Iluka Resources Limited (ILU) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Iluka Resources Limited 2021 Full Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Tom O'Leary. Thank you. Please go ahead.

Thank you, and good morning. With me in Perth today are Adele Stratton, Matt Blackwell and Luke Woodgate. We all look forward to discussing with you what I think is an excellent set of results delivered by Iluka in 2021, not to mention a substantial agenda ahead for the company. But before getting to that, I would like to acknowledge the announcement made by our Chairman Greg Martin that he will retire from the Board in April. Greg will depart Iluka, having made a significant contribution to the company over the last decade. He has called out a few matters of note in today's ASX release. And while I'll have more to say on Greg's contribution at the AGM, I will take the opportunity this morning to put on record my thanks and appreciation for Greg's support since I joined Iluka 5.5 years ago. Rob Cole will be succeeding Greg as Chairman, and I look forward to working with Rob during what I think will be an exciting time ahead for the company. Those of you familiar with our business will know that for some time we've been discussing challenges facing the mineral sands industry. In particular, we've talked about challenges due to declining production because of mine depletions, and there remains no substantial new capacity coming online in the near term. We've commenced today's deck with a refresher on these challenges at Slide 4, not least because over the past year, we've seen their market implications on practical display, with those covered on Slide 5. The current mineral sands marketplace is characterized by constrained supply and steady demand, with this dynamic playing out in the context of a global environment defined by COVID-19, geopolitical strategic competition, generalized political uncertainty, for example, in South Africa, and increasing momentum towards an electrified low-carbon economy. So what's been our approach and what's been delivered? First, you can't hope to do anything for long if you're not doing it sustainably. And you'll see our approach and achievements in this area outlined on Slides 7 and 8. Reducing serious potential injuries has been a very specific safety focus for Iluka over the past couple of years. And I'm pleased to report a 25% decrease for 2021, which was achieved alongside a similar decrease in our total recordable injury frequency rate. We've released our position statement on climate change. And our approach on that, as you'd expect, is measured. Obviously, our plans around production of separated rare earth oxides would see us being a facilitator of global efforts of decarbonization through electrification. At the same time, we'll continue to work on the carbon challenges associated with our existing mineral sands business on identifying the solutions and technology advancements that will be required, and then setting work programs to target their achievements. Rather than making general statements of ambition, we think it's important that there is first a reasonable basis to expect that, that can be achieved. We have made incremental steps during 2021, including the commissioning of the 3.5 megawatt solar farm at Jacinth-Ambrosia in the latter part of the year. While this addresses only a fraction of our overall emissions, it's nonetheless a potential blueprint for the use of renewable power sources at other Iluka sites. Slide 9 summarizes the operational flexibility we once again demonstrated in response to market conditions over the course of the year. In Australia, we returned to maximum operational settings in April, with both the Narngulu mineral separation plant and synthetic rutile kiln 2 at Capel running at full capacity. In Sierra Leone, last month, we withdrew our notice to suspend operations on the back of improved production performance delivered over the second half and parliamentary ratification of amendments to Sierra Rutile's fiscal regime. I'll now hand over to Adele to cover the financial results, which reflect the commitment of our workforce. The team has been resilient in the face of the threat of ongoing disruptions presented by the pandemic. And while we can expect that resilience to be further tested over the coming year, particularly in Western Australia, we do so with some confidence given our achievements today. Over to you, Adele.

Thanks, Tom, and good morning. Key aspects of our financial performance are outlined on Slides 10 to 13, and I'll keep my commentary brief because I think the numbers really speak for themselves. In short, we achieved material increases in underlying NPAT, up more than 100%; revenue, up 57%; EBITDA, up 85%; and free cash flow, up more than 700% relative to 2020. Unit cash cost of production and cost of goods sold were also both down. The results have contributed to a further strengthening of our liquid balance sheet. Our net cash position was $295 million at 31 December. We also have significant funding headroom, with total debt facilities of $512 million, which is important in the context of our development pipeline, an area Tom will return to shortly. Our final dividend of $0.12 per share fully franked reflects our updated dividend framework, which is to pay 100% of dividends received from Deterra Royalties and pay a minimum of 40% of free cash flow from the mineral sands business not required for investing on balance sheet activity. As you can see from our outlook slide, we're expecting to deploy over $200 million in capital expenditure this year. So we've considered that when determining the final dividend amount. Given 2021 was our first full year reporting period since the demerger of Deterra, we thought it worth highlighting the contribution of our 20% stake, which you can see on Slide 14. This includes $15 million in total dividends received by Iluka during 2021, which equates to a $0.035 dividend for Iluka shareholders. Production from BHP Southpoint development is yet to fully ramp up. Based on Deterra's recent market capitalization, Iluka's stake is worth around $0.5 billion, providing us a significant additional source of long-term financial strength. And with that, back to you, Tom.

