Iluka Resources Ltd

ASX:ILU

Earnings Call Analysis

Stable Pricing Amid Strategic Inventory

The company's recent strategy mirrors measures taken in 2020, which successfully stabilized prices by adjusting supply. Current inventory values should be considered in the context of higher unit costs rather than volume, emphasizing a disciplined cash cost management. Notably, this quarter's pricing remains constant compared to the last, indicating an inclination towards stable revenue streams.

Iluka Prioritizes Safety and Market Discipline Amidst Productivity

Iluka Resources commenced its half-yearly earnings call by highlighting a remarkable enhancement in worker safety, reducing its total recordable injury frequency rate from 6.9 to 3.9 compared to the previous year. This achievement signals a dedication to employee welfare and operational excellence.

Strategic Production Pause for Synthetic Rutile Amidst Market Uncertainty

In a response to short-term market ambiguity, Iluka has strategically decided to halt the production of its smallest synthetic rutile kiln, SR1, for four months starting from October. This pause is aligned with the company's commitment to generating value rather than volume. Existing contracts averaging 200,000 tonnes per annum of synthetic rutile are to be fulfilled by the main SR kiln, SR2, thereby avoiding excess inventory and instead focusing on scheduled maintenance, which will also result in the saving of over AUD 4 million in external service costs. A planned restart in late January is expected to synchronize ideally with market fundamentals.

Navigating Challenging Zircon Market Conditions with a Focus on Value

Iluka reported downtrends in zircon sales, which they attribute to reduced underlying demand and a lack of significant restocking by customers. Despite the negative impact of slowed activities in China's property sector, the company chooses not to lower product prices, maintaining its emphasis on the intrinsic value of higher-quality zircon. With minimal inventory at customers' end and the prospect of being able to respond to demand improvement or supply disruptions, Iluka is well-prepared for market fluctuations.

Investing in Rare Earth Metallization to Enhance Competitive Edge

A major leap forward for Iluka is the commencement of a feasibility study into rare earth metallization. This venture, if actualized, positions Iluka as a pioneering force in a limited global space. An in-house metallization facility would remove dependencies on external providers, predominantly based in China or Southeast Asia, offering a considerable competitive advantage and potentially expanding Iluka's customer base. This aligns with the company's goal to furnish customers with sustainable, traceable, and compelling product offerings.

Robust Financial Position Anchored by Revenue Certainty and Strong EBITDA Margin

Despite market unpredictability, Iluka enjoys a commendable net cash position of AUD 343 million and has sizable funding arrangements in place for its rare earths refinery and mineral sands project pipeline. Sales volumes have declined, yet an increment in average prices has led to a revenue of AUD 712 million. A healthy EBITDA margin at 50% showcases the company's resilience, although cost of goods sold has seen an increase due to higher-cost inventory flowing through. A consequential AUD 55 million free cash outflow, primarily due to a large tax payment for the 2022 financial year, has not deterred the company from distributing a dividend of AUD 0.03 per share.

Eneabba Project: Advancing Strategically Despite a Challenging Construction Environment

Iluka conveyed an update on the Eneabba project, emphasizing its strategic relevance as a foundation for a new, long-lived business within the company. The front-end engineering and design (FEED) is due to conclude in late 2023, and capital expenditure guidance for the year has been adjusted from AUD 270 million to AUD 150 million. The change accommodates for a delay in ordering long-lead items and allows for comprehensive design optimization efforts. For instance, the decision to include a CO2 absorber, at an additional cost of AUD 20 million, contributes to both long-term cost savings and significant CO2 emissions reduction. These operational efficiencies and value optimizations are key to Iluka's forward-thinking approach amidst the challenging post-COVID-19 Australian project development landscape.

Earnings Call Transcript 2023-Q2

[Operator]

Hello. And welcome to the Iluka Resources H1 2023 Results Teleconference. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded.

It is now my pleasure to introduce Managing Director, Tom O'Leary.

[Tom O'Leary, Managing Director and Chief Executive Officer]

Good morning and welcome. With me are Adele Stratton, Matt Blackwell and Luke Woodgate.

It's been a busy half for Iluka across our operations, markets and development pipeline. I'd like to [indiscernible] safety performance at the outset. We delivered a significant improvement in our total recordable injury frequency rate from 6.9 in 2022 to 3.9, reflecting a concerted effort around musculoskeletal, hands and finger injuries.

