Iluka Resources Ltd

ASX:ILU

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Iluka Resources Limited Investor Briefing 2019. [Operator Instructions] I must advise you that this conference is being recorded. I would now like to hand the conference over to your first speaker today, Ms. Mel Roberts, General Manager, Investor Relations and Commercial Mineral Sand Operations. Thank you. Please go ahead.

[Melissa Roberts]

Thank you. Welcome everyone to the Iluka briefing day. Thanks to everybody that's traveled across to WA and to -- also to people joining us on the webcast. Just one piece of housekeeping, in the very unlikely case of an emergency evacuation, please follow the executives that are here today and the fire wardens to exit the building.We have a number of speakers from our executive today. And -- but we've allowed adequate time for plenty of question and answers at the end of session. So if we could ask that you please keep your questions to the end of the presentation. The other thing I just wanted to point out was that we have microphones in the ceiling, so those will be turned on during the Q&A. So we won't have a roving mic, and you will be clearly heard through the webcast.So with that, I'll pass over to our Managing Director, Tom O'Leary. Thank you.

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

So welcome, and again, thanks for taking the time to attend Iluka's Investor Day. We hold this event every couple of years to help provide some insight into the strategy and direction of the company and to provide some context to the industry in which we operate. We hope you find the session today informative and I encourage questions at the end. We're also webcasting this session and you're able to post questions online.As you'll have seen, today, we released our quarterly review as well as an announcement in relation to a formal review of the corporate and capital structure of the group. I'll come back to that at the end of the presentation today.2019 has been a year of delivery with a significant number of projects and a commensurate quantum of expenditure incurred to sustain operations and to deliver value in a period ahead. We've also continued to work on the project pipeline, as Matt will explain, to deliver further value into the future. Market conditions have been mixed. The zircon market has faced some short-term challenging conditions, although, as Christian will cover, the longer-term fundamentals for the market remain sound. On the other hand, conditions in the high-grade titanium feedstock market remain positive.This slide's the disclaimer. Slide 3 sets out the agenda for the afternoon. We have a number of the executives presenting today, as Mel mentioned, including Rob Hattingh, our Chief Executive Officer from Sierra Rutile who's visiting us from Sierra Leone at the moment. But all of the executives are with us today and are available for questions at the end, and I encourage you to take that opportunity.This is not a new slide, but I think it hopefully encapsulates our global reach, both in our marketing and operations. Turn to Slide 6, our objective remains unchanged, and that is to deliver sustainable value. There are many factors to this, including the quality assets in our portfolio, and we're currently -- that we're currently operating as well as those in the development pipeline, our royalty business, our disciplined capital approach and the long-term market fundamentals. To take you through the mineral sands markets we participate in, let me hand over to Christian Barbier, our Head of Marketing. Chris?

[Christian Barbier, Head of Marketing]

Thank you, Tom. Good afternoon, everyone. I have included in this presentation some slides that are a reminder on update on slides that you probably have seen before. So please take them as a reference. I'm not going to dwell on them in the interest of time but I'm happy to answer questions at the end of this session. And for instance, on this Slide #8, you've probably seen it before, the purpose of this slide is simply to remind all that Iluka is focused on the highest products -- highest-value products in the mineral sands suites. And of course, zircon, which is the dark blue part on those bars, and for TiO2, the high grade of feedstocks, let's see the chloride pigment industry, the yellow and gray-ish blue bars the bottom on these bars. So starting with zircon, and again, as introduction and probably a reminder for all, the left pie chart here shows in blue, Iluka's share of the world's zircon markets by production, so slightly under 30%. And the right pie shows where the zircon comes from in the world.The next slide is also a reminder of the applications of zircon on the top row of pie charts. And on the bottom row, the applications where Iluka is selling its zircon. As most of you know, Iluka is particularly present in the ceramic and the zirconia applications, which traditionally have been bringing higher-margin contributions to Iluka. Interestingly, the middle picture shows the pacemaker, which uses a sensor that contains the special type of zirconia ceramic. And that's an example of relatively niche but high-growth and high-margin applications for zircon. Now on zircon prices. The pricing model that Iluka implemented 4 years ago has been targeted at ensuring that we receive an income that allows us through the cycle to reinvest into the business into new projects, while at the same time, providing zircon users with visibility and stability, so they can focus on adding value to their business rather than on the timing of their zircon purchases. We have a reference price shown on the gray bars on this chart, which represents the headline price that we charge all of our customers. Actual prices invoiced take into account the adjustments on payments, the type of product that is being purchased, the packing, the shipping terms and, of course, the quantity. The biggest and most loyal customers of Iluka are part of a program called Iluka Rewards. The green and blue lines on these charts represent the realized prices. And they show -- it shows how they have increased over the last 3 years. But bear in mind that they also are a measure of the product mix that Iluka sells. We've reported this year that we are selling more lower-specification products as a result of a softer demand and the need for end customers to reduce their costs. And we've also increased loyalty and quantity rebates like in the past. So this comes after a couple of years, when, due to market tightness, these lower-spec products and rebates haven't been very much required.We've announced in August maintaining our reference price until the end of the first quarter next year. And hence, providing visibility and stability in a period where economic uncertainty is affecting our customers' business.Now in terms of applications, and considering the importance of ceramics, we've included a couple of slides with an update on the market segmentation and the zircon consumption trends in tiles. So there's no surprise in here, when looking at the 2 pie charts in the left side of this chart, China is the #1 producer and the #1 consumer of tile. But it's worth noting that its share peaked at 49% of world production in 2016, while last year, it was at around 43.5%. And that's due to the growth of emerging producer -- producing countries like Indonesia, India, Vietnam, Egypt and also to strong production from Spain and from Italy.For your reference. On the right side of this slide, depending on the type of tile, the zircon intensity varies and it explains, and I will leave this to you to read at your leisure.Slide 14 provides an idea of the trends that we observe in the tile markets. Some recently used innovations like special digital printing effects with texture or relief on white-body tiles are shown on the top left picture of large-format slabs, as you can see on the top right picture. And these have become mainstream and progressively are taking a larger share of tile production. The bottom pictures show new products that have higher-than-average zircon loadings. They are not yet fully-industrial but they're expected to take off in the next few years.Now the topic of substitution and thrifting often comes up when prices increase, so I'd like to give our observations. We do not see any substitution having occurred in the last 2 years, zircon being a material, which functionalities are highly difficult to replace. However, we've observed increased thrifting in the form of reduced specific consumption and blending with cheaper materials. And it's in this respect that the situation is quite different from what happened the last time zircon prices went up, around 2012. Because at the time, technological changes drove significant reduction in consumption due to the introduction of double-charged tile production. That was [ increasing ] at all at the time. Today, there are ways to reduce zircon consumption in tiles by producing thinner tiles, not using 100% zircon in the opacifier or by using low-quality zircon when possible, of course, with a limitation. When the lower zircon used is -- provides visible whiteness difference or when the opacity is also visible -- visibly lower. This is not a revolution. It's been a trend that has developed over the last few years and is now fairly stable and common.Now we've also regularly commented on the zircon concentrate supply, mostly direct to Chinese processing demand. As you can see on this slide, the volume of concentrate has been progressively increasing over the last 2.5 years. It's been used as a way to meet increased demand for zircon. And Iluka has been participating in that segment, as you can see on the pie chart on the right side of this slide. But what I'd like to reiterate is that Iluka has ample capacity to feed this market as required on an ongoing basis.Likewise, we've regularly communicated on the Indonesian zircon situation, so I'd like to provide an update. I will leave you to leave -- to read this slide at your leisure. But I wish to comment on the next slide showing Indonesian sand exports. This year, we've observed Indonesian zircon sand exports are at around 6,000 tonnes per month, a rhythm that's been fairly stable since the fourth quarter of last year. And that we don't expect to see further increasing. The level of production and exports in Indonesia depends on a number of factors, like the exchange rate of the Indonesian rupiah, the gold credits that the miners get, the situation in the palm oil plantations in Kalimantan and, of course, the price of zircon.Finally, I'd like to end the zircon part of this presentation by a few considerations on the market outlook. The chart you see shows the zircon production according to TZMI in gray -- in the gray area. And TZMI's underlying zircon demand on the black line is present. We've added Iluka's production in the blue area to put things in perspective, it's the zircon sand production that does not increase our zircon in cost effect. And we've also added 3 trend line scenarios in dotted lines for the demand. This is not a demand forecast. It is to illustrate what has been shown previously, is a gap between an increasing demand and declining supplies from existing mines. Now short term, we have to be mindful that the demand softness as a result of the global economic conditions and the destocking across the downstream supply chain for zircon is affecting demand. However, medium term, we see solid fundamentals for the moment and even if, generally, we try to be cautious on growth rates to be expected. Regarding the production decline, as you know, Iluka has a suite of projects in its pipeline to ensure continuity of supply, and Matt will be providing you an update on this.Now to titanium dioxide. Again, this is a reminder of the applications on Slide 21 and on Slide 22 a reminder of the production of TiO2 feedstock. This is for the record. Again, these are updates of slides that we have previously shown.On Slide 23, you can see Iluka's focus on the highest grade chloride feedstock to the right of the slide. And on Slide 24, you can see our synthetic rutile in green -- sorry, in yellow on this slide and natural rutile in green help chloride pigment plants increase their head grade, generating benefits for them in terms of cost, in terms of complexity of logistics and operations, in terms of environmental footprints and of capital optimization.Now we've communicated before that we base our pricing of TiO2 feedstock on a relative economic value, REV. To explain a bit more, we use a wealth of information, data points and technical parameters to identify the value in use of our natural rutile and of our synthetic rutile when processed into pigments, and to calculate their relative economic value compared to other feedstocks that have a lower grade. Thanks to the advantage of these higher-grade feedstocks that we provide, as was shown on the previous slide. We price our products to ensure that we adequately capture the value. At the moment, we observe that the tightness of rutile and its ability to improve the head grades in the chloride demand, especially at a time where a number of chlorinators are operating at a high-utilization rate, this provides a positive pricing dynamic, which also benefits our synthetic rutile. And we believe that the positive pricing dynamics will continue into the future, when considering the rutile price relative to pigment price on the left chart of this slide. And as the supply of rutile is expected to remain tight in the coming years. And as you can see on the right chart, especially after the supply tipping points that occurred in 2017.Now moving to the pigment industry. This slide is also a reminder of where the chloride technology sits compared to the sulfate technology on the left pie chart; and who are the players in the chloride world on the right chart. This is, again, for your reference. What I'd like to stress, and we've commented in the past, is the growth of chloride pigment production in China. On chart 1, on the top of this slide, the left bars represent the low-quality pigment that are made from sulfate technologies, where emerging players are dominant. The middle bars are the segments where the competition between Western and Chinese players is most acute. When you start to differentiate your pigment products, they require chloride pigment. When you go towards the right side of this chart, you require chloride pigment. And so far, BILLIONS is the one in China that's really moving in that direction and commissioning new chloride pigment lines for that purpose. On Chart 2, you can see that in the last 6 years, 80% of the pigment growth in China has been in the sulfate technology, the gray bars; while in the next 4 years, the growth is expected to come mostly from chloride technology, the green part on those bars. Hence, the need for China to increase its very high-grade feedstock consumption in the future. And you can see on Chart 3 that's currently the country does not produce much domestically. And that's why we believe Iluka is well positioned to take advantage of these trends.After the zoom on China, stepping back and looking at the whole pigment market in the world, we observe that after peak, early 2018, the pigment market has been consolidating for 1.5 years, with softer demand and destocking. We, as well industry analysts, expect that it will recover towards the middle or the end of the second quarter next year. The fundamentals remain positive in the long term. The growth of industrial and construction outputs is expected to stimulate pigment demand in the world. So on this, I will hand over to Adele, and I'll be happy to answer any questions at Q&A time. Thank you.

