MINERAL
SANDS
BRIEFING
PAPER
NOVEMBER 2009
An occasional briefing paper prepared by Iluka Resources to provide information relating to the mineral
sands sector.
CONTENTS
David Robb, Managing Director - Response to Questions
1
Jacinth-Ambrosia Zircon Development, Eucla Basin, South Australia
3
Update on Iluka Currency Hedging Arrangements
4
A China Perspective on Zircon - TZMI Singapore Conference October 2009
5
David Robb, Managing Director
From a portfolio perspective, what is the significance of the completion of the Jacinth-Ambrosia project?
Commencement of production at Jacinth-Ambrosia, ahead of schedule and under budget - with expected
final capital expenditure of less than $390 million relative to the approved budget of $420 million - is the
key component of Iluka's asset portfolio transformation which we have focussed on for the past three
years.
The significance is threefold.
First, it should significantly de-risk the portfolio from an investor's viewpoint in that the major project
execution risks are now effectively behind the company.
Second, it confirms that 2009 will be the year of peak capital expenditure and the absence of that large
capital expenditure programme in 2010 and beyond should underpin a significant improvement in the
balance sheet.
Third, it transforms Iluka's portfolio from a reliance on a mature, increasingly challenged mineral sands
province in Western Australia to new, globally significant, long life and higher margin production sources
in Victoria and South Australia.
2
There has been a market concern that Jacinth-Ambrosia production will only serve to oversupply the market. With
weak demand for zircon in 2009, isn't this a greater risk with the commencement of Jacinth-Ambrosia?
There are always risks associated with bringing on new production - technical, logistical and market
related but we believe these are manageable. People sometimes overlook the significant transformation
of our existing asset base, which we have accelerated during 2009. While Western Australia produced
an average of 250 thousand tonnes of zircon per annum between 2006 to 2008, by mid to late 2010,
there will be minimal zircon contribution from Western Australia as we take the final steps to curtail
production from this source. We have also indicated that we will phase the ramp-up of Jacinth-Ambrosia
and that we will supply the market as demand dictates. We have no concern about holding inventory if
necessary.
Not only is Iluka a significant global supplier of zircon, but Jacinth-Ambrosia is the most significant new
source of global zircon supply in decades. Our customers who have a view on security of supply over the
medium term recognise the significance of this development.
The Australian dollar must continue to remain a concern for revenues and earnings?
Our focus of effort has been to move the Iluka portfolio of assets to a much better margin position, both
absolutely and relatively within the mineral sands industry. We are making good progress towards this
objective.
As with any industry, the broader supply context and competitive position of the main suppliers needs to
be considered. And here there are two factors which are significant. First, our main competitors are
typically Rand or Canadian dollar based producers. To the extent that the depreciation of the USD
affects Iluka as a suppler it has also affected our main competitors as well.
The second factor, and something which was highlighted by South African producers at a recent industry
conference in Singapore [refer TZMI Conference Summary
www.iluka.com
], is that South African
producers are facing some significant challenges related to costs, quite apart from currency movements
relative to the USD.
Eskom, the national power provider in South Africa has indicated that power costs will rise by an average
of 45 per cent for each of the next three years. For producers of upgraded ilmenite in South Africa, we
assess this as equating to something like a US$100 to 150 per tonne cost increase. Given these
products have a market position with relativities to synthetic rutile and rutile, this cost pressure alone -
quite apart from the general tightness in supply for high grade titanium dioxide products - must influence
pricing dynamics.
Our approach remains that, over time, prices will adjust to take account of external factors, including
currency movements, as well as potential resource scarcity considerations.
In the context of the weak demand situation in 2009, and continuing uncertainty about the shape of
demand recovery during 2010, lluka has taken steps to provide further balance sheet protection. In
addition to the US$153 million in forward cover at approximately 86 cents we had in place for 2010, we
have extended this by US$235 million via currency call options over the balance of 2009 and 2010 [refer
section below].
How is demand recovering in the mineral sands sector?
