Perth Aug 18, 2015 (Thomson StreetEvents) -- Edited Transcript of Iluka Resources Ltd earnings conference call or presentation Tuesday, August 18, 2015 at 1:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David Robb Iluka Resources Limited - MD * Doug Warden Iluka Resources Limited - CFO & Head of Strategy & Planning * Matthew Blackwell Iluka Resources Limited - Head of Marketing, Mineral Sands ================================================================================ Conference Call Participants ================================================================================ * Paul Young Deutsche Bank Research - Analyst * Clarke Wilkins Citi - Analyst * Mark Busuttil JPMorgan - Analyst * Angela Kean SNL Metals & Mining - Media * Adam Orlando Mergermarket - Media * Owen Birrell Goldman Sachs - Analyst * Brendan Fitzpatrick Morgan Stanley - Analyst * Glyn Lawcock UBS - Analyst * Ben Crowley Macquarie Research - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [1] -------------------------------------------------------------------------------- Good morning, everybody. Welcome to the call and thank you for your time today. With me I have Doug Warden, CFO and Head of Strategy and Planning; Adele Stratton, Financial Controller; on the line from the US Matt Blackwell, Head of Marketing; and Rob Porter, General Manager Investor Relations and Corporate Affairs. Turning to slide 2 and the disclaimer. Obviously I have to draw your attention to that disclaimer. And also please note that we are joined on this call by a transaction advisor chaperone in line with and as required by the Irish Takeover Code. Slide 3, key pictures of the results. So far I would sum it up as 2015 unfolding largely as expected. We have a sense of steady as you go within the business. Quarterly volume trajectory we see as very positive, underpinning my comments at the beginning of the year about expected top-line growth. Important assets have been restarted and are operating well. And, in fact, the synthetic rutile kiln 2, which started last quarter, has set new production records quite consistently in the quarter. We are generating cash and paying dividends. And you would note the interim dividend of AUD0.06 per share fully franked equal to that paid as an interim last year. We do want to put our balance sheet to work. That's what we refer to as acting counter-cyclically where appropriate. And I believe there has been very pleasing progress in all areas in which we are investing for the future. Slide 4. There are more green arrows appearing, which is pleasing. It is nice, of course, and has been helpful to the results to have currency tailwinds after four or five years of significant headwinds. And we are trending better than guidance on key parameters. The cost performance, in particular, is very pleasing. On the other hand, as you will see two-thirds of the way down the slide, earnings and returns are still lower than we would like. But they are positive and they are improving and, as I mentioned, the dividend has been maintained at AUD0.06. Slide 5. Having dramatically improved the levels of our environmental health and safety performance over the last few years, our challenge now is to sustain that performance and over time do even better. And that remains a continued focus across the business. Slide 6. The 2015 interim dividend is consistent with our framework. That framework for distributions has been observed since 2010 and has resulted in a cumulative payout ratio of 68% or AUD635 million distributed to shareholders. Perhaps I would also just point to the fact that we've paid out twice as much as we have retained, or thereabouts, when you compare the AUD635 million with the AUD303 million retained. And, with that short introduction, I will now hand over to Doug Warden to run through the results in some more detail. -------------------------------------------------------------------------------- Doug Warden, Iluka Resources Limited - CFO & Head of Strategy & Planning [2] -------------------------------------------------------------------------------- Thanks, David. Although we show our second half of 2014 in slide 7 in the middle column, all my comments in terms of variances will relate to the first half of 2014. And, given the seasonality of our business being predominantly heavily second-half weighted in sales, I think this is appropriate. So revenue up 2%, as David mentioned. Some FX tailwinds certainly helped, more than offsetting some price weakness and slightly lower ilmenite volumes. And at this stage of the cycle we have maintained a pretty healthy EBITDA margin of 33%, which, relative to others in our industry and more broadly in the resources sector, I think fares pretty well. D&A down half on half, due to the closure of WRP in March of this year. And the write-down of the US assets in 2014 meant that there was no D&A in 2015 for the US. Just to highlight that the AUD84 million for the first half does look a bit high versus the full-year guidance of AUD130 million. However, I point out to you that there was about AUD30 million of D&A in respect of WRP which will not occur in the second half due to its closure. Going the other way, obviously, with the South West recommencing in February for the mine at Tutunup South and April for the kiln, there will be slightly more D&A in the second half in the South West. NPAT was up 74% to AUD20.4 million and free cash flow down 39% from AUD64 million in the first half of 2014 to AUD39 million in the first half, due largely to lower MAT cash receipts of about AUD14 million and some working capital impacts as well. There are some other puts and takes in the cash flow but they were predominantly the main items. ROC and ROE remain well below where we would like them to be but they do reflect bottom-of-the-cycle pricing; still not acceptable on our internal metrics. Turning to slide 8, mining area C. MAC income was up marginally but this was due to additional capacity payments half on half of AUD2 million and a one-off receipt of $8 million as a result of some modifications to the royalty agreement which we announced a short while ago. These two factors obviously offset the falling iron ore price, which resulted in lower royalty income for the half. Going forward there will be a slight reduction in the royalty rate, as we point out in slide 8, but it will apply across an increased revenue base. So we're not expecting there to be any negative impacts there. Turning to slide 9, the NPAT waterfall. I won't go through every bar on this but just to hit the high points. All the commentary is in the 4D for those who are interested. So on price you will note in our ASX release that we were refer to zircon and rutile prices for the first half being similar to the full-year 2014 pricing. That might seem a little inconsistent with the AUD23 million pricing bar in the NPAT waterfall on slide 9 but I would point out that the pricing delta is the first half 2014 versus first half 2014 delta. And there was some price weakness in the second half of 2014. So, when you take that into account, particularly with volumes being weighted to the second half in 2014, we are broadly in line with full-year 2014 pricing. FX tailwinds, as we've mentioned. AUD0.775 versus AUD0.921 for first half of last year, which resulted in the AUD50 million NPAT impact to the positive. Slightly lower ilmenite volumes and lower prices, reflecting a higher proportion of lower quality products sold in the first half of 2015 versus 2014, and also lower volumes of iron oxide concentrate sold as a by-product of our SR production, reflecting the softening in the iron ore market. Our restructure and idle costs. We idled Concord in the US in April of last year and that recommenced in July. Together with that we had the WRP closure in March, as I've mentioned, due to the exhaustion of the ore body there. In mineral sands other. Slightly