WITH the development of BHP’s South Flank well underway, Iluka Resources is considering a demerger of the royalty it pockets from BHP’s Mining Area C (MAC).
The development of South Flank means the capacity of the expanded MAC hub will sit at around 145 wmtpa from 2023 onwards and would equate to an increase in annual iron ore production (within the MAC royalty area) from around 55 million dmtpa to 135 million dmtpa.
With this increase in production (and cash flow), it’s a no-brainer for Iluka to seriously consider a structural separation of MAC by way of demerger.
Iluka managing director Tom O’Leary said that the MAC area is a high grade, low cost iron ore asset with a tier one operator in BHP.
“Thanks to the South Flank development, it has significant growth in expected cash flows,” he said.
“In addition, further growth in the value of MAC is possible given the potential for the development by BHP of deposits within the area covered by the royalty agreement.”
MAC’s earnings contribution to Iluka will ultimately be dependent on a range of factors including iron ore pricing and the US/Aus dollar exchange rate, but the asset could be fruitful in more ways than one.
Beyond the existing South Flank development, BHP has identified two potential future operations in its long-term plan, Tandanya and Mudlark, which are likely to fall at least partially within the royalty area – another cherry on top of the potential demerger sundae.
Iluka chairman Greg Martin said the review would determine what is ultimately in the best long-term interest for the company and shareholders.
“Given the substantial scale of the mineral sands business and the prospective scale of MAC, the time is right to formally review Iluka’s corporate and capital structure with the objective of fully capitalising on the respective features of both assets,” Mr Martin said.
The review will consider Iluka’s corporate and capital structure, capital requirements, business plans, management structures, and cost and tax implications.
An update is anticipated at the announcement of the company’s full year results in February 2020.
