Iluka Resources Limited (ILU) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Iluka Resources Full Year Results 2022 Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Mr. Tom O'Leary, Managing Director. Please go ahead.

Thank you, and good morning. With me are Adele Stratton, Matthew Blackwell, and Luke Woodgate. Thank you for joining us. It's been an extraordinary year for Iluka, and that's reflected in the materials we've released today as part of our full year results. I'd like to acknowledge at the outset the substantial trust invested in our company; whether it's at Eneabba in Western Australia for our rare earth refinery, at Balranald in New South Wales to implement our remote underground mining technology, or working with the Far West Coast people on the potential Atacama development in South Australia, or in the Wimmera region of Western Victoria to open up a significant rare earth and serve as a precinct. We're undertaking work that is significant for us and for our stakeholders. Central to the trust necessary to do this are our sustainability credentials and approach, which we've drawn out on Slide 3 of the presentation and the awards we refer to on Slide 4 provides a strong example. In 2022, Iluka was recognized by the Government of Western Australia for environmental excellence. We received a prestigious Golden Gecko award for our rehabilitation at any ever, specifically for the development of the bespoke seeding machine, Flora Restorer. This machine was developed internally by our local's rehabilitation and environment team has more than doubled the annual area rehabilitated to native vegetation, improving plant growth and diversity in Eneabba's Kwongan ecosystem. Our set of the Golden Gecko important recognition for what is an important achievement. While it's a demonstration of our commitment to deliver sustainable value, it's also an expression of our long-standing focus on research and technical development right across the company, and that's the same I'll return to in a moment because it relates to other announcements we've made this morning. But first, I'll hand to Adele to take us through the financial results.

Thanks, Tom, and good morning. Building on Tom's comments, sustainable financial performance is fundamental to trust in any company. We've been very focused over the past 6 years on ensuring a sustainable approach to the markets in which we operate. Examples of this include putting place underpinning take or pay off take contracts for the development of Cataby back in 2017, which we are very pleased to have extended this year. Also production discipline in the market, including removing 10% of global zircon supply in 2020 when the COVID pandemic first hit, along with our sustainable approach to pricing more generally. You'll see on Slide 10 that our average operating cash flows over the past 5 years has been $400 million per annum. This provides a strong platform from which to pursue our growth opportunities. Turning to our results this year. Today, we've reported record revenue of $1.7 billion. Net profit after tax was $589 million, robust operating cash flows of $711 million, and free cash flow generation of $444 million after our investment, along with excellent margins of 53%. As I said at the half year, the latter is significant in the context of our management in an inflationary environment and rising costs, which will see impact our outlook in 2023 for our cash cost of production. Our customers are cognizant of the fact that we need to generate returns on the capital we deploy in order to deliver the security of supply that they increasingly require. From a balance sheet perspective, we ended 2022 in a net cash business of $489 million. We have significant funding capacity in both parts of our portfolio. At Eneabba, by our $1.25 billion strategic partnership with the Australian Government, and we've also completed the refinancing of our multi-option facility agreements, giving us undrawn financial bank facilities of $570 million, which are committed for the next 5 years through to 2027. Iluka's financial strength is further enhanced by our 20% stake in Deterra, which contributed $36 million of cash over the past year, all of which was passed through to shareholders directly as contemplated in our dividend framework. We've declared a final dividend of $0.20 per share, bringing full year dividends to $0.45 per share fully franked. So in all, a very positive end to the year. And with that, back to you, Tom.