higher marketing costs and higher resource development costs. The marketing costs due to some old shipment additional costs for high-grade TiO2 and some reduced trading conditions there. On the resource development, we continued to work hard on exploration drilling, so some increases there. And also further technical work relating to our future projects being the other impact of higher costs there. And the D&A, as I've mentioned, US being written down to zero in 2014, therefore no D&A this year, and the closure of WRP in March. Turning to slide 10, the debt movement chart. Net debt at June 30 of AUD80 million compared to debt facilities of AUD950 million. So plenty of headroom, as we've pointed out consistently. And the bars in the dashed box, just to highlight, represent the AUD39 million of free cash flow for the half. So, notwithstanding the low cycle conditions, we generated strong operating cash flow of AUD92 million, which enabled us to continue to invest in exploration, technology and our projects and still generate free cash flow of AUD39 million and declare a AUD0.06 dividend. The dividend payment that you see in that bar chart is obviously last year's final dividend. Turning to slide 11, the unit cash costs and revenue. Slight improvement there of, per tonne, of Z/R/SR when you exclude the by-product impact of AUD52 a tonne lower than first half 2014, reflecting the cessation of relatively high costs but, I would point out, high margin mining at WRP and Z/R production from SR, as Dave has mentioned, resulting in lower unit costs. Slide 12, on the inventory. Up marginally, with a AUD23 million increase in work in progress, partially offset by a AUD5.5 million decrease in finished goods stock. We continue to monitor the inventory levels but we have maintained our demand-following approach and, given our strong balance sheet, remain comfortable where inventory's at at these levels. That said, we'll obviously look to draw down inventory over time as demand for our product grows. I would point out that, as you are aware, the inventory is carried at cost. So if you think about a reasonable margin to apply to that inventory, less some transport and upgrade costs associated with the concentrate or the work in progress, we estimate there's in the order of AUD1.2 billion of cash flow at current prices and exchange rates. Obviously, it's important to bear in mind that there will be a normal level of inventory going forward. And I would point you to the period on that chart between 2008 and 2011 for some sort of a guide on what would be considered normal. Bear in mind also that we've got a slightly longer supply chain these days as we try and place product closer to our customers through various warehouses around the world and as we've moved away from FOB or pure FOB shipping as a model for marketing and sales. So I would say around 50% to 60% of the AUD1.2 billion of cash flow should be considered cash flow to be liberated, I should say, over time as market conditions improve. However, that's not to say that we're keen to do that. And we don't feel any pressure to do that, given the balance sheet strength. It's merely to point out the significant free cash flow that's embedded within that inventory. Slide 13. The balance sheet, as we've mentioned, continues to be very strong, with net debt at June 30 of AUD80 million, representing gearing on a [devised] net debt plus equity basis of 5.4% and an additional AUD100 million in facilities added during the half. After taking into account cash on hand, we had undrawn facilities of AUD785 million at the half. And finally, slide 14, sources and uses of cash. This is just a little bit of history since 2002. What I'd point out is a very strong track record in capital management since 2007. As you'd be aware, we raised equity to build JA and Murray Basin stage 2 in 2008 and 2009 and, since then, from 2010 onwards, Iluka has generated in the order of AUD940 million of free cash flow and, as we mentioned earlier, paid AUD635 million in dividends and repaired the balance sheet from that period of 2008 and 2009. And, with that, I'll hand over to our Head of Marketing, Matthew Blackwell, to take you through the current market conditions. -------------------------------------------------------------------------------- Matthew Blackwell, Iluka Resources Limited - Head of Marketing, Mineral Sands [3] -------------------------------------------------------------------------------- Thank you, Doug. Good morning, all. David and Doug, I trust the line is the okay there, you can hear me. -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [4] -------------------------------------------------------------------------------- I'd speak up just a touch Matt, perhaps. -------------------------------------------------------------------------------- Matthew Blackwell, Iluka Resources Limited - Head of Marketing, Mineral Sands [5] -------------------------------------------------------------------------------- Okay. Well, thank you, I'll start on slide 15. As you can see, sales volumes are up on the prior corresponding period, which is encouraging for us as the first half followed a very strong fourth quarter for Iluka. Within the half, the second quarter was solid as we moved from rollout to execution in the establishment of our pricing and payments framework. In zircon the sales by region saw a decline in the US as Iluka's Virginia offering was lowered, in line with the planned idling of the operation. Now this was more than offset by sales into Europe, the Middle East and India, and that last market helped by the introduction of a new grade of zircon. Volumes in China were consistent with the prior corresponding period. Sales by sector played out as we expected, with demand in ceramics stable. The chemical sector continued to face pressures of oversupply and sales to fused zirconia producers slightly softer, reflecting mixed performance in industrial end uses. Iluka's sales to specialty applications grew and this is characterized by smaller sale lots, higher margins that you would expect from a focus on the long tail. Turning now to slide 16. Regionally, demand remains mixed, with some softness in the US. Europe is improving for us but it remains a market where others are slightly advantaged. China continues to be the largest market and one, we believe, with continued potential. Ceramics remain stable and we have been of the view for some time that the modernization, substitution and thrifting impacts has worked its way through. And we expect demand to resume growing, albeit from a slightly lower base. Modern tile designs, particularly those that are digitally printed, which contain a body, an engobe, an ink and a glaze, whilst having a generally lower zircon loading in the body than, say, a porcellanato tile of five years ago, are less prone to substitution and thrifting and characterized by a base load of zircon, due to the requirement to have that in the engobe, the glaze and more and more in the ink as well. As mentioned, fused zirconia customers who focused on supplying the refractory sector are cautious as to the medium-term impacts from lower demand for steel. However, those who sell into the auto industry continue to see reasonable demand as do those producing for ceramic pigments. Chemicals remain subdued, in contrast to specialty applications, and we continue to progress commercialization of new products for this sector. Turning now to titanium and high-grade feedstocks. As flagged in the March quarterly, sales of high-grade ore are largely second-half weighted. This is a logical consequence of planning to bring online SR2 at the end of the first quarter and ramp it up in early second quarter. The startup of the operations, as mentioned by David, has exceeded expectations and positions us well for the second half and beyond. The shift between European and Asian sales reflects