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Edited Transcript of ILU.AX earnings conference call or presentation 21-Aug-19 1:00am GMT

Half Year 2019 Iluka Resources Ltd Earnings Call

Perth Sep 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Iluka Resources Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Adele Stratton

Iluka Resources Limited - CFO

* Christian Barbier

Iluka Resources Limited - Head of Marketing

* Thomas Joseph Patrick O’Leary

Iluka Resources Limited - MD, CEO & Director

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Conference Call Participants

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* Glyn Lawcock

UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst

* Hayden Bairstow

Macquarie Research - Analyst

* Jack Gabb

BofA Merrill Lynch, Research Division - Associate

* Mathew Hodge

Morningstar Inc., Research Division - Sector Head and Senior Analyst, Basic Materials

* Paul Young

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Paul Joseph McTaggart

Citigroup Inc, Research Division - Metal and Mining Analyst

* Peter O'Connor

Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining

* Rahul Anand

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Iluka Resources Limited 2019 Half Year Results Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Managing Director, Mr. Tom O'Leary. Thank you. Please go ahead.

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [2]

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Thank you. Good morning. I'm Tom O'Leary, Iluka's Managing Director. With me this morning are Adele Stratton, CFO; Christian Barbier, Head of Marketing; and Melissa Roberts, General Manager, Investor Relations and Commercial.

Let me start by saying the first half of 2019 has been a busy period of delivery for the company. We have commissioned the Cataby mine, which is now performing at nameplate capacity. We've completed the planned major maintenance outage of the SR2 kiln to enable it to deliver a synthetic rutile production for the next 4 years, underpinned by the take-or-pay contracts, which support Cataby's development. We just completed our mine move to the Ambrosia deposit from Jacinth, which has now begun delivery of heavy mineral concentrate from the new pit. The move has been completed, not only ahead of schedule, but also under budget by around 20%.

And in Sierra Leone, we've decommissioned the dredge, completed the doubling of capacity at our Gangama mining front, and we're currently commissioning the land to expansion. Need a vital project to maintain current operating level and to continue to deliver our high-value products with zircon, rutile and synthetic rutile. We also continue to progress the next phase of projects in our pipeline, and I'll provide some more detail on these shortly.

As you can imagine, it's been a pretty busy 6 months. On our financial results, Adele will take you through some detail in a moment, but I'm pleased with our performance. Our net profit after tax is up 9% to $137 million, and our operating margin has increased to 43%. We also are saying that we declared a fully franked dividend of $0.05 per share, even though, we had a free cash outflow of $65 million in the first half.

Our dividend framework is to return 40% of free cash flow not required for investing in our balance sheet activity, and we've determined the interim dividend, taking into account a range of factors, including the payment during the first half of $127 million final tax installment for last year. Our Mining Area C royalty contributed $41 million to earnings in the half, which was reflective of higher iron ore prices.

As I've mentioned in the past, we're about optimizing returns to shareholders from all our assets, and this growth has showed the Mining Area C royalty. As commencement of mining activity draws look closer, I note that the South Flank development will enhance our liquid's capacity to pay dividends in the coming years.

Moving to mineral sands market, as you'll be aware in the zircon market, the seasonal slow start to the year lasted longer than expected, contributed to by uncertainty in global markets during the second quarter and that affected consumer sentiment and ultimately purchases. This led to greater demand for concentrates and standard grade zircon products, and as noted in the quarterly, there has been more standard zircon available in the market.

Iluka's production flexibility has allowed us to respond to this shift, and we're offering standard zircon volumes to our customers as part of our product suite. And we're focused on making customer requirements and supporting customer relationships while ensuring we deliver sustainable value from a diminishing resource.

I believe we're well placed to adapt to changing conditions in the zircon market, and we continue to believe that market fundamentals over coming years remain solid.

In titanium feedstock markets, we continue to experience strong conditions, with sales continuing to be constrained by production. This is being driven by the improved outlook in the pigment sector with high utilization rates across most major producers.

Price increases of 6% to 8% are expected for rutile and synthetic rutile in the second half. With respect to our operation, while first half group production is marginally down on the first half last year, this is a consequence of the operational changes that were expected to occur in 2019. And I'm pleased with the delivery of significant projects as outlined earlier.

At our main zircon mine, Jacinth-Ambrosia, operations continue to full capacity, and as noted, we're now mining in Ambrosia.

