Iluka Resources Ltd

ASX:ILU

Earnings Call Transcript 2022-Q2

[Operator]

Thank you all for standing by, and welcome to the Iluka Resources Half Year 2022 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

And I'd now like to hand the conference over to your first speaker, Tom O'Leary, Managing Director and Chief Executive Officer. Thank you. Please go ahead.

[Tom O'Leary, executive]

Hello, and welcome. Thanks for joining the call. Adele Stratton and Luke Woodgate are with me here in Sydney this morning to discuss Iluka's half year results. We also have Matt Blackwell on the line from Perth.

It's been a busy period for the company. We've successfully completed the demerger of Sierra Rutile. We've made good progress on our diversification into rare earth, and we continue to progress our internal growth pipeline. The half year results demonstrate the strength in our business with pleasing operational and financial performance. We've continued to deliver pricing traction across our product suite with expanding margins despite the inflationary backdrop.

On safety, our serious potential injury frequency rate has fallen, which is pleasing, but our increased total recordable injury frequency rate is an area of focus going forward. Against a backdrop of global macroeconomic and geopolitical uncertainty, mineral sands markets continue to be characterized by tight supply. Reflecting these conditions, Iluka's operational portfolio is configured at maximum settings. Both producer and customer inventories are low in industry production, which has been experiencing long-term grade depletion for some time, has been further tested by the war in Ukraine and challenges in South Africa. With few sources of new production coming online, these factors are driving customers to prioritize security of supply, and demand for Iluka's products continues to be strong.

Adele will now cover how these factors have translated to financial performance. Over to you, Adele.

[Adele Stratton, executive]

Thanks, Tom, and good morning, all. We've delivered a pleasing financial scorecard. Iluka achieved material increases in NPAT, revenue, EBITDA and free cash flow relative to last year. In fact, many of these metrics are record H1 results for the company. Most pleasing was the growth in our margins with the benefit of our sustainable approach to pricing clearly observable. NPAT was $369 million for the half, which actually exceeded the full year earnings from last year. However, we're not immune to the inflationary environment, especially increasing cost of fuel, consumables and labor. And as we said at the quarter end in July, full year guidance on cash costs of production for the group is expected to increase for the full year by $55 million.

Slides 6 and 7 in our presentation highlight the further strengthening of Iluka's balance sheet. We recorded a net cash position of $600 million at 30 June, and this includes the cash we contributed to Sierra Rutile on demerger, which was a total of $106 million, and that's inclusive of the USD 45 million contribution to a rehab trust. We also have significant funding capacity for our development pipeline over the coming years, both our multi-option facility agreement and the separate nonrecourse loan we have in place with Export Finance Australia to fund our rare earths business.

Our stake in Deterra contributed $20 million to earnings and we have received a $12 million dividend during the half. Given the timing differences between when a dividend's declared and paid, we are expecting to receive cash of $23 million, representing the H2 dividend just declared by Deterra in the second half, thanks to BHP's continued ramp-up of the South Flank development. This will be passed through in full to our shareholders. And while on dividends, we've declared a $0.25 per share fully franked dividend in line with our framework. That represents payment of 100% of cash flows received from Deterra, delivering 3 of those $0.25. We're also paying 40% of free cash flow from the mineral sands business, excluding the $106 million contributed to Sierra Rutile as part of the demerger.

So overall, a very pleasing financial results for the half. And with that, back to you, Tom.

[Tom O'Leary, executive]

Thanks, Adele. In parallel to delivering the result Adele just outlined, we've also made substantial progress on our strategic priorities. As you're aware, in April, we announced the final investment decision for the rare earths refinery at Eneabbe, Western Australia, underpinned by a risk-sharing arrangement with the Australian government, including that $1.25 billion nonrecourse loan. This positions us at the forefront of the global shift to electrification and a low carbon economy with a partnership we've agreed with the Commonwealth, mitigating risk in a way that recognizes the substantial contributions of both parties.

We awarded further EPCM contract in June and groundworks are set to commence shortly. We acknowledge this is a significant project for Iluka and have recently appointed a new project director, Kerrie Matthews, to Iluka's executive. I look forward to working with Kerrie, who joined us from BHP, where she was the deputy project director for the South Flank project and where she also worked with Fluor.

