Iluka Resources Limited - PDF Free Download

Iluka Resources Limited Presentation to Resources Investor Roadshow Dr Robert Porter, General Manager Investor Relations 27 & 29 September 2016

Disclaimer Forward Looking Statements Forward Looking Statements This presentation contains certain statements which constitute forward-looking statements. These statements include, without limitation, estimates of future production and production potential; estimates of future capital expenditure and cash costs; estimates of future product supply, demand and consumption; statements regarding future product prices; and statements regarding the expectation of future Mineral Resources and Ore Reserves. Where Iluka expresses or implies an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and on a reasonable basis. No representation or warranty, express or implied, is made by Iluka that the matters stated in this presentation will in fact be achieved or prove to be correct. Forward-looking statements are only predictions and are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed, projected or implied by such forward-looking statements. Such risks and factors include, but are not limited to: changes in exchange rate assumptions; changes in product pricing assumptions; major changes in mine plans and/or resources; changes in equipment life or capability; emergence of previously underestimated technical challenges; and environmental or social factors which may affect a licence to operate. Except for statutory liability which cannot be excluded, Iluka, its officers, employees and advisers expressly disclaim any responsibility for the accuracy or completeness of the material contained in this presentation and exclude all liability whatsoever (including in negligence) for any loss or damage which may be suffered by any person as a consequence of any information in this presentation or any error or omission there from. Iluka does not undertake any obligation to release publicly any revisions to any forward-looking statement to reflect events or circumstances after the date of this presentation, or to reflect the occurrence of unanticipated events, except as may be required under applicable securities laws. Non-IFRS Financial Information This presentation uses non-ifrs financial information including mineral sands EBITDA, mineral sands EBIT, Group EBITDA and Group EBIT which are used to measure both group and operational performance. A reconciliation of non-ifrs financial information to profit before tax is included in the supplementary slides. Non-IFRS measures have not been subject to audit or review. 2

Iluka Resources - Characteristics Objective create and deliver value for shareholders ~A$2.4 bn market capitalisation; 6th ranked Australian resource company Leading position in international mineral sands industry largest producer of zircon one third market share significant high grade titanium dioxide feedstock producer Production operations in Australia and US (latter currently idled) Global marketing presence and capability Iron ore royalty from BHP Billiton's Mining Area C in WA Two mineral sands projects at advanced stages of evaluation SRL acquisition subject to German Antitrust review 3 month process Capital discipline; analytical focus; return on capital as internal proxy for RoE 3

Zircon Broad/Consumption Based Uses Ceramics ~50% of demand Refractory and Foundry ~30% of demand Zirconia, Zirconium Chemicals and Metal ~20% of demand Zircon is opaque, water, chemical and abrasion resistant Zircon is heat resistant and non-reactive Uses include steel and glass manufacturing and metal casting Zircon has many unique properties Uses include fibre optics, electronics, catalytic converters, nuclear fuel rods, cosmetics 4

Titanium Applications Pigment Predominantly Pigment ~90% of demand Titanium Metal ~6% of demand Welding (flux) ~4% of demand Nanomaterials Growing market Titanium dioxide pigment is opaque (white), UV resistant and inert. Uses include paints, plastics, paper and inks Titanium metal has high strength to weight ratio and is corrosion resistant. Uses include aviation, defence armourments, sporting goods and medical applications Uses include solar cells, water purification, cancer treatment, noise absorption 5

Iluka Areas of Focus FINANCIAL FOCUS Growth Options / Focus Areas Marketing and Market Development - Direct sales arrangements Projects Mineral Sands - Internal options advanced Exploration Mineral Sands / Other Commodities Innovation and Technology - resource commercialisation Other Growth Option - Metalysis, Tapira Acquisitions, Mergers and Joint Ventures Where financial and strategic merit can be demonstrated. 6