In Western Australia, we commissioned our new Cataby mine, which is now producing ilmenite feedstock for our kiln. In preparation for receiving that Cataby ilmenite, the synthetic rutile kiln underwent the planned major maintenance outage in the half, it's most significant since commencing operations in 1997 and was returned to full capacity.

Pleasingly, we're now producing synthetic rutile from Cataby material as well as high quality rutile and zircon.

At our main rutile mine, Sierra Rutile, the expansion project at Gangama has been commissioned, reached design capacity and is performing well. The Lanti dredge was decommissioned uneventfully in the period ahead of expansion at the Lanti dry operation, which is nearing completion. While existing operations at Lanti have continued to perform below our expectation, we're implementing a number of improvement measures and continue to focus on achieving operational stability from this asset.

At this point, I'll hand over to Adele.

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Adele Stratton, Iluka Resources Limited - CFO [3]

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Thanks, Tom, and good morning, everyone. As Tom has already mentioned, our net profit after tax increased 9% from last year to $137 million, with product prices being a key driver. Zircon prices have increased 19% from the first half last year, with Iluka having maintained the reference price of USD 1,580 per tonne for 12 months through to 30 September. Today, we announced that we will continue to hold the reference price flat for a further 6 months through to 31 March 2020. We believe that it's important to provide stability and certainty to our customers. Rutile prices have increased 22% from the first half of 2018, and we expect further price appreciation of between 6% to 8% in the second half of this year.

On the other hand, sales volumes were lower across all products. Sales of rutile have been constrained by production with the prior year benefiting from the inventory drawdown of the remnant Murray Basin material that is now fully depleted. Synthetic rutile sales are lower following the 45-day planned major maintenance outage, and we are this year ahead of the next 4-year kiln campaign. And as Tom has noted, zircon sells are lower than we had originally anticipated on the back of global uncertainties, particularly impacting China.

The average Australian dollar exchange rate weakened to $0.70 from $0.77 in 2018, which had a favorable impact on revenue of $52 million, with the majority of our sales contracts denominated in U.S. dollars.

Unit cost of goods sold have increased to $861 per tonne. Synthetic rutile unit costs are up, reflecting increased ilmenite feed cost, since the completion of mining at Tutunup South in early 2018.

At Sierra Rutile, the translation of the U.S. dollar-denominated cost base into Australian dollars has been exacerbated by the weakening Australian dollar, with the actual U.S. dollar cash unit cost being $39 per tonne lower this year than it was in the prior year. Mining Area C continued its positive contribution to the Group's results with an EBITDA of $41 million on the back of higher iron ore prices.

Turning to the operations performance. Jacinth-Ambrosia continued to operate at capacity, generating an EBIT margin in excess of 75%, whilst Cataby and the kiln provided an EBIT margin of 43%.

Cash costs of production increased in Australia, reflecting the commencement of mining and concentrating at the new mine in Cataby. Sierra Rutile, on the other hand, has had a disappointing performance, generating a loss before interest and tax of $6 million in the period. The first half performance has been impacted by the transition of operation with the dredge being decommissioned and both dry mines only commissioning the expansions late in the half, and this has impacted the ability to absorb the high fixed cost base.

The focus in the second half will be on delivering consistent performance from the Lanti and Gangama mines as well as the ramp-up of the Lanti expansion. Cash generated by operations in the half was $180 million. And I note, there has been a build of inventory of $43 million, relating to both ore and HMC at Cataby as well as some finished zircon product. The free cash outflow of $65 million was impacted by the tax balancing payments relating to last year of $127 million, with total tax payments in the year of $144 million.

We've also invested $145 million of capital into projects, including $49 million on the Cataby development, $30 million for the planned major maintenance outage of the kiln, $16 million on the Ambrosia mine and $42 million at Sierra Rutile.

We've successfully completed the refinancing of our debt facility post the half year, extending the 10-year out to 5 years and also achieving a reduction in the margins on the facility. We have reset the financing capacity to $519 million to lower costs on Gangama. We continue to focus on maintaining a strong balance sheet. And July has been another positive month with net debt reducing to $109 million from $142 million in June.

And with that, I'll hand back to Tom.

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [4]

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Thanks, Adele. As you can see from our project pipeline on Slide 21, we continue to progress a number of options for maintaining and for growing production. We've provided some additional detail on some of these projects in the slide pack.

