By Rhiannon Hoyle
SYDNEY--Iluka Resources Ltd. (ILU.AU) said it is considering a
spinoff of an iron-ore royalty worth around 850 million Australian
dollars (US$833 million), underscoring how mining companies are
taking a hard look at their assets amid subdued demand for
commodities.
Iluka is the world's largest producer of zircon, which makes
ceramic products opaque and is used in everything from wash basins
to kitchen tiles. The A$5 billion-valued company is also a major
exporter of titanium dioxide feedstocks like rutile that create a
pigment to give paint a bright white color.
The move to examine a possible spinoff of the iron-ore royalty
is at an early stage, and no firm decision has been taken, Iluka's
Chief Executive David Robb said in an interview.
"We are aware, if you look at the multiple paid to dedicated
royalty companies in North America, there may be in future a way to
unlock value for shareholders by giving it a life of its own," Mr.
Robb said.
It comes as other mining companies look to overhaul their
portfolios, driven by a desire to cut costs and boost returns to
shareholders. Rio Tinto Ltd. (RIO.AU) is considering an initial
public offering of aluminum assets in Australia and New Zealand,
and separately has hired investment banks to advise on the sale of
assets including its Canadian iron ore operations. BHP Billiton
Ltd. (BHP.AU) has closed mines, laid off workers and put a freeze
on major project approvals.
Perth-based Iluka receives the iron-ore royalty stream from a
BHP mine in Western Australia state's Pilbara region. The royalty,
calculated either on each ton of iron ore sold to customers or
produced from the mine, was secured as part of the sale of a joint
venture interest in the early 1990s.
Mr. Robb said the company was "patiently working through the
things we need to do" to have a spinoff as a possible option,
including assessing tax implications. Iluka received A$70 million
in royalty income last year.
"We need to think very carefully about letting such a fabulous
asset go, but I see it as a process where I would like to have an
option sitting on the shelf in case," Mr. Robb said.
Earlier this year, Bank of America Merrill Lynch said the
royalty could be worth around A$800 million and a spinoff could
lift Iluka's stock. Other analysts estimate its worth even
more.
Iluka flagged a pickup in the global zircon demand, which
slumped last year following steps by China to cool speculation in
real estate and a softening in European and U.S. housing markets.
Iluka accounts for about a third of global zircon output, with Rio
Tinto and Tronox Ltd. (TROX) its major competitors.
Mr. Robb said demand from Chinese consumers has been
particularly strong, with sales of zircon so far this year at a
similar level to volumes sold in 2012 as a whole.
Chinese homeowners prefer tiles over other flooring products
like carpets, laminates and wooden floorboards. According to Mr.
Robb, three-quarters of all flooring products sold in China are
tiles, compared to less than 10% in the U.S.
"But we are cautious," said Mr. Robb. "There is no dimmer switch
in China--it seems to be either full on, or full off."
Iluka has been reining in production and spending over the past
year in response to falling demand, but Mr. Robb said further cuts
were unlikely unless the market suddenly worsened.
Iluka reported combined zircon, rutile and synthetic-rutile
output of 110,900 metric tons in the three months to Mar. 31, down
33% lower than in the October-to-December period and 49% below a
year ago. Revenue fell 29% from a year earlier to A$139.9
million.
-Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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