Iluka Position Low Cycle Conditions Weak 1H financial results although sound position during cyclical low Strong balance sheet (gearing 1H 2016 8.7%) Business running efficiently, safely, sustainably Year-on-year sales volume growth expected Margins healthy; costs reducing Potential for inventory draw-down cash monetisation Ability to reactivate idled capacity when market conditions warrant 7

Mineral Sands Price Trends Significant retracement in prices low formed/forming? US$/tonne FOB 3000 Iluka weighted average prices 2009 to 2015 2500 2000 1500 1000 Zircon Rutile Synthetic rutile 500 0 Source: Iluka 2009 2010 2011 2012 2013 2014 2015 8

Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Commodity Price Trends Index (2005=100) 700 Historical monthly commodity prices and mineral sands prices (indexed) 600 500 400 300 200 Copper Iron Ore Nickel Zinc Rutile Zircon 100 - Source: CEIC, CIQ, TZMI and Iluka 9

Factors Influencing First Half Results 1H 2016 versus 1H 2015 Net loss after tax of $20.9 million (1H 2015: $20.4 million profit) Mining Area C iron ore royalty receipts $18.2 million lower Resource development costs up $24 m - investment in trialling new mineral sands mining technique Negative free cash flow of $50.6 million (1H 2015: $39.0 million; $155 million for 2015 full year) Reduction in operating cash flow of $108 million reflects: an increase of $103 million in trade receivables increased expenditure on rehabilitation works ($11 million); offset partially by lower cash production costs ($35 million) Interim dividend of 3.0 cents fully franked (1H 2015: 6.0 cents; 25.0 cents for 2015 full year) 2010 30 June 2016 cumulative dividend payout ratio (vs FCF) 72% cumulative cents per share 174 cents cumulative retained free cash flow $277 million 10

Zircon/Rutile/Synthetic Rutile Unit Margins Lower unit revenue for main three products more than offset by reduction in unit cost of goods sold Gross margin of Z/R/SR increased 2% to 29% from 1H 2015 1H 2016 1H 2015 1H 2016 vs 1H 2015 % change Unit Revenue A$/t Z/R/SR 1,015 1,130 (10.2) Unit Cost of Goods Sold A$/t Z/R/SR 717 821 (12.7) Gross Profit A$/t Z/R/SR 298 309 (3.6) Gross Margin % 29 27 11

Production Cost Performance kt 1,600 1,400 Production, Revenue per tonne Sold and Unit Cash Costs A$/tonne 1600 1400 1,200 1,000 800 600 400 200 - $1,015/t $717/t $402/t 2011 2012 2013 2014 2015 1H 2016 Synthetic rutile Production Rutile Production 1200 1000 800 600 400 200 0 Zircon Production Revenue per tonne of Z/R/SR sold - RHS $/tonne Unit Cash Costs of Production (excl. by products) - RHS $/tonne Unit Cost of Goods Sold Z/R/SR - RHS $/tonne Unit production cash cost reduction largely reflects cessation of mining and concentrating activities at Jacinth-Ambrosia and Virginia production of finished goods maintained from HMC inventory Cost of goods sold is a better indication of cash and non-cash cost of product sold in the period continued downward trend to $717/tonne Z/R/SR (full year 2015: $780 per tonne) 12

Balance Sheet Strength $m 1000 Net Debt, Gearing and Funding Headroom Total facilities Net debt (cash) Gearing Gearing % 35 800 28 600 21 400 14 200 7 0 0-200 1H 10 2H 10 1H 11 2H 11 1H 12 2H 12 1H 13 2H 13 1H 14 2H 14 1H 15 2H 15 1H 16-7 Modest debt drawdown net debt (as at 30 June 2016) of $124.1 million gearing (net debt/net debt + equity) 8.7 per cent Significant funding headroom undrawn facilities of $828 million with total facilities of $1,010 million cash and cash equivalents of $53 million 13

