ILU 2.27% $7.21 iluka resources limited

Today's Street Talk in the AFR comments on the MAC demerger...

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    Today's Street Talk in the AFR comments on the MAC demerger proposal (google a par for full text). Excerpt:


    "When two completely different assets are housed in the same corporate structure, the lowest common denominator sets the value for the whole company. And when the lowest common denominator drops even lower, you pretty quickly get aggrieved shareholders, a company under pressure and conditions ripe for a demerger.

    "So it is at Iluka Resources, where years of rallying by activist Sandon Capital and, more recently, L1 Capital and others, finally has the mineral sands miner formally working with Gresham, Herbert Smith Freehills and Greenwoods on a potential $2 billion spin-off.

    "Iluka faced difficulty integrating its Sierra Rutile project, which accounts for about one-fifth of the company’s value. The problems sent its shares to a 21/2-year low in August and fired up shareholder pressure. According to the activists, the troubles in the mineral sands business were hiding the value of its Mining Area C royalty – a passive income stream from BHP – at a time when low bond yields and interest rates globally mean the royalty should be worth more than ever.

    "So we’re at the point where Iluka is formally reviewing the structure and has its bankers and lawyers working on arguably the biggest hurdle to the deal; tax. Iluka will want to get shareholders capital gains tax rollover relief should it spin-off the royalty, and needs to put some thought into exactly how that can be achieved.

    ___________

    The first assertion on a company housing two assets suffering lowest common denominator valuation is pure theatrics. While it can be argued the market is not valuing MAC properly, a demerger is not the only way to achieve the recognition the ILU board desires.

    I earlier argued MAC could form the nucleus for a mining royalties unit within ILU. Mining royalties are pure economic rent and perceived as 'passive income', a lazy way to earn a buck, yet there are examples of active, skilled acquirers and traders making a motza operating in this area.

    While very low gearing is appropriate for a miner, a royalties business can support considerable debt to fund purchases.

    Street Talk correctly identifies tax as a major issue. This is only a problem if the two businesses are separated.

    The agenda of the greedy bastards dignified as 'activists' is simply to trouser cash as quickly as possible, Then it is 'Good-bye and thanks for the fish'. I would rather see a very strong ILU, able to deploy capital toward the best opportunities as they present over time.

    Mineral sands is a lumpy business, sometimes throwing off buckets of cash, or needing big capex, only to be hit by drought. The ILU board can use this eccentric to drive solid growth by switching investment activity back and forth between the units. This path is in the best interests of short and long term holders alike.

    Ash
 
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