Thanks, Adele. Iluka's performance in 2021 included important progress throughout our project pipeline which is covered on Slide 15. Collectively, these projects are core in delivering our response to the challenge of declining industry production, both in the nearer and longer term and across our product suite of zircon, high-grade titanium feedstock and rare earths. Last year, we took decisions to restart synthetic rutile kiln 1 at Capel, which will be online at the end of the year, commence a definitive feasibility study for Balranald in New South Wales, and announce a resource estimate for Wimmera in Victoria. The latter two decisions reflect our sustained focus on mineral sands technical development in Australian jurisdiction highlighted on Slide 16, with each of these projects and their technologies having the potential to transform our industry. In line with the macro view of mineral sands markets I touched on earlier, Slide 17 and 18 provide some additional detail on the general tightness we're encountering at the moment. We've seen significant pricing traction over the past year with customers increasingly prioritizing security of supply. This underscores the importance of our approach to pursue a sustainable pricing environment for our product, something Iluka has been doing for a number of years. And that takes us to our emerging position in rare earths, which is covered on Slides 19 to 22. As we reported in our quarterly last month, our offtake obligations for Phase 1 have been met in full and are concluded. Phase 2, which will produce a direct feed for our rare earths refineries in the latter stages of construction, with commissioning scheduled in the first half. The feasibility study for Phase 3 of fully integrated rare earths refinery is substantively complete from a technical perspective and will be finalized by the end of Q1. We received key environmental approvals in January and are in discussions with the Australian government on potential risk-sharing arrangement to deliver Phase 3 are ongoing in parallel. I'm not in a position to provide further detail today because in the context of our ongoing discussions with government, that will not be appropriate. 2021 saw rising prices for rare earths with demand expected to increase markedly as the world pursues electrification. The fastest-growing application for rare earths is for the production of permanent magnets, which are essential inputs for sustainable energy technologies, such as electric vehicles and wind turbines. As the highest-grade operation globally, Eneabba provides an enviable foundation for Iluka's diversification into this market. That foundation is complemented by the Wimmera development, which, as you can see on Slide 22, has a very similar assemblage to Eneabba, but with more dysprosium and terbium, and could offer an attractive long-term source of feed for Phase 3. As I've outlined previously, Phase 3 is also being designed specifically to be able to process feedstocks from a range of third-party development. To sum up, Iluka is positioned to lead in the response to industry and market conditions, both near and longer term through our operations, development pipeline, financial strength, marketing approach and product suite. And this was demonstrated, I think, by the excellent results we achieved in 2021. With that, I look forward to your questions.

[Operator Instructions] Your first question comes from Rahul Anand from Morgan Stanley.

Can I perhaps start with the zircon guidance, please, for calendar year '22? I just wanted to see if you can provide some color around how much of that might be ZIC. And then I presume JA is probably running at higher than reserve grades this year still. How long can you maintain that position in terms of staying above reserve grade? And when do you revert back? That's the first one. I'll come back with a second.

Yes, Rahul. So just in terms of the zircon in concentrate, Rahul, we've guided across the group 80,000 tonnes of zircon in concentrate. And included in that collection guidance is 75,000 tonnes in Australia, and then the remainder from the Sierra Rutile. In terms of the Jacinth-Ambrosia, as we've said, the intention is to return to Ambrosia in the latter part of '22. So sort of think that's around August, September months. And so we'll be depleting completely, just north where we currently are and that's in that lower-grade asset, and then returning back to Ambrosia, which will be a slightly higher grade. So as we've said before, we can sort of see outlook for the next couple of years probably being consistent with what we've guided at the moment. There's no rationale in terms of the grade drop-off just for the next couple of years.