Adele will cover our financial results in a moment, but before she does, I'll outline the two key announcements we made as part of the materials we've released today.

First, we've announced that production at our smallest synthetic rutile kiln, SR1, to be paused for four months from October. That's a deliberate decision in response to uncertain market conditions in the short term.

This course of action is very consistent with our broader approach to prioritize the value of what we produce and to demonstrate genuine market discipline. We're very fortunate to have a premium swing production asset like SR1 in our portfolio and we'll use it to match the market.

We have on average 200,000 tonnes per annum of synthetic rutile contracts that are under take or pay contracts over the next four years, and we can satisfy that demand from our main SR kiln, SR2.

Rather than build excess inventory, we'll pause production and leverage the skilled labor we have operating SR1 to execute the scheduled major maintenance outage for SR2.

Utilizing our own people will save over AUD 4 million in external service costs without managing maintenance outage, which will now take place over four months coinciding with the production pause at SR1.

The restart of both assets in late January reflect the supplier fundamentals for high quality hybrid products produced in Australia. So, just as we're well placed to navigate the present environment, we'll be equally well placed to respond to an improving environment.

Turning to the zircon market, we have seen reduced sales in July and August. This is a function of the lower underlying consumption, along with customers not looking to restock to anywhere near normal levels of inventory, and hence overall demand is down.

As has been widely reported, lower activity in China in the property sector, in particular, is currently a headwind. While our direct exposure to China demand for our products in aggregate has reduced over the past few years, activity levels there are a driver of global demand more generally.

Again, we're focused on respecting the value of the higher quality material we produce. Our view is that the dropping price will not stimulate underlying assumption nor restocking, and hence we're not seeing a compelling reason to reduce prices at all.

While the supply side of the zircon market is not robust, dominated as it is by South African production, at Iluka, we are expected to sell less than we produce in 2023. We expect to build some inventory. But our view is that inventory at our customers are minimal, and so we will be well placed to respond, whether that's an improvement in demand or to further disruptions to supply.

Our other key announcement is that we've commenced a feasibility study into rare earth metallization, the next stage of value addition following rare earth oxide production. If developed, this will be a strategically significant asset, one of very few globally. [indiscernible] the vast majority of downstream rare earth customers [indiscernible] through metallization facilities in China or Southeast Asia. Eliminating the need for this by having our own metallization facility would provide a key competitive advantage and broaden our potential customer base.

Alongside our product offering, including sustainability credentials and traceable product provenance, metallization is a compelling customer offering and one that we're keen to highlight in building a reliable and transparent supply chain.

Given the supply chain is evolving rapidly as a result of the imperatives of governments and customers alike, Iluka is at the forefront of this evolution and we'll continue to be both open minded and disciplined in considering the broad range of development options made possible by our rare earths business.

With that, I'll hand over to Adele to take you through the financials.

[Adele Stratton, Chief Financial Officer and Head of Development]

Thanks, Tom. And good morning. I'll start by reiterating Tom's opening comments that while the global economic outlook is uncertain at the moment, Iluka is well placed. We have a high degree of revenue certainty in our titanium feedstock business with production from SR2 effectively contracted through to the end of 2026.

We're in a net cash position of AUD 343 million at a group level. We have a non-recourse loan agreement for AUD 1.25 billion to fund our rare earths refinery and undrawn commercial debt facilities of over AUD 500 million to fund our mineral sands project pipeline. By any measure, this is a strong position.

Turning to our reported results, sales have been impacted by lower volumes, while prices on average were higher during the period, resulting in revenue of AUD 712 million. Our EBITDA margin remained very healthy at 50%. Unit cash cost of production [indiscernible] flat, demonstrating cost discipline in this inflationary environment. And unit cost of goods sold increased as our higher cost inventory wade through the P&L.

The final tax payment of AUD 127 million for the 2022 financial year impacted free cash flow in the half, resulting in a AUD 55 million free cash outflow.

In line with our framework, we've declared an interim dividend of AUD 0.03 per share, which passes through the cash receipts from our 20% holding in Deterra Royalties.

With that summary, Tom, I'll hand back to you.

[Tom O'Leary, Managing Director and Chief Executive Officer]

Thanks, Adele. Before opening up to questions, I just want to make a few comments on our progress at Eneabba. As we've noted, our FEED is scheduled to conclude in late 2023. When that's done, we'll obviously announce anything material that comes out of it. Given that timing, I'm not going to be drawn further on CapEx expectations today. And for the avoidance of doubt, we're not looking to guide you to a higher or lower CapEx number.

