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Why the Iluka share price is surging higher

The Iluka Resources Limited (ASX: ILU) share price is topping the leader board after the mineral sands miner excited investors with a potential spin-off and solid quarterly production update.

The Iluka share price surged 3.9% to $9.15 in morning trade, making it the best performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index. The Gold Road Resources Ltd (ASX: GOR) share price in second place on a 3.6% run to $1.14 and Iress Ltd (ASX: IRE) share price following behind with a 3.3% gain to $12.99.

In contrast, the broader market is flat even though the US market hit another record high in overnight trade.

Why breaking-up is not always a bad thing

Coming back to Iluka, the miner announced a review of its business that could lead to a divestment of its Mining Area C (MAC) royalty business. The move is speculated to unlock more than $2 billion in shareholder value, according to the Australian Financial Review.

The miner is contemplating the restructure at a time when royalties to MAC from BHP Group Ltd (ASX: BHP) is expected to increase substantially as the US$3.6 billion South Flank iron ore mine in Western Australia starts production.

The relatively high iron ore price is also adding to the big windfall for Iluka and could trigger a step-change in earnings. If BHP hits its targets, royalty payments can balloon to $239 million by 2023 if the iron ore price hovers at US$95 a tonne and the Aussie fetches US70 cents.

Iluka collected $41 million in the six months to June 30 this year and the miner can also collect one-off capacity payments based on an increase in annual output from the ramp up of South Flank.

Companies that undertake a spin-off have a history of outperforming. The separation of Wesfarmers Ltd (ASX: WES) and Coles Group Ltd (ASX: COL) is one example with both shares trading new 52-week highs.

Quarterly production update

But the corporate review isn’t the only thing investors are cheering. Management reported an increase in production for most of its minerals. Zircon production is up 29% to 94,000 tonnes in the September quarter compared to the previous quarter, and rutile output jumped 18% to 48,000 tonnes over the same period. Synthetic rutile was flat at 57,000 tonnes.

The year-to-date revenue per tonne also increased by 22% over the previous corresponding period to $1,666 a tonne versus $1,370 a tonne.

“Iluka’s mineral sands business continues to be a global market leader in the production of zircon and high grade titanium feedstock,” said Iluka’s managing director Tom O’Leary.

“The business is producing solid cash flows in the current market environment and is well positioned for the future, with a pipeline of attractive growth projects.”

Don’t confuse mineral sands with rare earths. They are used for different things and the spotlight has been mainly focused on the latter – specifically Lynas Corporation Ltd (ASX: LYC).

However, this is likely to change following today’s update from Iluka.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Lynas Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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