Okay. That's very clear. And then the second one is on Sembehun, I saw the updated reserve there. Obviously, a better grade, lower tonnes and perhaps somewhat lower rutile estimate there. So clearly, I mean, you're trying to improve the grades to improve economics by the looks of it. I just wanted to get an update. I mean, I think the last report was the first time that a demerger also seems to be an option for the asset. Can you perhaps update us on how the process is looking currently? Are you actively looking to develop there? Or has the strategy now changed to perhaps more of a divestment?

Look, Rahul, as always, what we do with Sierra Rutile is all about optimizing value, and you touched on sort of thinking around the possibility of demerger and so on. But what I'd say is that subject to achieving an FID on our Phase 3 development in Eneabba with rare earths, we're in for an incredibly busy few years ahead. Over in Sierra Leone, as you say, we've updated the reserve information there. And they have the Sembehun development to optimize. And when we're thinking about that, we're also aware and contemplating the recent change to the fiscal regime. So the team is also busily identifying what additional resource in the Area 1 might now be economic to extend life. And that's opening up options around Sembehun. So there's a lot to do there and material capital allocation decisions to come. So we're continuing with our process. As well now, we're considering demerger, as we've said. If we did pursue that, it would create an Australian company focused on critical minerals in Australia and a separate West African company focused on optimizing Area 1 and Sembehun. So look, they are the things we're considering. And as I said, it's all about optimizing value, Rahul.

Perfect. Okay. Last one from me is around projects. So Atacama, Euston, Wimmera, all sort of sitting in the same select section of your Slide 15. Atacama is one which has been talked about for a long time. I just wanted to understand, has there been any movement in terms of trying to find a solution for processing at that asset? Or does Euston now become your primary, if I want to put it that way, maintenance opportunity in terms of volumes?

Rahul, I think you know us better than we've been sitting on our hands worrying about Atacama. We've been actively engaged in searching and developing -- in fact, beyond searching, to developing a technology solution to treat the impurities in the ilmenite. We've flagged that previously, that Atacama's got quite a lot of zircon, but it's also very dominated by ilmenite. Ilmenite does have some impurities, and we're pleased with the progress that's been made in that regard. And that's one of the reasons why we are pushing forward with the PFS and the various components that go into that. So we're certainly not giving up on Atacama. Quite the opposite. And we've got a team working on that. We've got a team working on Euston. And that's one of the great advantages of Iluka compared to some of our competitors is we're not a one-mine company. We don't only have one option. We will progress these through PFS so that we can make the best risk-weighted commercial decision for our shareholders.

Your next question comes from Paul Young from Goldman Sachs.

A few questions on the market to begin with, Tom. Can I start with rutile or high-grade feedstock pricing? I know you made the comment in the presentation around achieving low double-digit price increases with pigment customers and I think a 25% increase with welding customers. Can you just confirm, is that just for this -- for the June half?

Yes. Look, currently, our pricing is on a 6-monthly basis for high-grade feedstock, certainly, pigment. Some welding where might be shorter than that. But that gives you an indication of where we're heading from the weighted average of last year.

Great. And welding sales are, what, 10%, 15%?

Sorry?

Welding sales around 10% to 15% of volumes?

Out of SRL, they are. Probably more like 10% -- no, 10% to 15% would be right, yes.

Okay, great. Second question on the zircon market. Extremely tight market conditions. I mean, as you point out, no inventory across producers, customers, robust demand in China and also Europe. We had your peer, Tronox, make comments last week about the potential for further price rises this year. What's your view, Matt, on the market's ability to -- based on what you're seeing, to actually absorb further price increases. And obviously, I understand that you're trying to create price stability. But just your -- interested in your thoughts on further price rises.