[Adele Stratton, Chief Financial Officer]

Many thanks, Christian, for the insights on the market, and good afternoon, everyone. For those of you who don't know me, I'm Adele Stratton, the CFO of Iluka. I'd like to briefly talk through our operations here in Australia. It's quite unusual for a CFO but I thought I'd give it a go, before I actually hand over to Rob Hattingh who's going to take a lot more in-depth look at our operations in the Sierra Leone.So as you can see, and as Tom's articulated, 2019 has certainly been a year of transition for Iluka. All of our operations in Australia have had a major operational configuration change and I'd like to just touch on those briefly. Starting with Cataby. That's been our newest greenfield development. As this time line shows, this resource has sat within our portfolio for over 40 years. In the more recent history, i.e., over a decade ago, we considered multiple development options, but we just couldn't quite make the economics work at that time. Finally, we identified a suitable approach to development, which included reusing idle equipment, which helped reduce the capital cost, combined with the development being underpinned by the take-or-pay contracts that we've mentioned many times before. That underpins 85% of the production of synthetic rutile with what the pigment produces. And again, I need not remind you that those contracts have floor prices with no cap, which is quite an unusual contracting strategy within the mineral sands delivery. The project has been delivered on time, within 12 months, coming in time and budget. I think this is a great demonstration that Iluka has patience, seeks to achieve an appropriate return on capital and is focused on capital discipline. Cataby commenced its commissioning in April this year, and we've been steadily increasing the rougher head feed production and expect to achieve full run rates this month. As of commissioning any new plants, ramp up doesn't always go in a straight line and in Cataby's case, the reuse of refurbished equipment led to some initial reliability issues. But we're confident that these are being addressed. And the focus has now turned to building throughput capacity beyond the current nameplate.For those who are joining us to the operations, Dan McGrath, Mel Henderson and the team will provide further color and insights in this regard.Slide 34 provides a helpful summary of the Cataby operation more for reference. As noted, we approved the $270 million investment. The current mine has an 8-year life, and there's a possibility to extend that by a further 4 years. In support of the Cataby development, it's necessary to undertake a major maintenance outage on the kiln, which produces the synthetic rutile. These major maintenance outages generally serve a 4-year kiln campaign on average. Earlier this year, we completed one of the largest overhauls to the kiln that was ever undertaken. This included a new rotary cooler shell and a new quench tower. And rather than me talk to it, I think I'd show you a quick video as I think I'd get the [indiscernible] video presentation which Melissa's going to help with. And for those who are watching via the webcast, if you just click the link in the presentation, that'll take you to the video. [Presentation]

[Adele Stratton, Chief Financial Officer]

I think the video managed to give it much better justice than what I would have been able to talk you to it.So that cost us around $35 million of capital, a significant body of work, as you can see, and all, again, completed within the schedule. In fact, came in a couple of days early. So moving to Jacinth-Ambrosia, which is Iluka's largest zircon-dominant deposit within the portfolio. This was discovered in 2004 with first product brought to market in 2010. And this deposit has a very high zircon assemblage of about 50% and originally had a 10-year life that brought to market 10 years ago. Iluka's history of being able to extend the life of its operations and we've successfully completed that again this year at Jacinth-Ambrosia with the successful move to the Ambrosia deposit, which helps to maintain our current group zircon production levels through to 2022. Matt will touch on later, some of the projects that fit within our pipeline to continue that expansion project and put Iluka in a strong position going forward. On the mine move, again, this has been completed on -- well, actually, we've been under time and under budget, so 2 months ahead of schedule. And that was a bit of a whirlwind tour of the Australian operations. So I will, at this point, hand over to Rob Hattingh to take a much more detailed look at Sierra Rutile.