really customer mix and their individual shipping location requirements. You can expect this to rebalance in the second half. The bulk of high-grade and low-grade sales between now and the end of the year are already contracted. And finally I'd say that you could probably expect the mix to trend towards SR as we continue to allocate rutile to our strategic accounts. Turning now to slide 18. While demand is uneven across the globe, we believe it is, in aggregate, stable and certainly paint sales, the largest end market for titanium, remain solid. We see positive signs for potential further growth in Ti demand. Indicators, such as increasing home sales in the US, support for the property market in China and low levels of scrap in the metals supply chain, we believe they are all favorable. And although a small sector, record orders for planes with higher Ti metal content, bodes well for the metal sector going forward. It's probably an outlook that would be seemingly shared by Warren Buffett. Welding has been a particularly bright spot for us this year. Rutile is the preferred feedstock for those making flux cored wire, which is used in heavy industrial applications, such as shipbuilding, and we now offer a number of different rutile grades to this market. Turning to slide 19. I think everyone is aware of the depressed market for ilmenite in China. And most recently we saw several unsuccessful attempts by local ilmenite producers to increase prices in the second quarter. It's a market that we see as being challenged in the near term. Sales of Iluka's low-grade ore or ilmenite into the Americas will increase in the second half as short-term sales resume from Virginia. Turning to slide 20. We believe Iluka is well positioned to respond to the changes in the market due to our range of low- and high-grade feedstocks. As our customers' head grade requirements change, so can the grade in the material we ship to them. We're working hard at enhancing our technical capabilities and customer service. The China technical center is one element of this and we expect to have it in operation early in 2016. Now, due to demand for our conventional SR products, we are unable to schedule a commercial scale run of ASSR production until early 2016. We remain committed to the commercialization of this high-grade sulfate feedstock solution. Turn now to slide 21. And I will close by just saying that we will continue to focus on top-line growth in a disciplined manner. We believe that volume recovery will underpin sustainable price recovery. We have invested in an extensive sales network and we intend to continue to leverage our position in markets and segments where we think they have the most growth potential. We'll continue to work closely with our customers and design the products they need to deliver on our promise of customer value to them. So, with that, David, I'll hand back to you. -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [6] -------------------------------------------------------------------------------- Thank you, Matt. I'm sure there may well be some questions on some of the things that you've said but just to finish up with a few more slides before we get to questions, slide 22. As I said at the outset of the call, progress is pleasing in all the areas in which see the potential to create and deliver value for our shareholders. If I think about exploration, obviously consistency of spend there is important. That's true for exploration generally. We do have, to some extent, an increase in Tier 1 ore body discovery focus, particularly as some of the project-related support, drilling and so on declines we are able to increase that Tier 1 focus. And that brings with it increased international opportunities. In Kazakhstan, for example, we're in a phase of certain aerial geophysics. In Brazil, as we usually find, there have been some HM intersections in our work there. And, in terms of the non-mineral sands at the Fowler prospect, we hope to be putting some holes in that in the second half of this year. Our feasibility studies are progressing to plan in terms of internal projects, with Cataby in pre-execute planning; the environmental impact statements taking up a lot of time. The public phase of that in Balranald. The work around the J-A satellites, referred to there as Sonoran, has been completed to preliminary feasibility study stage, now on hold. And in Sri Lanka our scoping studies there are well advanced; the focus being on engineering and infrastructure and on some environmental assessments. There is a government election there yesterday, so obviously we await the outcome of that. Market development. I think you've had a good overview from Matt. In essence, I believe our marketing reach and our customer-focus initiatives are working. And we remain excited about innovation and technology's potential to deliver game changers for this industry. We certainly, for example, in relation to Metalysis, remain encouraged. We see upside in terms of feedstock customization possibilities, particularly suited to SR as the feedstock. And in Tapira in Brazil, fair to say that we have reached a position of strong alignment between ourselves and Vale about the way to take that investigation work forward, which is a positive. Slide 23. The potential acquisition of Kenmare. I have nothing new to say on this potential transaction. We are working with Kenmare to satisfy the pre-conditions to a firm intention offer, perhaps commonly thought of as a binding offer, under Rule 2.5 of the Irish Takeover Rules. And I would also draw your attention in the supplementary pack to a specific disclaimer slide in relation to that. Slide 24. The business characteristics that we see in the second half. Well, as I said, 2015 so far is unfolding largely as expected. So no change to the guidance, what we refer to as our key physical and financial parameters document. In fact, based on our year-to-date performance and full-year expectations, we're slightly ahead of that guidance but not enough to warrant a revision, but slightly ahead. And remember, please, that in that guidance, 2015 Z/R/SR production was up 27% on 2014. And we also indicated that 2015 sales may exceed that production. So we feel comfortable, as I said, in relation to that guidance still. We do, however, have a typical second-half weighting in terms of business profile. That gives us some reason to be cautious. We are very pleased with how well the business is running. As I mentioned, and as Matt mentioned, the startup of SR2 has led, in turn, to all-time production records being set and our balance sheet is strong. Slide 25. In conclusion, then, given all of the foregoing, there should be no surprise that our approach, as listed here, is unchanged. We try to be flexible in the short term but maintain a consistent focus on the long term. We believe now is the time to be securing and developing options, conventional and innovative, organic and inorganic, consistent with our objective. I think we seek to have a bias towards the deployment of capital. I think that's what shareholders pay us to do, prudently. And, in doing that, we do try and counter-cyclically where appropriate. What I sometimes refer to as marching to the beat of our own drum, but doing so in a disciplined, diligent and patient manner. So, in summary, cautiously optimistic. The optimism coming from our year-to-date performance. The caution coming, obviously, from the fact that global confidence is still fragile and there are major economic adjustments being made and to be made; Chinese renminbi devaluation, US interest rate rise and so on. We have a global exposure and those forces will be relevant to our performance. So, with that, we'll hand over for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). Paul Young, Deutsche Bank. -------------------------------------------------------------------------------- Paul