Iluka Resources Ltd

ASX:ILU

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Iluka Resources March 2019 quarterly report conference call. [Operator Instructions] I must advise you today's conference is being recorded on Monday, the 15th of April 2019. I would now like to hand the call over to your first presenter today, Mr. Tom O'Leary, Managing Director. Thank you. Please go ahead.

[Thomas Joseph Patrick O’Leary, MD, CEO & Director]

Thank you. Good morning, and thank you for joining us. Today with me, I have Adele Stratton, CFO; and Matthew Blackwell, Head of Marketing and Procurement; and Melissa Roberts, General Manager, Investor Relations and Commercial. I'll provide a short summary of our March quarterly which was released this morning and then open up the line for questions. First on production. You will note that our combined zircon rutile and synthetic rutile production of 154,000 tonnes in the first quarter was down around 17% from the December quarter last year. That was in line with our expectations, and there were several reasons for it. Quite significantly, our synthetic rutile kiln in the Southwest underwent a planned major maintenance outage during the quarter ahead of its next 4-year campaign. And that meant that the kiln was offline for around 45 days, so nearly a week short of the planned outage of 51 days, thanks to the planning and hard work of the operations team. The kiln is now being successfully returned to production, and is processing stockpile ilmenite ahead of processing the feedstocks from our new Cataby mine. At Sierra Rutile, we decommissioned the dredge in February, and that permanently removed that source of production from our operations in Sierra Leone. The dredge was over 40 years old, and we'd already extended its life by more than a year beyond the original plan at the time of acquisition. The decommissioning was completed successfully and safely, and with close consultation with both the union and government. Despite the decommissioning of the dredge, rutile production was higher from Sierra Leone, up a little from the December quarter. Operational improvements have been made at the Lanti and Gangama sites following the disappointing production results last year. We started seeing encouraging results in throughput, particularly at the in-pit mining in Lanti, but we still have more to do, and the team has turned its attention to increasing run times. At Jacinth-Ambrosia, we continue to operate well, delivering 156,000 tonnes of heavy mineral concentrate during the quarter. Sales in the quarter were down from the December quarter, although, I note that decline is also in line with our expectations. With inventories having returned to normal levels through 2018, such that going forward, sales ought to be broadly in line with production, the planned kiln outage, I touched on, meant that as planned, synthetic rutile sales were lower. Also 2 synthetic rutile shipments budgeted for March were pushed out into April, just a logistics outcome, so they'll be recorded in the June quarter sales. For zircon markets, we highlighted last year, and at the time of the full year results that we were anticipating a slower start to the year for zircon sales in line with historical seasonal norms. That's eventuated, but our view continues to be that underlying demand is sound. Across China and more broadly including Europe, trade and political tensions are creating some uncertainty, and leading to a cautious approach to buying. However, inventories throughout the value chain have now been depleted, and we expect to see more robust sales activity returning over the course of the year. In China, further ramp-ups of ceramic plants following Chinese New Year period should also support demand in the region. Positively for Iluka, some suppliers of zircon have experienced difficulties in supplying premium-grade zircon products. Iluka was more heavily weighted to that market with production from our Jacinth-Ambrosia operations, and that short-term supply tightness is expected to provide further support for our zircon sales. The high-grade feedstock market continues to remain strong with the pigment market reporting a solid start in 2019. High-grade feedstocks are an important part of the blend fed into pigment plants, most of which are currently running at high rates of utilization. And as we stated in the quarterly, the market remains in a state whereby we can't meet all the inquiries for volumes of our titanium products. Now turning to our projects. I'm pleased to report that across our portfolio of major projects, we've continued to progress on schedule and budget. The Cataby development is all but complete, commissioning is well-advanced, and the project team is expected to officially hand over the site to our operations team this week. Heavy mineral concentrate is being produced at site, and we have begun trucking material to our operations in the Southwest. The Lanti and Gangama expansions are progressing as planned. Construction of the second Gangama concentrator is nearing completion. And with the cessation of dredge mining, relocation and reconditioning of the floating concentrator for reuse of Lanti has begun.For the Sembehun and mineral separation plant upgrade projects at Sierra Rutile, value optimization work is continuing, and I expect that we'll be able to inform the market of our preferred development approach in the second half of the year. You may have noted that we've added a new project to our commentary this quarter, the Eneabba tailings project. Iluka has a significant stockpile of tailings material at Eneabba, near Geraldton in Western Australia. That stockpile was built over many years from remnant material from the Narngulu mineral separation plant. The stockpile is rich in zircon, ilmenite and Monazite. And with the improvements in mineral processing and new markets emerging for this material, the project represents a good opportunity for Iluka to monetize a historic stockpile and reduce ongoing rehabilitation obligations. Engagement with stakeholders and government has commenced, and we'll provide further updates in due course. And with that, I'll now open up the line for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Rahul Anand from Morgan Stanley.