First, on the Eneabba Mineral Sands Recovery Project in Western Australia, we can now confirm we've contracted offtake for 50,000 tonnes of production per annum of the monazite concentrate for 2 years and the project is moving forward. Construction will commence in the fourth quarter this year, and first sales are expected in the first half of 2020.

This is a low-risk, low-capital project that delivered strong returns as well as reducing an ongoing rehabilitation obligation.

The Wimmera project in Victoria is a large, long life project with zircon and rare-earth product streams. Pilot plant test work has been successful and the PFS is progressing on schedule. At Balranald, the Board has now approved the final field trials for this new technique. Pending the results of the trial, we are aiming to develop this substantial rutile and zircon resource in the next few years.

Finally, to our outlook for the remainder of the year, we've updated some of our guidance parameters. We foreshadowed in the June quarterly, we expected the zircon sales to be second half weighted. Current indications are that sales will be at the lower end of expectations, with second half sales volumes now expected to be similar to the first half.

We continue to support our loyal customers through our rebate system and through our flexible product offering, which will include more standard zircon product. As a result, we expect a lower average realized price in the second half. However, we expect to carry-forward some inventory of higher-value premium zircon. And as a consequence of the greater availability of concentrates in the first half. Iluka also expects producer-held inventories generally will rise over the second half.

On Slide 26, you'll see that we've updated guidance on capital expenditure, depreciation and unit cost of goods sold. One of the drivers of the reduction in capital expenditure guidance has been delayed to the start of the stage 1 early works for our Sembehun project, which we announced at the June quarterly. As we revisit and broaden the value optimization studies with a focus on determining a development option that both fits for purpose for Sierra Rutile and optimizes the risk-return relationship. While we're committed to directing our efforts to achieving acceptable stability and performance from our assets in Sierra Leone, we're pleased that a number of key projects have been successfully executed, which support production of our key products for the medium term.

Looking beyond 2019, Iluka is well positioned as we're able to turn our focus to our portfolio of mineral sands and rare-earth projects that we will continue to progress. The context remains positive as grade decline and mine closures drive global reductions in supply over coming years. As we move forward in a period of some uncertainty, we'll continue to make investment decisions and pursue market strategies, which we believe will deliver sustainable value.

And on that note, I'm happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from the line of Jack Gabb from Bank of America

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Jack Gabb, BofA Merrill Lynch, Research Division - Associate [2]

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Just 2 questions from me. Firstly, just on the zircon market. You previously said a move to more standard zircon would cut pricing by $50 to $100 a tonne. Does that still hold based on your updated guidance today?

And the second question is just on Sembehun. I guess quite a lot of -- or lack of detail really in the presentation. Can you give us a sense on the timing of this project now? And whether you've cut CapEx guidance for this year, but should we assume lower CapEx for next year going forward as well?

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [3]

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Yes. Look, thanks, Jack, I'll hand over to Christian in a moment for any comments he might have on the zircon markets more generally. But I might just say a few words about that market. We've noted at the quarterly that the pricing for zircon typically sells at a discount with the order that you indicated. And that we're starting to move into that market. But the conditions in the market are difficult. And we've indicated that we expect to see a lower weighted average price into the second half. And this is really a consequence of the engagement we've had with customers over the last period where they're reflecting back to us the conditions they see in the market and what we've provided to you is our best assessment of the second half of the year, that sales are going to be evenly weighted with a lower weighted average realized price.

I think we need to look a bit beyond the next 6 months and take a broader and longer view of the market. The market is a complex one at the moment with trade tensions across the board and the Brexit, Iran, Turkey, India faltering. The list goes on. And at the same time, concentrates have been mobilized, and we talked in the quarterly about the consequences of that. You will note that we decided to hold the reference price flat for a further 6 months now and that takes one level of uncertainty out of the market for our customers and allows them to go on and make their decisions with some clarity. Yes, we'll again observe over the next 6 months what happens, both in terms of demand from various regions, what happens in terms of supply from concentrate processes in China as well as Indonesia. We'll also look carefully at our customers, at our own customers' behavior.