Clearly, it's a challenging environment with Australia to build projects in the period post COVID-19 in terms of labor, supplies, and general levels of activity. And we've all seen this reflected in the capital increases associated with other companies' projects.

We're obviously alert to this environment, and we're seeing a range of outcomes in our own project at Eneabba. I'm not going to cherry pick one or two positive or negative examples because it's too early for that. We haven't issued too many long lease contracts and expect that activity to ramp up in the fourth quarter.

You'll have seen that we've altered CapEx guidance on Eneabba for 2023 calendar year from AUD 270 million to AUD 150 million. And that reflects that we're a few months late on FEED and we haven't placed with many long lead orders at this point.

While our schedule is obviously important, I'm not entirely unhappy about that, as we've used the additional time well. I'm encouraged that the FEED process has been very thorough, and as noted in the presentation, we're finalizing value optimization measures, as well as operational efficiency improvements.

An example of the latter is we've chosen to incorporate a CO2 absorber at what will inevitably be a higher upfront capital cost of around AUD 20 million. Following originally planned build and operate arrangement with an external supplier of carbon dioxide, we've subsequently determined that, if we incorporate this absorber, we can reduce operating costs by up to AUD 5 million per annum and reduce our CO2 emissions by approximately 13,000 tonnes per annum. So while we're still finalizing this trade off, we're likely to go down that path.

This is just an example of the sort of operational efficiency improvements we're incorporating. You can imagine that there are also a range of value optimization, and we're diligently working through them, and look forward to providing an update at the end of the year.

As I said before, the Eneabba refinery is a strategic infrastructure asset and the foundation of a new, multi-generational business for Iluka. We're focused on ensuring that scoping and design support long term cost competitiveness.

As you know, Eneabba is a brownfield site and this is certainly an advantage from a cost and schedule perspective, given we already have existing infrastructure. A brownfield site is [indiscernible] as ground preparation and earthworks are particularly important as we approach final form to commence refinery construction.

We've now completed all excavation and are currently backfilling. We expect site preparation to be completed by the end of October. We've already upgraded the existing accommodation camp and we've commenced construction of the new operations camp, which will be complete by the end of the year.

So all in all, and notwithstanding the industry backdrop, I'm pleased with the progress we're making.

And with that, we look forward to your questions.

[Operator]

[Operator Instructions]. Our first question comes from the line of Paul Young with Goldman Sachs.

[Paul Young, Goldman Sachs]

Tom, thanks for the comments on and the update on the mineral sands market. It does appear that there's been a bit of a change certainly in the last four weeks, particularly in the zircon market, and just looking at some of your peers out there, particularly Tronox and some data from out of South Africa around pricing and just commentary around, I guess, near term demand and pulling back on sales volumes sort of matches what you've been talking about, but probably what doesn't is around the dropping of the price, which you said won't help demand.

And I think probably the other piece is that zircon millers in China, they're not making money at the moment based on the renminbi sort of US dollar exchange rate. That's probably a function of demand as well. So I guess at the moment, how do we think about the second half difference with respect to your sales mix ZIC versus premium? And also, are we going to see you offering some rebates, for example, to sort of move some volume?

[Tom O'Leary, Managing Director and Chief Executive Officer]

I'll hand over to Matt in a moment to talk through some of those points you asked about. But I think it's important to reflect first on what has changed really and what hasn't. Clearly, there's been some softening in China, and that's going to change – and we've all heard a lot about property markets in particular. We need to remember that our supply into the Chinese ceramics market is most impacted by that softening. It's really probably more than halved over the last three or four years to around 16% of our zircon sand sales.

But what hasn't changed is really the broader thematic long term around the zircon and mineral sands markets more generally. And in that respect, we're seeing depleting mines, the cost of new mines being higher, operating costs being higher, and the geology of new deposits being dominated by poorer quality, lower grade deposits for exploitation. So some of those broader thematics around mineral sands haven't changed.

But with that, I'll hand over to Matt to go through some of the details you mentioned, Paul.

[Matthew Blackwell, Head of Major Projects and Marketing]

Just following on from what Tom said, we embarked on a deliberate approach to the geographical diversity or greater geographical diversity with our product offering a number of years ago. And over the last three to four years, the sand that we sold in China, as Tom said, has dropped from 60% of our volumes down to 40%. And also, our exposure to the ceramics industry in China has dropped from circa 55% of our product offering to approximately 40% over a similar time frame. [indiscernible] as Tom said, only 16% of our zircon sand sales are linked to the Chinese ceramic market.