In addition to our rare earth diversification, we're progressing a number of mineral sands developments, and these are covered on Slides 18 to 21. By way of overview, synthetic rutile kiln 1 at Capel is scheduled to restart production in the fourth quarter, having been idle since 2009. This will deliver around 110,000 tonnes per annum of additional synthetic rutile into a tight market. The definitive feasibility study for Balranald is scheduled for completion by year-end. This development is focused on a new internally developed mining technology designed to access a high-grade ore body at a depth of around 50 meters with lower environmental impact.

Also scheduled for completion by year-end are the preliminary feasibility studies for the Wimmera and Atacama project. Wimmera is a large, potentially long-life zircon and rare earth development in Western Victoria with its rare earth being an attractive supplementary feed source for the Eneabba refinery. Atacama represents a potential extension to our existing Jacinth-Ambrosia operation in South Australia and the material source of zircon and ilmenite.

So as you can see, it's been a busy and productive period for Iluka, one that I think sets the scene for the company to evolve considerably over coming years. And with that, I'll open up the line for questions.

[Operator]

[Operator Instructions] Our first question comes from Paul Young at Goldman Sachs.

[Paul Young, analyst]

First question, Tom, is on the market. Firstly, start with zircon, have noted that maybe some of the smaller producers out there selling to China, such as the Indonesians and a few of the African producers or base producers, have seen a bit of a moderation in pricing recently around maybe the China property piece and demand outlook. Just curious around the sustainability of your pricing ore are maybe leading into the fourth quarter, I guess the sense I get is that you didn't push prices up as much as others. So therefore, you're better positioned, but just curious around how you're seeing China at the moment, and just any color you have on sort of those price retracement from other producers.

[Tom O'Leary, executive]

Yes. Thanks, Paul. Look, I might let Matt talk to some of the sectoral and regional dimensions, i.e., Indonesia, you touched on and so on and perhaps our approach to sustainability of pricing generally. But I thought before going into that, it might be just worth providing a bit of context around our perspective on the outlook more generally.

We're not oblivious to the fact that the world is an uncertain place at the moment, both from macroeconomic and geopolitical perspective. And there's a lot of talk around the uncertainties you mentioned in China. And there's also uncertainties in Europe and the U.S. What we've emphasized in our materials I think is really important to note is the supply side, both in terms of grade decline but also in terms of inventory levels. And we've put a lot of materials in the pack around inventory as well as disruptions to the supply chain.

And that's the key theme I think I'd like to leave you with today. We've had a really strong half and that was despite China property market concerns, which have really been a focus for the last year.

While there could be some softening from time to time as zircon sold out, as we've said in the third quarter, and in the titanium side, high-grade feedstocks production is also pretty much sold out for the half. In terms of what guidance we can provide at a high level, we can really only talk to what we're observing with our customers. And the key thing that we're observing is that they're seeking security of supply. That's the key thematic.

On China, in the property sector, you touched on that. China is continuing to push stimulus. And quite obviously, the property sector is a really significant component of the Chinese economy. In turn, the strength of that economy is mission-critical for China. But coming back a bit to where I started, the overwhelming theme in mineral sands continues to be around supply, as we've emphasized for a long time. It's not about demand. And in recent times, that supply side has been exacerbated by the war in Ukraine and the issues in South Africa. And that's, I think, where our focus should be.

South Africa is the largest supplier into the mineral sands sector. And across the world, we're seeing genuine concern around the stability there. And that, in particular, is driving an enormous focus on security of supply for all of our products with customers no longer prepared to accept that level of insecurity in their supply chains. They're really turning to look to reliable production from a reliable jurisdiction.

But Matt, I hope I haven't stolen all the answers. I mean it would be really, I think, useful for you to touch on Indonesia in particular, what you're seeing there. And maybe also, I know you asked about China, Paul, but I think there's some interesting dynamics playing out in Europe as well as at the moment. Matt?