Overall, and I'm looking at the longer period, I think the market fundamentals remain solid. And as I think about that, I look back over the last few years, and you'll remember, Jack, that just a couple of years ago, the market was very concerned about Iluka production falling this year as a consequence of JA grade decline. And with bringing Cataby on, and accelerating the Ambrosia mine move, we've managed to smooth production ahead of time and under budget. And it kind of illustrates for me the ease with which Iluka has been able to allay that fear of grade decline this year. We've also demonstrated in the last couple of years, the ability to introduce ZIC into the market as a swing producer at minimal cost. So the fact that global demand is relatively flat at the moment and we're seeing ourselves and others carrying forward inventory means that, that supply deficit we've talked about is being pushed further out. You might have noticed that Tronox recorded a build of inventory in the first half and sales cut by reference to last year. So, yes, to my mind, the fundamentals remain very sound for Iluka over the -- and for zircon sales over the longer period. And by a comparison to others, we don't need to bring significant fresh mining and infrastructure to bring on additional tonnes. And so I have to say that new entry into the market appears pretty unlikely in my opinion. We also mentioned that we -- as I said, we're going to bring some -- take some inventory forward, and I think that's a really appropriate response to the modest surplus in product that we've seen in the market. And we don't plan to build massive inventory. I'm not going to be drawn on how much inventory we're prepared to build, but we'll keep a careful eye on the situation over the coming period. But I think, Jack, it's important to give that broader context about the market and really ensure that we remain focused on the longer term as well as what might transpire in the next 6 months. I don't know, Christian, if you want to add anything to that on the -- on pricing or...

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Christian Barbier, Iluka Resources Limited - Head of Marketing [4]

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Yes. Maybe, Jack. This is Christian Barbier. Just to come back on your question regarding zircon. Some zircon prices have suffered in China over the last few months and weeks, due to very soft demand and also due to a higher import ratio of concentrates versus finished sands. And you know, Iluka is weighted towards the premium segment, it hasn't affected us directly very much so far as you can see in our reported prices. However, in the downstream market, millers are under tremendous pressures from their customers, the ceramic tile producers that are sacrificing margins in order to compete in markets, which in China has reduced in size. So a lot of millers are shifting towards standard zircon for part of their production. Hence, the decision that we have made to support our customers and help them compete in that market. This is why we have a product mix change in the second half of the year.

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [5]

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Jack, just to your second question on Sembehun. We don't have a lot of detail about it in the presentation. We -- as we mentioned in the quarterly, we're pausing to broaden and revisit the optimization studies, and just a general approach to Sembehun. And again, as we outlined in the quarterly, in that revisiting of optimization of value there, we are open to no changes to mining methods, to the target volume, to the timing of commencement, so it's quite a broad review. And so we're going to be thinking very widely, thinking laterally about alternatives there and Matt Blackwell and his team are very much engaged in that process. It's also worth noting that we also need to see a period of operational stability from our mines in Sierra Leone before we embark on further investment there.

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Jack Gabb, BofA Merrill Lynch, Research Division - Associate [6]

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And can I just follow-up on that because I think when I asked on your quarterly, I said, you know, is there going to be a gap between when Sembehun is commissioned, and obviously, when Lanti and Gangama end. And at that point, there was no kind of clear-cut gap that was going to be created. But if we need stability to be achieved, it sounds like that maybe there will be a gap, is that right?

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [7]

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Well, it's a bit of an open-ended question, I think, Jack. I expect we will achieve operational stability in the near term. So we're not expecting a gap at this point.

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Operator [8]

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Our questions comes from the line of Paul Young from Goldman Sachs.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [9]

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Tom, the first question is on the zircon market. Did I hear correctly that you said that you expect sales in the second half to be in line with the first half and, therefore, that implies sales of 260,000 tonnes for the full year?

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [10]

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Yes. That's right. We said that it trends broadly in line with the first half. And the first half was 133,000.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

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Okay. So you sold 380,000 tonnes of zircon in 2018. It's a 1.2 million tonne market. That's a fair drop in a sizable market. So the question for me is that -- and you actually referenced Tronox and their commentary on sales. They actually said that they expect their sales to increase in the second half. So the question I have is 2 things. Is it -- are you having to pull back your sales in the second half because your major competitors aren't pulling back?

And second, are you seeing any -- back to Christian's comments about the downstream being weak. Are you seeing any substitution at all? Or is this cyclical not structural, this lower sales?

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [12]

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Yes. Paul, I can't talk about the reasons we're pulling back on sales and taking inventory forward by reference to customers. I can only really comment on what we're doing. And I think I've mentioned on inventory that we are planning to -- we are expecting to build some inventory in the second half. I think that's a perfectly appropriate response to the amount of surplus we're seeing in the market.