And what we have seen, and you've probably heard this as well, tile production in China continues to be a bit subdued, primarily due to the soft domestic – softer market in the domestic real estate market. In response, some tile makers are limiting the use of a pacifier derived from premium grade zircon in favor of pacifier made with low grade zircons. But this comes with a quality trade off and we don't believe that to be sustainable. We're encouraged by the fact that European ceramic producers favor a pacifier derived from premium products, as does the American market. It uses exclusively our premium grade products.

So over the short term, we're likely to see some continued use of these low grade products in China. But how sustainable that is, we'll find out. But we don't think it is very sustainable.

What I would say, you asked about mix, we have the ability and we've talked about before that we have both zircon sand and zircon in concentrate. Zircon in concentrate goes exclusively into that Chinese market. We would expect to see a higher proportion at this stage in the market of ZIC and that gives us that flexibility. Others only can sell ZIC and others only have [indiscernible] offerings. So as we unwind our stockpiles at Narngulu, which we've talked about, that gives us an opportunity to supply to that market today.

And you also talked about pricing and rebates, I think as we have done for a number of years, we'll be prioritizing value of our products. Iluka's sustainable pricing approach has served us well. It wasn't that long ago, people were asking why we weren't pushing harder. We were deliberate then, just as we're being deliberate now, and our prices won't be dictated by small volumes from minor producers, or for that matter, others that have a different pricing approach to us.

And in terms of rebates, what we have seen, what we have been able to do is, whilst we don't do – no, we're not talking about rebates per se, what we have seen is the ability with freight rates to come down to remove some of the freight surcharge that some of our customers have been seeing in some geographies, in line with the normalization of global shipping.

[Paul Young, Goldman Sachs]

Tom, can I maybe switch over to the rare earth refinery and you've stepped through – the fact you're going through FEED, is a little delayed and there's a few scope changes there, in additions to the flow sheet, given one example of the AUD 20 million capital number on one of those processing units. So I think there's a few moving parts there, understand that.

A couple of questions specifically around – first of all, within the capital estimate you provided when you approved the project, you had AUD 400 million or AUD 470 million of sort of other costs in there, indirect costs, owners' cost. Can you maybe break down what of the AUD 400 million to AUD 470 million is actually contingency in the base case?

[Tom O'Leary, Managing Director and Chief Executive Officer]

Well, Paul, not really. We haven't disclosed it today. It's certainly [indiscernible] AUD 470 million quite obviously, but we haven't broken it down and I don't prefer to break it down at this point.

[Paul Young, Goldman Sachs]

With the delayed FEED, Tom, I presume that might push out first production, can you maybe just talk through potential impacts to first production? And then also, just the timing around that, does that possibly impact the third-party FEED discussions?

[Tom O'Leary, Managing Director and Chief Executive Officer]

No impact on third party FEED discussions. But on the schedule, the FEED will – obviously, as part of those outworkings of the FEED towards the end of the year will be a detailed, optimized schedule. And, obviously, timing and schedule are important to us, as well as CapEx. And so, that optimized schedule that we'll be doing at the same time that there's a possibility, obviously, of some delay, but constructability and construction sequencing are and have been key areas of focus for the team as we move toward completion phase. But, again, I wouldn't want to guide you that there's going to be a delay on that score or not in very much the same manner, as I mentioned around CapEx.

[Operator]

And our next question comes from the line of Levi Spry with UBS.

[Levi Spry, UBS]

I think there'll be heaps of questions on market. So just sticking with the projects for a bit longer. Adele, can you just remind us of the mechanics of the funding structure or any other in the case that the full overrun is used? What happens for the next, any extra costs beyond that?

[Adele Stratton, Chief Financial Officer and Head of Development]

In terms of the funding structure, we've got the AUD 1.25 billion loan from ESA. And also you'll recall that Iluka contributes AUD 200 million in equity and there's a certain ratio in which we contribute that equity, being 3 to 1.

In terms of if there is any potential cost overruns, the facility is actually silent in that regard. So, that would be something [indiscernible].

[Levi Spry, UBS]

So, really should know what will happen with FEED later this year. I guess on the other project, Balranald, so the CapEx spend there was going a little bit slower. Can you just give us an update on how things are going there and what's driving that? What happens next?