[Matthew Blackwell, executive]

Yes, sure, Tom. Good day, Paul. Turning to the matter of prices, you've said correctly, some of the pricing has softened from record highs on the Indonesian. They were selling about USD 3,000 at the peak per tonne and on very small volumes, mind you. And those volumes have been curtailed this year by COVID. It's impacted the Indonesian suppliers quite significantly. And so they're more in the -- they've come off that and there might be around $2,400, $2,500 at the moment. And -- but the bulk of zircon that's being sold into China from the multinationals with the more consistent supply chain is in the range of $2,150 to $2,250 is probably the range where people are selling. And that hasn't come off. And in fact, customers are seeking stability in pricing as they enter the year.

What I would also say and to, I guess, echo a bit what Tom is saying is that all of our customers are still asking for more product. And so whilst there is this uncertainty and Tom talked about the property market in China, we are seeing continued demand for our product, particularly the premium zircon market.

And maybe one other thing that I could just point out just on China before I touch on -- I'll mention Europe and a couple of other places, we have [ a high risk ] exposure today to the pure ceramic sector in China than we did previously. So for example, in 2020, 50% of those zircon sand went to the -- through the opacifying process into ceramics in China, that's now 42% deliberately. So I think certainly less exposed to that sector if there was concern about that in the fused zirconia, and refractory sectors are continue to be quite stable, if not robust in China.

[Paul Young, analyst]

That's -- Matt, that's a really good wrap actually. I think it probably answers a lot of people's questions around the market. Can I just switch to the feedstock marketplace? Just 2 things on this. One is can I just confirm that the low double-digit price increase for the second half for retail is referencing the first half rather than a year-on-year change?

[Matthew Blackwell, executive]

Yes.

[Paul Young, analyst]

Okay. Excellent. That's great. And then second part before I move on. Lots of questions on the projects, but I'll just keep it to the market to now and round back. But on synthetic rutile, can you maybe just talk through the contracting strategy there, but more so around SR2 and SR1, was SR2 up for recontracting those volumes at the end of the year? And what are your thoughts around potentially pushing price parity between SR and retail this time around?

[Tom O'Leary, executive]

Look, before I hand over to Matt for an update there. Look, what we're seeing, Paul, is really strong interest from all of our suite of existing synthetic rutile customers as well as new synthetic rutile customers. Not all of the existing synthetic rutile contracts expire at the end of this year. There's a significant one that goes for many years yet. And Matt's working with customers and around the extent to which we see it as appropriate to put in place extensions or new contracts for remaining uncommitted synthetic rutile volumes in total, recognizing the aggregate of SR1 and 2.

But given the circumstances, there's a lot of benefit in staying merchant, as I touched on earlier, given security of supply issues. But nonetheless, we are engaging genuinely with our key and new customers. But Matt, I don't know if you want to add to that?

[Matthew Blackwell, executive]

Yes, Tom. Maybe just coming back to Paul's question on SR price parity with rutile. We sell -- we try and maintain and we look at a relative economic value when we sell, and we run REV models across all of our products and what value they can create for our customers by individual asset that they own. And so we're very mindful when we're selling SR to capitalize, I guess, on that knowledge and also make sure that we're getting what we think is a fair price for the value that they are receiving. And so it's not just going through rutile, but it's also against competitors' offerings as well.

And I'm very confident that we are achieving a premium to REV on our SR and rutile sales when you have a look at what else is out in the market, so on the pricing. Paul, does that answer your question?

[Paul Young, analyst]

Yes. No, that's helpful. Listen, that's a lot on the market, so I really appreciate it and I'll pass the call.

[Operator]

Our next question comes from Rahul Anand of Morgan Stanley.

[Rahul Anand, analyst]

Look, first one is on the rutile side of things. So firstly, congrats on successfully demerging SRL. I mean -- but I did note that the price increase on the rutile side was more than 2x of synthetic rutile. And obviously, with the business now heavily tilted towards synthetic rutile as opposed to natural, I wanted to perhaps touch upon the project pipeline. And the one thing that I noted on Balranald was that previously you were saying FID by the end of this year, and now it says DFS. Is there a change here that we should be aware of, Tom?

[Matthew Blackwell, executive]

No, I wouldn't...

[Tom O'Leary, executive]

Yes, go ahead, Matt.

