Don't be fooled by the profit surge in Iluka Resources Limited's (ASX: ILU) results this morning that sent its bottom line to record highs.
The mineral sands miner posted a net profit of $2.41 billion for the 2020 financial year ended 31 December. This compared to a loss of $300 million in the year before.
But the dramatic swing to profit was largely due to gains from its spin-off of Deterra Royalties Ltd (ASX: DRR).
Iluka's big profit result boost from Deterra spin-off
That transaction added $2.25 billion to Iluka's net profit for the year, while the performance at its remaining mineral sands business declined.
Mineral sands revenue fell 20.6% to $947 million while earnings before interest, tax, depreciation and amortisation (EBITDA) tumbled 35.6% to $342 million.
The weaker numbers won't come as a big surprise though. The COVID-19 pandemic hurt zircon sales volumes early in 2020 as ceramic plants (which use zircon) were forced to shut or work at reduced capacity.
No day at the beach for mineral sands in 2020
The price of zircon fell in the March quarter as the crisis unfolded but managed to stabilise thereafter.
Meanwhile, Iluka's synthetic rutile sales volumes were down largely due to the contractual dispute with major customer Chemours.
Few bright spots in Iluka's profit results
Rutile prices were the only bright spot as the price for the commodity increased due to supply tightness.
Another silver lining was that management managed to achieve an EBITDA margin of 36%. While that's down from the 45% level it reported in 2019, that's still a respectable margin given its operating leverage.
A drop in revenue will almost always have a much larger impact on a miner's bottom line and margin due to the high fixed cost nature of the industry.
Brighter outlook in 2021
There are signs that Iluka's mineral sands revenue could improve in 2021. The miner told its customers it is increasing zircon prices to US$70 a tonne from April.
The price increase comes as Iluka noted signs of recovery in market conditions for zircon and high-grade titanium dioxide feedstocks.
While the contract dispute with Chemours hangs over the group, management believes it will be able to sell at least 295,000 tonnes of rutile and synthetic rutile this year.
This is because of the take-or-pay contracts it has with a range of customers. These contracts commit customers to buy a mandated minimum amount of the commodities from Iluka.
The miner's 2021 production forecast is for 285,000 tonnes of zircon, 200,000 tonnes of rutile and between 115,000 and 175,000 tonnes of synthetic rutile.
