Monsters of Rock: Iluka says Sierra Rutile mineral sands demerger good for shareholders
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Iluka Resources (ASX:ILU) has experts Deloitte onside for the demerger of its Sierra Rutile mineral sands business in Sierra Leone as it pivots its core focus back to Australia.
Iluka is jettisoning the business, one of the world’s largest natural rutile operations, six years after its $393 million merger with the company that owned the mine.
The ASX 100 listed miner booked a US$290 million impairment against the carrying value of the company in December 2019 and threatened to suspend operations last year before market conditions turned around and rutile prices accelerated.
It has now chosen to demerge the company as a separate ASX-listed entity as Iluka places its focus on investing in its Australian mineral sands and rare earths portfolio, which includes the construction of Australia’s first onshore rare earth separation plant at Eneabba in WA.
Deloitte in its report as part of Iluka’s demerger booklet said funding for the Sembehun deposit, a brownfields development that will extend the life of Sierra Rutile into the late 2030s, was more certain in a separate company.
“The Sembehun project will extend the life of Sierra Rutile’s existing operations and provide investors with long-term exposure to the natural rutile market,” Deloitte said.
“Spot prices for natural rutile are at a 10- year high and the outlook for the titanium feedstock market is favourable, given the tight supply of high quality rutile.
“However, the lack of clarity on how the development of Sembehun will be funded has created market uncertainty and significant ambiguity about the true underlying value of Sembehun and therefore of Sierra Rutile.
“This is demonstrated by the significant disparity in brokers’ valuation estimates for Sierra Rutile, which range from A$18.0 million to A$1.1 billion.
“This suggests there is significant upside optionality associated with the Sembehun development which is less likely to be realised by Shareholders in the short to medium term if Sierra Rutile remains in the Iluka portfolio.”
Sembehun is one of the few new rutile developments proposed globally.
A pre-feasibility study released along with the demerger documents today put a US$337m price tag on its development with an internal rate of return of 24%.
The first phase of the development, around 25km from Iluka’s existing processing infrastructure would hit steady state production in 2026, with a second phase expansion due to ramp up to full production by 2028.
Sierra would generate funds for the Sembehun development from the existing Area 1 mine, which is expected to produce 144,000t of rutile at costs of US$892/t in FY22.
Mineral sands prices have gotten a bit hot and sweaty in the world’s post-pandemic economic recovery as a dramatic rise in infrastructure and property development has stoked demand for products like rutile and zircon.
Natural rutile is especially important as a titanium dioxide feedstock for paint pigments and welding among other things.
That means prices tend to go up late in the cycle, when cash is being thrown around like confetti.
But with economic conditions rapidly shifting across the globe, some analysts say it may be premature to be promoting a standalone rutile company with only one asset and underlying EBITDA last year of just US$20.5 million amid an environment of rising interest rates.
Iluka’s Tom O’Leary begs to differ. He thinks the structural undersupply of natural rutile places the demerged entity well.
“You’re welcome to your view, I think it is going to be in a position to generate cash and you can make your own projections of the shortfall and the funding requirements that will need to be raised at some point in the next couple of years,” he said.
“You talk to the outlook for the global market, you also need to reflect I think pretty carefully on the global production stack of naturally occurring rutile and that is declining precipitously.
“There are many around the world who require naturally occurring rutile for their pigment plants and for other applications and so the amount that is that is being produced globally, is falling to levels which are close to what I regard as less substitutable requirements.
“So I think the rutile market in particular is well placed given those circumstances.”
Base Resources (ASX:BSE) meanwhile has given a boost to global rutile supplies in the short term, by announcing plans to develop the Bumamani project near its Kwale operations in Kenya.
Bumamani will extend the life of Base’s Kwale by 13 months to December 2024.
But the $290 million capped miner’s shares dropped as it released its FY23 production guidance, revealing a substantial drop from FY22.
Production of rutile, ilmenite and zircon will fall respectively from 73,000-83,000t, 310,000-340,000t and 24,000-28,000t in FY22 to 62,000-73,000t, 260,000-310,000t and 22,000-27,000t in FY23.