[Matthew Blackwell, executive]

Yes. Rahul, I wouldn't -- I think Tom is going to say I wouldn't read too much into that. And if you actually read the 4D, I think the language is pretty consistent with what we've said previously that fourth quarter, we've always said the fourth quarter. And in terms of the talk between rutile and SR -- sorry, this sort of the more weighting to SR, I think what you can see a little bit of in the rutile contracts, first of all, there was a renegotiation. Or that the rutile contract for it, SRL, I think people would know came to an end at the end of last year. We had more rutile on spot this year out of Australia. We don't generally sell rutile on long-term contracts.

And the other thing, which is a positive, I believe, is that under the SR agreements, most of our volume is sold under these longer-term contracts, which have market mechanisms in them, which tend to lag the market. And so whilst it may not have been trying to face as big an increase in the first half of this year, those mechanisms will continue to operate. And as I said, lagged the market a little providing more runway going forward regardless of what happened in rutile or the market in general.

[Rahul Anand, analyst]

Okay. No, that's really helpful. And just keeping with the projects and rutile, I mean, Houston is obviously another project where you have rutile and ilmenite rich ore body. Can you perhaps remind us of the potential challenges there and why it sits behind Balranald, which is a new mining technology?

[Tom O'Leary, executive]

It's not so challenged as a whole. It's more where we're at in terms of the feasibility studies. We're at an earlier stage for Houston. It's not scheduled to finish, I think, Adele, until '23, sometime in '23.

[Adele Stratton, executive]

Yes.

[Rahul Anand, analyst]

Okay. Perfect. Look, for the second one, perhaps if we talk rare earths, we saw China increasing the quota a bit recently. I just wanted to touch upon and get your views on, I mean, whether you're starting to see or any sort of market participation in terms of diversifying the way supply and people actually being willing to pay extra for it. I mean have you had any initial conversations perhaps in the market? And do you think a bifurcation is possible in terms of the price sort of perhaps being different to what the China price might be for supply security, perhaps?

[Tom O'Leary, executive]

Yes, it's an interesting area of discussion, Rahul. We are, as you'd expect, having a range of conversations with potential end users and intermediaries. And so look, it's an open question. What I would emphasize is that there's certainly a high level of interest around diversification of supply. And again, security of supply for different reasons, but nonetheless, customers looking for diversification, the extent to which customers are prepared to pay a premium. I think that, that's -- I think it's quite likely, and we're seeing an interest in that.

I think customers inevitably want to understand what they're getting for that, and they want to see for example, some ESG certification in respect of the benefits they get from a Western supplier like ourselves.

So it's a pretty nascent area at the moment, but it will develop over the coming years. I mean given that we're fully funded for the refinery, the key point is that we're not in a major rush to put those contracts in place. We don't need to put contracts in place to get the project done, which is what many hopeful to giving away value and in a sense -- not giving away value because the projects may never eventuate, but we're not in that position. And so we'll be prudent about the steps we take in contracting our product.

[Rahul Anand, analyst]

No, absolutely. And I think the government regulations perhaps similar to the U.S., perhaps another reason for that supply bifurcation. That's my two, I'll pass it on.

[Tom O'Leary, executive]

Thanks, Rahul.

[Operator]

Our next question comes from Hayden Bairstow at Macquarie.

[Hayden Bairstow, analyst]

Just a question on the growth projects. Obviously, there's a lot of capital risks in Western Australia. I mean we're getting close to some decisions on these key projects. Just keen to understand your confidence in what capital assumptions you'll be able to put out later this year, just given where the inflationary environments are? And is the locations that you're potentially building these things in not as -- the issue is not as acute as what we're seeing in Western Australia?

[Tom O'Leary, executive]

Yes. Thanks, Hayden. Adele, do you want to take it?

[Adele Stratton, executive]

Yes. I was just going to say, obviously, we're, Hayden, going through those definitive feasibility studies at present, and hence, they factor in the market conditions at present as well. So that gives us a degree of confidence in terms of when we come out with the guidance for that capital that it's a fresh number unlike some of the projects that have had their results out there for a while. As you know, it's obviously different locations. Balranald, for example, is not in Western Australia. So yes, that will come into play as well. Matt, I don't know if there's anything else you wanted to add there.