2009 has been a difficult year, with unprecedented demand reduction, mainly evident in the first half. The
second half has seen a recovery in demand, but this has varied by market.
Overall, indicators are positive for the recovery in demand to continue as we move through 2010,
although this remains heavily reliant on global economic conditions.
In relation to high-grade titanium dioxide products, demand recovery in 2009 has been in line with our
expectations. As we have said previously, we will end 2009 with virtually no inventory of high-grade
titanium dioxide products. It is our assessment that rutile and synthetic rutile will be in tight supply.
In terms of zircon, demand recovery in China in the second half has been very strong, following a
destocking phase and with the benefits of government stimulatory measures flowing though to housing,
general construction and consumer demand. Chinese zircon sand imports in August and September
were at a higher rate than pre global crisis levels. Demand in North American has shown signs of
recovery in some sectors, while the European market remains challenging.
3
How do you see 2010?
We are in the process of preparing our 2010 budget. The finalisation of this will be influenced by
discussions we are having with our customers about their requirements for 2010, as well as our own
market intelligence and assessments of demand recovery, market by market. We expect to provide
greater detail on how we see the shape of 2010 when we have completed this process. I think it is
prudent, though, not to expect demand in 2010 overall to be restored to pre GEC levels, at least in the
first half of the year.
An important factor for an investor in Iluka is what we believe are favourable medium term industry
dynamics, as the world emerges from the global economic downturn. Demand for mineral sand products,
influenced by the twin forces of urbanisation and increasing per capita consumption in major population
centres, provides a dynamic which - while later in the economic cycle - may be no less significant than
the infrastructure stage demand for other materials. And yet in this sector the potentially viable sources
of new high quality supply, namely high grade titanium dioxide products and zircon, are difficult to see.
Can you elaborate upon the supply situation?
It may seem paradoxical to some but while the medium term demand fundamentals for high quality
mineral sands products remain positive, the supply situation, especially for zircon and for high-grade
titanium dioxide products is challenging.
Iluka's inducement analysis suggests very few projects are logically induced at current zircon and rutile
prices. In the case of ilmenite upgrading capacity, this is predominantly utilised and/or controlled by the
major players. Again, Iluka's inducement analysis suggests prices would need to be significantly higher
to warrant additional upgrading investment. A potentially sustained weak US dollar is another project
development challenge.
I think a reasonable case can also be made that Iluka is the logical producer of incremental zircon and
high grade TiO2 supply, given latent capacity, and that it could do this faster and cheaper than
competitors and therefore at lower risk for customers.
Jacinth-Ambrosia Zircon Development, Eucla Basin, South Australia
Iluka's Jacinth Ambrosia project represents a globally significant, long life source of zircon.
The key characteristics of the development include the following:
·
pivotal new source of global zircon supply
- at peak production, potential to constitute ~ 25% of global zircon supply
(relative to 2007 and 2008 consumption levels)
·
high quality, long life source of production
- ~60% of Iluka's total zircon production from mid 2010
- high revenue per tonne
- estimated 1st quartile revenue:cash cost ratio positioning in the industry
·
attractive project economics
Approved project capital expenditure was $420 million and the final capital expenditure for the project is
expected to be less than $390 million.
The nature of the development was designed to mitigate typical project execution risks associated with a
greenfield development. Key elements of the approach included the decision to utilise and extend
mineral processing capacity within the Iluka group, most notably at the Narngulu processing facility in
Western Australia, as well as to relocate equipment (including a wet concentrator) from other parts of the
Iluka portfolio.
The mineral separation plant ("MSP") expansion activities at Narngulu, Western Australia, which
constituted approximately $60 million of total capital expenditure for the project included:
construction of new plant and equipment to transfer heavy mineral concentrate ("HMC") from
ships, reclaim from stockpile and wash saline residue from surface
the existing MSP restored to dual train configuration by installation of a separation circuit
- Plant 1 capable of treating both Jacinth-Ambrosia HMC and Eneabba HMC
- 2nd processing train upgraded and reconfigured to treat Jacinth-Ambrosia HMC only
zircon finishing plant upgrade to produce over 300kt of zircon annually.