[Matthew Blackwell, Head of Major Projects and Marketing]

Yeah, really pleased with how that project is going at the moment. We've appointed Wally [ph] as the EPCM. Various other subcontractors working at pace. Project, we started ground disturbance actually ahead of schedule. And so, there's nothing to report other than it's on track and moving forward very deliberately and in line with plans.

[Levi Spry, UBS]

Spend is a bit slower, though. What's driving that?

[Adele Stratton, Chief Financial Officer and Head of Development]

[indiscernible]. So I wouldn't read anything into the minus – reduction in that forecast CapEx for 2023 [indiscernible].

[Levi Spry, UBS]

Maybe one on market sense. So what would you need to see to turn SR1 back on in January.

[Tom O'Leary, Managing Director and Chief Executive Officer]

I'll hand over to Matt perhaps to talk about SR and talk to any feedstock markets in a moment. But we're not needing anything to turn back SR1 in January. That's very much our plan to turn SR1 back on in January. And that is because of the supply and demand fundamentals for higher grade feedstocks. In general, Matt and his team are seeing positive signs around SR offtake in 2024 [indiscernible].

[Matthew Blackwell, Head of Major Projects and Marketing]

Levi, I think one of the important things to remember is SR is just not a feedstock pigment production. In the past, we've had supply limited – or limited to spongy metal. But we've got other customers, new customers now, planning commercial trials or undertaking commercial trials, as we speak. Given this general scarcity of merchant rutile, there's potential for SR sales into the metal market. And that's a really exciting prospect over this sort of medium to longer term. And there's a lot of factors that give us confidence, and we're going to secure additional volume under even long term arrangements as well. This includes the recapitalization [indiscernible] is going to come out of bankruptcy a much stronger company with a very cost competitive SR consuming asset in UK. The growth of China chloride production. We are well known in China. We've had a presence here for a long period of time. We're known as a key and reliable supplier quality product. We've got positive outlooks on demand, 2024, from consumers further down the value chain.

As I said before, we've got this growing sponge market that needs a secure and consistent supply, coupled with this reduced merchant rutile. And what the implication there is you're seeing is rutile is prioritized to the welding market which creates additional space in pigment and sponge.

[Operator]

Our next question comes from the line of Al Harvey with J.P. Morgan.

[Al Harvey, JP Morgan]

Just couple on CapEx. So just trying to get a sense of where you're kind of decreasing CapEx, that number dropping back down. I know you've provided the number for Eneabba and Balranald, but just trying to get a sense of where else it's coming from and whether or not we expect that to push back into 2024 and how that impacts the outlook on production more broadly?

[Adele Stratton, Chief Financial Officer and Head of Development]

In terms of – I should say we've given specific guidance for both Balranald and Eneabba, but also have actually within the slide deck given a guidance for the full year. So we expect capital to be AUD 390 million in 2023. And as you say, that AUD 150 million for the refinery and the AUD 60 million for Balranald. As Matt already talked to, no impact at all for Balranald schedule. There's a little bit of timing between 2023 and 2024. Also, you're exactly right, [indiscernible]. So some of the other slight reductions have come from the major maintenance outage. We've noted the AUD 4 million saving by utilizing the loaned labor, so that's one component of the reduction. And a little bit just in terms of some of those sustaining projects [indiscernible] exactly as you said, push into 2024, the spend for the activities underway through 2023 is just concluding in 2024.

[Al Harvey, JP Morgan]

Just wanted to get a sense of whether the AUD 15 million for the metallization study is part of the – any other guide. I appreciate it's not all into 2025. But is that separate and that couldn't be pushed out or…?

[Adele Stratton, Chief Financial Officer and Head of Development]

The AUD 15 million study would actually be R&D that's likely to go through that P&L as you do those feasibility studies. So it's not part of any other capital number that we talk to. But then, as you clearly articulated, will be across 2023, 2024 and into 2025. Yeah, that will come through the P&L [indiscernible].

[Al Harvey, JP Morgan]

And just the timing on that, is it a critical part to commence that now? Or could that have potentially been a source of saving cash in the near term?

[Adele Stratton, Chief Financial Officer and Head of Development]

I think broader strategic imperatives to do study, that's the focus there on. So, the majority of the AUD 15 million will be spent across 2024, I can imagine. But, yeah, no, definitely impacts [indiscernible].

