European powerhouse poised to become digital payments hub
- Essential refined products for use in electric vehicles, sustainable energy and medical applications.
- The funding model includes a $1.27 billion federal government non-recourse loan facility.
- Iluka is entitled to retain up to $81 million in annual royalties payable from the refinery’s cash flow.
- Start of construction planned for H2 2022, production of alloys from 2025.
- The absence of debt and a cash position of $295 million support solid growth prospects and fully franked dividends.
- Iluka is well positioned to meet the growing global demand for critical minerals used in the clean energy industry.
Iluka Resources Limited (Iluka or the Company) specializes in mineral sands exploration, with expertise spanning processing, marketing and rehabilitation. Iluka is the world’s largest producer of high quality zircon and rutile and synthetic rutile derived from titanium dioxide.
Iluka also has an emerging portfolio in rare earth elements. Rare earths are essential components of an electrified global economy and are considered critical inputs in the production of electric motors. Iluka’s Eneabba stock is the highest quality operational rare earth deposit in the world. The Company holds a 20% stake in Deterra Royalties, the largest ASX-listed resource-focused royalty company.
Green light for rare earth refinery
Iluka will construct and commission Australia’s first fully integrated rare earths refinery. The refinery represents a major value-added downstream infrastructure asset, including roasting, leaching, purification, solvent extraction and product finishing. The final investment decision follows the completion of the feasibility study which confirms the significant economic value of the project. The refinery will produce separated rare earth oxides including neodymium, praseodymium, dysprosium and terbium. These rare earth metals and alloys are critical inputs that have applications in various technologies including electric vehicles, sustainable energy and advanced electronics, as well as medical and defense applications.
The refinery will be based on the existing screening and concentration plant currently in operation and will employ 300 people in the construction phase and 270 people in the operating phase. Construction of the refinery will begin in the second half of 2022. Initial production of metal oxides is expected in 2025.
The Australian government has agreed to co-finance the refinery with a $1.27 billion non-recourse Critical Minerals Facility loan, with an interest margin of 3% above the bank note exchange rate at 90 days. The loan includes a $1,050 million 16-year credit facility, plus a $200 million cost overrun facility and $20 million for the plant. Repayments begin from the completion of the refinery in 2025, with repayments scheduled over 12 years. Under the financing agreements, Iluka is entitled to annual royalties of up to $81 million from the refinery’s cash flow, having the same priority as scheduled loan repayments. Royalty payments are capped at $900 million. The non-recourse financing agreement and annual royalties of up to $81 million from project cash flow payable to Iluka significantly reduce the risk of financing this landmark project.
Iluka cleverly structured the refinery project financing facility so that the mineral sands business was unaffected, leaving cash flow available to fund growth capital expenditures and fully franked shareholder dividends. Operating cash flow generated in the December 2021 fiscal year was $528 million. After forecasting taxes, capital expenditures, shareholder dividends and the return of JobKeeper payments, free cash flow was $300 million.
As of December 2021, Iluka was debt free with $295 million in cash. This strong net cash position and steadily growing free cash flow supports the payment of fully franked dividends which in fiscal 2021 totaled 24 cents. The final fully franked dividend of 12 cents per share will be paid on April 7.
Forecasts of substantial passenger electric vehicle sales growth of 6% to 40% of global passenger vehicle sales by 2030, representing approximately 34 million vehicles per year, ensure continued demand for earth metals and alloys rarities of Iluka.
This growing global demand for the Company’s critical minerals, coupled with its strong focus on shareholder return of rewarding shareholders with fully franked dividends as cash flow becomes available, should ensure a positive outcome for shareholders. in the medium and long term.
This Post Market Wrap is presented by Kodari Securities, authored by Michael Kodari, CEO of KOSEC.