[Matthew Blackwell, executive]

I think, Adele, that the key point you've made, and it's important for people to take away is that as these studies are live today, we've got the benefit of and the people who we're partnering with to do the studies, are building assets around Australia or in every jurisdiction at the moment. And so we're getting live feedback on material costs, labor costs and availability of both of those resources. So as Adele said, it's a live number. And when we do go to the Board with investment decisions, we're able to do so with really up-to-date and relevant information.

[Hayden Bairstow, analyst]

Okay. Great. And the second one is just on the rutile market. I kind of noted your commentary around the low level of inventory for some of the key customers. But I mean, given particularly one of them the behavior in the last couple of years, I mean, are you expecting to see a big inventory build? Or are you more comfortable now that we are going to see these low level of inventories may well be how those customers continue to operate going forward?

[Matthew Blackwell, executive]

Yes. Look, on the high-grade feedstock, there's a couple of things to note. One, and it's in our slide pack, is the low level of inventory that we have. And that -- I think that's pretty characteristic across the sector on the titanium feedstock side, particularly on the high-grade feedstock. So starting at the mine, the miners don't have much material. Moving down to and moving up or downstream to the pigment producers, again, not significant amounts of feedstock. They're probably not as lean as they were at the beginning of the year or at the end of last year, but still inventories are very low.

And you'll see Kronos' inventory of days sales and they're quite low compared to historic periods of high demand. And what I'm hearing from customers, and as recently as yesterday, is that the demand for high-grade feedstocks will continue to be strong. And that's driven by a couple of things.

So one, the pigment market has changed significantly over the last -- if we want to go back to over the last decade and more importantly, over the last 3 years. There's been this introduction of let's call them value stabilization contracts, each pigment producer calls it something different. And as we understand that some of the big multinationals will have up to 70% of their volumes under these types of contracts, right, so, and these contracts are a quid pro quo. They guarantee the supply during difficult times like we've had, and then there's an offtake.

And there's sort of a -- there's the other side of that coin that they will continue to buy from these people who we sell to through the cycle. So the market is much -- it's moved away from this sort of ridiculous 90-day pricing options that characterize the pigment market with no volume commitments 10 years ago.

These multinationals, I think, are far more disciplined in the past -- than in the past. They've got strong balance sheets. Most of them enjoy the benefits of good margins, so they're stronger than where they were. So you don't need to have Christmas sales, for example. And there are also -- most of them are listed now, right? So they're investor-focused. And their investors are focused on their earnings and earnings multiples. So all those contribute to a more disciplined, and I think, more stable industry in the pigment market.

And the other thing, I think, that's important to note, particularly in our sector, and where we play, which is in the high-grade chloride market, there's two interesting, well, a couple of interesting dynamics at the moment. One is you will have heard about high chlorine costs, particularly in the U.S. When chlorine costs are high, that sort of pushes you towards using high-grade feedstocks because you use -- you lose less chlorine through waste. So that's one thing. And when people want to continue to produce, they're going to -- at the lowest cost at the moment, they're going to want high-grade feedstocks.

And in the chloride market more generally, Tom mentioned some of the uncertainties in Europe, and everyone -- I'm sure everyone on this call knows well that gas prices are up in Europe, and that means electricity prices are up. Well, a sulfate pigment plant consumes -- or where sort of estimate it's between, I think, 3 and 4 times the amount of electricity per ton of pigment produced in a chloride plant. So if you're chloride only, you're in a pretty good position and if you've got chloride and pigment plants in that environment or you're going to run your chloride plant. And that all goes well for Iluka, I think, because of what we supply and our high-grade mix of SR and rutile.

[Operator]

Our next question will come from Peter O'Connor at Shaw and Partners.

[Peter O'Connor, analyst]

Matt, you left your last answer with a question. European mix sulfide chloride, what is that in terms of tonnes or percent?