[Rob Hattingh, Chief Executive Officer of Sierra Rutile]

Good day, everyone. It was interesting to be in subterranean temperature for a change. I've sort of lost contact with what that feels like. So first of all, I would go through our current operations and talk a little bit about where we are at, at the moment. I think some of you may be familiar with our operation. But I'm assuming that you haven't had that much contact with it. So this image on Slide 38 would be our Gangama operation. In the background there, you can see Gangama stockpile that we used to help us through the wet season. We get up to 3 meters of rain over a 6-month period.So in terms of the overview for Sierra Rutile, 50-year-old operation, it really was a bridging operation for most of that time, and that bridge finally died this year, 9 days ahead of schedule, which is I think the operations guys timed extremely well. We now have moved completely to dry mining operations. We employ about 2,500 people, 98% are Sierra Leonean and we're responsible for, 2018, 3% of the GDP of the country. So we are fairly large by 13% of domestic exports. We are completely self-sufficient. So this is an operation that has to be reliant only on itself. So let's start with power. We've got a powerhouse. We're got our own port, so our own logistics chain internally until such point where we deliver our product to a ship in the Sherbro channel, the Sherbro estuary. It is a long logistics chain and that's had its own challenges that we've had to deal with. So if we want anything, you're not -- there's no Bunnings around the corner you can run to. You literally -- will take you a month or 2 or 3 months to get something into the country. Our operations, I'd like to point out on the next slide. So towards the bottom there with the pink blotches, that's Area 1 we're mining at the moment. We've got about -- up to about 5 years left there. There are some areas within Area 1 that's not necessarily in our mine plan at this stage, but we can high grade to extend our life in that area if we need to. The larger area towards the top left there, that is our future Sembehun there. That's also a mining lease. Sembehun is -- looks like geology, it's all open to the sort of northwest bay -- northeast rather, so we've applied for mining additional exploration leases in those areas and to the north. We believe the geology to be suitable for -- similar to what we have here, when we're going farther south.If you look at the resources and reserves there, that's a rough cut, you can talk -- we're talking about 8 million tonnes or 9 million tonnes of ore per year now. Those are the 2 operations, Lanti and Gangama. So a [ continuation of our life ] will be complete. So it used to be a bridging operation until 2019, this year. In 2013, the company went and started exploiting mini pits, which is adjacent to the Lanti complex, which is a bridging complex. And that has been open cast mines as a dry mine. The first mine was commissioned in 2013. When I look at the -- over one of the benefits we thought it could bring to the table was increased recovery, increased throughput and also mine more efficiently in the mini pit. So we converted that to an in-pit mining unit, the size of mine -- mineral sizer with a expert scrubber with the ore then pumped across to the same concentrator. DM4 is our new operation. I think Matt will talk a little bit more about that. The old bridge had a floating concentrator behind it. What we did was to decouple the bridge and concentrator, beach the concentrator and we're going to use that for the next few years to process ore from the new mining unit that we put in, in the same benefit. That was commissioned in September, and it is currently busy ramping up.At DM2, our Gangama operation. In 2016, before the Sierra Rutile wet operation was commissioned. It was done really well. We're very happy with what we saw. A slightly different operation. So truck and shovel, which then takes it up a ramp into a discharge hopper and then from there to a scrubber, into a plant where [indiscernible] conventional technology. That was a good operation, so we basically duplicated that. That was commissioned in April, and reached full capacity in June this year.In terms of operational challenges because we have been talking about those. Broadly speaking, one of the things that really was a surprise to us was the lack of technical skills and depth in people we could find in country. Difficult geography, difficult operation to get things into as well; reluctance of skilled people to work at Sierra Leone. I don't know why. My wife is here with me, we love living there. But it's just I think there's a lot of stigma attached to the country, quite unfairly in some cases. There has been a change in government. And with any new government, you find people take a bit of time adjusting. So there has been some distractions from operational priorities due to government interaction and community disruptions. So this is a very old mining area, 50 years old. Community, there's a bit of a sense of entitlement, so the interaction is not quite you would expect in a more -- in a sort of area where there's more greenfields, where the mine can grow with the community. We find that we have a lot of legacy issues we have to deal with, with the community.In terms of Lanti Pit itself, where we would talk of benefit, we've been talking about operational issues we've had. Now we did identify that we could bring a lot of benefit by implementing new technology in that area. One that's not even mentioned here is through -- this is recovery. I believe we've lifted recovery by about 15%, which is a huge benefit that our technology has brought to that environment. But it's a complex technology, and it relies on good maintenance skills, and it is a difficult environment to operate. So we've had weather challenges, we've had ore challenges and we've had maintenance and operational challenges as a result of the flow sheet. So quite a few of the things we're doing at the moment are aimed at minimizing those impacts. So we've done a lot of modification to the in-pit mining units. So the second mining unit we just commissioned has got various modifications in to improve both the maintenance and the wearability or the wearing of those components. We've also outsourced our maintenance to a large extent, in the short term, while we can upskill people in our crews to do the work in a more acceptable manner; a higher quality of maintenance, so to speak. And we're looking at alternate methods and mechanisms to help mitigate some of the ore challenges we've had. For example, blending ore and pre-mining some areas so we can -- we're going to have to move the mining and it's [indiscernible]. Some of the difficulties we have there, which are also quite interesting to deal with at times, we have to supply a full medical service to all our employees, plus for dependents, plus their partners. So we have a clinic that needs to -- that sees about 2,500 to 3,000 people per month. And we've done a lot of looking at clinic updates and upgrade the clinic. From education perspective, the new government came in the manifesto, amongst others on education authentication, and that aligns really well with our requirement to upskill our people. So we are working in partnership with a number of NGOs but also the government to upgrade and update facilities in the area and ensure that we have the people we need, but also are benefit of the company.Our rehabilitation we brought to Sierra Leone, previously, it was viewed as the best in country. But I think what we're doing there now is a step change. We want to make sure it's [ not ] liability. And we've done a lot of work, and specifically our people to upskill them as well to bring certain technology to Sierra Leone but also ensure there are people that going to continue doing it after the mine closes.In terms of the fiscal regime, we have a very specific Act of Parliament that advised us, the Sierra Rutile Agreement (Ratification) Act of 2002. That has been in place now for a number of years. And we -- it has whole [indiscernible] clauses in it. So today, there's been absolutely no indication that that's hardly respected and it's really important to us to have it as such. It's got some unusual terms in it. So for example, there's a turnover tax, irrespective of whether you're making profit or not. Royalty rates are slightly higher than it would be under a law legislation. But overall, the stability that it brings to us is such that we're very comfortable with the act as it is now. Sierra Leone has now recently started getting involved in the Extractive Industries Transparency index that just have showed at least an improvement over the previous reporting period. We are very happy to take part in that. We encourage that transparency. We encourage people seeing where their money goes to. And it's part of our anti-bribery and corruption sort of approach that we take. So we're very happy to take part in that. And I think we're the first company that's now submitted a new 2017, 2018 requirement.I just want to touch on our partnership with IFC. So I think this is one of the largest equity investments in Africa in mining. They've invested $20 million or 3.57% stake in Sierra Rutile in this year. Part of that relationship is access to the IFC's social and environmental governance advisory group, which we are making full use of. So not only does it help us upskill our own people in terms of community relations, community development, but it's also giving us access to international expertise in a number of areas that we just haven't the critical mass to do ourselves, for example, gender-based violence, some of the local supplier upliftment projects and processes but also things as simple as agriculture improvement. We're trying to get people off the dependency of the mine. The only way to do that is to get them back on the land and for them to actually be able to make a living out of it. So the IFC relationship at this stage is very important to us. We'll be very pleased to be part of that process. Okay. Thanks, Matt.

