The Iluka Resources Limited (ASX: ILU) share price has plunged 45% because of the demerger.
What has happened?
The company has demerged Deterra Royalties Limited (ASX: DRR) from Iluka.
Deterra is 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 (which is operated by BHP Group Ltd (ASX: BHP)).
Iluka shareholders will receive 1 share of Deterra Royalties for each Iluka share they own. Iluka will keep 20% of Deterra Royalties as a long term investment.
The demerger will allow each business to focus on their plans and growth ideas, with greater flexibility. It will give shareholders a clearer choice of what they want to own. Each business will have the ability to adopt the appropriate capital structure.
With the demerger now cone, Iluka has/had $89 million of net cash. It will pay 40% of its free cashflow as a dividend and it will focus on expanding mines, extending the life and finding new sites. Iluka believes there is a favourable industry supply and demand outlook.
The existing Iluka business no longer owns the 80% of Deterra Royalties which it just listed, so Iluka’s shares are naturally worth less than they used to.
Summary
Instead of one big pie, shareholders will now own a slice of two smaller pies. I’m not sure if either business is a good buy today. It’s best to buy resource shares when the commodity price is low. That’s not the case with iron ore right now. So there are other ASX growth shares I’d buy first, like Pushpay Holdings Ltd (ASX: PPH).