Inventory Cash Liberation Potential $m 900 Total Inventory 800 700 600 500 $13.3m 400 300 200 100 0 $43.3m Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Work in Progress Finished Goods Total inventory reduced by $56.6 million to $755.2 million (31 Dec 2015 - $811.8 million) work in progress and other inventory 1 drawn down by $43.3 million HMC volumes down 253 thousand tonnes finished goods inventory decreased $13.3 million Inventory expected to reduce to pre-2012 levels over ~2 years 1 Ilmenite and consumables 14

Production Constrained Lower Demand Combined zircon/rutile/synthetic rutile production 2016 ~660kt has been as high as 800kt 1.1 mt Jacinth-Ambrosia largest global source of zircon mining/concentrating idled April 2016 Murray Basin operations major rutile source mining ceased end 1Q 2015 Virginia operations chloride ilmenite/zircon source idled end of 2015 Largest synthetic rutile kiln reactivated 1Q 2015; 3 kilns idle 15

Industry Dynamics Supply Issues Emerging? Subdued market demand evident since 2012 Growth exists, but not in all segments and geographies Industry cash flow and balance sheet pressures some distressed selling debt/equity restructuring Industry sustaining capital expenditure requirement large (~$1.6 billion) and imminent Current industry profitability insufficient to support required investment Financing challenges for new projects; prices below inducement levels Absent new investment there is a zircon supply challenge within three years 16

Significant Industry Re-investment Required Source: TZMI, S&P Capital IQ, company announcements Iluka estimates ~US$1.6b to be spent on major projects during the next few years to sustain production this estimate excludes maintenance capital relates to major existing producers, not potential new players 17

Zircon Supply Structural Gap Emerging? Source: Iluka * Zircon production from 2016 onwards excludes any finished goods inventory held at 31 December 2015, but includes zircon processed from concentrate stockpiles held by Iluka at the end of 2015. Zircon from existing producers declining due to depletion and decline in grade and assemblage Minor producers not sufficient to fill structural supply gap Inventory declining and largely in the hands of major suppliers (predominantly Iluka) New zircon production dependent on co-product zircon from yet to be built TiO 2 mines 18

Sierra Rutile Acquisition All cash consideration of 215 million (A$380 million) plus ~A$80 million debt Subject to approval of German anti-trust authority 3 months process from mid September 1 ASX Release, 25 August 2016, Sierra Rutile Limited Merger Update 19

Strategic Rationale and Financial Merit Strategic Rationale Major producer of rutile globally Strong operating history, established customer relationships in an industry Iluka knows well Long life asset (20 plus years mine life) 1 Further potential in reserve optimisation, exploration opportunities in Sierra Leone Approximately doubles Iluka s resource base Production potential expansion from ~130ktpa to ~240ktpa Increased portfolio flexibility in relation to Iluka s internal production options Consistent with Iluka s counter-cyclical approach Financial Merit Attractive risk/return profile across range of scenarios Expected to be EPS accretive in first full year (2017) and thereafter FCF and DPS impact in any year subject to investment decisions across portfolio Peak debt is expected in 2018, dependent on phasing of Iluka s internal projects Post transaction gearing (net debt/net debt + equity) of ~25% Operational and resource conversion improvements; production expansion potential Balance sheet capacity (funding headroom) maintained ~A$500 million post acquisition 1 Subject to Iluka feasibility studies and resource assessment post acquisition. Source SRL Annual Report. 20

Investment Considerations - Iluka Shareholder value creation focus and capital discipline Favorable industry position and industry structure Sound financial position at low point of cycle; share price reflects low cycle conditions Demand recovery protracted, remains uncertain encouraging trends in high grade TiO 2 Some end markets opaque; price risk (both ways) Volume demand recovery may precede price recovery Favourable medium to longer term demand; challenging industry supply dynamics Willingness to act counter cyclically - financial and strategic merit - bias to deploy capital Commitment to return funds to shareholders if no appropriate investment opportunities 21

Iluka Resources Limited For more information contact: Dr Robert Porter, General Manager Investor Relations robert.porter@iluka.com +61 3 9225 5008 / +61 (0) 407 391 829 www.iluka.com