On inventory build, the question always is the timing of when you expect to sell it, at what price as well as the perception impact it has on our customers in relation with scarcity of the product. So we're not planning on building massive inventories. But I'm not going to be drawn on how much inventory we're prepared to build. We'll keep a careful eye on the situation across the industry over the coming period.

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Paul Young, Goldman Sachs Group Inc., Research Division - Equity Analyst [13]

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Yes. Thanks for confirming that second half sale number. That's fine. Moving on to the monazite, Tom. There has been a lot of talk for maybe 6 months now on this project. I see you've signed an offtake of 50,000 tonnes per annum. Is this just a start? Do you expect that maybe you can -- it'll all come down in demand and plant capacity with your major customer in China, but can we expect further offtake -- increase in offtake beyond that level?

And also, I know you stated here that pricing's commercial in confidence. But can you help us out with percentage of margin or a dollar per tonne margin that you think that you might be able to achieve to help everyone out there?

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [14]

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Yes. Look, Paul, I really can't help much there, to be honest. But -- because the terms of the contract are confidential, as we've indicated. We haven't actually indicated that it's a customer in China, as you implied there. But just broadly, you have no doubt seen reference prices for monazite, that are available from industry commentators or around the post. If you were to deduct from that a processing cost as well as a margin for our customer process, you'll come to a figure. And for a received monazite -- a received price for monazite, and then with the information on the slide, you can work out how much monazite is in the products sold and the annual income to a price.

In terms of the amount, this could be the beginning, but -- and there may be more. But this is very much a sufficient contracted volume to get on with that project.

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Operator [15]

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

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [16]

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Just a couple from me. Look, firstly, if we can quickly talk about the production costs? I noticed the cost of goods sold are being bumped up. But I also wanted to touch on the production costs. And just try to investigate whether those have gone alongside as well? Or is it just basically that inventory that you flagged that's leading to COGS? That's the first one.

The second one is around dividend, Tom. How should we think about it going forward, considering we had negative free cash flow this period, and we're still seeing a dividend come through? What are your thoughts around, going forward, the level of gearing and potentially dividend payouts?

And the final one is around the zircon and rutile markets. Rutiles, you spoke about inventories now having normalized. What levels were they and where are they now? And then in terms of zircon as well, how are you viewing inventories in the downstream at this point in time?

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [17]

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I'll hand over to Adele, I think, Rahul.

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Adele Stratton, Iluka Resources Limited - CFO [18]

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In terms of cost of goods sold, so Rahul, let's start with the question around cash cost of production. So those have increased because, obviously, we've commenced mining at Cataby. The cash cost of production reflects your operating activities. Given we weren't operating at Tutunup South last year then there was no related mining costs in association with that. So this -- as we've mentioned, in terms of the Cataby development, it was underpinned by the commercial contracts because the overlying costs were a bit higher than what they were at Tut South due to the journey of distances -- distance from the kiln. But coming back to cost of goods sold. There's a combination of factors that impact that. One is mix, so depending on how much -- as we -- as I spoke about the margins between the different operations are quite different. And therefore, depending on if you've got more product coming out of Jacinth-Ambrosia, for example, that will reduce your unit cost of goods sold from a group perspective. So sales mix does play a part in terms of that total cost of goods sold number for the group. And also, as I mentioned, in terms of Sierra Rutile that the U.S. dollar base, but with the Aussie dollar where it is, just sheer translation into Australian dollars will inflate those costs just on a translation perspective. So I think there's a combination of factors that have driven the increased unit cost of goods sold being, as I said, mix, translation of SRL and some higher ilmenite feed cost going into the SR2 production would be the key underlying factor. But here, when you look through to the operation level, they're still making very good margins. I don't know if that helps.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [19]

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So basically, I understand COGS is impacted by the mix, and that's why I sort of wanted to sway away from that and go into pure production costs and see if there's any other movements there that we need to be aware of going forward?

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Adele Stratton, Iluka Resources Limited - CFO [20]

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Yes. No, it's all in line with expectations in terms of cash cost of production and the unit cost from the operations. As we've mentioned, SRL, obviously, there are higher depreciation charges at the SRL, which we've flagged in the guidance outlook. That will have a flow and intact through to unit cost of goods sold because it looks at both cash and noncash. But otherwise, no, no material changes.

