March 16th, 2010
The mineral sands producer isn't exactly top of mind, but it can be argued Iluka's royalty exposure to a slab of BHP's Pilbara production has been undervalued by investors. At least that's the message from Iluka chief David Robb, who has been preaching to global investors about the value of the so-called Mining Area C (MAC) royalty and the improving supply-demand dynamics for the crucial industrial ingredients rutile, zircon and titanium.
Here's some sums: North America's International Royalty Corp, which holds nickel and gold royalty rights, last December was acquired for $650 million, based on existing royalty flows of about $29m.
MAC has been churning out about $50m for Iluka and brokers value the asset at an average $400m. "I would argue it is better quality (than the IRC assets)," Robb says. "How is it that someone will pays $650m for a lower quality $29m when our $50m is worth $400m? It's clearly not right."
Robb certainly makes a valid point about the potential, given MAC is slap-bang in the middle of the production area slated for major expansion by BHP.
Currently, the MAC royalty covers 40 million tonnes of annual production. This output could rise to 80-100mt. "It is a unique asset," Robb says. "It's very rare to have a an asset exposed to such a commodity with a blue-chip counter-party such as BHP."
The MAC royalties have been a handy annuity flow for Iluka during its troubled years of dwindling mineral sands demand, cost blow outs and big-ticket expenditure on its new Jacinth-Ambrosia and Murray Basin projects.
Happily, Iluka's fortunes are changing for the better in its core business, with the low-cost Jacinth-Ambrosia was commissioned last year.
Available supply of zircon (used to whiten ceramics) has flatlined, but demand is still sluggish. "There's a big tail of business in this industry which doesn't generate positive cash flow, let alone profit," Robb says. Robb says legacy contracts across the industry are wearing off, which exposes Iluka (and others) to more favourable spot or short-term contract prices (a la coking coal and iron ore).
The mineral sands producer isn't exactly top of mind, but it can be argued Iluka's royalty exposure to a slab of BHP's Pilbara production has been undervalued by investors. At least that's the message from Iluka chief David Robb, who has been preaching to global investors about the value of the so-called Mining Area C (MAC) royalty and the improving supply-demand dynamics for the crucial industrial ingredients rutile, zircon and titanium.
Here's some sums: North America's International Royalty Corp, which holds nickel and gold royalty rights, last December was acquired for $650 million, based on existing royalty flows of about $29m.
MAC has been churning out about $50m for Iluka and brokers value the asset at an average $400m. "I would argue it is better quality (than the IRC assets)," Robb says. "How is it that someone will pays $650m for a lower quality $29m when our $50m is worth $400m? It's clearly not right."
Robb certainly makes a valid point about the potential, given MAC is slap-bang in the middle of the production area slated for major expansion by BHP.
Currently, the MAC royalty covers 40 million tonnes of annual production. This output could rise to 80-100mt. "It is a unique asset," Robb says. "It's very rare to have a an asset exposed to such a commodity with a blue-chip counter-party such as BHP."
The MAC royalties have been a handy annuity flow for Iluka during its troubled years of dwindling mineral sands demand, cost blow outs and big-ticket expenditure on its new Jacinth-Ambrosia and Murray Basin projects.
Happily, Iluka's fortunes are changing for the better in its core business, with the low-cost Jacinth-Ambrosia was commissioned last year.
Available supply of zircon (used to whiten ceramics) has flatlined, but demand is still sluggish. "There's a big tail of business in this industry which doesn't generate positive cash flow, let alone profit," Robb says. Robb says legacy contracts across the industry are wearing off, which exposes Iluka (and others) to more favourable spot or short-term contract prices (a la coking coal and iron ore).