Thanks, Adele. Just before we go to questions, I'd further highlight 3 key takeaways from our results in 2022. Iluka's rare earth diversification is a company defining transformation, and the first call out relates to feedstocks for the refinery. Iluka is going to have a unique offering of separated rare earth oxides produced in Australia. This includes the highly sought after heavy rare earth dysprosium and terbium, which will be an area of specific competitive advantage. Currently, dysprosium and terbium are produced almost exclusively in China and Myanmar. As you know, Iluka has access to some heavy rare earths from our Eneabba stockpile. We also have the concentrate supply agreement with Northern Minerals in respect of its Browns range development, and that deposit is uncommon globally and that it has an assemblage dominant in heavy rare earths. Today, we've made announcements on 2 further sources. We've guided Balranald, and I'll return to that. But for the moment, I'll just note that it will be a material supplier of rare earth concentrate to the Eneabba refinery. More significantly for our rare earths business, we've declared a reserve at our Wimmera deposit and in doing so, we've doubled Iluka's total ore reserves. And the economic liability of the Wimmera development is on the basis of the value of the refined rare earth oxide that will be produced from the Wimmera's minerals. And this is significant for a couple of reasons. First, the economic viability assessment ignores the zircon, so demonstrating the efficacy of our zircon purification process is left as upside. And second, it brings greater certainty of a multi-decade feedstock for Eneabba up step closer. On the Eneabba refinery, more generally, it will provide a tremendous foundation for further steps along the rare earth's value chain in the future. So as you'd expect, we're very focused on delivering the Eneabba refinery in the most cost-effective manner. We are currently progressing through front-end engineering design with Fluor and expect that to be completed later this year. The second call out is that the mineral sands markets have remained resilient in the face of global macroeconomic and geopolitical uncertainty. Supply remains tight, and inventories low, following what I described as a disciplined downstream industry response in 2022. This occurred against the backdrop of each of the European energy crisis, COVID restrictions in China, and inflationary pressures in the U.S. We've also observed continuing production outages at some industry facilities. This all underscores the resilience of the cash flow generation capability of Iluka's mineral sands business. Scarcity, security, and reliability of supply are increasingly prominent considerations for downstream customers and demand for high-grade and high-quality products produced by Iluka in Australia is clear. Evidencing this for the offtake agreements we announced last month for our synthetic rutile with customer commitments increasing to around 200,000 tonnes per year. As a result, production from our SR2 kill, which delivered a record performance in 2022 is effectively contracted for the next 4 years. The restart of our SR1 kiln occurred into December with production from that facility available for spot sales as planned. And the third call out, the Balranald FID makes way for a long-awaited development, which will enhance our portfolio offering of high-grade and high-quality products produced in Australia. It is an important source of zircon, rutile, ilmenite for synthetic rutile feed and for rare earth. The underground mining technology solution that we've developed for Balranald will see these products produced with considerable sustainability benefits, including a lower disturbance footprint and reduced carbon intensity. This is another example of Iluka's focus on research and development. In this case, to unlock Australian resources previously regarded as uneconomic and as I alluded to earlier, Balranald also demonstrates the complementary nature of Iluka's mineral sands and rare earth businesses. So, with that, we look forward to your questions.

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

Good set of results and fantastic to see some really good study outcomes on some key projects. So, the first question is on the zircon market. I guess the first point is supply is still pretty constrained. You mentioned some competitors. I mean we know that Tronox and particularly Tronox is having issues at the moment. Your guidance for zircon production for the year is pretty positive. I guess it indicates a good step up that or production at Ambrosia for the year. But the question I have is actually your inventories are low. Your competitors are having some problems on supply. What are you seeing in the market at the moment from a demand perspective and also from a price perspective, if you look forward, say, into the June quarter?

Yes. Thanks, Paul. And look, I'll hand over to Matt to talk a little bit about the outlook for zircon in a moment, but you're right, the inventories are low in the system and with issues elsewhere, the market remains tight. There was talk in the middle to the latter part of last year of prices declining, but I think that overlooked what many realize that with mining depletion and the intermittency of a number of our competitors, particularly in Africa, there is -- it remains a pretty tight market for zircon. But, Matt, about the outlook and zircon market in general…

Sure. Thanks, Tom. Hi, Paul. So, look from our perspective and if I think about our order book, we've got limited inventory as you point out. I think we're sitting with 1,500 tonnes in our warehouses in Europe, which is a historic low for us. All of our customers that are part of our rewards program have signed up again this year and customers are signing up for or asking for volumes equal to last year or greater where they can. So, we've highlighted in the quarterly, we expected some cautious buying in Q1 as people, sort of came out of Christmas and Chinese New Year being early this year, but we've also struck some sales for the Q1 book. All of that sales at Q1 at the same price as last year, we've held prices flat like we said we would and our customers expect demand to pick up in Q2, Q3. So, let's see how that plays out.