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [21]

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So Rahul, on the dividend, how to think about it. So with negative cash flow we've looked through that a little bit and taken cognizance of the very significant tax payment that was due and was paid in the first half and we've kind of explained that in the past as well. It's kind of a nuance of the tax system, the timing of that payment. So we've looked through that a bit and looked at broadly free cash flows that are expected. So, that's that. In terms of our -- how to think about dividends over coming years, until we say otherwise then our policy remains as it is. I've just noted there that with the looming onset of the Mining Area C cash flows from North Flank it will enhance our capacity to pay dividends. In terms of our balance sheet framework, on Slide 10 we've talked a little bit about that and that's unchanged as well.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [22]

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So basically just investment-grade rating in terms of credit going forward.

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [23]

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Sorry, Rahul, could you just repeat that?

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [24]

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Yes. I was saying, so the policy remains just investment-grade balance sheet going forward and you're happy to take on a sensible amount of debt within that framework?

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [25]

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Yes, I think that's right.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [26]

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Okay. And then finally, around zircon and rutile, please. The inventory levels that I was talking about?

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Adele Stratton, Iluka Resources Limited - CFO [27]

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So in terms of inventory, we've mentioned, Rahul, in the half, so inventory has increased but a lot of the driver in the half is actually to build this ore and HMC at the Cataby operation. There's a small build obviously, when you look at sales versus production of inventory. As was noted, that sales are a bit lower and hence it will drive inventory on the balance sheet. But I think we're at $40 million from December where we called it. Normalized levels is in that range.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [28]

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Okay, apologies. I was actually talking about the broader markets, just in the markets at the moment, like it was mentioned that rutile inventories have now normalized. And I'm -- sorry, pigment inventories have now normalized. I'm aware they were elevated as well. Just wanted to see what are the levels they're at, at the moment? And then the same thing for zircon, what are you seeing in terms of the Chinese levels of inventories in the downstream at the moment?

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [29]

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Okay. Got you, Rahul. I'll pass over to Christian.

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Christian Barbier, Iluka Resources Limited - Head of Marketing [30]

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Yes, Rahul, this is Christian Barbier, you're aware that in the pigment industry, one of the main players has been implementing a so-called value stabilization program to adjust the level of inventory. It seems to have played out very well over the last 6 months. What we see is that through their reduction of sales volume, the pigment market is now stable. Sulfate pigment pricing has been standardized, and we've seen in some geographic areas chloride pigment pricing is increasing. So to answer your question, yes, it seems that pigment prices -- the pigment inventories downstream have standardized.

Regarding zircon, with the softening economic conditions and the uncertainty over the global economy, we have noticed that customers across the value chain have been very cautious in the first half of the year. And we believe that downstream inventory is now fairly reduced. We don't see any buildup of inventory downstream. People are very cautious and have been drawing down on their stocks. And -- even in China, there has been no significant inventory. You may see some inventories in concentrate processing plants, but that's the nature of the business. They buy bulk -- bigger quantities and release them progressively as they process them.

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Operator [31]

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Our next question comes from the line of Paul McTaggart from Citigroup.

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Paul Joseph McTaggart, Citigroup Inc, Research Division - Metal and Mining Analyst [32]

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So I just want to circle back to zircon. Is the problem - so if you look at property starts, they're up strongly (inaudible) but if you look at completions they're down 10% year-to-date. So is it -- the weakness that we see in the market, is it simply a reflection of those weaker completions and do you have a sense of why that is, I mean, why we've got property starts up quite strongly in China but the fact completions are down? And the second part is really around the reference price. So -- I mean the way we model, obviously we have a reference price and then we've got to have some kind of realized price against that, but my question is if you're not realizing the reference price or less and less material is being sold at that reference price, what is the value of the reference price?

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [33]

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Okay. Well, I'll hand over to Christian in a moment. But on the third question on property starts. So certainly, when property completions rise, there's inevitably a pull on the sort of products that we sell, why property completions are lower than starts is a pretty complex one and a difficult one to evaluate, Christian can elaborate on that. In terms of the reference price, if you looked at the slides we've shown over the last few years, Paul, we can say that the weighted average realized price, the company standard has varied above, well, not above, but it has -- it's a discount from the reference price, has varied over the years and the gap between weighted average realized and the reference price has narrowed over the most recent period. And the reason for that is around rebates and discounts. And what we're flagging is that, that while average realized price is probably going to open up a little, what's the value of the reference price. It's really a commercial mechanism that we utilize with our customers to pitch pricing, and it's been very successful in building in our customers' minds, a little bit of fairness around what they pay for their zircon by reference to what they take. And the level of loyalty they show in terms of wallet share and delivering on their annual target commitments. So at present, we continue to think it's a useful mechanism. But at the moment, we are foreshadowing a little bit of an opening up of that gap.

