considering a spin-off

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ILUKA Resources is considering a spin-off of an iron ore royalty worth about $850 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 $5 billion company is also a major exporter of titanium dioxide feedstocks such as rutile, which is used to produce white pigment for paint.

The move to examine a possible spin-off of the iron ore royalty was at an early stage, and no firm decision had been taken, Iluka chief executive David Robb said. "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," Robb said.

The move comes as other mining companies look to overhaul their portfolios, driven by a desire to cut costs and boost returns to shareholders.

Rio Tinto is considering an initial public offering of aluminium assets in Australia and New Zealand, and has hired investment banks to advise on the sale of assets including its Canadian iron ore operations.

BHP Billiton 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 the Pilbara region. The royalty, calculated either on each tonne 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.

Robb said the company was "patiently working through the things we need to do" to have a spin-off as a possible option, including assessing tax implications. Iluka received $70m 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," Robb said.

Earlier this year, Bank of America Merrill Lynch said the royalty could be worth about $800m and a spin-off could lift Iluka's stock. Other analysts estimate its worth even more.

Iluka flagged a pick-up 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 US housing markets. Iluka accounts for about a third of global zircon output, with Rio and Tronox its major competitors.

Robb said demand from Chinese consumers had been particularly strong, with sales of zircon so far this year at levels sold last year.

Chinese homeowners prefer tiles over other flooring products such as carpets and wooden floorboards. According to Robb, three-quarters of all flooring products sold in China are tiles, compared with less than 10 per cent in the US.

"But we are cautious," said Robb. "There is no dimmer switch in China -- it seems to be either full on, or full off."

The Wall Street Journal
May 23, 2013 12:00AM