[Matthew Blackwell, executive]

Good question, Peter. Off the top of my head, I'm not going to -- I guess it's about -- sorry. It's about 50-50, but I don't have the exact number. I mean you've got -- so Venator have a mix of sulfate. They've got a couple of sulfate plants in sort of in -- or 3 in Europe, including 1 in Italy, which is partially shut down at the moment. And they've got their main chloride plant at Greatham, which is a customer of ours. And then Tronox have a mixture of plants in Europe and or across the globe. And Kronos, also a European-based customer, 2 chloride plants, 1 sulfate. It's about -- probably about 50-50.

[Peter O'Connor, analyst]

And what's the proportion of European pigment production versus rest of world?

[Matthew Blackwell, executive]

Well, pigment consumption is about 1/3 Europe, 1/3 China, 1/3 Americas. Pigment production, I'd have to come back to you on that. I just can't remember off the top of my head, and I don't want to give you the wrong number.

[Peter O'Connor, analyst]

Because it goes to the point I'm trying to make about that split between the two European gas prices is fairly important takeaway. If you could, that would be great. Adele, to Hayden's question about CapEx, I totally get you guys are so focused on prudent and disciplined and you do your math right. So the numbers you'll come out within will be perfect, but I think what -- to Hayden's question, what is the pricing differential you're seeing period-on-period for when you started looking? We hear across the industry in WA, 20%, 30%, 40%. Is that the ballpark you're in?

[Adele Stratton, executive]

Yes, it's a really good question. Peter, it depends on from what starting point you're talking to. What I can really talk to is some of the recent cost increases that we've experienced. So you can see in terms of the cash production costs, a lot of that is driven by fuel. So fuel into projects getting stuff delivered, et cetera. I think in terms of that general consensus of what the market is seeing that 20% to 30% for some projects wouldn't be out the ballpark. But we haven't guided previously some of those capital numbers. So there's no starting point on which people to really determine the change.

[Peter O'Connor, analyst]

Okay. And the dividend, you talked specifically about the timing of the Deterra dividend. Just you sound like that was very nuanced. So the dividend that you just announced or declared that will include just the dividend received during the period. Is that what you're trying to speak to?

[Adele Stratton, executive]

Yes, that's exactly right. So we got in 12, so we'll pass out 12. So there's just a timing difference. Deterra obviously just came out with their results last week. They've had stellar results as a result of that ramp-up in sales line, which means they've declared a much stronger dividend. And again, that will flow through to us, in essence, doubles in the second half. So we've got line of sight of what that cash is coming in. And hence, shareholders have got line of sight of what that component of the dividend will be for the second half.

[Peter O'Connor, analyst]

Got it. And lastly, Matt, there's probably one person on this call who doesn't get the acronym REV. Do you mind explaining it to them?

[Matthew Blackwell, executive]

Sorry, relative economic value. So when we assess our products and the value that it can create for us and our customers, we look at things like TiO2 content impurities. And we look at our customers, for example, the thermodynamics of their plant waste disposal, all those sort of things because every -- you look at slag, it's got a lot more waste than say SR. And so there's a cost to dispose that. There's a cost to chlorinate it first. And so when we price our products, we consider all those factors when we engage with, Peter. As I said, we do that on an individual plant basis to make sure that we're capturing the appropriate amount of value for our product.

[Peter O'Connor, analyst]

And Tom, just lastly on security supply, the commentary you talked about in the first question of the answers. You talked about Africa, I guess, you're specifically referring to South Africa. Where does rutile within the African construct of risk and that global need for security of supply versus a country like Australia?

[Tom O'Leary, executive]

Yes. Look, Peter, I think where Sierra Leone sits is probably a question best directed at Sierra Leone management. But you know our experience there has been relatively predictable. It was relatively predictable in terms of a range of things, a range of factors, which have become completely unpredictable in South Africa from government administration to importation, export logistics. From a range of perspectives, it's, in my opinion, a far more attractive jurisdiction. But it's really a question best directed at the Sierra Rutile management, I think.

[Operator]

Our next question comes from the line of Al Harvey at JPMorgan.

[Alistair Harvey, analyst]

Just one from me. Just wanted to get a bit of clarity on the synthetic rutile kiln 1 restart. You've noted that you'll be taking both internal and external ilmenite fee. I was wondering if you'd be able to break down for us the relative split and if you're able to speak to the terms of the external feed. And then maybe just a follow-up, will that shift to all Iluka feed beyond the initial 18- to 24-month campaign?