[Rahul Anand, Equity Analyst]

Look, the first question I have is relating to synthetic rutile pricing going forward. I understand the previous tonnages were locked in, in terms of prices, and going forward, you probably have some collars in place. But how should we think about the price you can achieve for synthetic rutile? That's the first one. Second one is around pigment inventory levels. We here at Morgan Stanley had noted that pigment inventory levels in the West are significantly higher than this time last year, obviously in anticipation of a pickup in demand. Just wanted to get your views on how you're seeing that situation develop. And how do you think about feedstocks in that regard?

[Thomas Joseph Patrick O’Leary, MD, CEO & Director]

Thanks, Rahul. I think, I'll pass both those questions to Matthew.

[Matthew Blackwell, Head of Major Projects, Engineering & Innovation]

Rahul. This is Matthew. Look, firstly on SR pricing, the contracts that we're selling into this year are essentially the same as what we had last year. And as we announced at the time, those contracts that underpin Cataby, more than 60% of those contracts had a floor price. None of them had a cap and -- which makes them pretty unusual, and they take or pay and they run for another 4 years from the beginning of this year, so for the life of the kiln. And one other mechanism, without going into all the details of them, is that they tend to track market, maybe in a bit of a lagging fashion, and so it gives us a great degree of clarity and insight as to where SR prices are heading. But to be clear, there are no caps on these contracts -- absolute caps. So that's the first thing. To your second question, pigment inventories. Look, the one that's most often reported is that of Kronos, which you might be referring to, and it's significantly higher. When Kronos calculate their day sales, it's a function of closing inventory divided by quarterly COGS for a particular quarter than done on a daily -- than normalized for daily basis. So you have 2 influences. You have -- what you've actually got in stock, and how much you have sold in that particular quarter. So if you've had a slow quarter, it doesn't actually give you a -- the best line of sight to what the day sales actually are on a more normalized run rate, they're not seasonally adjusted. So I'll just point that out. The second point I'd make is that in all of our discussions with our customers, Q1 has either started in line or better than their expectations for pigment sales and demand. So in terms of the inventory, we're not worried about it.

[Rahul Anand, Equity Analyst]

Excellent. Just one follow-up, Matt, with regards to synthetic rutile pricing. So in terms of -- I guess from next year onwards then, should we be thinking about a simple grade adjustment 90% by 95% for synthetic rutile? Or is there some other way to think about it in terms of achieved prices?

[Matthew Blackwell, Head of Major Projects, Engineering & Innovation]

Sorry, say that again? I don't understand your question.

[Rahul Anand, Equity Analyst]

So in terms of the pricing from next year once you come out of the contracts, should we make simple grade adjustment for synthetic rutile? Or is there any further, sort of, pricing mechanism to take into account?

