Iluka (ASX:ILU) share price jumps even as it pours water on M&A rumours

The Iluka share price is surging but it may not have much to do with divestment rumours than this other speculation about its business.

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The Iluka Resources Limited (ASX: ILU) share price surged this morning even after management dismissed speculation that it could have found a buyer for its troubled Sierra Leone asset.

The Iluka share price jumped 4.1% to $8.11 in morning trade, which makes it the fourth best performer on the S&P/ASX 200 Index (Index:^AXJO).

Coincidentally, all the best performers on the index are mining shares. The leader is the IGO Ltd (ASX: IGO) share price with a 6.1% rally. It’s followed by the Chalice Mining Ltd (ASX: CHN) share price and the Pilbara Minerals Ltd (ASX: PLS) share price.

Iluka share price jumps on divestment rumour

The big rally follows the drubbing on the ASX yesterday and investors won’t let the quashing of a rumour spoil their bounce-back party.

Iluka acknowledged media speculation that it was moving closer to selling its rutile operations in the African nation. But management said it has nothing new to report.

A number of news outlets, including The Australian, wrote that a number of potential suitors may be knocking on Iluka’s door.

Divestments are an exciting business for ASX companies. Remember that Iluka only recently successfully spun-off Deterra Royalties Ltd (ASX: DRR).

Sierra Rutile on the auction block

Iluka said last month that it informed the Sierra Leone government that it was considering mothballing the money-losing mine by November.

In the meantime, Iluka would look at ways to keep the mine operating. This includes bringing in a partner or selling the asset.

Assets in Africa aren’t typically the easiest to flog given the continent’s volatile geo-political environment.

Cashed-up and motivated Chinese buyer

But The Australian reported that China’s Lomon Billions may be a hot contender. There are a few reasons to believe why Lomon could be eager.

Firstly, the Shenzhen-listed major is eyeing a secondary listing on the Hong Kong stock exchange. Using its large war chest to add assets ahead of the new float would attract better support from Hong Kong investors.

Further, China seems to have a smoother relationship with Africa than with many other parts of the world.

This makes Sierra Rutile a more palatable buy for Lomon than other assets in Australia or India – countries that Lomon said it was looking at.

Other potential suitors

But Chinese suitors may not be the only ones willing to run the ruler over Sierra Rutile. European major Kronos Worldwide isn’t spared from the rumour mill. Kronos already has an offtake agreement with Iluka at Sierra Rutile.

It may be tempted to move up the value chain, particularly at a time when commodity prices are buoyant.

This takes me to a more important point. The real reason Iluka’s share price may be running could be due to speculation about a profit upgrade.

A better reason for Iluka’s share price rally

Iluka may be able to negotiate a substantial increase in zircon prices as contracts come up for renewal.

Some media reports suggest Iluka could add around US$125 a tonne as zircon supply is tightening. This is in part due to problems at the Richard’s Bay operations in South Africa, which is owned by Rio Tinto Limited (ASX: RIO).

At least speculation about the price increase seems to be on more solid footing than rumours about looming asset sales.

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Brendon Lau owns shares of Iluka Resources Limited, Rio Tinto Limited, Deterra Royalties Limited and IGO Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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