Iluka Resources Limited (ILU) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, or good afternoon, as the case may be, depending on where you're viewing this meeting. I am Greg Martin, Chairman of the Board of Iluka Resources Limited. I'm pleased to be presiding over this extraordinary general meeting, and on behalf of the Board, I'd like to welcome you. In response to government restrictions and the potential health risks arising from the ongoing COVID-19 pandemic, the Board determined to hold this meeting virtually. We very much appreciate your understanding at this challenging time. While every effort has been made to ensure that this runs smoothly for our shareholders, if technology issues do arise, you'll be able to access the meeting addresses and the results of voting on the ASX platform and on our website. We hope to be able to resume our usual format for meetings next year. Before commencing the formal part of the meeting, I will talk through the procedural matters. [Operator Instructions] Please ensure that you register through the webcast as a shareholder and not as a guest, as only shareholders are entitled to ask questions at this meeting. When the question facility is available, the Q&A icon will appear at the top of the screen. [Operator Instructions] All questions will come to me as Chair of the Meeting via Sue Wilson, our company Secretary. If there is duplication of questions, we will group them together. And if questions are particularly lengthy, we may need to summarize them in the interest of time. I will either answer the question or pass it to the most appropriate person to answer. [Operator Instructions] We have also received questions from shareholders in advance of today's meeting, which will be covered at the appropriate time. Voting today will be conducted by way of a poll on the item of business. Once the poll is opened and if you are eligible to vote at this meeting, a voting icon will appear in your browser. Selecting this icon will bring up the resolution and present you with voting options. To cast your vote, simply select one of the options. The selected option will then change color. There is no need to hit a submit or enter button as the vote is automatically recorded. Any appointed proxy who has been given discretion on how to vote should vote in the same manner. Any appointed proxy that has been directed to vote in a certain manner and has no discretionary votes to cast does not need to vote as those votes will automatically be counted in accordance with those directions. If you experience any difficulties with the online platform, the helpline number is displayed at the bottom of the page, and is 0394 154 024 within Australia or +61 394 154 024 if you are attending from outside Australia. I've been advised that a quorum is present, therefore, I formally declare the meeting open. To ensure everyone the best opportunity to vote, I now also declare the poll open. You can vote throughout the meeting using your browser. You can also change your vote up until the time I declare voting closed. I will give you a warning before closing voting. Before we commence formal proceedings, I'd like to acknowledge the visional custodians of the land we are broadcasting from our main office in Perth, the Whadjuk people. I'm appearing from Sydney, and I wish to also acknowledge the visional custodians of the land I am broadcasting from, the Gadigal people. I wish to acknowledge and respect their continuing cultures and the contributions they make to the life of their respective cities and regions. Please now allow me to introduce my fellow directors, some of whom are attending from our office in Perth and others who are attending by audio link from their homes. Tom O’Leary, our Managing Director; Marcelo Bastos; Rob Cole; Susie Corlett; James Hutch Ranck and Lynne Saint. As well as the Iluka Board, we are also pleased to be joined by the incoming Board of Deterra Royalties: Jenny Seabrook, Chair; Julian Andrews, Managing Director and Chief Executive Officer; Graeme Devlin; Joanne Warner; and Adele Stratton, Iluka's nominee Director. Also in attendance at our office in Perth is Iluka's Company Secretary, Sue Wilson, the Iluka executive and Deterra management. Now moving to the formal part of the meeting. The notice of meeting was distributed to shareholders in September, and I propose it to be taken as read. As outlined in the notice, we are here today to consider 1 item of business, the demerger of Deterra Royalties from Iluka. Ladies and gentlemen, this is an important milestone for our company. And while it is once again disappointing that we cannot meet in person, I extend a warm welcome to everyone joining online as we come together to vote on the proposed demerger. As shareholders, you will have received a notice of meeting and the demerger