[Adele Stratton, executive]

Yes. Al, it's Adele. No, I'm not going to provide any further clarity in terms of what that split is. We've got a number of sources that feed that, so really the focus is on the 18- to 24-month period. And as you correctly note, in terms of post that period, the focus will almost definitely be in terms of securing further supply. We've got a pipeline of projects that have got ilmenite in them. And hence, you should expect that would be a focus.

[Operator]

Our final question comes from the line of Paul Young at Goldman Sachs.

[Paul Young, analyst]

A follow-up question, Tom, on the rare earths refinery and just the feed strategy around the rare earths refinery. You have a fair bit of time to sort of work through project studies with respect to your own feed versus third party, et cetera. But to start with, I'm just curious around any other Phase 2 and production of concentrate and what the strategy will be their starting point. Have you made a decision whether you'll produce at a full run rate there during construction period, stockpile and material with the aim of filling the refinery to full capacity from day 1?

[Tom O'Leary, executive]

Yes, we have, Paul. What -- I guess, progress we didn't talk much about it, but the EP2 is -- has been fully commissioned and it can produce product on spec -- has produced product on spec and at required rates. So -- and so we're very pleased with that. It's been a really smooth process, and the team has done a great job. But the question that arises, as you point out, what do you do with that facility? Do you build a stockpile or what? At the moment, given we've got plenty of time, we're not planning on building a stockpile. Instead, what we've done is we're using that facility to process a range of what would otherwise be waste streams to eke out a little bit of ilmenite and zircon for the time being. So we might do that for the next couple of years. But at any time we could change course and start building a stockpile, but we're not planning on doing that at this stage. There's no need.

[Paul Young, analyst]

Got it. Yes. Okay. That makes sense. And then just on the decision time and studies around Wimmera versus third-party fees. And again, you've got a fair bit of time to make these decisions and whether push out with a feasibility study on Wimmera, et cetera. But when you do these studies, what are you trying to solve for here? Is it maximizing NPV for Iluka? Or is it maximizing returns? I'm just trying to think about how you think about decision on Wimmera with obviously a significant capital decision on that project if you proceed versus, say, topping up the refinery at some point with third-party feed, just the approach to that would be interesting.

[Tom O'Leary, executive]

Yes. Look, it's an interesting question. I think we're looking at both overall NPV and nearer-term returns. We don't see those as necessarily mutually exclusive in almost all circumstances. So what I'd say is that we remain very confident about where we're at with Wimmera. And we're also, as you know, exploring more carefully the rare earth credits that come with our internal project portfolio because we can now put a value on the rare earth monazite xenotime credits that come from all of our internal mineral sands projects.

But we're also -- and it's part of the NPV discussion you touched on. But we're also looking at procuring feedstock for the long term. We want to have this refinery going at maximum capacity for many decades to come. And so we're interested in a range of third-party feeds and deposits. So we're exploring that as well. But we'll make any material announcements in due course, Paul.

[Paul Young, analyst]

Just a final one maybe for Adele. When you start spending on the refinery, do you start drawing down on the government debt?

[Adele Stratton, executive]

Yes, Paul, that's exactly right. So there'll be a little bit some money that would deploy without drawing down just through that process. But yes, when you're starting to draw down, it's in that ratio that we've talked about in terms of the 1 for 3, if you like. So we put in $200 million of equity, and they put in the $600 million after that. It all comes up to 100% from the ESA, so yes.

[Operator]

And we'll just take one final question from Glyn Lawcock at Barrenjoey.

[Glyn Lawcock, analyst]

Tom, I know you've said you're not oblivious to the world issues and supply is tight. But just wondering maybe if you could share some thoughts. I mean we are going to see like paint producers talk about DIY being perhaps a bit lower now in the U.S. Kronos called out on their call, they're seeing pigment demand weakness across Europe and China. I understand supply is tight, but just trying to appreciate like your customers want your product today, because their customers want it today, but it does feel like things are staying to soften downstream.

