Iluka to demerge underperforming Sierra Rutile business to focus on rare earths

Iluka Resources (ASX: ILU) has finally landed on an exit strategy for its embattled West African mineral sand business, Sierra Rutile.

The Iluka Board said that a demerger would allow the company to “focus its capital allocation priorities and management attention on its core Australian assets and development opportunities"

The demerger remains subject to final Board, regulatory and shareholder approvals. 

If all goes to plan, the demerger is expected to be completed in 2022. All of the shares in Sierra Rutile will be distributed to Iluka shareholders in proportion to their existing shareholding in Iluka.

Sierra Rutile in a nutshell 

Iluka acquired the Sierra Rutile Project in 2015 for US$330m. The investment has fallen well-short of expectations following a substantial US$290m impairment in December 2019.

Iluka managing director Tom O’Leary said then that the company had underestimated the difficulties and complexity of operating in Sierra Leone.

Challenges aside, Sierra Rutile hosts the world’s largest rutile deposit and comprises two operations at Lanti Dry and Gangama. Materials are processed at the company’s mineral separation plant and exported via a dedicated port facility.  

Iluka delivered its full-year results to 31 December 2021 during February reporting season. Revenues for Sierra Rutile increased 4% to $232.7m or 15.8% of Group revenues.

Sierra Rutile has struggled to lower costs, even at higher production levels. The $232.7m revenue figure translated to just $17.1m in earnings, or 3.3% of Group earnings.

Demerger benefits

The demerger will separate an underperforming asset from Iluka’s remaining three Australia-based assets.

If Sierra Rutile continues to struggle, then those headwinds will be isolated to the new entity and no longer weigh on Iluka. 

Iluka’s Managing Director, Tom O’Leary said the company’s strategic and capital allocation priorities are now focused on Australian operations and development projects, most notably the Eneabba Rare Earths Refinery Project. 

On 3 April, Iluka’s Board gave the green lights to develop Australia’s first rare earths refinery. At full production, the plant could supply up to 9% of global rare earth oxides.

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