Iluka resources soars after activist urges de-merger of iron ore assets

Source: Barron’s.
By: Shuli Ren.

Iluka Resources (ILU.Australia), a major producer of zircon and high-grade titanium dioxide products, soared 3.3% in Sydney today after activist investor Sandon Capital said the company should spin off its iron ore assets.

In Sandon’s view, Iluka’s iron ore royalty over BHP Billiton’s (BHP) Mining Area is worth close to 2 Australian dollars a share. Sandon rose A$0.22 to $6.70 today. Sandon Capital wrote:

In Sandon’s opinion, Iluka’s MAC royalty is the best asset in the Australian mining sector and the cheapest. Despite having a book value of only $16.7m, the asset has generated Earnings Before Interest & Tax (EBIT) of almost A$650m for Iluka since Mining Area C first produced iron ore in 2003.
Sandon Capital believes the royalty is significantly undervalued whilst it is housed within a mining company and would be more appropriately valued in a separately listed, pure play royalty company. Based on offshore comparables, the royalty today could be worth A$840m-940m. Should BHP Billiton proceed with the development of the South Flank deposit, we believe the royalty could be worth between A$1.7-1.9bn.
Meanwhile, Iluka’s total market cap is only A$2.7 billion.

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