Yes. Look, I'll answer that in 2 parts. First of all, our lawyers advised us very strongly not to talk about what the prices might do in the future. And that gets you into dangerous territory. But to the basis of your question about the capacity and the capability, we're seeing, for example, calcined alumina prices, which is one of our -- one of the substitutes for zircon in Spain, almost doubled in price over the last sort of 6, 12 months. And so obviously, as the price of substitute moves up, that creates headroom for things like zircon. What we're also seeing is a trend, as we alluded to in the quarterly pack, towards the large-format tiles. When you have a tile that's 3 meters by 2 meters, breaking one of those is the equivalent of breaking 33 normal-sized tiles. So you want better quality, better strength. And we've seen an increase in zircon loadings going into those larger-format tiles of premium zircon. So that's all positive. And I think what we see is an underlying strength in demand for premium zircon through the market going forward.

Great. Final question on any other Phase 3 in the refinery. Tom, obviously, we're all waiting with anticipation on the results from the feasibility study in the June quarter. Can I ask around the capital guidance? So maybe it's a question for Adele, around the AUD 260 million or so CapEx guidance for the year, what's included to any of the Phase 3 in that number?

Just for the finalization of the feasibility study, Paul.

Okay. So any capital as far as getting started with construction will be in addition to the AUD 260 million?

Yes. It's got, obviously, the completion of the Eneabba Phase 2, which is under construction and the feasibility study for Phase 3. And obviously -- and I think we've drawn out some of the expenditure on Wimmera, progressing those solutions, but yes, nothing more in relation to executing a decision for Phase 3.

Your next question comes from Jack Gabb from Bank of America.

A couple for me. Just firstly, on monazite pricing. Can you give us any sense of what pricing is looking like for Phase 2 material?

Jack, we've stated that we're holding back on our decision whether we will treat Phase 2, depending on the outcomes of Phase 3. But the spot market for monazite today in China, I think, is $10,000 a tonne. So considerably higher than when we anticipated and approved the expenditure on the Phase 2.

And then secondly, just on ilmenite. Obviously, high-grade feedstock's in short supply. Are you seeing increased demand for ilmenite sales? And I guess, how does that make you think about pricing and your need to source feed for SR1?

Yes. Good questions. And yes, there is strong demand for ilmenite. There's strong demand for all feedstocks, particularly high-grade feedstocks. And with regard to ilmenite, we have been able to secure, through external and internal, predominantly internal sources, sufficient feedstock to run SR1 for at least 2 years.

Okay. And then just last one, a follow-up on Paul, just on the CapEx. Even if we ex out the various studies that you've broken out in your presentation, plus the SR1 restart CapEx in Australia is, I think, 3x of what it was last year, can you provide any additional color on what's driving that? Some of that, I'm sure is inflation. But is there anything else material within that number that's driving the big increase relative to '21?

Yes. So Jack, just in terms of when we went to Ambrosia -- we've deferred capital now. We're going back to Ambrosia-Jacinth, as I mentioned earlier. And then that deferred capital is going to have to spend there. I think it's around about at that $20 million mark. When we went into sort of the pandemic and we went back to business, one of the drivers behind was that to defer some of that cash spend. So that's coming out then in 2022.

Okay. Perfect. So we won't assume that, that carries on, I guess. The 2022 number drops down materially in '23, all else being equal?

Yes, that's right.

Your next question comes from Peter O'Connor from Shaw and Partners.

Tom, Adele, Luke, congratulations on the great result. Firstly, dividends, Adele, passing through Deterra, how do I think about the timing? Is it based on what they've announced you passed through or what you will see be passed through? I ask that with relation to another company we cover who passes through dividends and has been a quirk with timing.

Yes. So it's dividends that we actually see, Peter. So what comes into our free cash flow, the money that we get from Deterra, that's what we'll be pushing for 100%.

So effectively a 6-month lag between what you get and what you pay out. Okay. Tom, the balance sheet, Slide 13. It's a great slide. You're down at the [ complete opposite end ] of that chart where you were previously, which is great. What's appropriate? [ New development ] spend coming and you've got cash on the balance sheet and ample liquidity. What's the right capital structure for this company?

Yes. It's a really interesting question, Peter. As we approach Eneabba Phase 3, in particular. What we've said is that our capital structure build has been for many occasions is that we want to retain the firepower from the committed facility to make significant capital expenditures, when required. But we want to be able to repay those relatively quickly. And certainly, that's the approach we're taking with the mineral sands business. On what will be a very significant capital expenditure in Eneabba Phase 3, we have, as we've discussed, engaged with government via a risk-sharing arrangement for that development. So as I've said, I'm not in a position to go further on that today. But that will clearly, if that goes ahead, demonstrate a pretty material change to balance sheet structure going forward.