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

Thanks, Rob. Thank you, Rob. And let me express my welcome again to those who -- person on the phone. I guess the majority of discussions I've had with people here has been as Head of Marketing. Mainly in projects, I've spent most of my career actually delivering projects, so it's a bit of back to my roots. And it's a really exciting time to be leading Iluka's major projects and engineering initiatives. We had -- I believe we can add significant value -- or there is significant value to be released through our -- through the successful execution of our project pipeline.Now, I have a great team, and it's a team that I would say has been getting match fit. They know what it takes to deliver not just a physical asset, but a working part of a business. Now this is evidenced by the fact that the company this year has delivered 5 significant projects so far, and for the most part, with exceptional safety outcomes. In all cases, expenditure has been within the approved budgets, and the assets have been handed over in accordance with the schedule.Now I'd point out that due to timing, predominantly, some of our enhanced and sustaining capital spend will shift from 2019 into 2020. That's why you see on this slide, guidance of approximately $215 million this year rather than the $260 million that we had -- what we guided at the half.Now I've started with this slide about what we've delivered so far because current performance, I think, provides important context as we embark on the next phase of our project delivery journey. And we have a really exciting pipeline of projects. Now as you would expect, the majority of these highlighted contribute to the future production of both titanium and zircon, our key product lines. But we also have projects that will diversify our product offering by monetizing the significant rare earths endowment that we have. The Eneabba Mineral Sands Recovery Project, longest name we have, [ adversely ] proportional to its capital, is the first of these. And with an absolute minimum -- with a minimal capital spend of less than $10 million, we aim to be exporting a monazite-rich concentrate within 9 months from today. Now this project is on track. Construction has commenced, and a number of the key approvals required have already been secured. The project investment decision was based on exporting about 50,000 tonnes per annum of product. Now we have interest for more from our customers, should we want to sell more. But one of the reasons we might constrain the sales in Stage 1 is that we believe Stage 2 of the project could deliver -- or should deliver significant margin expansion. First, we will deliver on our commitment to Stage 1, prove to U.S. shareholders and other key stakeholders that we can do this successfully, and then we will continue -- or we may continue into Stage 2, the studies of which have already started.The second project, which has an element of diversification about it is the Wimmera project. Now this project is as much about rare earth as it is about zircon, with revenue split roughly 50-50. And we're busy undertaking the pre-feasibility study, which involves testing and confirming our various assumptions. And we anticipate to be in a position to select a preferred flow sheet to take the DFS in by Q2 of next year.If our assumptions prove to be correct, and we do confirm that we have a commercially viable processing pathway, we will be able to reassess its numerous resources in our portfolio. I mean this project probably opens up a whole new province of zircon. And it enables Iluka to significantly solve the zircon structural deficit in an investment-friendly jurisdiction.Now moving to our secret, super-secret squirrel mining method. And you can see it's a deliberately blurry picture just so you can't see what's going on, something that I wasn't really all that involved with, but now that I'm inside the tent, it's bloody exciting. Now we have started planning for our third trial, or T3 as we call it. Long leads are on order and relevant people mobilized to site. Now a reminder and as the name suggests, this is a trial. It may not work. But I'm certainly satisfied that we have adopted the learnings from the first 2 trials. We've done what we can above ground to test and prepare for this third trial and that we do need to go back and go back underground to confirm our assumptions. And very similar to the Wimmera project, if our engineering assumptions are sound and the trial is successful, then we have potentially unlocked currently inaccessible or uneconomic resources -- that are currently inaccessible or uneconomic based on current and conventional mining methods. And there are more of these deposits in the Murray base. Further, our mining engineers believe that the technology that we have developed and protected has potential applications in other commodities as well.Now if we move a little bit this way for Mid-West, we have started work on the pre-feasibility studies for the Atacama project. Now this deposit has the potential to supplement the feed at -- supplement operations at Jacinth-Ambrosia. It is in the regional reserve, and it is subject to coming to an agreement with the people of the Far West Coast. But we are confident that our track record at Jacinth-Ambrosia speaks to our environmental stewardship, and we enjoy a positive relationship with the Far West Coast people. Going a long way west, and turning to Sierra Leone and our announcements about Sembehun. Obviously, it's very important that we find a development pathway that has the right balance of risk and return. So we've effectively recycled back to the scoping stage with some clear parameters for our project team willing to work. So our immediate focus is undertaking a number of trade-off studies and analysis, for example, between different mining methods, some of which are conventional, some of which are used elsewhere in Africa, but maybe not in mineral sands. And as I've highlighted on the slide, examples of this might be hydraulic mine. We are trading off different ways of concentrating the run-of-mine ore. Is it done at the mine site? Is it done partially at the mine site and partially at the MSP, where we might have some front-end capacity? We're thinking about how we move people and product around. We're also looking at what makes sense to take off balance sheet, not only in doing everything ourselves. The initial objective is to be able to decide early in 2020 on 2 to 3 options to progress through a PFS into DFS and then select 1 to take to a DFS. Now I would note that much of the information that we've gathered in the studies to date is not wasted. It will either have direct application in some of the actions that we're taking now, or it will be used to inform our thinking about some of the current alternatives that we are presently studying.So with that, I will hand over to Sarah.

[Sarah Hodgson, General Manager of People & Sustainability]

Thanks, Matt. Good afternoon, everyone. I'm Sarah Hodgson, I'm the General Manager of People and Sustainability. At Iluka, we have a genuine commitment to the continued improvement of our sustainability performance across the business. In 2016, we set ourselves the objective of aligning with the International Council of Mining and Metals' sustainable development principles by the end of 2020. In the period to date, we have made significant progress in our practices and performance. This is demonstrated in the improvement in our ESG rating. Iluka is leverage recognized as a leading sustainability performer on the Dow Jones Sustainability Index, and we have continually improved our score over the last 5 years, now ranking at the 80th percentile of the index. We frame our approach to sustainability on the key pillars of health and safety, our people, the communities in which we operate, environmental stewardship, economic responsibility and governance. We have set public targets across these key pillars, which is explained in our sustainability report, some of which I will cover today.We put the health, safety and well-being of our people first. We recently undertook an independent safety culture review, which confirms the commitment and focus our people place in safety every day. We strive to remain fatality-free and minimize the severity and frequency of injury. Our safety performance remains relatively stable with a total recordable injury frequency rate of 3.7. This year, we are focusing on critical control management and a review of our safety leadership program. We continue to make good progress towards maintaining a workforce that reflects the communities in which we operate. Through our talent management and succession planning processes, we continue to support female progression through the organization, with a focus on lifting female participation in nontraditional roles. You can see Mel Henderson in the picture. Those of you going on the site visit tomorrow will meet Mel. She's the Operations Manager for Cataby and Iluka's first female operations manager. We work with partners to deliver ongoing Aboriginal engagement and employment outcomes. Partnerships with organizations such as the Clontarf Foundation help us to provide career pathways from schools into the workplace. Recently, the Mid-West operations at Narngulu were recognized for their performance in this area. Narngulu currently employs 8 former Clontarf Foundation [ personnel ]. In Sierra Leone, females make up 8% of our workforce. And Rob talked earlier about the work that they're doing in partnership with the IFC. Sierra Rutile is committed to improving the workplace environment for women. And in the partnerships and initiatives with the IFC, we look at stressing gender issues in the wider community and increasing female enrollment into the business. Our approach to environmental stewardship is based on understanding and minimizing the potential impact of our operation. Our rehab capability continues to deliver significant results. In the first half of 2019, the group has rehabilitated 490 hectares. And in Sierra Leone, we have rehabilitated 150 hectares in the year to date. We maximize our performance in this area through industry-leading research partnerships, upfront planning during mine development and progressively rehabilitating land closely behind mining. Our 5-year demolition program, which started in 2017, targets the removal of redundant mine and process plant infrastructure in a sustainable way. Our focus is on responsible asset disposal and reallocation to future projects. And as I already mentioned, Cataby, where we -- you'll see that tomorrow as well, reducing Iluka's rehab liability and minimizing waste. Tragic events around the world has led to a spotlight on the responsible management of tailing facilities. Iluka continues to maintain leading practice in this area. But we are keeping a close eye on the industry response and learning. None of our tailings storage facilities are constructed using upstream raised methods. All are constructed at final height embankment or raised using downstream construction. We manage our tailing storage facilities in accordance with ANCOLD guidelines. And we provide full details of our tailing storage facilities and our approach to their management on our website. The impacts of the climate change are being increasingly felt around the world. Regulation and the expectation of all our stakeholders are building and evolving at a very fast pace. Last year, we undertook a review of our climate change approach to better understand how Iluka can respond to this global challenge, both managing potential climate change risks and identifying opportunities. We want to take a measured and staged approach. We're committed to adopting the Task Force on Climate-related Financial Disclosures, the TCFD recommendations over a 3-year period, and using that framework to shape our climate change response. Our response is framed around 3 key areas: resilience, opportunity and emission reduction. Our year 1 activities have been to assess Iluka's resilience to the typical impact of climate change. We are undertaking climate modeling across the group to identify and understand any material climate-related physical risks and opportunities available to us. We have also begun exploring the identification of carbon abatement opportunities and evaluating renewable energy options to reduce our emissions footprint. We will continue to disclose our progress in this area. Thank you. I'll now hand back to Tom.