Christian, any further comments around that?

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Christian Barbier, Iluka Resources Limited - Head of Marketing [34]

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Yes. Paul, this is Christian Barbier. You asked something on the housing starts. Well, first on this -- much has been written and will always be written in China about the real estate market. Historically, the Chinese governments have used that to stimulate the economic growth, but also to avoid overheating and speculation and lately they have increased the scrutiny on bank loans to ensure that loans feed genuine demand instead of feeding speculation. Now, we've noted indeed for a few quarters the housing starts indicator being higher than the completion indicator. This probably means that further down the track when completions catch up there will be an upside for the consumption of titanium dioxide and zircon products. They are used in the later phases of construction closer to completion. Now, on the reference price, I would also like to add that it's been over two years that we've decided to switch to a six-monthly pricing in order to increase the stability in the markets. We're maintaining our reference price for another six-monthly period because there is, as we've noted, the economic conditions are not conducive to increasing the reference price. And we also noticed that decreasing the price will not stimulate any demand. Overall, our customers have been very supportive of our policy to maintain stability and to give visibility in the long term, and this is why we continue to implement our pricing this way.

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Paul Joseph McTaggart, Citigroup Inc, Research Division - Metal and Mining Analyst [35]

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Okay. Yes. So I guess the risk is, Christian, that if starts are up and completions are down, it means there's an inventory build. So the risk would be that before completions actually start up again, you need to run down inventory. So if you were a bear, you could look at it and say, this could be an extended period of weaker pricing.

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Christian Barbier, Iluka Resources Limited - Head of Marketing [36]

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Yes. Paul, yes, look, this is a really good question. I think this is what has been happening over the last -- probably, over the last year. But it's not happening just now. And we've noticed also, probably over the last couple of years, that there is an inventory of finished apartments in China. And that stuff needs to be resolved. And little by little, the Chinese government have chosen to have a soft command in policies. This is what we believe is unfolding.

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Operator [37]

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Next question comes from the line of Hayden Bairstow from Macquarie.

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Hayden Bairstow, Macquarie Research - Analyst [38]

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Just a couple for me, just on production, I guess. And obviously, you're giving good guidance on the volume numbers for the year. But is there sort of much you can do in pulling back production? I guess, obviously, you're not guiding to how much inventory you're going to build. But is there things with JA, some flex that you can pull volume back on the production side to help on the cost side? And just where do we sit now with a potential SR1 restart? Is that sort of on the back burner? Because the rutile market certainly looks a little bit better than zircon, for sure.

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [39]

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Yes. On production, Christian (sic) [Hayden], I mean, clearly, there are things we can do. We always structure our affairs so that we can -- so that we can wind back production. But I don't think -- I wouldn't expect that winding back production is going to have a positive impact on our cost position, positive as in lower. And we typically operate at high rates of production to ensure lowest cost.

But as the next period unfolds, we'll certainly be alive to those possibilities as you'd expect. In terms of SR1, yes, I mean, the SR1, obviously, is for synthetic rutile, lots of zircon, so as you point out, I think the conditions are pretty strong in that area. And we continue to evaluate options around feedstock, our own or others. And that's certainly something we continue to look at pretty carefully.

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Operator [40]

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(Operator Instructions) Next question comes from the line of Peter O'Conner from [EW].

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Peter O'Connor, Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining [41]

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So just a thought and an observation on the dividends comments you've made and relating that back to the Mining Area C commentary. I note you've been very deliberate and very careful with your wording about dividends and Mining Area C twice in this presentation. I've also noted there's been more PowerPoint slides dedicated to Mining Area C than I think I've ever seen and the word count on Mining Area C is more than I've ever seen. Part of my job and part of our job is to look between the lines and join the dots. You're telling me something about Mining Area C and dividends, which you spelled out as Iluka's ability to pay dividends in coming years will be enhanced. Is part of that enhancement a change to the way that flows? Would you consider different mechanisms for dividend payments as Mining Area C grows going forward and are there any other messages that I need to read between the lines or join the dots later?