Okay. And to Slide 5, where you run through the waterfall. And one of the bars is mix, in one of the columns. With the change in mix -- I know you commented in the release about that you're now processing lower-grade material, lower-cost material, at what point does the company review their pricing deck, given the way you've outlined the market trend and the market pricing? Is the pricing deck you use for studies appropriate? Should it be higher? And is there an element of low grading in that change of mix, [ given the price ]?

Peter, just to clarify, you're talking about the NPAT waterfall on Slide 11, that sales mix aspect?

Sorry, yes, 11. Got it. Perfect. Yes.

I think the sales mix is just literally -- so the prices reflect the product prices individually. And sometimes, if we sell, for example, more zircon than we do rutile, then the mix would be favorable. In this instance, you can see the drawdown of synthetic rutile inventory, and hence, synthetic rutile is priced lower than zircon. And that's what drives that mix. So it's just a relativity between the zircon, rutile and SR more than anything combined within, for example, zircon, ZIC versus premium.

Your next question comes from Hayden Bairstow from Macquarie.

Question, Tom, just on the CapEx. I think, if we go back to when you sort of started, you sort of tucked in pretty hard into the resource development spend and pulled all that back a fair bit. I mean, with all this CapEx you're spending on these projects this year, is it -- because that money seemed to just disappear into the ether previously. But just keen to understand what are we hoping to be delivered, say, this time next year from all that spend? Are we going to get economic feasibility studies and changes to the medium-term production outlook for Australia, mainly? Is that what we should expect to see from all these projects?

Look, yes, I'll hand over to Matthew in a moment, Hayden. But we're not expecting that money to disappear in the air into the ether. You'll be pleased to hear. We're actually looking for better clarity on our -- as you point out, our medium- and longer-term production profile, in particular. Our Wimmera deposit, we are working on feasibility and looking for outcomes from that. This calendar year would be desirable. Balranald, we're looking at, again, an executive decision potentially in Q4 this year and significant progress on Atacama. So I think these studies we're undertaking are really core to our future. And as I've said on a couple of occasions before, over the last few years, we've been making really significant progress on really meeting the very difficult technical challenges posed by some of these deposits. And that's really kind of emboldened our pursuit of development of those. So I think it's going to be a really interesting year this year in what we can achieve. I don't know, Matt, is there anything else that you can add?

Yes. Look, a couple of things I'd say, Hayden. I draw you back to Slide 4 and some of the challenges faced in depleting grades and depleting supply globally. For example, in the area of zircon, less than 45% of potential new deposits would actually chin the bar today in terms of meeting the regulatory requirements. So what we have been doing is we've been actively -- we identified this years ago. And we've been actively working towards a solution to deliver premium zircon product from deposits that today are ineligible for pretty much every market across the globe. And that will change our -- has the potential to change our portfolio quite considerably and open up the Murray Basin resources. As Tom said, by the end of the year, we should have an investment decision on Balranald. I mentioned earlier at Atacama. Yes, there's a bit of lumpiness of capital in there. You've got SR1 in there, which is in execute. And that gives us 110,000 tonnes of additional high-grade ore capacity, which is the only short-term, high-grade ore capacity that can come to the market. So these are all very targeted activities as we look out into the medium to longer-term future for our industry.

Okay. And on the rare earths project, I mean, the bullet point just on actively engaging with the government. I mean, you've pretty much done everything you can do here. After all that, you should be getting EPA approval, et cetera. So are there discussions around government-based green debt or is it about tax breaks? And what are the discussions around?

Look, Hayden, I'll kind of reiterate somewhat. For the last couple of years, we've been engaging with government because we thought there was strong alignment between our own commercial position and the government's critical minerals strategy and advanced manufacturing strategy. And we continue to be encouraged by our engagement with government. The essential nature of that alignment has only increased, I think, over the last couple of years. The imperative to diversify. Supply chains is stronger than ever. Look, I look forward to updating you further when developments permit.