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

Thanks, Sarah. I thought I'll briefly touch on -- touch now on Iluka's current approach to capital management. And there's not a lot of news here, so I'll be brief. As we announced at the half, we've completed a refinancing of our debt facilities, reducing our facility limits to around $520 million, but also resetting the 5-year tenor out to July 2024. Our net debt is reduced to $89 million at 30 September, down from $142 million at the half, demonstrating the cash-generating ability of the business while still investing for growth. And our dividend framework remains unchanged at a minimum of 40% of free cash flow not required for the balance sheet or investing purposes.So moving to today's announcement. As I noted earlier, we've announced a formal review of both the corporate and capital structure of Iluka. We've said for several years that we're always considering how to optimize value from all of our assets, including the Mining Area C royalty. We've also been saying that as tonnes from the South Flank expansion become more proximate in time, that the quality of MAC will be more fully understood and valued. With the prospect of additional tonnes being delivered in 2021, we have, over recent times, sought to provide greater clarity on the royalty business and its earnings and potential in coming years. And you'll observe in our investor relations materials becoming more specific over the course of this year, in particular, in advance of the commencement back in September of the formal review announced today. So again, with the increasingly near-term increase and potentially very significant cash generation, it's entirely appropriate, I think, for Iluka to undertake the review to ensure we're well placed to take the most appropriate steps in the interest of Iluka shareholders.The review considers the most appropriate corporate and capital structures of the company's 2 principal businesses, its Mineral Sands operations and Mining Area C. The review will consider a range of options, including, but not limited to, dividend policies and a potential structural separation of MAC by way of demerger. The review will be comprehensive, considering all relevant factors, including capital requirements, business plans, management and cost and tax implications of various options. There's no certainty that it will result in a change to current corporate or capital structures. And we expect to provide an update on the review no later than the announcement of our full year results in February '20. The company's priority is to ensure all relevant matters are carefully and rigorously examined so that, consistent with our historic approach to MAC and with a disciplined approach, decisions are made in the best long-term interests of Iluka shareholders. So just to provide a bit more detail around the MAC royalty. It's a world-class royalty asset. The royalty is at 1.232% of revenue from all ore mines within the royalty area, and is an uncapped option on future discoveries of mining operations within the area. And I'll come back to that in a moment. It provides exposure to both iron ore prices and volumes, with capacity payments of $1 million for every 1 million tonne per annum increase in production capacity from the royalty area. The area encompasses both the current North Flank mining operations as well as the South Flank development and any future developments in the area. The MAC royalty has delivered significant revenues to Iluka since BHP commenced operations in excess of $850 million today. First half 2019 royalty income saw a significant increase on the back of strong iron ore prices, with income up 41% on the prior year.The South Flank development was approved by BHP back in June last 2018. BHP has indicated that it will increase capacity in the mining area C hubs from around 55 million dry metric tonnes per annum to around 135 million dry metric tonnes per annum in coming years. As at September, BHP has stated the project is 50% complete. It's a long-life, high-quality iron ore deposit with a Tier 1 operator in BHP. Potential earnings from the expanded hub are, of course, dependent both on iron ore prices and foreign exchange and a range of other factors we've set out there, including lump to fines ratio and so on. But they could be in the range of $120 million to $240 million per year. As to the future possibilities associated with the MAC royalty area, this slide tries to encapsulate some of the public commentary provided by BHP in relation to its iron ore problems. First, if you have a look at the map on the slide, and this map is taken from BHP Iron Ore Pilbara Strategic Environmental Review document, there are 2 potential future operations identified by BHP as long-term plans, supported by the Tandanya and Mudlark deposits, the development of which within the Mining Area C royalty area will, of course, lead to royalty payments. And second, operations at Mining Area C are long-life. BHP has noted that operations at North Flank and South Flank development are expected to continue to about 2050, and that there's potential for that to be extended further by future development. BHP's closure plan for Mining Area C, noted on the left-hand side, at the foot of the slide, which has been lodged with the state's Environmental Protection Authority, note that BHP's long-term strategy for Mining Area C is to continue operations to 2073. That's more than half a century away. I believe all of this can only be value-accretive in the long term. So just to wrap up, as I said at the outset of the briefing, 2019 has been a year of delivery, and we've executed a number of projects to sustain value. These projects, combined with our existing assets, mean that our operational configuration is set to deliver value and sustain production in high-value markets. Cataby has an initial 8-year mine life, sustaining synthetic rutile production at Capel, with returns underpinned by secure offtake agreements. The Ambrosia move with JA sustained for its zircon production. And expansion projects at Sierra Rutile will deliver increased rutile at a time when high-grade titanium markets are tight and global supply is expected to decrease. And finally, let's reiterate our commitment to our purpose to deliver sustainable value in all we do.So with that, I'm delighted to open up for questions.

[Melissa Roberts]

For those in the room and for the benefit of the webcast, can I just remind, say your name and organization before you ask a question.

[Jack Gabb, Associate]

Jack Gabb at Bank of America. Could I ask Christian on the zircon market? I guess it was another big inventory build this quarter. Obviously, the long-term fundamentals are intact, but when do we expect the zircon market being more in balance? And in particular, when do you expect you not to be building inventory?

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

Christian?

[Christian Barbier, Head of Marketing]

Yes. Thanks, Jack. Look, actually, we are very conscious of the level of inventory that we have. And we certainly want to avoid being [ out ] of inventory for the sake of working capital. So this -- we started the year with a very high -- we started with a very low level of inventory. The first thing is in our supply chain, it's actually not bad to have a little bit more to come on that stage. But at the same time what we've done is that we have adjusted our production settings. So you've seen a moderate increase in inventory, but we don't expect to see that increase to be extensive in the future. Our state of demand, which certainly drive the level of sales, as we reported before, the level of demand has been softer than what we expected at the beginning of the year. I think this happened for a number of reasons. Some reasons were expected. And in particular, the structural changes in the Chinese economy and, as you know, China takes about half of the world's consumption of zircon. So structural changes, the soft landing of the Chinese economy, the environmental policies being implemented and the Chinese industry going up the value chain, that was all expected. Now you and everybody is aware of the situation of the world trade today and the U.S.-China trade war, the sanctions against Iran, which have affected consumption in the Middle East, and generally, a more protectionist atmosphere everywhere in the world. And that [ was ] known at the beginning of the year, when it was not expected when [indiscernible] but as it has to the point that we don't really know whether it's the new normal or if this will change. And there are some cyclical or temporary changes in world consumption. And that relates to the situation of zircon, more particularly, where there's been a stabilization of prices and it produces a stock reduction for most players. So overall, demand has been softer, but what we see now is that the inventory drawdown has mostly played its course. And we expect a relatively stable situation.

[Unknown Analyst]

[indiscernible] from Bowen Capital. Firstly, congratulations on the MAC review announcement. It's something we have [ faced portable ]. Can you give us further color on if a demerger case is followed, if that goes hand-in-hand with the debt restructure? Or if you think the Mineral Sands business can organically fund its CapEx profile?

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

Yes. Look, what we said is we're undertaking the review. And that will be ongoing for the next while. Clearly, a number of factors are going to be part of that review, including capital as well as corporate structure, as you touched on. I'm sure that you and others will have many questions in relation to the review, how we're going to assess it and how we looked at [indiscernible] improve capital structure, tax implications and so on. Look, I don't plan to give a blow-by-blow description of our thinking on any of those matters or our advice, nor the complexities which we'll encounter as we proceed. I really don't think that would be appropriate. That said, as I said, we'll talk about it when we come back in February next year, so I think that's the point where we'd be talking about it with the sort matters you touched on.

[Unknown Analyst]

I'll have 1 more quickly. The zircon sales guidance implies a pretty meaningful step-up in Q4. Can you give us a bit more color on, I guess, your forward visibility and confidence level on that step-up?

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

Christian?

[Christian Barbier, Head of Marketing]

Yes. Well, as I mentioned, we believe the inventory reduction has mostly played its course. And as you probably know, we have a team of people on the ground talking to our customers on a daily basis. And we are confident in the traction on demand for our products. This is what we confirm in the guidance. As you noted, after a slow third quarter, we expect sales in the fourth quarter to be at a higher level.