[Matthew Blackwell, Head of Major Projects, Engineering & Innovation]

No, sorry. Look, perhaps I wasn't clear. These contracts run for another 4 years. So we don't come out of those contracts. These pricing mechanisms and the contracts that we have in place, the take or pay no caps and collars, have the same mechanisms next year and the year after, and the year after that as they are now. And sorry, to your point when you talk about a collar -- caps and collars. I guess, if you call the floor price a collar, protecting the down side, but we don't have any upside constraints.

[Rahul Anand, Equity Analyst]

Understood. So it's more of a put option?

[Thomas Joseph Patrick O’Leary, MD, CEO & Director]

Yes, sorry, sorry, Rahul, just to clarify. It's not really a put option. It's -- we've got take or pay contracts in place for 85% of the offtake for the Cataby ilmenite, and they extend, as Matt said, for a further 5 years. And then we've got an option to extend one of those contracts, which would be in the vicinity of 60% of kiln capacity for a further 4 years, effectively the second kiln campaign. And those -- the pricing under those synthetic rutile contracts -- offtake contracts are, as Matt said, subject to floors, which increase annually with CPI, and they're not subject to cap. So we'll get market prices for that synthetic rutile subject to that floor.

[Operator]

The next questions come from the line of Paul Young from Goldman Sachs.

[Paul Young, Equity Analyst]

My first question is on zircon. I know you mentioned that first quarter sales of 66,000 tonnes are in line with expectations, and remain in line with historical averages. But just noting that last -- first quarter of '18 sales were 90,000 tonnes. So wondering if you could just explain the differences? And secondly, interesting to know your view of underlying demand appears to be stable and what you expect growth of any -- for global zircon demand this year considering that you're going to sell 40,000 tonnes less ZIC as a base case to, it appears, to balance the market?

[Matthew Blackwell, Head of Major Projects, Engineering & Innovation]

Yes, Paul. It's Matthew. Good questions. Two points I'd make. First of all, historical averages don't -- one period doesn't make a historical average. If we look back over the last 7, 8 years, the 66,000 tonnes is higher than 4 of those periods and less than 3 of those periods. So that's why we talk about it in line with historical averages. So that's to your first question. And it was in line with our expectations, we've been the same since July last year, that we expected the fourth quarter to be slightly slow, and the first quarter of this year to be slow as well, and that's how it's panned out. To your second question about demand. In terms of growth this year, demand is probably going to be stable, but what we saw last year was probably a bit of inventory rebuilding in the first half of this year as well as underlying demand in the second half of the year, as people were running pretty lean inventories. How that's going to play out in the overall demand this year, I don't think anyone is expecting demand to be significantly greater. But we do expect that the year to be -- between supply and demand, in balance.

[Paul Young, Equity Analyst]

So just elaborate, sir. This on demand side, you're expecting basically no growth globally in 2019 at the base case, sir?

[Matthew Blackwell, Head of Major Projects, Engineering & Innovation]

I think that the underlying demand will remain stable and there will be growth in sectors. How that plays out in the overall top line, is probably more to be stable this year than last year.

[Paul Young, Equity Analyst]

And also, are you seeing any signs of substitution at current prices? And also, any change in customer trends in China, perhaps away from tiles?

[Matthew Blackwell, Head of Major Projects, Engineering & Innovation]

Look, the first question, there is no financial or technical reason at today's zircon price why people would substitute away from zircon to alternatives, such as aluminum. That's the first point I'd make. Secondly, people substituting away from ceramic tiles in China, no -- pretty much every building when I was there last week had tiles still. And I think they will continue to use tiles. And what we're seeing actually globally is an increase in the use of tiles in markets that -- that were previously very dominated by carpet wood such as North America, where consumption of tiles is growing quite rapidly.

[Paul Young, Equity Analyst]

Okay. Thanks, Matt. And I had a question to Tom. So Sierra Leone, some progress. It seems that at Lanti, Tom, which is encouraging. Just noting you fully guided to 150,000 tonnes, the fact that 29,000 tonnes in the first quarter implies that you'll be running at 160,000 tonnes per annum for the last 3 quarters. Just interested -- that's -- without a doubt that's second-half weighted because that's when the dry mine expansions kick in. Just wondering what were your -- what's your planned exit rate for the fourth quarter, please?