Okay. Maybe the next question, Tom, is just moving on to the projects and digging a little deeper into some of the study outcomes. Firstly, on Balranald, certainly, the first point is that the IRR is pretty attractive. Just want to bed down, when do you expect first production and what the ramp-up profile might look like on this project?

Yes, sure. Look, again, I'll hand to Matt to talk about Balranald. That's been his baby for a while. But we're really pleased, as you kind of indicated, it's a really pleasing milestone to get the Balranald project approved by the Board and set off to build what is a world served in terms of delivering high-quality critical minerals from Australia in a deposit, which was once regarded as uneconomic. It's a really important development for both the Balranald region, for Iluka, and for Australia, I think. But Matt, why don't I hand you to talk a bit more about it.

Yes, Paul, the current -- the execution schedule shows us with first production of HMC from Balranald in Q1 of 2025.

And then a ramp-up should be pretty quick?

Yes. So mining will commence actually in 2024, late 2024, and we'll be ramping up the mining operations during that period of time in the last quarter to then see the concentrated plant, which we expect a fairly quick ramp up. The ramp up notionally 6 months.

Okay. I'll just move on to the last question on Wimmera. So again, a lot of information here to digest for myself and I'm sure everyone. The first question, just on the DFS completion 2025, I'm presuming that the permitting is driving that timeline and then commissioning potentially 2028. Is that just an indication you've got a lot of flexibility around the Eneabba stockpile, some monazite from Balranald, potentially third-party feed and just sort of managing, I guess, the CapEx profile of the overall group?

Yes. That's a fair assessment, I think, Paul. It's a really pleasing development. Again, I'll hand over to Adele in a moment to talk a little bit about timing. But again, it's a really pleasing development. The fact that we've declared a reserve there doubling Iluka's overall ore reserve, but declaring that reserve on the basis of the value of the refined rare earth oxides that are going to come from the xenotime and monazite at Wimmera is really a first for us. The other piece there that you'll see when you have a chance to read this more deeply is that we are foreshadowing a demonstration plant for zircon purification, and that demonstration plant development will provide details of later in the year, but it will -- we're imagining that will be developed a long-sized definitive feasibility study. So with that, Adele, do you want to touch on timing...

Yes, sure. So, Paul in terms of the length of that definitive feasibility study exactly as you say, a lot of that is driven by the approval timeline approach in Victoria. That's really dictating how quick we can go there. I think some of the points to note in terms of the reserve, as Tom just alluded to, this has been declared on the rare earth oxides only. So, the zircon component is potential upside and that's to come. And as we say, that links into the demonstration plant ascribed to that. And as you note, we have a lot of flexibility with the refinery as a result of the Eneabba stockpile. So that certainly comes into us thinking when we're looking at what time to execute and commission this project.

Great. That's fantastic. That's my first past round of questions. I'll leave it there.

Our next question comes from the line of Levi Spry of UBS.

So maybe just back to Eneabba, can you run us through the update on the CapEx that's to come? And do we take from this that it's kind of full and how much room is left for third-party materials?

Thanks, Levi. Look, the development at Eneabba is really the beginning of a substantial new business for the company. It's going to be one of few facilities globally that will produce light and heavy separated rare earth oxides. In terms of the development, we are working with Fluor on the front-end engineering and design, and those works we expect to be concluding later in 2023 and that's when I'll be providing an update more generally on project and progress and the like. From a market perspective, in terms of the refinery development, we continue to be really delighted with the engagement we're having with end users. They realize that what we're going to be producing has a number of features that are very attractive to them, in terms of reliability and reputation of us as a supplier. The fact that we're funded with certain -- and we have that unique among Western suppliers mix of heavies, as well as lights. So, yes, really delighted with how that project and how that business will shape up over coming years.

And just on the feedstock Levi, coming back to -- there's a couple of points in today's results. One, Balranald adds to the feedstock. So, as I've always said, the rare earth business and the mineral sands business are very complementary. So, contained within the Balranald investment, there's an extra 4,000 tons of rare earth concentrate that will go into the refinery. That's one source. As you know, we're progressing. Wimmera, it's a significant source of feedstock. We've obviously got feedstock coming from both Jacinth and Cataby, as well as the stockpile. And just to refresh people's memories, we've done the deal with Northern Minerals. And as Tom noted, that's quite a unique deposit because it's very focused on heavy rare earth, which is really positive in terms of competitive position for Iluka. So, yes, it's looking promising in terms of that longevity of feedstock.