[Glyn Lawcock]

Glyn Lawcock with UBS. I guess I have 2 questions and a follow-up from those discussions so far. I mean how does this review differ? I mean you've done the review before and got to an end point where you said there's tax leakage. What specifically is this going to do differently from the previous review?And then, I guess, just on the zircon market. I understand what you're saying that you think the [ increase ] has come off. But I guess, if we look at your actions to date, you've held back volume, and by your own admission, your price has come off. Maybe that's a mix of -- product mix that you're having to put in, more standard, less premium, but it would appear in peers' reports as well, the price is starting [indiscernible] despite you're holding back. You are doing all the heavy lifting. How long do you do the heavy lifting for before you sort of say enough is enough?

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

Yes. Look, I'd -- I can't answer the question in terms of us doing all the heavy lifting, and I'll hand over to Christian in a moment to talk about where we're at with sales as we've indicated [indiscernible] at a level under, but Christian may comment more. In terms of the review, as I've said, we began the formal review back end of September, so it's been going a little while. And we believe that [ a tactical ] demerger may be possible. And [ context ], I'm not going to be providing the technical details around it. But as I've said, when, we'll ensure the market remains updated.

[Christian Barbier, Head of Marketing]

Yes, maybe on your comments about doing the heavy lifting. The first thing I'd like to say is historically, Iluka has always been supplying more products into the market, when there was tightness and reducing several supplies when the market was a little bit low.So we always have played historically, but just in order to maintain stability in the market. And we believe that this has played positively. And as you can see, the level of pricing that we have, had slightly come up, but we still are at a level which -- actually since the inception of our reference price, we have the highest price level that we ever had at [ $1,580 per tonne ] and we maintain this price now for over a year. We continue to maintain it until the end of the first quarter next year. Now there's always been slight variations in prices, as you said, depending on product mix and depending on the level of volume and loyalty rebates and this will continue going on. I don't think we are the only ones who have experienced this slowdown in sales and, I mean, in fact, the inventory is higher.

[Hayden Bairstow, Analyst]

Hayden Bairstow from Macquarie, a couple more on zircon. Just the ZIC product, do you think that impacts the ability to sell premium products and there's some sort of customer substitution as more of that becomes available? And then with the [ monosite ] next year, it's only 9 months away, does that come in regardless? And you'll pull back sales of reserve if the zircon market is still a bit soft in that period of time? Or will that potentially get delayed given it does have some of the [indiscernible]?

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

No, that won't be delayed. So that [indiscernible]. But Christian, do you want to talk about the softening [indiscernible]?

[Christian Barbier, Head of Marketing]

Yes. So probably the last few questions, the supply is very high in the world market. [indiscernible] the market price, so in that case, the market is under-reserved, that was [indiscernible]. When we've drawn, to some extent, a big supply into the market here because we see that [indiscernible]. What is different in here is that the concentrate that is fed [indiscernible] change process in the line, and then recycled in mostly 2 types of industries. First is the chemical production which is an application that requires [indiscernible] zircon. It does not compete with Iluka's product. And the other one is the remix where generally, the standard zircon is blended to different degrees with premium zircon. So it's a complement to premium production. And this is what continues to this day. So no, we don't see any direct [ impact ]. Now all of these source of the zircon, of course, are feeding into the global consumption.

[Jack Gabb, Associate]

Jack Gabb, Bank of America again. I just want to follow up on zircon pricing a little bit. Given inventories have been built up, just yourself but also at your peers, should we assume prices and the mix at a similar level for, let's say, the next 6 months? Is that a fair assumption as inventory maybe gets drawn down again?

[Christian Barbier, Head of Marketing]

Are you talking about the mix of products being sold?

[Jack Gabb, Associate]

Well if we look at what's happened on the ore product, when you report ore products pricing, given the expectation that your sales are going to recover, but also, I guess, elsewhere we'll see then supply coming to the market, if inventories come down. Should we assume that negates any potential price increase going forward, i.e., we should see pricing flat and then to go into the next 3 to 6 months?

[Christian Barbier, Head of Marketing]

Yes. So we've announced that price is flat until the end for the first quarter.

[Jack Gabb, Associate]

But the premium benchmark, but on a realized price, how should we think about it going forward?

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

Well, we're not going to be guiding on that. We've guided on expectations around inventories and mix and our anticipating the market [indiscernible].Glyn, sorry?

[Glyn Lawcock]

Glyn Lawcock again. Just 2 questions, maybe an odd follow-up on Matt as well. Firstly, just if you look at how much less zircon you're going to sell and if you think about the inventory going out with the apparent consumptions down in the order of 200,000 tonnes on the 1.2 million tonne market, so it's been a quite a big contraction. Is that a fair observation of the market?

[Christian Barbier, Head of Marketing]

What we've observed is that there's been quite a bit of inventory drawdown, so the underlying demand has decreased, but not as much as it is an important part of the zircon inventories. And there has been, probably, a little bit of inventory buildup during the last couple of years across the industry and especially in downstream sectors. And with the state of the -- of demand of the global economy, most of the players downstream have decided to reduce their level of inventory. And we actually have stated at the moment it has probably below normal level of zircon or zircon processed inventories. [Indiscernible].

[Glyn Lawcock]

So the 1.2 million tonnes last year that you referred to and everyone refers to, do you think that was a true underlying demand? Or are we -- or, actually, you said there was inventory build. So was there inventory build last year, so the market is really a 1.1 million tonne market, perhaps? So you're going to struggle to get -- [indiscernible] industry and play that [ swing-reducing ] card for longer?

[Christian Barbier, Head of Marketing]

But I think overall -- and people argue about these figures, whether you're talking about 1.1 million, 1.2 million, 1.25 million, overall, it's a fair level. Probably last year, the [indiscernible] would be higher than that. And the underlying demand was around that level I'm pretty sure.

[Glyn Lawcock]

Okay. And then just trying to understand a little bit more about Sembehun. And just -- you talked about 3 streams you may have at -- by the end of the year, early next year. And could you just expand a bit more of what you're thinking, to the extent you can? Given you've got an existing business there and it's only [ $30 ] between Sembehun on one of the existing business. How easy is it just to use the existing business? I'm trying to understand that.And then I still struggle. I mean this is a 50-year business. You said it's 50 years old, yet, we've still got logistics problems. Why is a business that's 50 years old not able to finally have some sort of normality? [ I guess it's a thing. ]

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

Look, I'll take the easy question first.

[Glyn Lawcock]

[Indiscernible] within that watch, it was changed at 50 years suggests [indiscernible].

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

Look, one of the things -- in terms of the project, it is 30,000 as the crow flies. There are hills. There's a river. There's a jungle. There's villages. It's not like driving from Cataby to [indiscernible] or something like that, no. There's no infrastructure there. So part of the project development is about finding an infrastructure solution and an access solution that makes sense for the size of the project. And that's why, as I talked about, one of the things that we're looking at is how we move product to people. That's a key. That's one of the work streams. But I talked about 2 or 3 options. Ideally, when you go through scoping, scoping is about looking at -- it's a high-level estimate as to how the project could look, what works and what might not work. When you're move into PFS, it's really about -- you're deciding what it could be, all right, and then, in DFS, it's defining what it will be to take to execute it. So you don't want to get into a PFS and be looking at too many different options. You just -- hence, you'll waste money and you'll waste time. So these trade-off assessments, we will have a pretty clear view by the end of the year and going into early next year as to what can work within the parameters that we've set and what won't work, just is it at least not going to work? We're engaging -- where we've got the internal capabilities, we're using internal capability where we're -- where it might be a mining method that we're not as familiar with, say, hydraulic mining, others do it, which is a low capital-intensive mining method used in mineral sands, used elsewhere, in Africa exclusively. We don't use it. We've gone to who we think are the best people in the world to give us a view on what would be the cost and likely success [ and worth ]. Something like that, yes, we do a trial. That's something we won't go ahead with.And the other work stream -- so there's the mining methods. We've got dry mining, those push truck and shovel and there are different ways to do that, as I said. And then the other key work stream is how you do the -- essentially, what's called bulk mass reduction in the mining industry. How do you go from a grade of 1.5%, say, down to -- and bring that concentrate up to a higher grade and something that can be fed into the front of the mineral separation plant. We're not wedded to using the existing assets if there are assets overseas that makes -- it makes more sense to export out a material and have it processed somewhere else. We're not wedded to that, we're looking at all sorts of different options. And we'll do what's the most capital efficient and gives us the best risk-reward trade-off. That said, we do have existing assets there. And [indiscernible]. Is that sort of helpful?