4
Summary of Jacinth-Ambrosia Physical Characteristics
Mineral Resources
9.5 million tonnes of Heavy Mineral
Ore Reserves
6.4 million tonnes of Heavy Mineral
Average Ore Reserve Heavy Mineral Grade
6.5%
Average Heavy Mineral Assemblage
50% zircon
28% ilmenite
5% rutile
Expected Mine Life
At least 2020
Estimated Total Finished Product
Targeted peak production
2.8 million tonnes of zircon
1.5 million tonnes ilmenite (saleable)
0.35 million tonnes of rutile
300,000 tpa zircon
Staged ramp-up in year 1 (2010)
Update on Currency Hedging Arrangements
Iluka recently extended its currency hedging arrangements by the purchase of call options. Given the
continued uncertainty in relation to the pace of demand recovery during 2010, this additional currency
hedging was considered a prudent balance sheet management action. Iluka's currency hedging
arrangements are shown in the table below.
Nov to
Dec 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Total 2010
Current position
Collar (US$m)
13.5
Cap
0.8500
Floor
0.7829
Forwards (US$m)
72.0 40.0 26.5 15.0 153.5
Fixed
rate
0.8297 0.8848 0.8762 0.8697 0.8553
AUD Calls (US$m)
70.0 25.0 60.0 60.0 90.0 235.0
Cap
0.9000 0.9000 0.9000 0.9000 0.9000 0.9000
Total hedging (US$m)
83.5
97.0
100.0
86.5
105.0
388.5
If spot rate is above cap rate Iluka delivers at cap rate
If spot rate is below cap rate Iluka delivers at spot rate
5
A China Perspective on Zircon - TZMI Singapore Conference October 2009
Comments from China Zirconium Advisor (Jian Dongmin)
Director of China Zirconium and Hafnium Committee
Source: TZMI Conference October 2009
·
Zirconium industry is an important part of China's national economy
·
Zircon is an important strategic material for China's modernization and defense construction
and also the mainstay of China's new materials industry
·
China is the largest producer and exporter of ceramics in the world
- production of sanitary ceramics 120 million pieces (58% increase since 2005)
- architectural ceramics 5 billion m2 (37% increase)
·
China the world's largest producer of zirconium oxychloride
·
The nuclear grade zirconium processing industry is the most prospective area
·
The consumption of zircon sand in the zirconium industry in China will reach 630,000 tonnes
by 2015 (current estimated at 400,000 tonnes)
INQUIRIES
Dr Robert Porter, General Manager, Investor Relations
Phone: + 61 8 9360 4751 Mobile: +61 (0) 407 391 829
Email: robert.porter@iluka.com
www.iluka.com
Disclaimer
This briefing paper may contain forward-looking statements that are subject to risk factors associated
with exploring for, developing, mining processing and sale of minerals. Forward-looking statements
include those containing such words as anticipate, estimates, should, will, expects, plans or similar
expressions. It is believed that the expectations reflected in these statements are reasonable but they
may be affected by a range of variables and changes in underlying assumptions which could cause
actual results or trends to differ materially. These include, but are not limited to: price and currency
fluctuations, actual supply versus demand, production results, reserve and resource estimates, loss of
market, industry competition, environmental risks, physical risks, legislative and regulatory
developments, economic and financial market conditions n various countries and regions, political risks,
project delay or advancement, approvals and cost estimates.
Specific Risks & Sensitivities
The information contained in this briefing paper is subject to, but not exclusively to, the following:
Changes in exchange rate assumptions
Changes in product pricing assumptions
Major changes in mine plans and/or resources
Changes in equipment life of capability
Emergence of previously underestimated technical challenges
Environmental or social pressures which impact licence to operate
All currency referred to is Australian denominated unless otherwise indicated.
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