Young, Deutsche Bank Research - Analyst [2] -------------------------------------------------------------------------------- Dave, thanks for clarifying the guidance. The guidance has not changed for production. Also demand recovery's intact. Just a question on the TiO2 mix. Can you provide the rough production split between SR and R for 2015, considering SR2 had such a great performance in the June quarter? And then second question is on Kenmare, seeing as you did mention the K word. Can you provide an update on the discussions with the Mozambican Government and actually why this is taking so long? And, in particular, I'm interested in the written determination on any capital gains tax liability. I'm just interested around the -- if you can discuss the technicalities around that. Thank you. -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [3] -------------------------------------------------------------------------------- Look, on the SR/R split we very deliberately don't break it out in -- I guess right now, as Matt mentioned, there is a mix shift occurring to SR. The out production, I prefer, I guess, not to bank or certainly not to advertise. So I'm not going to provide the granularity that you seek on the SR-to-R mix. We are in an evolving situation with all our customers about that. On Kenmare, well, as I said, there's really nothing new I can say. The preconditions were clearly articulated in our note of April 30, in our release. We are working through them, together with Kenmare. And, as you correctly point out, a couple of them relate very clearly to Mozambique Government determinations and approvals. And we are working assiduously to secure those. These processes take time. There's not a lot of precedent in the country and, therefore, timelines are really impossible to predict. But we are working on it. -------------------------------------------------------------------------------- Paul Young, Deutsche Bank Research - Analyst [4] -------------------------------------------------------------------------------- Dave, just back on the SR/R. Is it safe to say that, based on the performance of SR2 in the June quarter, production skew will be towards SR? And to further -- yes.. -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [5] -------------------------------------------------------------------------------- Sorry, Paul. We've given you guidance, obviously, about rutile and syn rutile. And what I've said is that our guidance remains intact. Remember that the rutile production over the course of the whole year is really a function of how much WRP concentrate we choose to produce through Hamilton, following demand for that material. So the concentrate has been produced. The mine is not running any more. The production, as I say, will be a function of how much we take through the Hamilton MSP. The SR performance, well, we're off to a great start but we've got a number of months to go in the year. So hence, overall, although we are encouraged by year to date, we're not upgrading the guidance. We are maintaining it. -------------------------------------------------------------------------------- Paul Young, Deutsche Bank Research - Analyst [6] -------------------------------------------------------------------------------- Okay. I understand all that. I'll pass it on. Thanks. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Clarke Wilkins, Citi. -------------------------------------------------------------------------------- Clarke Wilkins, Citi - Analyst [8] -------------------------------------------------------------------------------- Just a couple of questions. First off, just in regards to the projects that are in DFS, can you just give an update on the timings, in terms of when Balranald's going to be complete, etc.? And where are you in the process, I suppose, in terms of the CapEx side? If you don't get those projects approved this year, do we look like a similar CapEx number for 2016 as what it would be for 2015? Or will there be other CapEx in 2016 that we should include? Also, just the other one was in regards to the ASSR. Is the plan to put that through the kiln that's running now, to do that trial on the kiln? Or is there potential to restart another kiln to run that trial if the SR demand remains strong? -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [9] -------------------------------------------------------------------------------- As to the first one, I'm not yet in a position to characterize the exact timing. We do have flexibility in relation to both projects. We've made it clear that we think timing is important in terms of generating the optimum return for shareholders. We are certainly thinking about some of the pre-execute decisions that you would make, long lead-type commitments that have to be made, Clarke, but I'm not yet in a position to characterize precisely the timing of any of that. So, unfortunately, it's just a little early. We do have flexibility and we intend to use it, hopefully, to the advantage of our shareholders. On the kiln, we can, we now know, swing a kiln midstream, if you like, from producing SR to producing ASSR. So whereas a little while ago we perhaps thought that a campaign dedicated to ASSR and possibly even, as you say, in time a kiln dedicated to ASSR, which obviously makes the commercialization of that product a bit harder, if you think about it, because you've got to be really confident there's enough demand to load a full kiln. We now don't need that to be in place before starting a kiln. We can swing SR2 from conventional SR to ASSR. We know that. But I also wouldn't refer to it as a trial, really. We know customers like what they've had to date. We know we can produce it. We know the economics. It's really a case of getting a production window that enables us to produce meaningful quantities to get in the hands of customers for final qualification through their plants. So it's more than a trial. -------------------------------------------------------------------------------- Clarke Wilkins, Citi - Analyst [10] -------------------------------------------------------------------------------- So that could be reduced. It's not limited to any one of the kilns being able to produce that product. It can be produced at other kilns, if there was demand strong enough to keep running it, purely producing the existing SR? -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [11] -------------------------------------------------------------------------------- Absolutely. And logically that would be SR1, given we now see merit as running the two side by side, from a logistics overheads, efficiency manning point of view. The next cab of the rank, as we've said before, Clarke, is likely to be SR1 in the South West, next to SR2, rather than a restart of either of the kilns in the Mid West. We do have some infrastructure upgrading to do to run both simultaneously, particularly around the stack. And that's the kind of thing that I was thinking about when I referred to long lead-type decisions that we are thinking about in preparation for any of the projects or, indeed, another kiln restart. -------------------------------------------------------------------------------- Clarke Wilkins, Citi - Analyst [12] -------------------------------------------------------------------------------- Thanks, David. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Mark Busuttil, JPMorgan. -------------------------------------------------------------------------------- Mark Busuttil, JPMorgan - Analyst [14] -------------------------------------------------------------------------------- Just a couple of things from me. Firstly, what should hopefully be a fairly easy question. But on the depreciation expense, if you look at the second half of the year, AUD46 million, kind of annualize that over a full-year period, it's AUD90 million, which would be quite a big drop from the depreciation expense that you expected to incur this year. Is there any reason why we shouldn't be using AUD90 million as a go-forward basis? -------------------------------------------------------------------------------- Doug Warden, Iluka Resources Limited - CFO & Head of Strategy & Planning [15] -------------------------------------------------------------------------------- Sorry, Mark. What AUD46 million are you referring to? -------------------------------------------------------------------------------- Mark Busuttil, JPMorgan - Analyst [16] -------------------------------------------------------------------------------- Yes. So the AUD46 million to get you to your full-year guidance of AUD130 million? -------------------------------------------------------------------------------- Doug Warden, Iluka Resources Limited - CFO & Head of Strategy & Planning [17] -------------------------------------------------------------------------------- Sorry, yes. -------------------------------------------------------------------------------- Mark Busuttil, JPMorgan - Analyst [18] -------------------------------------------------------------------------------- Any reason why for, say, 2016 and onwards we shouldn't be looking at that and annualizing that? -------------------------------------------------------------------------------- Doug Warden, Iluka Resources Limited - CFO & Head of Strategy & Planning [19] -------------------------------------------------------------------------------- Look, very much depending on idle gear and new projects. So with the current production settings, yes, that's probably a fair number. If we start Cataby or Balranald or restart the US, obviously, which would require a write-back of the write-down, then that obviously changes things. But yes, in the current production settings -- or restart SR1, for that matter, but, yes, current production settings okay. -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [20] -------------------------------------------------------------------------------- Just how I think about that is, whether it's good luck or good management, who knows, but we've ended up in a period of what we would refer to as low cycle, if you like, in terms of industry conditions. And we've been in that period at a time where we've had a low capital appetite in the business. We've got lots of flexibility. The D&A is low because we're not running as much as we would expect to at other times and because we haven't put a whole lot of fresh capital in for a while. But that lies ahead. So I actually am pleased that we've managed to get that alignment between low demands on the business at a time of relatively moderate market conditions. -------------------------------------------------------------------------------- Mark Busuttil, JPMorgan - Analyst [21] -------------------------------------------------------------------------------- No, I mean I actually think it's a reasonably positive thing. I think it's going to result in some fairly sizeable upgrades to 2016. But if just move on to just one other -- (multiple speakers). -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [22] -------------------------------------------------------------------------------- That's certainly not the intention. (laughter) -------------------------------------------------------------------------------- Mark Busuttil, JPMorgan - Analyst [23] -------------------------------------------------------------------------------- Just moving on to one other thing. I was interested in your comments about your zircon sales in North America. Are there product differences or character -- differences in characteristics between the zircon that you produced out of Virginia and what you produced from your other assets that means you can't supplement some of those sales in the US with what you've produced out of Eucla or the Murray Basin? -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [24] -------------------------------------------------------------------------------- Matt, do you want to handle that one? -------------------------------------------------------------------------------- Matthew Blackwell, Iluka Resources Limited - Head of Marketing, Mineral Sands [25] -------------------------------------------------------------------------------- Mark, one of the things about the American market is it's predominantly characterized by foundry and investment casting. And investment casting probably makes up -- it's a significant portion of the foundry market. Almost all investment casting zircon in the US is calcined and so we don't actually have a calcined product. On the foundry side, there were particular characteristics of the Virginia zircon, which made it very good for foundry applications and fused zirconium. We have found with research that some of our other products have similar characteristics and that's all I can say on that at the moment. We're encouraged by some of the opportunities we have to replace VA with other material. -------------------------------------------------------------------------------- Mark Busuttil, JPMorgan - Analyst [26] -------------------------------------------------------------------------------- Fabulous. Thank you very much. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Angela Kean, SNL Metals & Mining. -------------------------------------------------------------------------------- Angela Kean, SNL Metals & Mining - Media [28] -------------------------------------------------------------------------------- I'm just interested in knowing your take on the outlook for the mineral sands market for the second half and, I guess, heading into early 2016. Some challenges obviously remain there. What sort of challenges is the mineral sands market facing? And what -- where is -- is demand going to pick up and where do you see the market in that period? -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [29] -------------------------------------------------------------------------------- I'll ask Matt to comment, Angela, but it's not for us to speak about others. I think it is clear, though, that some projects have been committed to in headier days. They are projects that have had, or continue to have, some operational difficulties. And when you are producing a range of products of relatively low value, i.e., mainly ilmenite, and where that is at the end of the product slate that is perhaps most challenged right now, then life is tough. It's also obviously not a time to be sitting with a balance sheet that has a lot of debt on it. But if I look at the overall picture, though, the reference we've made consistently to demand being robust medium to long term, driven by urbanization and consumerism and application diversity, those things are clearly intact. China is holding up well for us and zircon sales are up. Paint producers and their sales, volumes and revenues are fine. So the end demand picture is better than what you see in certain individual business situations or what you see in some parts of the value chain. We're comfortable with how we are positioned. And, yes, perhaps that looks a little better than some other parts of the industry but we are where we are and others are where they are. Matt, is there anything you want to add to that? -------------------------------------------------------------------------------- Matthew Blackwell, Iluka Resources Limited - Head of Marketing, Mineral Sands [30] -------------------------------------------------------------------------------- I don't think so, David. I think you've covered the -- even if there is some short-term challenges for the pigment producers, who we sell our TiO2 to, they remain positive about the longer term. And demand, as you said, the medium- to long-term demand fundamentals for zircon and TiO2 remain very positive. And, as we've seen in previous presentations, there is not a dearth of