booklet, which outlined in detail the rationale for the demerger, the advantages and disadvantages of the proposal and the pro forma financial position of Iluka and Deterra should the demerger be approved this morning. These documents contain important information to help you inform your vote. Before proceeding with the item of business, I'll say a few brief words, as will Jenny Seabrook, Chair of Deterra. The position of the royalty business and more specifically, the Mining Area C royalty within Iluka's portfolio has been subject to ongoing consideration by the Board for many years. Iluka is, first and foremost, a mineral sands business with over 60 years industry experience. Our objective is to deliver sustainable value. Given the expected increase in materiality and cash flows from the MAC royalty associated with BHP's South Flank development, which is now nearing completion, we decided in October last year to undertake a comprehensive review of both businesses and the optimal corporate and capital structure for Iluka. At the heart of that review was an examination of all our operations and assets to determine what is in the best interest of shareholders. Iluka has always been disciplined in pursuing its objective. And the decision to demerge the royalty business is a further expression of that discipline. We believe this will, over time, deliver greater value to Iluka's shareholders than the current structure. Following the review, in February, we announced our demerger plans. And although the world has changed markedly since that announcement, the Board's view remains the same that the demerger is in the best interests of shareholders. As part of the process, the Board commissioned a report from an independent expert, Deloitte, to examine the demerger and assist shareholders in considering the proposal. This proposal can be found in Section 7 of the booklet. Deloitte has also concluded that the demerger is in the best interest of shareholders. It determined that separating the 2 different businesses will facilitate greater strategic focus for each and provide shareholders greater flexibility based on their investment objectives. As I stated in my letter contained in the booklet, the demerger will liberate 2 fundamentally different businesses, each with high-quality assets and a promising future and unlock long-term value. If approved by shareholders, on the 23rd of October, Iluka and Deterra will start trading independently on the ASX as stand-alone companies on a deferred settlement basis, and shareholders will retain equity in both. The formal separation of the companies will follow on the 2nd of November. For Iluka, we will continue to be the global leader in the mineral sands industry. The demerger enables our management team, led by Managing Director, Tom O'Leary, to focus on delivery from our world-class assets and on developing a pipeline that includes mineral sands projects and an emerging position in rare earth elements. I am confident in Iluka's ability to continue to drive operational and financial performance. 2020 has been trying for all businesses with the economic damage brought by COVID-19. Tom and his team have demonstrated steadfast resilience in adapting quickly to the external environment, protecting the safety and well-being of our people, achieving solid financial results and positioning the business for the future. Despite a difficult external environment, Iluka has achieved significant milestones this year. Today's vote being one of them, with others including the first stage of our reentry into the rare earth market at any of our -- in Western Australia and commencement of our key underground mining technology trial at Balranald in New South Wales. If the demerger is approved by shareholders, Deterra will be the first royalty business of scale to list on the ASX. The company will have its own dedicated Board and management team, led by Jenny as Chair, and Julian Andrews as Managing Director and CEO. Both Jenny and Julian have provided exceptional service to Iluka, and we wish them well as they assume the leadership of Deterra in the company's formative phase. It may be of interest of the shareholders to know that Deterra’s name is derived from the Latin, meaning of the earth. This is symbolic of the company's business and foundational asset in the Mining Area C iron ore province. Iluka and Deterra will be well capitalized post demerger, each with the financial flexibility to pursue opportunities and deliver on their respective strategies. As shareholders would expect, with regard as an imperative that both companies be set up for success. I am satisfied that we've got those settings right and notwithstanding the external tumult of 2020, we can look to the future with confidence. I will now hand over to Jenny to say a few words. Thanks, Jenny.

