Uncertain markets during coronavirus crisis push Iluka Resources to withdraw guidance

Mineral sands major Iluka Resources has withdrawn its 2020 financial guidance, but will push ahead with the iron ore spin-out.

Iluka is still waiting on a ruling from the Australian Taxation Office on the tax implications of the demerger, needed before it can proceed with the spin-out.

Mineral sands major Iluka Resources has withdrawn its 2020 financial guidance, citing the uncertainty in the markets for its zircon products, but said it would push ahead with the spin-out of a lucrative iron ore royalty later this year.

Iluka boss Tom O’Leary told shareholders that the impact of the virus crisis on its Chinese zircon customers made Iluka’s financial future difficult to predict for the year.

The company’s annual meeting on Thursday was conducted via webcast because of the coronavirus crisis.

While Iluka has substantially more revenue certainty from sales of titanium dioxide and rutile into the paint pigment market, where the company has made a concerted effort to lock in more sales through take-or-pay contracts, Mr O’Leary said it was not yet clear what impact COVID-19 would have on its zircon sales.

While most of Iluka’s zircon product is sold into China, many of the end users - particularly tile-makers - are in hard-hit parts of Europe such as Spain and Italy.

“In terms of our key commodity markets, the first quarter is traditionally a seasonally low period for zircon sales. This year, the impact has been exacerbated by the widespread factory shutdowns that occurred in China, where we sell around 60 per cent of our zircon in January and February,” he told shareholders.

“The pace at which factory utilisation and capacity rates in China normalise will be an important influence on our zircon sales for the remainder of the year. It is perhaps also worth noting that a number of our zircon customers are themselves supplying to customers located in Europe, including Italy and Spain, where the pandemic has hit especially hard.”

But Iluka said that, despite intensive planning for the potential impact of virus-related restrictions on its core Australian operations, its local mines and processing facilities were moving towards a “business as usual” assumption for the bulk of its production, despite travel restrictions imposed by some states.

But chairman Greg Martin told shareholders the turmoil on global markets had not led to a re-think of Iluka’s February decision to spin-out the lucrative royalty stream it generates from an interest in BHP’s Mining Area C operations, saying the company still expects to close out the deal by the end of the year, a move expected to unlock billions of dollars for the company’s shareholders.

Iluka collects a 1.232 per cent royalty from sales of iron ore from tenements within BHP’s Mining Area C hub, as well as a so-called annual capacity payment of $1m for every million tonne increase in exports from the area

Before-tax earnings on the royalty were worth $85m to Iluka last year, more than 60 per cent of its $140m free cash flow. Over the past six years Iluka has collected $380m from the royalty, according to its annual report, and close to $881m since mining began at MAC in 2003.

Payments will steadily mount in coming years as BHP builds its massive new South Flank mine to a planned 145 million tonne a year mining hub by 2023.

Mr Martin said he was unable to give shareholders a detailed timeline for the proposed demerger, given the turmoil on global markets, but Iluka still intended to close out the spin-out in 2020.

“You will appreciate that the practicalities of executing a demerger –including matters such as shareholder engagement, arranging and holding an extraordinary general meeting and the like – are somewhat difficult and unpredictable in the current climate. I can assure shareholders this morning that preparations are continuing and the board will proceed with the demerger when it is practicable to do so,” he said.

Iluka is still waiting on a ruling from the Australian Taxation Office on the tax implications of the demerger, needed before it can proceed with the spin-out.

Iluka shares closed for the day on Thursday 2.4 per cent higher at $7.29 having been down earlier.