAC Royalty generated earnings before interest, tax, depreciation and amortisation (EBITDA) of $85.1 million.

It has generated EBITDA of $881 million since Mining Area C’s first production in 2003.

Its royalty payments were up 53 per cent from 2018, due to strong increases in iron ore prices, Iluka said.

Meanwhile, Iluka said EBITDA from its mineral sands business was down 2.5 per cent to $530.9 million, while underlying group EBITDA was up 2.6 per cent to $616 million.

Underlying net profit for the period was down 7.3 per cent to $278.7 million.

Free cash flow was $140 million, down 54 per cent from $304 million, with the company investing $198 million in capital projects, including the completion of the Cataby operations in WA.

Separately, Iluka has temporarily suspended its operations in Sierra Leone, following a community disruption overnight.

The company said it expected this to be resolved and operations to resume in the coming days.

Its shares were up 7.32 per cent at 2:55pm AEDT to trade at $10.12 per share.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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