[Operator]

And our next question comes from the line of Rahul Anand with Morgan Stanley Australia.

[Rahul Anand, Morgan Stanley Australia]

Look, I want to focus on pricing. So perhaps if we start with the SR side of things, your take or pay volumes for the 200,000 tonnes per annum, from what I remember at the time, Cataby was sanctioned, you put out a presentation talking about the collar. Do you perhaps remind us how that floor mechanism for that pricing works, please. That's the first one

[Tom O'Leary, Managing Director and Chief Executive Officer]

Rahul, caps and collars were the nemesis of this industry back [indiscernible]. We don't have any caps and collars in our CR2 contracts. We have mechanisms that are linked to or sort of broadly track the market. But I've been really pleased with how we've delivered sustainable value from those contracts over the last number of years and outperforming the sort of the market more broadly. And there is a floor price, but [indiscernible] we're a long way away from that. It moves with [indiscernible] coming into play given the demand for SR and the way customers are prioritizing security supply in our products.

[Matthew Blackwell, Head of Major Projects and Marketing]

Just for clarity, the floor price was set back in 2016 and 2017 when those contracts were entered into. And that floor price has been rising with CPI over the long term, but as that says, the prices are well above that. That's unlikely ever to [indiscernible].

[Rahul Anand, Morgan Stanley Australia]

Just to follow up there, contracts, I guess, still unchanged, remain take or pay. Because I remember there was a dispute last time with one of your offtake parties. Did that change the contract at all in terms of the resolution of that dispute?

[Matthew Blackwell, Head of Major Projects and Marketing]

No. No, not at all, Rahul. I think in terms of our arrangements with the take of pay, I think we have demonstrated quite clearly our willingness at that particular junction to defend those take or pay arrangements. I probably think of that now as just a bit of an unfortunate blip in the relationship between the two organizations, and we're working very well together.

In fact, all of our long term contracts for SR are take or pay. And that's customers – and accepting that that's what we see is necessary to achieving the revenue certainty under those types of arrangements. So hasn't changed how we contract.

[Multiple Speakers] right way to contract.

[Rahul Anand, Morgan Stanley Australia]

No, absolutely. Absolutely. It is. Look, perhaps changing tack a bit, but sticking with the price side of things. Obviously, a feature of the change in the pricing mechanism that Iluka brought about was the sixth monthly pricing vehicle on second and third quarter, and then fourth and first and then first half, second half for rutile. I just wanted to confirm, are you still following that six month fixed pricing mechanism, i.e. once the price is set for zircon in October, we'll see that price stick for six months and then rutile will remain stable till end of year. Is that how we should be thinking about that?

[Tom O'Leary, Managing Director and Chief Executive Officer]

No, not really, Rahul. It's Tom. You're right about the [indiscernible] feedstock. They do tend to be priced on a six monthly basis. Zircon, we typically announce – sometimes it's higher than the price change. We almost always coincide those with the upcoming quarter. And occasionally, we've said that the price will be fixed for a six month period. Most recent announcement we've made was to say that the third quarter price will remain flat with Q2. So that's the current quarter pricing is the same as last quarter.

[Rahul Anand, Morgan Stanley Australia]

Perhaps final one for me. The rehab provisions and rather than the rehab spend, so to speak, in terms of cash outflow, perhaps one for Adele. How should we think about that going into the next year? Does it remain stable here? What's the current run rate, please?

[Adele Stratton, Chief Financial Officer and Head of Development]

In terms of the rehab provision level, [indiscernible] there's no real change to that number. We set about our program of rehabilitation work. And that really is quite a long dated look forward. It's factoring in the progressive rehab that we do and those costs go through the P&L and should be a one-off. And then the rehabilitation work sort of done conclusion of mining. That run rate fluctuates depending on sort of where we are in the phases of that rehabilitation between – anywhere between AUD 45 million to AUD 70 million per annum. And we're probably coming towards the end of our spend in the US that is going more into that [indiscernible] from 2024 onwards. And, yeah, undertaken rehab across Australia, be that down the southwestern WA or it's at Murray Basin, et cetera. So, yeah, no real change to our approach nor our guide on that cash spend.

[Operator]

And our next question comes from the line of Glyn Lawcock with Barrenjoey.