[Thomas Joseph Patrick O’Leary, MD, CEO & Director]

Paul, look, it's probably too early to be giving that sort of information. I don't think we're, sort of, declaring victory yet. But the -- but I think you've picked up well that we're very much encouraged by what's going on at the moment. I was in Sierra Leone just last week, and there's a level of confidence associated with the team having experienced much better rates of production at the in-pit mining end in particular. So look, I think, we're positive about the full year in Sierra Leone. But as I've said earlier, the focus is now on increasing run times. But we'll keep updating on progress with quarterlies and at the half.

[Paul Young, Equity Analyst]

Last question, Tom. Just on head grade. Do you expect head grade to stay around the 3% for the remainder of the year? Or is that something that is too early to tell?

[Thomas Joseph Patrick O’Leary, MD, CEO & Director]

Yes, I think that's probably a fair assumption to continue with.

[Operator]

Next question comes from the line of Jack Gabb from Merrill Lynch.

[Jack Gabb, Associate]

Just 2 quick questions from me. Firstly, just on, sticking to zircon, how quickly do you anticipate the shortfall in zircon sales in Q1 to be reversed? So should we expect a similar, sort of, shortfall in Q2? Or can you -- can it reverse quite quickly? And the second question is, just given the strength of the TiO2 market at the moment, have you advance plans for the restart of the second SR kiln?

[Thomas Joseph Patrick O’Leary, MD, CEO & Director]

Yes, I'll get Matt to take that.

[Matthew Blackwell, Head of Major Projects, Engineering & Innovation]

Jack, Matt Blackwell here. So look, in terms of the reversal, if you like, of the zircon, we expect that the zircon demand to -- or buying to increase over the first half, and that's all that I'm prepared to say on that. I'm not going to give a guidance figure on sales for a quarter. But we've given guidance so far on production this year, and we've said sales will be broadly in line with production, and we're sticking to that. That's the first point. On the second point, in terms of TiO2. Yes, we have continued to progress our studies and efforts around the restart of SR1. Obviously, it hasn't gone to an investment decision yet because we would have announced it, but we continue to be encouraged by what we're seeing in the market and continue to work on that project.

[Operator]

Our next question comes from the line of Hayden Bairstow from Macquarie.

[Hayden Bairstow, Analyst]

Just a couple of quick ones. On the TiO2 market, I mean is this SR1 restart sort of your only volume option? Or can you sell more ilmenite? Or is this an opportunity that we do get a much tighter market second half, that you've got options there to lift? And obviously with Cataby going, is there something you can do there in terms of ramping that up a little bit harder? Or does it already rely on what you can do with SR1? And just on the market itself, are you basically fully price-contracted for the first half across the different products and hence it's just a second half story on pricing?

[Thomas Joseph Patrick O’Leary, MD, CEO & Director]

I'll hand over to Matt for the pricing question, Hayden. But in terms of responding to the demands of TiO2 feedstocks. You talked about whether we can ramp Cataby up harder. We're just ramping it up at the moment. So probably a bit early to be pushing things too hard. But we've said that -- it's a high quality feed -- the Cataby feed for our SR2 kiln and that's come back earlier than planned. So there's a possibility that we could produce a little bit more synthetic rutile than planned. So we'll see how that goes. In Sierra Rutile, obviously we've guided that amount, and I've already given some commentary about whether we might -- how we might fare there this year. But I think that's largely it. But Matthew, do you want talk about pricing?