[Glyn Lawcock]

A little bit? I guess a little bit. I guess I'm sort of struggling with a 50-year-old business that is still not working. And you talk about logistics, unskilled labor, et cetera, I mean, it hasn't changed in the 2 years you've owned it. It hasn't seemed to have moved in 50 years. Why will it change in the next 5?

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

I think that's a hard question [indiscernible].

[Glyn Lawcock]

Yes, sir.

[Rob Hattingh, Chief Executive Officer of Sierra Rutile]

No, look, I think it's a very good question. Why do we think we can make a difference? Just a bit of a context, it really has always been a stand-alone mine. So it never had the critical mass, either purchasing power or intellectual critical mass in terms of having practice in other areas they could apply and learn from each other. So that's certainly been the case. And I think we've -- it's probably taken us a little bit longer to get over that path than we thought we would. But we are putting in and have put in a number of things that makes it better.For example, we're just literally going live in another 2 weeks on our new Pronto, our ERP, so effectively, have -- we'll have an improved stores maintenance and a new order process. Everything is done by hand. And it's a very old colonial-style approach a bit, but it's taken us time to bring it up to modern standards. So just literally understanding what you've heard in the stores and how long it takes to get there, it's a very simple thing today in any modern operation, but it's just hard to get that up and running in [ the Lanti mine ]. So we are making gains every day. September was our best month since November '17. And October is, at this stage, a better month than September. So we are making gains, it's just slow.

[Melissa Roberts]

Just -- I've had a few questions that come through the webcast from Rahul Anand at Morgan Stanley. A couple have been covered, but there's probably one question. You talked about thinner tiles and grinding impacting zircon demand in 2019. Is this not a trend going forward with [indiscernible] on that?

[Christian Barbier, Head of Marketing]

Well, yes, it is. And no, it is not at the same time. It's a trend that has already been [ taught ] to a certain extent. And it's something that has been practiced by players in the industry for a number of years. they have been doing it probably a little bit more recently due to higher zircon prices. But at the same time, what is happening is the thinner tiles is that for -- there's also a number of these thinner tiles that needs a stronger body. And in order to respect everybody, it needs zircon [indiscernible]. So business adapted a combination using a number of raw materials, depending on the end products that they need. So yes, this is something that people have been doing to reduce their zircon consumption. But it's not something new. It's been playing out over the last 3 years -- 3, 4 years regularly. And now it's relatively stable.

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

So Paul.

[Unknown Analyst]

So you have a Phase 2, so I knew you had a Phase 1 that's relatively modest, $10 million CapEx, not really change probably by much. In Phase 2, imagine that you're looking at much better margins. What -- how should we think about that? Is that a relatively simple process in terms of treatment? Is it a material step-up on the phase 1 CapEx? You're looking for maybe 100,000 tonnes of doubling of output. And how should we think about kind of the uplift value, realized value of the product?

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

Look, it's early days to be talking about the uplift in realized value. The capital is -- it's not at all in the magnetic [ highs ] but the complexity is higher, but again, [indiscernible] environmental and approval process especially, that's going to take some time. But really, we're taking it step bites for it. As we go further, we'll be giving a bit more detail, too.

[Unknown Analyst]

[Indiscernible].

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

No, no. I think that it's -- it had a significant increase. So as you said, it's [ done ]. But what it does do is that we're taking it, as to what it said on the screen or on the presentation, going from a constant rate, which we've given some sort of guidance around the amount of material that we've got to 85% [ common ], and that's almost [indiscernible] maybe sell the zircon separately and separating out the different processes, but it's not complicated. And it's in an area where we currently operate.

[Unknown Executive]

[ Yes, Ken. ]

[Unknown Analyst]

[Indiscernible], a couple of good questions. One's urban side, basically, demand is -- have you seen sort of like much pressure from end customers in terms of [ throughput ] to [ real life work ]? And on the IFC investment, there's obviously [indiscernible] from what I can see, that's based on some of their own standards. Are you able to discuss those conditions a bit more and [indiscernible] to the expansion itself?

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

The zircon question, I didn't quite catch.

[Unknown Analyst]

I mean is the cost in there [indiscernible]. My sincere apologies.

[Unknown Executive]

Ah I'm sorry. [ I had that question ].

[Christian Barbier, Head of Marketing]

Yes. Look, we -- over the life of our current pricing system with the reference price, we constantly adapted our pricing discounts, our geographic and product mix situation according to the requirements of the markets and we're doing that. So it's true that we've slightly increased this, as you've seen that on the chart. Talking about aggressive discounting, no. If it was aggressive discounting, we would not be maintaining our reference price at the level where it is. What we see -- and again, I think we mentioned that before, the intent of our pricing is to provide visibility and stability to our customers. And most of them have been very supportive of that. And they -- of course, they are under pressure from their end markets in terms of cost, but they also realize that stability in pricing is good for business, while high fluctuations are generally demand destructive.

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

So on the second question, even on the IFC, the timing of second installment is -- I'll announce those early works, timing, [indiscernible], but it's not [indiscernible]. So the second question you posed that I seen there's an impairment given that performance [indiscernible]. And I have to say, no, quite the reverse. They're actually -- that's quite helpful in terms of the approval process and the like because it's certainly an environmental standard and model around IFC [indiscernible] standards anywhere. So if they're [indiscernible], it's just pretty convenient. But -- and also, that [indiscernible] the impairment to the zircon development generally, again, quite the reverse because Matt's assembled a group of experts around [indiscernible] and elsewhere. And the IFC representative attended that workshop to evaluate the beginning evaluation of a number of different options to [indiscernible]. So it gave us [ high stakes partner of ours ] this development we attended. It's a great value-add having them on board.

[Unknown Analyst]

So there's nothing, basically, you're talking of [ opportunity ]?

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

Well, as I say, the timing of it is, [indiscernible] announcement of early works.

[Unknown Analyst]

[Indiscernible]?

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

No. Within 18 months. Yes, it's all set out in the announcement from...

[Melissa Roberts]

From June 6.

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

June 6.

[Unknown Analyst]

So still on SR1, obviously, the plans. I mean how are you thinking about [indiscernible] supply from, obviously, category [indiscernible]. I guess are you stockpiling that to ensure the longevity of SR2 over life of Cataby? And SR1 is more of a -- it's one of these projects coming up? Or was it a third-party ore source? And what's the thought process around that?

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

That is the thought process, pretty much, everybody, in the 5 months now. Our sources [indiscernible]. So they're the -- they're broadly the 3 options. It's over production from Cataby; the third parties'; or at third parties within [indiscernible] Australia.

[Unknown Analyst]

So instead of [indiscernible], a follow-on to that question. You mentioned there's 8.5 year resource, plus 4 years. Can you talk about how that additional 4 years fits in? Like whether that could be -- have -- where it would fit into the mine plan, whether it can be sort of brought forward to bring into an SR1.

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

Yes. Look, I can't really [indiscernible] much at the moment step out I'm afraid, but they are some of the things we think about that can be accelerated for merely an extension of Cataby growth that [indiscernible].

[Unknown Analyst]

Okay. I've got a couple more questions. Just another question on rutile, if you could just talk through the improving prices that's been reported and that you're expecting for this year. Is that driven by the pigment industry willing to pay higher prices for rutile and probably helped on the supply side by the issues you haven't had this year? Or is there sort of an element of mix, selling more into the higher-value welding markets and metal markets?

[Christian Barbier, Head of Marketing]

Well, you've seen on one of those slides, the situation of supply and demand for rutile. So it doesn't mean there is elements of tightness in the rutile market. Now at the same time, your chloride pigments production requires more high-grade ore. So it is -- the positive trend for prices does not only benefit rutile, but it's also positive for synthetic rutile and for the high-grade [indiscernible]. Normally prices are on the -- on positive pricing at the moment.

