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Why the Iluka (ASX:ILU) share price nearly halved today

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The Iluka Resources Limited (ASX: ILU) share price crashed by nearly half on Friday, but investors shouldn’t panic.

The ILU share price fell over 47% to its lowest point in five years of $5.23 during lunch time trade. This makes the mineral sands miner the worst performer on the S&P/ASX 200 Index (Index:^AXJO) by a country mile!

The loss is far worse than the 4% to 5% drop in the Southern Cross Media Group Ltd (ASX: SXL) share price and Regis Resources Limited (ASX: RRL), which are the second and third worst ASX 200 performers today.

Iluka share price fall doesn’t worry investors

But shareholders of Iluka aren’t worried. The reason behind the sharp drop is linked to the spin-off of its royalties business.

The Deterra Royalties (ASX:DRR) share price started trading on the ASX today with Iluka’s shareholders receiving one DDR share for every one ILU share they hold.

The DDR share price is currently trading at $4.77 and if you combined the value of both stocks, shareholders are actually sitting on a small gain.

When down is really up for the ILU share price

That’s a good outcome given that mining stocks are mostly trading lower. The BHP Group Ltd (ASX: BHP) share price shed 1.4% to $35.96 and the Newcrest Mining Limited (ASX: NCM) share price tumbled 2.6% to $30.77 at the time of writing.

The divestment is creating value for the Iluka share price as Deterra is worth more as a stand alone.

Deterra is the largest mining royalty company. It will receive royalty payments from BHP’s South Flank iron ore operations in Western Australia, reported Reuters.

Deterra plans to pay out all of its net profit as dividend to shareholders. But it isn’t ruling out acquiring other royalties generating assets – particularly outside of iron ore for diversification purposes.

What’s next for the Deterra share price

“Although we won’t be limiting our geographic scope, we will be more likely to be focused on opportunities in Australia than offshore,” Reuters quoted Deterra’s chief executive Julian Andrews as saying.

“We will have a fairly broad mandate so we won’t be restricting the types of commodities that we look at,” he said.

More often than not, streaming companies have tended to focus on precious metals.

Should you buy shares in Deterra?

Iluka received a royalty payment of $85 million from BHP in 2019. This is expected to increase substantially, thanks to the high iron ore price and BHP’s planned expansion of the project. Deterra’s royalties are based on a percentage of the ore produced.

The Deterra spin-off couldn’t come at a better time for ASX investors. Record low interest rates and the COVID‐19 pandemic have made it harder to find stocks with attractive and sustainable yields.

I think the 2021 outlook for the Iluka share price and Deterra share price is positive.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Iluka Resources Ltd., and Newcrest Mining Limited. 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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