Your next question comes from Matthew Hope from Credit Suisse.

I just have a couple of questions. Firstly, on Atacama ilmenites. I'm just wondering if maturities in that ilmenite are the same as we're seeing in the Murray Basin. So if you sell Atacama, would that help with Balranald and the Wimmera?

It's a different impurity, Matt. The Balranald and Murray Basin deposits, they are slightly different ilmenite. They are different geological sequence. But we got [ some ]. We are working towards and confident in our working towards solutions to both.

Right. Okay. And then you've got those Southwest deposits. I just wanted to understand what they are and their significance. Are they just ilmenite-rich deposits for the talc and the synthetic rutile kilns? Or are there significant amounts of higher-grade metal too?

Yes. Look, they are predominantly ilmenite, Matt, with some zircon credits. And they're what we call sort of an enabling ilmenite. So when you blend them with other ilmenites across the portfolio, they're helpful. Not essential, but helpful.

Right. I guess they're not part of the solution for SR1 because they're not in production...

No. No. No, there's no undeveloped deposit that is part of the solution for SR1 in the next couple of years.

Right. And then finally, just on zircon demand. You talked about growth in India, so the tiles there and fused zirconia for [indiscernible]. I just wanted to understand how significant are they to Iluka's portfolio because I guess, you're still largely selling into the -- 57%, I think you said, into the tile market. And China is the most important to that. So are these significant markets? Or are they still not quite...

Look, India is one of the -- a couple of comments there. First of all, we've been very deliberate in, I would say, geographical [ footprint ]. We are certainly less overweight in China than we were previously. Yes, we sell a large portion into the ceramics market because that's a market that demands premium zircon. It gets good, quality material but so does fused zirconia and some refractories which we have strong positions in as well. And those markets are not only in China, they're also in the United States and a number of locations for North America. Tiles in India. India is a big manufacturer of tiles. We're not overweight -- we're not significant in India, but we're selling out of our Malaysian warehouse into a number of Southeast Asian countries that are exporting also opacifier into places like Bangladesh, which are growing markets. One of the things that's occurred over the last couple of years is basically the democratization of tile manufacturing. So these large-format tiles which came out of Italy originally and then into Spain. You can now order one of these machines from [ Sisem ], an Italian producer and have it delivered into India to produce reasonably good, quality tiles. And so we expect to see an uptick in manufacturing outside of China, particularly as Chinese exports have slowed dramatically in the last couple of years.

And Matt, just following back to the sort of Southwest deposits. Just what we've actually released on our website is a little bit more of a detailed breakdown of our resource and reserves. So if you just go onto the website, there is actually a breakdown of some of the Southwest deposits on there, yes. If you have a problem just let us know and we can send you the link.

Your next question comes from Levi Spry from UBS.

Just a question on the Wimmera PFS. Can I confirm the delivery date of that?

Yes. So it will be quite significantly progressed through this year, Levi. So hopefully, early part of '23 is when we'll be providing more insights into that.

Early '23, okay. And so just moving back to the Phase 3 in Eneabba, so just understanding the scope there. Highly anticipated when we can finally get to look at it. But just understanding the scope for the FID, so will it be based only on the inventory that's at Eneabba, i.e., ex-Wimmera? Because you haven't done a study on that yet, and ex-third-party material, but with the government help. Is that how I'd think about it?

Well, just a nuance perhaps, Levi.

If the Board approved it, yes. Yes.

Yes. So the initial feed for the refinery would be, say, sourced from Eneabba but to be clear that the refinery has been designed to be capable of processing both Wimmera material, which is pretty similar but higher-end dysprosium and terbium, but also nonmineral sands feedstocks from around the place. And we have done testing and the like to ensure that, that design capability is clear. So when the Board assesses that, it will be looking at both Eneabba feedstock, the prospect of Wimmera feedstocks and the prospect of other stocks to come in the future.

Your next question comes from Glyn Lawcock from Barrenjoey.

Just wanted to talk a little bit about the zircon pricing guidance you gave, I think, up $220, realized $200 of it. I think the guidance you gave is on a CIF basis, and I was under the impression freight rates were maybe starting to ease. So I thought you might have actually got the full price benefit and clawed back some of what you lost last year. Could you maybe just talk through what's happening with freight and maybe logistics as well, just on the business sense, how that's flowing through?