Thanks, Greg. I'm also very pleased to be here with everyone today. On behalf of the Deterra Board and management team, I look forward to shareholders' ongoing interest and support for our activities. Deterra is a royalty business focused on resources investments. While the business model is well established in other jurisdictions, Deterra will be the first listed royalty business of scale here in Australia. I trust you found the information in the demerger booklet about our business and strategy useful. In summary, the MAC royalty will be the cornerstone asset of our portfolio. And our simple business model will provide investors with a new resources exposed investment alternative. Our plan is to provide investors with visibility on our earnings, cash flow and dividends. Our growth strategy is focused on increasing earnings through our existing assets and disciplined value-accretive investments in new royalty interests over time. We will have a lean business led by Julian, and we will be headquartered here in Perth. We also have been most fortunate to recruit some outstanding people to Deterra's Board: Joanne Warner; Graeme Devlin; and Iluka's representative, Adele Stratton. Suffice to say, we are all eager to get on with the business of delivering. We also look forward to continuing to engage with shareholders and our stakeholders. I will now hand back to Greg to conduct the business of the meeting.

Thanks very much, Jenny. Transcripts of both my address and then of the Deterra chair are available on the company's website and in the ASX company announcement platform. Ladies and gentlemen, we now come to the sole agenda item of the meeting. As mentioned, in accordance with the Corporations Act and the company's constitution, all voting today will be conducted by way of a poll. And as mentioned earlier, the poll is already open. You may vote through the online platform in your browser. Now let's proceed to the item of business. As mentioned earlier, the purpose of the meeting is to consider the demerger resolution. The demerger resolution is being put to shareholders to obtain approval for an equal capital reduction in Iluka's ordinary share capital under the Corporations Act. The capital reduction must be approved by a simple majority that is more than 50% of votes cast by Iluka's shareholders on the demerger resolution. The capital reduction amount will not be paid in cash to Iluka's shareholders. Instead, the capital reduction and the related dividend will be provided to Iluka's shareholders by way of an in-species distribution of Deterra shares. If the demerger resolution is approved by shareholders and the demerger proceeds, eligible Iluka shareholders will be entitled to receive 1 Deterra share for each Iluka share they hold on the record date, expected to be 4:00 p.m. Perth time on Monday, 26th October 2020. Iluka shareholders will also retain their shareholding in Iluka. The Board is of the view that taking into account all of the matters, the capital reduction is fair and reasonable to Iluka's shareholders as a whole, and will not materially prejudice the ability of Iluka to pay its creditors. As outlined in the demerger booklet, the independent expert has also concluded that the demerger, comprising the capital reduction and dividend, will not materially prejudice the ability of Iluka to pay its creditors. The Iluka directors recommended that you vote in favor of this resolution. To give shareholders a final chance to submit their questions, I will respond to the questions already submitted. So Sue, could you kindly read to the meeting the first question that we have received?

Sure, Greg. The first question is from Geoff Reid, a proxy holder on behalf of the Australian Shareholders' Association. And the question is, please, can you describe how the operations of Deterra will be conducted so as to minimize the total cost of operations?

Well, thank you, Geoff, and as always, a great pleasure to have you at the meeting. Very much appreciate your support and that of the Australian Shareholders' Association. And again, I'm sorry, we're having to meet this way but we do appreciate your continued support and interest in the affairs of the company. Jenny, that clearly is one for you. So if you wouldn't mind, I'll hand over to you answer that question.

Thanks, Greg, and thank you for the question, Geoff. Deterra will pursue its business strategy with a small and focused team of commercial and technical professionals. It is expected that Deterra will have 6 full-time staff members. These staff costs will form the major component of our cost base. Back-office functions, including IT, payroll, HR, accounting, legal and tech support, will be outsourced to third-party providers. In assessing new royalty in business, Deterra will seek external assistance from experts in areas to supplement the expertise of Deterra's own team. The cost of this specific assistance will be expensed if we do not proceed with the investment. Hopefully, that addresses your question, and thank you for the question. Greg, back to you.

Yes. Thanks, Jenny. Sue, can we have the next question, please?

The next question is also from Geoff Reid of the ASA. And the question is, please can you outline how payments from BHP for the Area C royalty are verified as correct, the tonnages, the iron content, the sale price, the exchange rate and the actual capacity built for the mining operations?

Yes. Well, Geoff, that's a very, very important question. I'm going to hand this one over to Deterra's Managing Director, Julian Andrews, to answer. Thanks, Julian.