[Glyn Lawcock, Barrenjoey]

Tom, I just want to sort of reflect on what you've been saying. It feels like you're using the same playbook that the prior management team did earlier, last decade. That didn't play out so well and you ended up – prices ended up falling and you had assets shut for well over 12 months. What is this one different this cycle? What do you point to to give me some confidence that your holding back volume to support price will work this time, whereas I guess, last time, if I think back, it didn't really work?

[Tom O'Leary, Managing Director and Chief Executive Officer]

Glyn, when you talk about last time, this approach that we're taking is an approach that we've taken most recently in 2020 when you'll recall that many were extremely alarmed about zircon pricing, in particular, when zircon demand ceased out of China. And so, at that point, we took a deliberate decision to reduce global supply by around 10% of projected consumption that year and prices were stabilized. And we're able to capture the long term value of our higher grade products. What we're doing now is not dissimilar.

And in terms of focusing on the long term value of our higher grade product, I think as I said before, what's changed and what hasn't. What hasn't changed here and what is different from the beginning of the last decade is the outlook for global production, the outlook of the quality of the deposits in the mine, and what we're saying is, we will, as anyone who looks over today, is the consequences of the lack of investment in new deposits and the much poorer quality of new deposits to be exploited. By contrast, Iluka has and will continue to have high quality products, high quality zircon and high quality titanium dioxide feedstock to give to our customers that require them.

The other point I think that's worth observing is around the discipline demonstrated downstream of us in the titanium dioxide feed stockpile. That's where, unlike the circumstances at the beginning of the last decade, pigment producers have uniformly reduced production to meet pigment consumption of the paint producers rather than continuing to produce their inventories and drop prices. So the pigment customers that we supply, the high quality chloride pigments producers are remaining profitable in the more stretched circumstances. So, I think there are a number of features which give us a level of confidence about the outlook.

[Glyn Lawcock, Barrenjoey]

Tom, can I just maybe follow up then? You said you referenced the 2020 cycle. Your inventory is already back to the levels of 2020? Just over AUD 300 million. How far are you prepared to push? Could we see inventory back at AUD 500 million like we did a decade ago?

And you made the comment in your presentation that you've seen reduced zircon sales in July and August. What does it look like from here? The data from Asia Metals was suggesting July down 50% sequentially, August down 30% sequentially. I know Tronox tried to call the bottom at their quarterly result a couple of weeks ago. Doesn't feel like that's happened to me. Do you have any observations of what the zircon market looks like going into September and the rest of the year? Is it still falling?

[Tom O'Leary, Managing Director and Chief Executive Officer]

Glyn, I'll pass over to Adele to talk a little bit about inventory levels, but we have guided a little bit as to the nature of this quarter, but I don't propose to guide any further. But just on inventories, you need to exercise a little bit of caution around focusing on the dollar value of inventories given the pricing. Adele, do you want [indiscernible].

[Adele Stratton, Chief Financial Officer and Head of Development]

Yes. I think that's exactly the point. So if you look at the inventory position, we've put that in our half year results deck, slide 13, to try and help – we've actually given the volume for work in progress, our heavy mineral concentrates. And you can see that continues to trend downwards. So, if you think of the cycle that you're referencing back in 2015 and 2016 when we had 1.6 million tonnes of HMC, we're now down to 400,000 tonnes. So, that's quite a reduction. And I think [indiscernible] speak to my ops guys, they're pretty nervous as to how much HMC we actually handled in the past. Unfortunately, over time, costs go up. Therefore, your absolute inventory number goes up. And that's certainly what – if you think of finished goods, once again, pay real attention to the unit cost that we are seeing. So we guide this global unit cash cost of production. So that's probably pretty close to the inventory unit cost. That number sits at AUD 7,000 [ph] a tonne and used to be AUD 600. So, that's a 40% increase in unit costs, which flows directly to your balance sheet. And so, don't be confused by absolute inventory dollars, but volumetric amounts of inventory.

[Glyn Lawcock, Barrenjoey]

Any thoughts just on the near term outlook for zircon given your comments about the last two months?

[Tom O'Leary, Managing Director and Chief Executive Officer]

I think I answered that in the first question. We've guided a little bit rest of the quarter. I don't propose to guide any further.

[Operator]

Thank you. Now I'm showing no further questions. So with that, I'll hand the call back over to Managing Director, Tom O'Leary, for any closing remarks.

[Tom O'Leary, Managing Director and Chief Executive Officer]

Terrific. Thank you. And as always, we look forward to catching up with many of you over the coming days. Thanks again.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.