Yes, sure, Glyn. It's Matt here. On that $200, that's on top of where we ended up sort of at the end of last year, right? The last price rises that went through had a component of freight and realized price in it. What we report is an FOB price, a realized price. Our prices can be -- when we talk about our end prices, we actually use the reference price, which is [ 2-tonne bags ] ex-China warehouse. It's what our customers see. So that might be on a CIF. It might be at a DAT basis, whatever that is. Freight rates generally, absolute bulk has come off a little bit when you're talking Panamax -- sorry not Panamax, larger vessels, so Panamax and large. But the Handysize is not coming off like one would expect nor are our container rates. So there's still considerable dislocation in global freight. And there's no new ship builds that -- sorry, there's a low percentage of ship builds. So what we expect to see is probably higher freight rates through the first half. And then after that, we'll be reassessing again. But it's still a very difficult market out there. And if you're trying to ship things around in containers, we don't do a lot of that. And particularly from Australia, it is a difficult market to secure at the moment.

Okay. So can I just clarify then, Matt, we should see price rises net to you if freight falls because your freight cost goes down. So even if you don't put through any more price rises, there could be more revenue gain for us in '22 and beyond as freight normalizes, is that the correct takeaway?

That's certainly the way to think about zircon because we sell a lot of that out of our warehouses globally. Some of our TiO2 contracts are FOB.

Okay. And then you said containers are difficult. I mean, you don't do much in containers. But from a logistics point of view, is there any risk that -- you've given production guidance, but do you see -- is there a risk on sales given the logistics channels issues?

We sell through containers out of places like Malaysia, which has got better access to containers on the TiO2. Container sales out of Australia are limited pretty much to activated carbon coproduct. We might see some short-term disruptions in the first quarter, first half. But post that, we see an easing in container shortages. So nothing on TiO2 or zircon out of the container shortages.

Okay. So essentially '22 is sales, hopefully, equals production given your inventory is in a good shape and then maybe some margin expansion from freight rates falling is the way to think about it.

Yes. That's a good way to think it, Glyn.

Your next question comes from Paul McTaggart from Citigroup.

So I know you said it's early stage for Sierra Rutile and you're thinking about options and maybe kind of a spinout. If you did go to that, would you be looking to maintain a controlling position or sell down to a minority position a la Deterra? I mean how would you be thinking about that if it sort of comes to that option?

Look, Paul, I think it's a bit early to be talking about that. But what I would say is that it would be quite difficult, I would think, from a competition perspective to be having 2 companies, one with the shareholding and the other that both had material interest in the rutile market.

Your next question comes from Paul Young from Goldman Sachs.

Just a clarification, Matt, on rutile pricing. The double-digit percentage increase for this half, is that based off the December half average or of the December quarter achieved price?

Full year, Paul.

The full year number?

Yes.

Understand. Okay. That's helpful. And then, Tom, back on Eneabba Phase 3. You've done a lot of work as far as the test work is concerned over the years, and that's still ongoing as far as power plant work is concerned, et cetera. And yes, this is going to be quite a large refinery, 15,000 to 20,000 tonnes of rare earths oxides and/or carbonates. Not going upstream, can I ask about the downstream and, particularly, the offtake? And you've done a little work on the rare earths market in the last couple of years as well. But how do you think about conceptually where this material might go as far as to who's going to produce the metal? Who's going to produce the magnets?

Yes. Look, good question, Paul. And again, I have to reiterate a little bit what I said earlier in terms of not wanting to comment further at this point. But there's a level of confidence that there is a significant growing demand for these products. And in terms of the specific question around metallization and magnetization, I think, they're parts of the supply chain that are emerging as well. And we would also contemplate -- certainly, metallization is something within Iluka's field of view.

There are no further questions at this time. I would now like to hand the conference back to today's speakers. Thank you. Please continue.

Thanks, Kevin. And thanks to all for joining the call this morning. I look forward to keeping you abreast of our development pipeline as there's a lot of interest in it. And hope I'll get to speak to a lot of you individually over the coming days. Thanks again, and have a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.