When does it start to come back up to bite us? Like what is the lag? Because when demand goes down, it seems that always seems to hurt no matter how high the supply side is. So it just feels like Matt maybe has some more comments to share, if he could.

[Tom O'Leary, executive]

Yes. Look, he may do. We'll come back to -- I'll pass it on to you, Matt, in a moment. But Glyn, for all the commentary that you draw on, for example, the paint players and talking about DIY, at the same time, they're saying that professional painters are experiencing a backlog. So even at the pigment and in the paint tin, the products that's at that end of the supply chain, there's a shortfall in product. Our customers in the U.S. have actually had to reduce production of pigment at a time when pigment prices are extraordinarily strong because they could not procure adequate feedstock.

Matt's talked about chlorine issues and so on. Glyn, it's about supply and demand. And what we're seeing is a supply crunch. And I've talked about that ad infinitum. Really, what we're seeing very clearly from our customers is a focus on security of supply. The overwhelming majority of feedstocks come out of South Africa. And that's a position that our customers are no longer prepared to expose their shareholders, too. So I don't know, Matt, do you want to add anything to that, but I'd just say that the outlook for high-grade feedstock producers like Iluka in Australia continues to be pretty robust.

[Matthew Blackwell, executive]

Yes. Tom, I think you're right. The commercial and the pro paint in Europe is certainly -- now, I heard a figure the other day, there's a 9-month backlog on pro paint. But I think other sectors to think about, too, is welding when infrastructure kicks in and stimulus drives infrastructure, you have a demand for welding consumables. So that I think, sits all as well for our rutile set or the demand for rutile.

Titanium slag, there is a significant uptick in the demand for titanium metal on a backlog of aircraft orders. Small sector granted, but an important sector and one that almost exclusively uses high-grade feedstocks. And so we're getting inquiries from producers of titanium slag for our SR that haven't bought it before because, again, as Tom said, they want security supply. That's on the feedstock side. And then on -- sorry, yes, titanium metal to produce. Yes, correct. And so we're seeing that continued pull forward. We've got significant interest in our SR and SR1, as Tom said, I think, reflecting both a genuine demand, underlying demand, which is supported by these multinationals having built up a far more sort of stable contracting base and demand base for their products.

And the zircon industry is going, as we said, we're getting -- being asked to pull forward shipments. I mean, for the first time in our own marketing, I think, one of our warehouses is empty. So it's a pretty interesting dynamic at the moment. And just while I got you, I know you didn't ask the question, but rocky -- Europe is about 1.2 million or 7 million tonnes of global pigment supply. And if you look at that in a western context, that's 1.2 million of about 3.3 -- sorry, about, yes, 4 million of Western supply in total. So just over 1/3 of Western supply that's trading. I don't know if that answers your question there, Glyn?

[Glyn Lawcock, analyst]

No, it does. It does. It's just an interesting debate, I guess, when demand starts to fall versus supply. Maybe just 2 quick follow-ups. Do you have a sense or could you let us help me understand how much of your feedstock goes into, say, the pigment market now versus the metal market?

[Matthew Blackwell, executive]

Yes. Look, I don't think we've actually not sure that we've actually gone and shared this split, but we would be...

[Adele Stratton, executive]

Yes, so that's right, I think post the SRL demerger, Glyn, that composition will change and with the SR1 restart coming on, so we haven't got an updated perspective there. We can come back on that.

[Glyn Lawcock, analyst]

That's fine. And then maybe just a final one. If you then look at the relativity, say, of your rutile pricing versus what's happening on the pigment pricing side, do you feel you've extracted everything you can now versus where the pigment price is? Or is there more to extract even if pigment prices were to stay flat?

[Tom O'Leary, executive]

Yes. Again, Matt may have a comment. But Glyn, it's a matter of supply and demand. We've talked about what the rutile pricing and SR pricing outlook is for the second half, and we'll continue to provide intermittent updates on that, but I think that's probably it. But thank you for your interest, Glyn. I look forward to reading about your thoughts.

Okay. Look, and I think there are no more questions. So look, thank you all for joining the call. A strong first half for Iluka. Appreciate your interest. Bye for now.

[Operator]

Thank you so much. This does conclude today's conference call. Thank you all for joining. You may now disconnect.