[Matthew Blackwell, Head of Major Projects, Engineering & Innovation]

Yes, look Hayden. On SR, we're fully committed. And in the first half, that's a combination of contracts and some smaller spot sales that we've done. But you should assume that they reflect pricing of the day. On rutile and high-grade ore, generally I'd refer you to the quarterly where we've said that we're physically unable to satisfy all the requests of feedstock. So you can read from that, that we've sold everything that we're going to produce in the first half. And in terms of the pricing of that material, any -- given that we're now in April, and customers would already have wanted to secure their product for April, May and June, we would have factored in where we think the market is today.

[Operator]

Next question comes from the line of Peter O'Connor from Shaw and Partners.

[Peter O'Connor, Senior Analyst of Metals and Mining]

Two questions. SR1, the studies you're talking about the time line, can -- if you mapped out or could you map out again the indicative time line of the studies, approvals, developments, contracts, et cetera that, that would take? And secondly, Matt, I loved your comment at that time, you said, you have absolute clarity to where SR prices are headed. I think I got that right. Where are they headed?

[Thomas Joseph Patrick O’Leary, MD, CEO & Director]

Okay. I'll leave Matt a moment or two to work out his answer to that. But in the interim, we haven't mapped out a time line for SR1 restart. There's -- it's a matter of a number of things, it's looking at the cost and process to reestablish SR1 to operating condition. But that's probably a year. We also need to bed down ilmenite supply for that kiln, and that's probably the one that's taking some time. So once we have clarity on that, we'll come back to the market and disclose what you're after there.

[Peter O'Connor, Senior Analyst of Metals and Mining]

Okay, Tom. Can I follow up?

[Thomas Joseph Patrick O’Leary, MD, CEO & Director]

Yes.

[Peter O'Connor, Senior Analyst of Metals and Mining]

How much flex is there geographically in terms of feed? Is -- does freight become a constraint in that equation? Or is that not a big enough component of the cost input that drives your decision?

[Thomas Joseph Patrick O’Leary, MD, CEO & Director]

Well, from time-to-time it would be. But not at the moment. So I don't think that's a driver. But, Matthew?

[Matthew Blackwell, Head of Major Projects, Engineering & Innovation]

So, Peter. Absolute clarity did I say? Well, I'm absolutely clear they'll be different to where we are today. And the market momentum would suggest that they're going to be in the right direction. I don't want to give forward-looking statements from an antitrust perspective. But what I can say is that wait -- we have really good visibility because of how the mechanisms work as to where those prices will be in the second half. And I can't tell you exactly what they are, but they will move with the market. And if you get a view of where the market is moving, and sort of how that's percentage-wise changing, halves on halves and things like that, you can start to think where the prices might head.

[Peter O'Connor, Senior Analyst of Metals and Mining]

And how does the market respond to the tightness with regards to the discount relative to the natural rutile? Is that something that moves and flexes over time?

[Thomas Joseph Patrick O’Leary, MD, CEO & Director]

Yes, it does. Certainly, the relative -- you've probably heard us talk in the past, we sell our TiO2 products on a relative economic value basis, and so that takes into account not only the tightness in supply in the market and availability of other materials, but where those materials are sold as well and into what effect by plant. So yes, we consider all those things as we price, Peter. And look, I'd to talk to you more about it, but I just -- I can't because of the type of contracts we have and to be fair to our customers.

[Operator]

We have a question from the line of Glyn Lawcock from UBS.

[Glyn Lawcock]

Just on the Eneabba tailings project. I know that the study is only 3 months away. Just could you put more meat around that a little bit, just where are you thinking of processing it, the routes -- the sort of the size of the prize that come out of this project, which is sort of, as you said, just come onto the drawing board, this report? And then secondly, just a little bit more on SR pricing. I'm just more interested in -- so if you think back and Matt talked a little bit about where inventory has been historically average -- sales, sorry for a quarter, but just wondering, what's the historical differential for SR to rutile if things normalize over time? Just curious about the historical differential?