Sorry, it's just I've forgotten you asked about feedstock there, Levi, just to add that we wouldn't regard ourselves as being full and we will continue to explore avenues for feedstock. Quite obviously, we want this refinery to be going for many, many decades to come. And so, lining up feedstock for that period remains a pretty core objective.

And just in terms of the CapEx, the CapEx you've got budgeted for calendar year 2023 there. So, what -- is that of the 1 to 1.2 that was in the original FID? What's the 270 or whatever the number was for this year on?

What's it going to be spent on? Do you mean, Levi?

Yes.

Yes. So that will be a combination of factors. Obviously, we've noted that the groundwork will be concluded at the tail-end of this year. So that's one component. There'll be some long lead items that we're placing orders for. Obviously, there's the EPCM contractor in the engineering, the progression of the fee, so accommodation camp. There's quite a broad range of items that we're spending that money on. So, as you noted in the guidance, we've said $270 million, that will be spent in 2023.

And last one, just on Wimmera, like it's, kind of unusual to come out with a reserve, excluding one of the key economic sort of revenue drivers. So, what is the sensitivity to the project? It's already big and long, but so what happens if you include some revenue from zircon?

Well, as I kind of indicated, the -- yes, and as you picked up the zircon potential is excluded. So that is really upside for the development. We've demonstrated that it's a reserve, that's economically recoverable, ignoring the zircon revenues. So, clearly, it will be even more economically recoverable, you know once we have that zircon purification process demonstrated via the demonstration plant.

Our next question comes from the line of Rahul Anand of Morgan Stanley.

Look, 2 for me. Perhaps first if we start with Balranald, just wanted to get a bit more color in terms of some of the metrics around the project. I mean, is this estimate or are the estimates you provided today for one mining unit? And then, what is the scalability of the project? That's the first part. And then secondly, how should we think about the contingency in the estimates in terms of CapEx given the environment? That's the first one, then I'll come back with a second.

Okay. Look, I'll hand over to Matt. I mean just on the metrics. That it's not just one mining unit, it's 2. But Matt, do you want to...

Yes. Look, Rahul, there was, you probably refer back to some earlier discussions we talked about potentially one mining unit scaling to 2. Over the course of the DFS, we've become, gained confidence in the technology that we're deploying, the work that we've done with our third-party technology providers and in-house gives us a lot more confidence to move forward in starting with the 2 mining units. So, we'll have 2, what we call, development units and 2 production units. So that annualized production is what the concentrator will be designed for. The method of mining is scalable, but in this case, you'd have to upgrade the concentrator. So, we're not planning to do that with these capital numbers. The capital estimate has been developed to what I would call a type class 2 -- type class 3 estimate. Over 40% of the capital in the estimate is at a class 2. So that's a quite strong market. So, we're pretty -- we're comfortable and we've got comfortable with the cost estimate that's being done in the current environment. So, it's been done alert to the challenges that we have in the environment today. And I don't -- there's not really anything else to say on that. And as we've noted previously, the opportunity with Balranald is, these mining units give us a high degree of flexibility of how we mine and when and how and look forward to commercializing Balranald and potentially taking them into other deposits.

Yes, okay. Look, I did see some of the notes and obviously you provided that accuracy range of minus 15% to plus 30% and the cost estimates to the 1st of Jan. I guess what I wanted to clarify was whether there is any contingency in the number that you provided or is this still in intentional on what that looked like?

Yes, well, it'd be pretty foolish to go forward without including some contingency in your capital estimates. So, you should assume that we have. What we do is we undertake quantitative risk assessment on that contingencies and I'm not going to go through the details of that, but we look at every one of the 9,000 line items and we assign a probability to that and work out what contingency will be based on that. So, we've done hitting a very, I think, disciplined and prudent manner.

Okay. So I mean in terms of your total estimate, are you able to provide a ballpark of how much contingency we should assume exists within that?

No.