[Unknown Analyst]

Okay. Specifically though, I'm just wondering, are the price improvements coming from pigment customers? Or are they partially a result of selling more than your typical 8% into the welding market? Specific to welding market.

[Christian Barbier, Head of Marketing]

All applications see an increase in market prices, whether it is pigment or welding or metal. All these applications are actually have the same pricing impact.

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

So it's not really driven by mix.

[Unknown Analyst]

Yes, that's what I'm asking. And also, Christian, can I just get your view on China's ability to be self-sufficient in [indiscernible]? When you look at -- [ low ] sort of the key driver of chloride capacity. They seem to have the ambition that they're going to be self-sufficient. Do you think it's possible for them to get to that point? Maybe not -- well, but China as a whole.

[Christian Barbier, Head of Marketing]

Well our point is, presently, that we believe we will be able to contribute to the requirements of high-grade feedstock. And you can see on the sulfate side, they are self-sufficient. On the chloride side, they probably will be become far from self-sufficient. We believe, they will also have to import high-grade [indiscernible] and they have started, hence, the [indiscernible].

[Unknown Executive]

Thanks. Yes, Jack?

[Jack Gabb, Associate]

Price, so that's one more on -- probably for you, Matt, just in terms of timing. Iluka has a lot of projects that have -- Cataby as well as the [indiscernible], performance decision. I guess there's still a lot of uncertainty around the projects that you've still got. And I guess, first on Sembehun and you talked about potential trials, PFS, DFS. Can you give us a sense on when a decision could be made on that mine, particularly given the life [indiscernible] they have is not extensive at this point? So you want to make sure that that's commissioning that before or very close to the end of those 2 mines. And then secondly, Wimmera, where are we at the tailings permitting? Has that process started yet? that's presumably a very lengthy process.

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

Yes. So on Sembehun, we -- as I said, we're back in the sort of a rescoping stage. Based on the current views on mine plans, it's actually difficult to say whether there will be a gap or not because -- and it's for a couple of reasons. One is that we don't exactly know how long the execution will be because we haven't decided what we're going to build yet, right? There are ways to accelerate any execution in Africa but it might come at a slight charge because you operate through the wet season versus not building through the wet season. You have to make those decisions. You weigh the cost benefit. Rob's got these extensions that he talked about. And at a high level at the moment, we don't see a gap for both mines, acknowledging that one of the mines finishes before the other one, right? And then how those other satellite deposits come in to fill what may or may not be a gap in the MSP. I mean we don't know whether there will be a gap but they finish at different times. And there will be things within our control we can do. That would be the first comment I would make. So in terms of something like Wimmera, we're in the PFS. We've stated that environmental permitting process. It's been referred. That can be a couple of year process. That is not inconsistent nor currently the critical path on the project. So no, I guess that's not on the critical path today. And in terms of just the overall portfolio or the pipeline of projects, I think one of the things to think about it is that, ideally, what a company wants to do is get yourself in a position where you can make choices, right? And so progress the projects to a point. We had sufficient understanding of the cost, the opportunity, the risks, and then be able to pick the best ones to progress at a certain period of time. So it doesn't necessarily mean you take all these projects, you lay them on top of each other and say this is the whole execute phase that you'll do as one -- in one go.

[Unknown Executive]

[Indiscernible] [ take that? ]

[Unknown Analyst]

[Indiscernible]. Presumably, if you're reviewing [ match ], there's potentially a view that maybe the market is not pricing that correctly. So as part of the review, would you consider buybacks as an option to close that theoretical gap? And my other question is on -- you guys have been talking about industry supply, under pressure for quite some time. I'm just wondering, are there any risks on the supply side that you see that are emerging? Or that story's basically the same as you've been telling it for some time now?

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

Look, I'll hand over to Christian on the supply side story [indiscernible] pretty similar sort of inventory builds. The next thing, [indiscernible] will be similar. But the -- on the first question as to whether we kind of let the buyback to close the gap you identified in terms of valuation from that, I don't think so, no.

[Unknown Executive]

[ For sure. ] Thanks. Sorry, Christian?

[Christian Barbier, Head of Marketing]

Yes. I'm not sure exactly what you're referring to, probably what we were saying about the supply deficit coming/emerging in the next few years.

[Unknown Analyst]

As you look at sales, yes.

[Christian Barbier, Head of Marketing]

So this is what we've shown also on that slide. So there's currently a decline in production and which still we see coming and the naturally declining grades at the existing mines. People will open new projects. We've just started our Cataby project. As you've seen from that, we have a portfolio of projects to meet some of these requirements. There will be some other projects. We don't believe in the structural deficit. But there will be a need for new projects, definitely. The view has not been changed.

[Unknown Executive]

Yes.

[Unknown Analyst]

[Indiscernible]. A question for you, Tom, getting away too easily. Last strategy though was 2 years ago. And you gave a 3-year outlook. [indiscernible] 3-year outlook or any such guidance or anything this year? One?

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

Learned our lesson, we think. No, I think there's a level of uncertainty in the marketplace generally. For about our global market, this is where it will be appropriate. So [we can't make ] a 3-year outlook for sales, for example. But see, on production, we have actually given guidance around having '19 to '23 and beyond if it was approved. We've given guidance to JA with the Ambrosia mine plan. It's the guidance that we can make do on production out to 2022 of greenfields and pre-cities at a steady sort of level. And we also have the ability to increase production with our swing capacity in [ there ] by a very significant amount each year, depending on [indiscernible]. So we've talked changing our production settings at the moment in zircon, last year at JA rather than any other -- or Cataby for example. So we'll provide guidance at the usual time. But I think we'd provide the [indiscernible].

[Unknown Analyst]

[Indiscernible] back on Sierra Rutile. You said the words just back in the scope ], [indiscernible]. And you're still talking about some sort of pathway decision for next year. Can you just remind us just the 2 assets as it sits, what's the sort of [ April ] production capacity without [indiscernible]? And obviously, you can scale it up as you go along the [indiscernible]. What do we see it capped at until those [indiscernible]?

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

Yes, we've talked about that a little bit before. The mineral separation path is broadly accepted to be capped at about 175,000 tons per annum. But we'll provide a bit of guidance in January about what level we expect next year.

[Unknown Analyst]

[Indiscernible] some of sort of [indiscernible] carry on after that that we'll see what that goes; will it be the subsequent couple of years as well?

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

Yes, yes.

[Unknown Executive]

Glyn?

[Glyn Lawcock]

Just on [indiscernible], I've been back to the results after you said maybe the [indiscernible] give us the help on kind of value for revenue stream. Can you or -- it doesn't feel like you have...

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

[Indiscernible] to look pretty early. Is that right, Mel?

[Melissa Roberts]

Yes. Getting closer.

[Glyn Lawcock]

Getting closer.

[Melissa Roberts]

They will happen.

[Unknown Executive]

Yes, [indiscernible].

[Unknown Analyst]

[Indiscernible] again. So I kind have to ask this question. What were the learnings out of Sierra Rutile? I mean it hasn't really panned out exactly as anticipated. What do you think could have been done better in the early evaluation? What were the key take -- learnings out of this process?

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

Look, I think probably a key one is that we're trying to operate in a particularly challenging environment at Sierra Leone. And I think that was probably underestimated. For a company that has a historically operated in Australia and in the U.S., to take on an involvement in Sierra Leone, there's an awful lot of lessons -- an infinite number of lessons that we've learned and we continue to learn today. Rob earlier discussed a number of areas where instructive, within tracking personnel, the skill base of the local workforce, community interactions and the time taken with the government interactions rather than operational matters. So I think that was significantly underestimated, the difficulties of operating in such a challenging environment.

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

Any others? Okay. Well, look, thank you all for your attendance today. [Indiscernible]? No? Okay. Well, thank you all for your attendance today, and look forward to seeing you at the briefing with Cataby tomorrow. Thank you.

[Melissa Roberts]

I have to say there's a couple of housekeeping things.

[Operator]

Ladies and gentlemen, this concludes our conference for today. Thank you for participating. You may now disconnect.