Thank you, Greg, and thank you for the question, Mr. Reid. As a royalty holder, Deterra has limited access to nonpublic data regarding the operations of the actual mining assets. With regard to Mining Area C, we receive quarterly payment information and supporting calculations relating to each of those payments. We also receive a certificate from the Mount Goldsworthy joint venture's external auditors each year as to the correctness of payments. In addition, we have the right to report -- to appoint an independent chartered accountant to review the certificate and the royalty payment returns annually. Thank you, Greg.

Thank you for that answer, Julian. I hope it answers your question, Geoff. Sue, do we have another one?

We do. The next question is also from Geoff Reid of the ASA, and the question is, have you sounded out BHP on their willingness to accept the royalty agreement being transferred from Iluka to Deterra? Do you sense the potential for agreement?

Well, I think once again, Julian, that's for you to answer, if you wouldn't mind.

Thank you, Greg, and thank you again, Mr. Reid. Consent to demerge Deterra from Iluka is not required and nor is it required under the MAC royalty agreement to transfer the royalty. Thank you.

Thanks, Julian. Short and sweet, but I hope that answers your question, Geoff. Sue, where do we stand? Do we have any other questions?

We do have more questions. The first question comes from Vivo Investments, and the question is, can you please give a rough DPS, which I assume means dividend per share, guide for year 1 or year 2 for the new company, Deterra?

Thank you for that question. Jenny, do you -- or Julian, however you want to respond to that question.

I'm happy...

Julian, if you want to.

Yes. I'm happy to take that, Greg. In terms of the -- in the booklet, we've set out quite clearly, the dividend policy of the business, which is to target paying out 100% of the net profit after tax each year. So in terms of the guidance, we're not providing guidance clearly around what that might be, but I think we've been quite clear on the policy. So I trust that helps. Thank you.

Thank you, Julian. Sue, do we have any more?

We do. We have one more question, which is from [ Mr. Fredric Raymond Willard ]. And the question is, why is Iluka retaining a large stake in Deterra rather than distributing all of Deterra to Iluka shareholders? Are there plans to sell or distribute the remaining stake in Deterra to shareholders?

Well, Mr. Willard, thank you for that question. Look, the holding in Deterra will provide Iluka with economic exposure, the production growth associated with BHP's group development of South Flank and Mining Area, and the potential for continued growth through future expansions, extensions, developments and discoveries within the Mining Area -- royalty area itself as well as Deterra's longer-term growth strategy. For Iluka, the holding in Deterra also provides an additional investment and source of financial strength for Iluka. And as we have said in the booklet, and as Tom has said publicly in talking about the demerger, Iluka regards its 20% interest in Deterra as a long-term investment. So hopefully, that answers your question. Thank you for that, Mr. Willard. Sue, do you have any more questions?

No, there have been no more questions submitted, Greg.

All right. Well, thank you very much for that, and thank you, shareholders, for your questions. So ladies and gentlemen, that concludes our discussion on the item of business. Could you please kindly cast your vote now if you've not already done so, on this item? And as you're doing so, the proxy results for this item of business are shown on the screen. [Voting]

It would appear that an overwhelming number of shareholders is -- are in support of the proposal, which is pleasing to see. I'm going to close the poll shortly. And given -- I mean the disadvantage of not being in a room with you all and seeing that all voting forms have been completed, I will just allow another moment or 2. So if you haven't already voted, please, could you ensure that you cast your vote now. [Voting]

I'm now going to close the poll. So I do declare that the poll has closed, and thank you very much for voting on the item of business. Well, clearly, as I said, based on the proxies received, the demerger resolution is passed by the prerequisite majority. The details of the final results will be posted on both the company's website and on the ASX company announcement platform later in the day. Well, ladies and gentlemen, that concludes the formal business for today. I once again thank you all for your participation and continuing interest. And if you don't mind me, the reflection, it's not every day that you get to create a new company, particularly one with the opportunities Deterra has in front of it. All said and done, this is what we have achieved together this morning, a modest, but important contribution to Australian corporate history. It's nice to see hope that the next time we come together will be in person at Iluka's Annual General Meeting in April next year. I now formally declare the meeting closed, subject to finalization of the poll. Thank you for joining us, and please stay safe. Good morning.