Look, the second question, perhaps one for Tom is around, sort of labor market conditions in WA and how you're seeing them? Obviously a small ramp up in the cost for the next year and that might be related to mining areas etcetera. How are you seeing some of the ground conditions in terms of inflation? And then perhaps if you can provide a bit of guide around beyond calendar year 2023, how should we expect some of the JA grades to progress? Do they get closer to reserve grade or is there perhaps a bit of a longer period in terms of the higher grades that you're currently seeing?

Yes. Look, I'll ask Adele to talk a little bit about JA. We've provided some guidance in the past there and not much has changed. But I'll hand it to Adele in a moment. On labor conditions in Western Australia, there have been obviously very tight. That's reflected in our cost guidance and it's pretty well publicized in the marketplace. In recent times, there's been some talk of some redundancies throughout the industry. And so, there may be a softening of that tightness to come, but we'll see a little bit more on that score as the year progresses. So, it has been tight and it's a real focus for us that is attracting and retaining the very best people to operate our mines and run our business more generally. But Adele, do you want to talk a little bit about JA?

Yes, definitely. So Rahul, just to recall, we obviously moved from the distant north deposit in August this year, which was the fully depleted. So, distance is now fully depleted and we're back into Ambrosia. Hence you'll see that up kick from where we were early part of this year on the grade and hence that's driving the production and we're expecting this mine run through to 2028 and the next couple of years are pretty consistent.

Our next question comes from the line of Al Harvey of JPMorgan.

Let's start trying to get my head around the process that you're using at Balranald a little better. There's a schematic on Slide 21. Just the ore morphology, is it putty-like like that? Or is it more of a same type, I guess, configuration. I guess what I'm trying to think through is with the 9.5-year life, what's the resource upside further along the belt. And I guess, is it quite putty generally here.

Al, it's Matt. It's not putty. And you're going to have a mechanical engineer here to describe the geology and lithology, so bear with me. So, the strand as identified is 29 kilometers long. It varies from 160 to 300 meters wide and the depth is between 3 to 6 meters high with a 5 meter average. That's at a 3% cut-off grade. The strand itself is quite a distinctive lens or strand line located on what's called the Loxton Parilla sands. So you've got this which is a well sorted sedimentary sands from this repeated transgression and transgressive-regressive events over time, delayed by the Shepparton formation, which is basically clays, et cetera, and some gravels. It is a very consistent ore body and very high grade for mineral sands. That's what makes it -- what the depth and being under the water table makes it difficult to mine. But the consistency of the deposit makes it attractive to this new type of technology that we've developed. So, we're quite comfortable that it's quite consistent. In the production target, we have not included mining any ore below 2.5 meters and we haven't included mining any ore above 4 meters. And as I said, the average is 5. We -- yes, I think I have to be cautious about going into upside. So, we've talked about production target of course in terms of -- the other thing that we've highlighted is that as we move forward in commercial operations and we prove up the technology will prove up the resource and go to a reserve. You might draw a view that over time that that will allow us to form more materially to the ore body.

Yes. And I think just the other thing to add and it is disclosed. I appreciate we've put a lot of material into the market this morning, but just on the resource information so that Balranald FID, Pages 3 and 4, give a little bit of information with regards to the resource, but also the sonic drilling that Matt and the team undertook during the DFS and that sonic drilling compared of the aircore drilling actually gave about a 25% uplift. So, there's some potential upside, but as Matt as we get into that, we'll be able to give you a bit more indication once we're operating.

Now I think you did a very good job of the geology there. A few terms I haven't heard about since second year geology. So can you confirm that the strand is 29 kilometers long? I would have thought, is it just that variation in width that you mentioned that's the key, I guess, to potentially convert to reserves. Is that how we think of it or like 29 kilometers have like a huge stretch? Just trying to sense that.

I guess there's a couple of things. One is, during the -- during the DFS. So, Balranald was originally drilled with aircore. What we have found is that the aircore drilling can understate the grade or the amount of heavy mineral in the ore body. We found that in our deposits in the Murray Basin. We then undertook 173 sonic drill holes, of which 103 were in the, what we call the DFS area, and some of those between, some of them were additional holes. In that particular area using the sonic, which is you can think of it sonic as akin to diamond core drilling in hard rock. You get a very distinctive and better indication of the basement of the deposit and the thickness of it. And what that led to was a 16% increase in the grade and a 4% increase -- about 20% to 25% increase in the HM, heavy mineral. But we haven't done that sonic drilling outside what we call the DFS area. We wouldn't normally go and drill on the spacing that we've done in the DFS area, which covers the first 4 years of mining over the remaining 6 years, we wouldn't do that in our other deposits either. So, that's drilling it will do in due course. But it is a very consistent ore body. Does that make sense?