[Thomas Joseph Patrick O’Leary, MD, CEO & Director]

Okay, Glyn. I'll take the Eneabba project, and I'll pass over to Matt for the second question. Look, we've -- just disclosing it, but we have actually been working on it for a little while and it is still in feasibility stage. What I'd say is that the -- in terms of the size of the prize, we disclosed back in 2016 with our resource and reserve statement that we had a resource of nearly 0.5 million tonnes, which is not just Monazite, but includes ilmenite and zircon, and we've continued to produce since then. So it's a reasonably significant deposit in its own right. The capital associated with processing it will depend on the route we take in terms of how far we upgrade it. But it could be mobilized for relatively -- a relatively small amount of capital, and then upgraded later to attract a higher price for the offtake. But we'll disclose a bit more detail about that hopefully in the third quarter when we've concluded that study.

[Glyn Lawcock]

So Tom, is it a kiln? Does it need the kiln at all?

[Thomas Joseph Patrick O’Leary, MD, CEO & Director]

No, no, no. Not for the level of upgrading that we're contemplating there.

[Glyn Lawcock]

The SR differential historically?

[Matthew Blackwell, Head of Major Projects, Engineering & Innovation]

Yes, Glyn. It's Matt. Look, the differential depends on who is selling the rutile at different times, the shortness in the market -- like, as I've said, I can't talk about it going forward because of the contractual requirements. But, I guess, I just have to point you to say TZMI's trade stats. If you looked back over the last 5 years, you can draw a bit of a view from that where SR has been trading compared to rutile, and get a bit of a feel for that band of what the ratio is.

[Glyn Lawcock]

So Matt, can you get back to that then, you think?

[Matthew Blackwell, Head of Major Projects, Engineering & Innovation]

What do you mean, can we get back to it?

[Glyn Lawcock]

The band. If I go back and look at that differential, can you get back to what it used to be?

[Matthew Blackwell, Head of Major Projects, Engineering & Innovation]

Well, will it revert to it? And I think, you'd find rutile on an REV basis. It's trading at a premium to most products in the market today. So -- and SR to rutile, over a period of time when things become -- in the fullness of time, you'd expect there to be some, I guess, averaging out, but at the moment there is a premium. And what I'm more concerned about is the premium that SR [ to say slag ] in my competitor products rather than to rutile.

[Operator]

[Operator Instructions] We have follow-up questions from Peter O'Connor from Shaw and Partners.

[Peter O'Connor, Senior Analyst of Metals and Mining]

Matt, I was not fortunate enough to have the luxury of sitting here and strolling through a TZMI publication. So I think, I could send Glyn a question, and get him to give me the detail, so what should I think about, if I could find a TZMI copy, what would that detail tell me over the last 5 years?

[Matthew Blackwell, Head of Major Projects, Engineering & Innovation]

Peter, that the -- that today the rutile price on an REV basis is probably higher than the traditional ratio. I'm not quite sure where the question is going. What...

[Peter O'Connor, Senior Analyst of Metals and Mining]

I think we're all trying to get to the point of -- the relative pricing today versus what it's traded at for X years, 5 years, or whatever the data was -- look at. If we look at most commodities -- normalization of commodity pricing. So where are we today? Where's the trend been? We can all look at the -- we know the drivers today that you've talked about, and we can make a judgment going forward. I know you won't give us any forward commentary, that's fine. But we can make a judgment when we think that may go high or low or normalize. But just where has it been?

[Matthew Blackwell, Head of Major Projects, Engineering & Innovation]

Look, yes. I don't have the exact ratio in front of me. So I don't want to quote the exact number. But what I can say is that you'd expect over time probably SR to catch up to rutile and then get closer to rutile then it is today, if it was to normalize back to historical levels.

[Operator]

We have no more questions from the line. I'd like to hand the call back to management for closing.

[Thomas Joseph Patrick O’Leary, MD, CEO & Director]

Terrific. Look, thank you for your time and participation today. And look forward to seeing you later in the year.

[Operator]

Thank you, ladies and gentlemen. That does conclude the conference for today. Thank you for your participation. You may now disconnect your lines.