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [42]

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Yes. Well, those are very interesting observations. Thank you for those. I guess one is that many have said from time to time that the Mining Area C asset is not fully recognized in Iluka's portfolio and so on. And so over the last while we've sought to ensure that our shareholders and market participants do understand the value and so at the conference earlier in the year we put up a slide that's very similar to the one in the presentation. So in terms of the signal and what you should be thinking about, I think it's really applying oneself and letting your customers know the true value of the Mining Area C royalty in the portfolio.

In terms of the second question around different mechanisms, we have been very deliberate around our words and the Board continues to consider ways in which the value of that royalty is optimized with a view to always ensuring that we maximize returns to our shareholders from all of our assets.

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Operator [43]

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Next question comes from the line of Glyn Lawcock from UBS.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [44]

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Apologies, a little bit late to the call. But just wanted to try and understand the zircon pricing a little bit better. Is it just the mix that's changing your ISP or is it also there is price on the underlying individual products like premium, standard and ZIC? I'm just trying to understand where the pressure is. Is it just the mix pressure or is there also pressure on the individual product pricing? Thanks.

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [45]

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Sorry, Glyn, I did sort of touch on this a little bit earlier. I pointed to the fact that over recent years we've put out a slide - I'm sure you recall it - where we've got the reference price and a line showing the realized, the weighted average realized price net of rebates and discounts and so on. And what we've pointed to is that as a consequence of where we're at with the market, with the level of rebates and product mix, we expect that the weighted average realized price is going to be lower in the second half. You'll recall in the first half it was in the order of $1,522, so we're expecting it to be lower in the second half for all of those reasons.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [46]

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I understand that. I guess I'm -- I think that Christian said earlier, I think it was just 2 questions ago, about dropping the reference price won't stimulate demand, not conducive to increasing demand. So I was trying to say so is it -- so you actually are having to put this downward pressure on the standard zircon price. That's what, I guess, I'm trying to make sure I'm clear on. Sorry.

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [47]

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Yes. So I think it's a good observation to pick up that the view -- our view that drop in the reference price would not stimulate demand. We observed that the -- at the quarterly that there is the most surplus of standard zircon as a consequence of concentrates coming into China and as a consequence of a bit of a downshift in demand. So there is a lot of surplus of standard zircon in the market. And the way to deal with that, we've talked about withdrawing some product from the market and taking some inventory forward. And that's what we're doing.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [48]

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And sorry, just a final question on a similar vein. Is it only China where you're seeing the demand weakness or is it more broader as well?

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [49]

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Oh, no. It's more broader.

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Operator [50]

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Our last question comes from the line of Matthew Hodge from Morningstar.

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Mathew Hodge, Morningstar Inc., Research Division - Sector Head and Senior Analyst, Basic Materials [51]

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I just -- not to harp on about the zircon market softness but I'm just curious about the kind of, how you see the split between supply and demand? Has there been kind of unforeseen supply that you've -- that has come to the market that you weren't expecting? Or is it just kind of a cyclical weakness in demand?

And looking forward, I kind of share your view on the longer-term outlook. So one of the key events that you're looking towards for you to get confident that the market is turning and things are improving?

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [52]

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Yes. Look, I think if you go back, we did talk a bit about at the quarterly about further concentrates being mobilized into the market. It's difficult to tell in year exactly how much is around, but it's evident that there is more around. In terms of demand, again, that additional concentrate in standard product has come at a time when demand has slowed both in China and elsewhere.

In terms of what we need to see, I think we'll be observing pretty closely both of those things, frankly. How much concentrate comes into the market, and what happens in terms of global demand drivers across the world. So when we see some uptick in activity levels and over time, inevitably, those sources of product will diminish.

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Operator [53]

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We have no more questions from the phone line. I would like to hand the call back to the management for closing.

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Thomas Joseph Patrick O’Leary, Iluka Resources Limited - MD, CEO & Director [54]

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Sure. Thank you. In summary, there is some uncertainty ahead, which we've acknowledged in relation to global environment, but we do believe that we are positioning ourselves in the best possible way to navigate through that and we have confidence in the longer-term fundamentals for the industry. Thank you very much.

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Operator [55]

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Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect the lines.