projects that are rutile and zircon rich coming on. So projects, as you mentioned, David, induced at the height of the market, which have lower assemblages or lower value in the ground than perhaps will be needed going forward. -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [31] -------------------------------------------------------------------------------- And look, Angela, when I think about some of the lead indicators that we track, be that Chinese ore space sold or property prices in China, US housing activity indicators, both for new homes and remodeling, even European sentiment, they're all in a better place than they were a year or two ago. So, as I've said, cautious optimism is how we feel. And we're positioning it on that basis. We are placing some bets consistent with that belief. -------------------------------------------------------------------------------- Angela Kean, SNL Metals & Mining - Media [32] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Adam Orlando, Mergermarket. -------------------------------------------------------------------------------- Adam Orlando, Mergermarket - Media [34] -------------------------------------------------------------------------------- I just have a couple of quick questions. Has Iluka deleveraged enough to Kenmare lenders' satisfaction as described in their preconditions, in that it will meet the September 30 cut-off date? And separately, as far as Iluka is aware, is an IPO for Metalysis an option still being considered this year? -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [35] -------------------------------------------------------------------------------- Sorry, can you just repeat the first question about deleveraging, Adam? -------------------------------------------------------------------------------- Adam Orlando, Mergermarket - Media [36] -------------------------------------------------------------------------------- Yes. So has Iluka deleveraged enough to Kenmare lenders' satisfaction, which was, I believe, a precondition that was set in that there was a September 30 cut-off date? -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [37] -------------------------------------------------------------------------------- Sure, Adam. There are no preconditions or deleveraging requirements of Iluka. The Kenmare lenders have, in a note to their accounts, it's spelt out, note 21, I think, set out their expectations for a Kenmare deleveraging potentially in the future if certain things don't occur by a nominated date. And that's really a matter for Kenmare, that question. I'm not in a position to answer that question. To the second one, Metalysis. Look, it's an opportunity that we see still as tremendous blue-sky potential. It could be revolutionary for this industry in relation to titanium metals and metal powder usage. And we think we have a very particular thing to bring to the table there in terms of feedstock knowledge and customization, as I mentioned. An IPO is a thing I know that the board of Metalysis has been considering. Whether it actually goes that way or what the timing of that would be, I'm not in a position to say at the moment. We remain very supportive of that business and its potential. And we are pleased with the progress that's being made in further developing the application of the technology to titanium metal. -------------------------------------------------------------------------------- Adam Orlando, Mergermarket - Media [38] -------------------------------------------------------------------------------- Okay. Just getting back to Kenmare. Have there been any surprise hurdles in you trying to satisfy the preconditions that have popped up that have taken you by surprise that could stall things a little bit? -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [39] -------------------------------------------------------------------------------- Well, look, I know where you come from, Adam, in asking all these questions about Kenmare but I'm not in a position to answer them. We are, as I said, working with Kenmare to satisfy them and if there's something that needs to be disclosed to the market by either them or us, I'm sure that will happen. -------------------------------------------------------------------------------- Adam Orlando, Mergermarket - Media [40] -------------------------------------------------------------------------------- Righto. Thanks very much. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- Owen Birrell, Goldman Sachs. -------------------------------------------------------------------------------- Owen Birrell, Goldman Sachs - Analyst [42] -------------------------------------------------------------------------------- Look, I just wanted to just drill down into your revised -- I mean your reiteration of guidance. You've said that the bulk of your TiO2 sales has already been contracted but you're still cautiously optimistic. Just wondering where the cautiousness comes from. Is it coming from the zircon side of the picture? Or is there some concern around these contracted TiO2 sales? And just a second question. You're talking about the dire state of the Chinese sulfate pigment market and the impact this is having on your ASSR development. Just wondering what you're seeing in terms of industry rationalization and profitability over in China. And what gives you confidence that 2016 will be the time to recommence your scale trials? -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [43] -------------------------------------------------------------------------------- Let me deal with the second one first, Owen. There is absolutely no correlation between current state of the Chinese sulfate pigment market and our ASSR timing. Potential customers would like very much to have that product now but we have contractual obligations to meet around conventional SR, which take priority. We see no risk to those contracts. So please don't think that our caution is in that direction because nothing could be further from the truth. The caution relates simply to the fact that we are a company that is exposed to the fortunes of the world, given we sell globally. And, therefore, global confidence, global policy decisions can have an impact on our business performance. They are not a thing we can control and, therefore, we're a little cautious. That's all. There's nothing in my commentary around maintenance of our guidance that is anything internal. It's really just that we are, as always, somewhat hostage to global economic conditions. And, sorry, the first part of your question, Owen, can you just repeat that? -------------------------------------------------------------------------------- Owen Birrell, Goldman Sachs - Analyst [44] -------------------------------------------------------------------------------- Just are you seeing -- did you have any caution around the zircon markets? -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [45] -------------------------------------------------------------------------------- No. Look, obviously China's important. If China's adjustment process encounters a hiccup, then that would have an impact on our zircon sales but year to date there is no indication of that. And, as Matt has mentioned, our new pricing approach in zircon is having the desired effects that we sought to achieve when we formulated it and rolled it out. So if anyone's fishing for a negative, I'm sorry I can't help you. -------------------------------------------------------------------------------- Owen Birrell, Goldman Sachs - Analyst [46] -------------------------------------------------------------------------------- That's good color, thank you. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Brendan Fitzpatrick, Morgan Stanley. -------------------------------------------------------------------------------- Brendan Fitzpatrick, Morgan Stanley - Analyst [48] -------------------------------------------------------------------------------- Clarifying some of the comments from earlier in the presentation when Doug was talking to slide 9 and referencing the price first half 2014 versus first half 2015, there was acknowledgement that the prices were higher in that first-half 2014 period and, therefore, we get the differential. It suggests that if prices now are similar to the weighted average of 2014 that they might be a little better first half 2015 than they were in the second half of 2014. But I wasn't sure if that's the takeaway we should be making there. And the second one. On slide 15 there's a reference in one of the bullet points to a higher proportion of standard grade zircon being pursued as the Company monetizes zircon concentrate in the second half. Is there a noticeable price differential on that product that's being pursued? Thanks. -------------------------------------------------------------------------------- Doug Warden, Iluka Resources Limited - CFO & Head of Strategy & Planning [49] -------------------------------------------------------------------------------- I'll deal with the first one. Prices are flat. No real improvement in the first half of 2015 versus second half 2014. It's really just -- think about the stronger sales in second half typically means that your weighted average will be more influenced by the second half than the first half of any one year. -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [50] -------------------------------------------------------------------------------- Yes. And Matt, do you want to deal with the second part of Brendan's questions? -------------------------------------------------------------------------------- Matthew Blackwell, Iluka Resources Limited - Head of Marketing, Mineral Sands [51] -------------------------------------------------------------------------------- Brendan, the standard grade, we have some opportunity to monetize some stockpile material that we would characterize as standard rather than premium. And we have made a conscious choice to put some of that material into the market. At the moment, given where the market is and in terms of is there a discount because that material comes from monetization of the stockpile? No, it will be price consistent for Iluka's standard grade. And that's a pricing formula that comes off our reference price. So it doesn't attract a discount per se, other than the fact that it's standard and not premium. Does that make sense? -------------------------------------------------------------------------------- Brendan Fitzpatrick, Morgan Stanley - Analyst [52] -------------------------------------------------------------------------------- Yes, that's clear. I was just wondering, have we ever been given a reference point to the price differentials that Iluka gets between standard and premium? -------------------------------------------------------------------------------- Matthew Blackwell, Iluka Resources Limited - Head of Marketing, Mineral Sands [53] -------------------------------------------------------------------------------- No, I don't -- no. -------------------------------------------------------------------------------- Brendan Fitzpatrick, Morgan Stanley - Analyst [54] -------------------------------------------------------------------------------- Okay. Thanks very much. I appreciate the [clarification]. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- Glyn Lawcock, UBS. -------------------------------------------------------------------------------- Glyn Lawcock, UBS - Analyst [56] -------------------------------------------------------------------------------- Two questions, just on the inventory. Work in progress keeps climbing. Would we expect, now that WRP has ceased, for that to now reverse? And just wondering your thoughts on timing to get the inventory back to the more normal levels. You had talked about two years. Wondering if that was still the case. Secondly, just on Virginia. Now that Chemours is up and running on its own, just wondering -- you made a comment, probably six months ago, that it was hard to engage DuPont while they were going through the demerger process. I was wondering if discussions can now reopen and how they may be going about the future of Virginia. And then, just finally, the second SR kiln restart. I thought, from memory, you talked a little bit about maybe that being envisaged for 2016. Do I take from your comments about being able to interchange the ASSR and SR that that's maybe off the agenda for now as well for 2016? Thanks. -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [57] -------------------------------------------------------------------------------- I'll have a shot at each one and then ask Doug and Matt to comment, perhaps more specifically. Look, the work in progress build is really a function of two things. One, we choose to operate as efficiently as we can and, mixed blessing perhaps, Glyn, as I said, our assets are performing very well. As to the timing of the drawdown, that previous best guess, which was Alan's, I probably won't ask Doug in his first results as CFO to put his best guess on the table as to the timetable of it, it doesn't really occupy our minds, Glyn, as I've said before, other than any physical constraints we might run into. In the current environment, the cost of funding that versus the benefit of producing it efficiently and at the lowest unit cost we can, and I draw your attention to our performance there, the tradeoff's very clear to us. We'd rather produce it at the lowest possible cost rather than try and throttle it back, just to create the optics of it stabilizing or going down. That's the reality. But the WIP versus finished products balance is a thing that we can shift very quickly by taking more material through MSPs. So that's literally a market-following issue. -------------------------------------------------------------------------------- Doug Warden, Iluka Resources Limited - CFO & Head of Strategy & Planning [58] -------------------------------------------------------------------------------- Glyn, just to add there that, yes, it will obviously come down, the WIP, all other things being equal, with WRP's cessation. So, obviously, the two big components of that are J-A and WRP. So you'll see a lightening there in respect of WRP as we bleed that through the Hamilton MSP. -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [59] -------------------------------------------------------------------------------- Virginia, well, I guess, frankly, Chemours' management's probably most fixed on its share price, I think, rather than anything else, Glyn. But Matt, do you want to comment on --? We don't give a running commentary, Glyn, as you know about specific discussions that we're having, but Matt -- -------------------------------------------------------------------------------- Matthew Blackwell, Iluka Resources Limited - Head of Marketing, Mineral Sands [60] -------------------------------------------------------------------------------- (multiple speakers) David. Look, I was just going to say we don't go into the details of each contractual discussion but, needless to say, Chemours are an important customer and there is a logic to them consuming domestic supply, or North American supply, particularly as they bring on new capacity. That's all I'd say to that. -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [61] -------------------------------------------------------------------------------- (multiple speakers). All right, look, the SR restart, Glyn, there's a couple of factors at work. One, as I said, we're at that point where we need to think about long lead items and that's clearly in mind now. And that revolves mainly around infrastructure that we need to upgrade in the South West for two kilns to run. We've produced more SR than we thought we might have out of