The Iluka Resources Limited (ASX: ILU) share price will be on watch today after the release of an update on its demerger plans.
What did Iluka announce?
This morning Iluka released its booklet in relation to the proposed demerger of its Deterra Royalties business. This demerger will result in two independent ASX-listed companies.
Iluka notes that it will remain a global leader in the mineral sands industry, whereas Deterra will be the largest independent royalty company listed on the ASX with its royalty over Mining Area C in Western Australia's Pilbara region as its cornerstone asset. This iron ore asset is operated by BHP Group Ltd (ASX: BHP).
What next for shareholders?
Iluka shareholders will have the opportunity to vote on the demerger at a meeting on 16 October 2020.
If the demerger proceeds, eligible shareholders will receive one share in Deterra for every Iluka share held at the demerger record date of 26 October. Iluka will retain a minority shareholding interest of 20% in Deterra as a long-term investment.
According to the release, the Iluka board strongly encourage shareholders to support the demerger by voting in favour of the demerger resolution. It has concluded that the proposal is in the best interests of shareholders and has potential to unlock shareholder value over time.
Why demerge the business?
Management notes that listed royalty companies provide investors with exposure to the value created through the discovery, extraction, and sale of natural resources, typically without full exposure to some of the key operating risks of mining businesses.
It also explained that royalty companies that hold revenue-based royalties typically have an advantaged position in a mining company's capital structure, accessing cash flows ahead of debt and equity capital providers.
Finally, given its structure, Deterra will also have little use for the cash it generates. As a result, its intended dividend policy will be to payout 100% of net profit after tax. This could make it an attractive option for income investors in the future.
