Mineral sands producer Iluka Resources Limited (ASX: ILU) has seen its share price surge over 6% during trading today after the release of full year results and a substantial increase in the final dividend.
Iluka posted an after tax loss of $62.5 million compared with a $18.5 million profit in the prior year. Profit was affected heavily by the $86.5 million non-cash impairment charge related to the expected closure of its U.S. Virginia operations.
The final fully franked dividend of 13c a share brought the full year dividend to 19c, up 111% on the previous year.
Revenue of $724.9 million was 5.0% lower than the previous year. The 5.4% increase in sales volume of its main products zircon, rutile and synthetic rutile, was offset by falling prices. During the year, the average realised price of zircon and rutile dropped 10% and 25%, respectively.
Strong free cash flow of $196.3 million allowed Iluka to reduce long term debt by 71.4%, ending the year with $59.0 million on the balance sheet.
Helping the final year result was an approximate $80 million draw-down of inventory, because Iluka sold 81kt more product than it produced during the year. Managing director David Robb indicated inventory draw down may continue into 2015.
Mr Robb commented that: "2014 was a year in which the financial health of the company was preserved and in which foundations were laid for recovery in the existing business and new options were secured for future growth. But reported profit was not satisfactory."
Iluka delivered a solid result in what was a tough period for commodity producers. A significant reduction in debt has strengthened the company finances and the availability of large credit facilities could allow it to pursue favourable acquisitions in the near-future. Inventory draw-down can help support revenue in the short term but it is not sustainable in the long term.
Whilst the large increase in dividend may have wooed investors hungry for yield, the future profits (and dividends) of Iluka are tied to volatile commodity prices and I would recommend leaving this company on the watchlist for now.