SR2 so far. If that continues, then we'll have more SR on hand and perhaps a bit more flexibility around SR1 timing. But I would see it as decisions are close around the long lead prestart-type capital for that. Whether that is immediately followed by a restart in 2016, we would obviously be looking to recreate the dynamic that we had with SR2, where there was some degree of commercial underpinning and confidence about offtake. So that's more the driver, Glyn, than anything physical about its preparation. -------------------------------------------------------------------------------- Glyn Lawcock, UBS - Analyst [62] -------------------------------------------------------------------------------- All right. Thanks, David. -------------------------------------------------------------------------------- Operator [63] -------------------------------------------------------------------------------- Ben Crowley, Macquarie. -------------------------------------------------------------------------------- Ben Crowley, Macquarie Research - Analyst [64] -------------------------------------------------------------------------------- Just quickly if we could just return to CapEx. I was just wondering, so the first-half spend was, I think, a little bit lower than probably most of us expected. Should we still be looking at the same full-year guidance of AUD120 million? -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [65] -------------------------------------------------------------------------------- Yes, Ben. I think if you look back over the last few years, it's always been that way. I don't know why it is but CapEx, like revenue, seems to be second-half weighted and it normally is. So -- -------------------------------------------------------------------------------- Ben Crowley, Macquarie Research - Analyst [66] -------------------------------------------------------------------------------- Sure, okay. And then just the longer term, longer term CapEx guidance, we should still be thinking that -- of that in the same terms as well? -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [67] -------------------------------------------------------------------------------- Look, we know we have an update to give people around the three- to five-year horizon characterizations. We know that, obviously, that is heavily influenced by the timing of any project investments that we make and, indeed, by any other investments that we make. And I would hope that we can, as soon as we get landing on some of those things, we would provide a further look forward into things like multiyear CapEx expectations, Ben. But I know it's a bit of a gap (inaudible). What we have said, and our best estimate still, is that an average over the next five years of circa AUD200 million to AUD250 million is the best view we can give you at the moment. It may well be that 2016 is lower than that and the peak is in the middle years of the five, just depending on timing. But we've said it will be lumpy but it will average AUD200 million to AUD250 million and I don't have any information that suggests that's not still the best view, Ben. -------------------------------------------------------------------------------- Ben Crowley, Macquarie Research - Analyst [68] -------------------------------------------------------------------------------- Yes, okay. Thanks for that. -------------------------------------------------------------------------------- Operator [69] -------------------------------------------------------------------------------- Clarke Wilkins, Citi. -------------------------------------------------------------------------------- Clarke Wilkins, Citi - Analyst [70] -------------------------------------------------------------------------------- Just a follow up in terms of the US. Is it basically you finish processing and mining the end of the year? Does it basically stop there? Or is it going to be like the Murray Basin where you actually have, I suppose, the concentrate treated into next year and there's sales coming from the US operations next year? And also, the other one is just around the China side. Has there been any pickup of interest in terms the sulfate side from China, given that, obviously, the collapse in domestic -- or the fall in domestic production on the back of the collapse in the iron ore price? -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [71] -------------------------------------------------------------------------------- Look, Clarke, it's likely, I think, there will be a trickle over into 2016. We'll probably be doing some retreat activities on some tailings material that there may well be a bit of final concentrate to go through the MSP in the early part of 2016. So yes to that. China. We know some sulfate ilmenite production has been taken out. It's not material in the context of overall Chinese production but there has been some rationalization and there is more talk of further to come. There is certainly a much heightened profile around environmental performance of all industries in China, not surprisingly. In fact, I have in front of me a very recent Chinese industry article about the chloride-route technology and its development in China. And the Vice Secretary of the TiO2 Association in China is quoted as saying that China has now the strictest environmental law in its history and that it has imposed new limits on additional sulfate-route capacity. And, as you know and we've referred to previously, there are a number of companies, some with significant capacity already built, chloride technology that they are trying to perfect. And we think when that perfection is reached that capacity will multiply quickly, as it's done in other areas. So there is a Government and, indeed, an industry goal of rapidly advancing chloride and cleaning up, if you like, sulfate. And we see both of those things as positive for TiO2 for us. So yes. I hope that answers your question, Clarke. -------------------------------------------------------------------------------- Clarke Wilkins, Citi - Analyst [72] -------------------------------------------------------------------------------- Yes, that's great. Just, sorry, back to the US operations. Is there, not getting [into] contract, but is there some contractual sales commitments where you have to retain material that sells off in the US? Or is it basically as the operations wind up then there's no legacy sales contracts or anything like that that have to be maintained or delivered into? -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [73] -------------------------------------------------------------------------------- No, there isn't. It's really a function of -- I think, we've used language previously -- in fact, when we announced the closure we spoke about optimizing the wind down, Clarke, and of trying to extract, if you like, the last dollar of value out of that operation. That's all that it means. -------------------------------------------------------------------------------- Clarke Wilkins, Citi - Analyst [74] -------------------------------------------------------------------------------- Great. Thank you. -------------------------------------------------------------------------------- David Robb, Iluka Resources Limited - MD [75] -------------------------------------------------------------------------------- And I think that's the end of our questions and we're a little over time. So I hope that's been useful for people. As I would say, and I just repeat, guidance maintained. We're cautiously optimistic and the caution relates not to anything Iluka specific but really to global economic conditions. We have created or secured commercially quite a number of options now and we are making pleasing progress in developing those options for future growth. And, with that, we will finish. Thank you for your time.
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