Profits: Iluka Booms, IAG Recovers, Toll Steady

The beach sand miner Iluka Resources (ASX: ILU) has confirmed it had a fabulous 2011 with sales and earnings soaring to record levels.

The group yesterday revealed a net profit of $541 million, more than 15 times higher than its 2010 takings.

Revenue jumped 69% to $1.6 billion thanks to surging demand and prices for its main products, zircon and rutile (titanium oxide).

Despite the news, the shares failed to react, falling 57c or 3.2% to $16.86 as management warned the boom in beach minerals may have peaked with signs of easing prices and demand for zircon emerging.

Iluka has cut its production guidance for zircon by 10% to half a million tonnes, from 550,000 tonnes last year.

But at the same time, demand and prices for titanium oxide (from rutile and used in paints) were still solid and will continue into 2012.

Dividend for the 2011 jumped to 75c, from the 8c a share paid in 2010.

The final payout was pushed up to 55c a share from 8c paid in the final six months of 2010.

China's hunger for mineral sands helped boost Iluka earnings as they vaulted from 2010's $36.1 million.

Demand for and prices of mineral sands such as zircon and titanium dioxide are booming.

Prices more than doubled in the past year with China leading the demand to use it mostly in paints and electronics, but also in more esoteric industries such as nuclear reactors and deodorants.

Minerals sands earnings before interest and tax (EBIT) increased to $737.3 million from $31.6 million in 2010, the company reported yesterday.

Mineral Sands EBITDA for the year was $925.9 million, up 270% from 2010.

Iluka said its Mining Area C iron ore royalty made an EBIT contribution of $88.1 million, as a result of iron ore sales volumes from the BHP Billiton mine in the Pilbara rose 3.2% to 44.6 million dry metric tonnes.

"The average AUD realised price upon which the royalty is payable increased by 18.9 per cent from the previous corresponding period. A $1.0 million capacity payment was made in 2011 (2010: $5 million).

"Group EBITDA, including Mining Area C contribution, was $979.3 million, with a Group EBITDA margin of 64%, which puts Iluka up there with BHP Billiton and Rio Tinto as some of the most profitable companies in the country.

"Group EBIT was $790.3 million, compared to $86.1 million in the previous corresponding period.

"Cash costs rose by 15%, to $628.9 million, but the unit cash cost of production was unchanged at $538 per tonne.

"The surge in revenue to $1.631 billion was due to higher prices for zircon, rutile and synthetic rutile products, but offset by the stronger Australian dollar."

lluka's managing director David Robb noted evidence of a softening in demand and prices for zircon but higher prices for titanium dioxide in comments to analysts and in yesterday's announcement.

"It is likely to take some time for a clear profile of likely 2012 product demand to emerge, particularly for zircon," Mr Robb said.

"In this context, and given evidence of a softening in the near term zircon demand outlook, Iluka has the ability to moderate zircon production accordingly, while still retaining the ability to respond quickly to demand recovery and while preserving high grade titanium dioxide production.

"This product flexibility is important, given that zircon price rises have moderated but high grade titanium dioxide sales volumes in the first half of 2012 will be delivered at prices appreciably higher (up 80 to 90 per cent) than in the second half of 2011," he added.

And Australia's biggest general insurer, Insurance Australia Group (ASX: IAG), has joined rival Suncorp (ASX: SUN) in surprising the market with a better than expected first half effort.

Whereas Suncorp surprised with a bigger than expected profit, IAG's fell less than forecast by the market.

And despite the weak result and high claims costs (with the big storm in Melbourne on Christmas Day the latest problem), the company is looking at an improvement in the second half, if those disasters stay away.

"We're upgrading our revenue target and still expect to achieve a reported insurance margin within our original guidance of 10-12%, although at the lower end of that range," CEO Mike Wilkins said yesterday.

IAG yesterday revealed an 11% drop in first-half net profit, with general insurance profit lowered (as forecast last year) by higher reinsurance costs after the record disaster claims in 2011.

IAG said first half-net profit was $144 million compared with $161 million a year ago, but it was well above the $119 million average forecast from the market.

That saw IAG shares break out of their rut and jump more than 8.2% to close at $3.14, a rise of 24c on the day.

Investors liked several hints to emerge from the profit statement and briefing yesterday.

Mr Wilkins outlined a plan to extract more profits from IAG's CGU business through a revised operating model.

There was also the higher full-year revenue target, he reconfirmed its full-year insurance margin target and gave a strong hint that the struggling UK business was on the verge of breaking even.

The latter has been a black hole for the past few years and has the capacity to surprise management again, on the downside.

But if it is back to not losing money, it could be sold, allowing IAG to exit a troublesome market.

And, as investors have learned to their cost, all it will take to upset the emerging recovery in the insurance business is a spate of floods or storms, like that in Melbourne last December.

Like Suncorp, IAG said the Christmas Day hailstorm in Melbourne would push up the cost of natural peril claims well above its allowance for the first-half.

IAG will pay an interim dividend of 5c, down from 9c a share for the first half of the 2011 financial year.

On Wednesday, Brisbane-based Suncorp reported a 45% drop in profit at its general insurance unit, but higher earnings and premium income offset that slide.

IAG reported an insurance profit of $271 million for the six months ended 31 December 2011 (1st half of 2010-11: $470 million), representing an insurance margin of 7.1% (12.7% in the first half of 2010-11).

This was achieved on the back of a 9.7% increase in gross written premium (GWP) to $4.318 million.

"The first six months of the 2012 financial year have again been challenging for the insurance industry, with high net natural peril claim costs, including floods in Thailand and the severe Christmas Day storm in Melbourne, significantly increased reinsurance costs and volatile investment markets," Mr Wilkins said yesterday.

"We exceeded our natural perils allowance for the period by $130 million and absorbed an adverse $80 million impact from widening credit spreads.

"On an underlying basis, our insurance margin improved to 10.7% (1H11: 9.4%).

"This reflects a strong performance from Australia Direct, continued improvement from CGU, a return to profitability in New Zealand and a significantly improved performance from our UK business.

"We've also delivered strong top line growth in our Australian and New Zealand businesses, driven by rate increases to address higher reinsurance costs and natural peril allowances, with assistance from volume gains and bolt-on acquisitions."

And transport giant Toll Holdings suffered a 4% dip in first half profit and says economic conditions make it difficult to forecast its performance for the rest of the year.

Toll yesterday said net profit fell to $158 million for the six months to December 31, 2011, down from $164 million in the previous corresponding period.

That was despite a 5% rise in revenue in the first half to $4.4 billion, from $4.2 billion in the previous corresponding period.

Earnings before interest and tax fell 2% to $248 million.

Toll declared a fully-franked interim dividend of 11.5c per share, unchanged from the first half of the 2011 financial year.

"While the volatility we are all seeing in the macro-environment makes it very difficult to have a firm view on the outlook for the remainder of the year, we are confident that Toll is following a strategic path that will provide superior, sustainable returns for our shareholders over the longer term," CEO Brian Kruger said in yesterday's statement.

Toll shares jumped 14c or more than 2% to $5.33.