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Iluka Resources share price drops after US$290 million impairment

The Iluka Resources Limited (ASX: ILU) share price is down 2.71% in morning trade after the company flagged multi-million dollar impairments for FY19.

What did Iluka announce this morning?

The Iluka Resources share price has been worth watching in recent months after flagging a review of several business segments.

Iluka’s review of its Sierra Rutile (SRL) operations has ended with a US$290 million impairment charge.

Sierra Rutile is a wholly-owned mineral sands company of Iluka that operates in the African nation of Sierra Leone. Iluka acquired the group in December 2016 for US$330 million and has spent a further US$150 million on the project since.

The Aussie miner has written down the carrying value after noting a review in its September Quarterly Review.

The group will also writedown SRL’s deferred tax assets of US$115 million to reflect a more “conservative outlook” for the business.

The carrying value of SRL’s remaining net assets will be reduced to US$50 million. Weaker operational performance below the acquisition investment case has been the major cause.

The impairment comes despite improving production in the second half of 2019 as mining expansions have been commissioned and ramped up.

Iluka shares have performed well in 2019 despite the setbacks with its SRL operations.

Rutile production from SRL to September was 93 kilotonnes (kt) compared to the expected 135kt.

Iluka also provided SRL guidance for 2020, including rutile production of 170kt. Cash production costs are expected to total US$125 million with zircon/rutile production of 175kt.

What does this mean for the Iluka Resources share price?

Investors rarely like to see impairments and the Iluka Resources share price is under pressure this morning. This is particularly given Iluka paid US$290 million for the SRL business in the first place.

However, the company has flagged productivity improvements as it looks to turnaround its SRL operations in 2020.

These include maintenance and runtime improvement measures, operating cost and procurement reviews and potential extension assessments.

Either way, today’s impairment news makes the Iluka Resources share price worth watching as we head towards Christmas. Iluka shares are currently down 2.71% to be trading for $9.35 at the time of writing.

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Motley Fool contributor Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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