Yes, yes, no, that's really helpful. I guess just one more before I line up again. Just thinking about the application of this tech more broadly, I know you guys obviously have a lot of IP locked into the process, but just thinking if I just try to replicate it, how do you think about potentially opening up some of these other, sort of deeper mineral sands, belts, and the potential impact that it have on the markets?

So I guess there's a couple of points there. One is that our patents will actually be published, probably in February or March of this year. We've been working on this technology for over probably 8, 9 years now. We've held it as a pretty closely guided secret. And we're now protecting it through a patent process. We see it as an opportunity to open up more deposits within the Northern Murray Basin area with similar types and it extends beyond mineral sands to other, it has potential application beyond mineral sands, not that we may or may not go there ourselves, but in due course, once it's commercialized we think it's got to be something that others will be interested in as well. Yes, there's a little link in the release that takes you to an animation, which probably people haven't had a chance to look at, which gives you a bit more indication of how you can think about it.

Thanks, Al. Are there any more questions?

Our next question comes from the line of Matthew Hope of Crédit Suisse.

Just wanted to talk about what your thoughts about dividends were. So, obviously CapEx is stepping up with a lot of these developments. You got 550 million next year and then obviously a lot more in 2024, 400 million for Balranald alone. Just wondering what's your thoughts about the -- that you put a big knock on the free cash flow. So, what's your thoughts about the sustainability of the dividend? Are you going to have to drop it back in the next couple of years?

Matt… Our dividend -- I'll hand to Adele in a moment to talk a little bit about dividend generally, but our dividend framework is pretty crystal clear. It's not to maintain a particular dividend. It's to deliver specifically what we say we'll deliver. Based on Deterra earnings specifically flowing through, as well as free cash flows. But we will adhere rigorously to our dividend framework going forward. As you've seen, it's still in the past, but Adele do you want to touch right now.

Yes. So, Matt, a couple of things. One in terms of as Tom has alluded to, our dividend framework allows for that investment in future growth and it's a minimum of the 40% of free cash flow. I think some important things to note as the significant capital that we've guided for 2023. A lot of that relates to the Eneabba refinery, as everybody knows, we'll be funding that through a debt. So, that's certainly something to contemplate when we're looking forward on the dividends and the available free cash flow. The dividend also distributes all of the Deterra cash that we received. So that will be an ongoing focus. So, the framework is exactly intended to ebb and flow with the investment in the business.

That's pretty helpful. Just on -- jump over to Wimmera, you've talked about the reserve just on the rare earth elements obviously studying zircon, what about those other elements? You obviously got some rutile, you got some leucoxene, and then you're referring to some other valuable heavy minerals on the ilmenite, is there any sort of thoughts about -- or is there any contemplation of making use of these other very fine grained minerals? If you guys had any thoughts about how you might make them sellable?

Yes. So, Matt, just in terms of -- and as I said, we've released a lot of material to the market this morning. Some of those other mineral sands components are included in that reserve. So, yes, there will be utilization changes. It's specifically the zircon that we've currently excluded in that assessment.

And just final question at this stage. Just on Balranald's, obviously, you spoke about the big long strand that you're looking at. I assume you're referring to West Balranald here. Is there any contemplation about mining the pen and endeavor the other resources out there or is that just kind of too far out and you haven't really thought about it yet?

Look, we've highlighted that there are other deposits approximate about Balranald that shares similar characteristics. I think what's appropriate is that we focus on demonstrating the commerciality and commercial viability and the technology at Balranald, which is the first place and you're correct it is West Balranald, but there are a number of other deposits that are amenable to this type of mining.

That does conclude our Q&A for today. I'd like to turn the call back over to Tom O'Leary for any closing remarks.

Okay. Really, thank you for joining the call today and for your support. The materials were out a bit late really as a consequence of our timing this morning and during the call from Melbourne, but thanks for bearing with us. And let us know if you have any queries about the material as you read them more. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.