Iluka Resources Limited Mineral Sands Sector Overview. December 2009

Transcription

1 Iluka Resources Limited Mineral Sands Sector Overview December

2 Disclaimer Forward Looking Statements This presentation contains forward-looking statements that are subject to risk factors associated with exploring for, developing, mining, processing and sale of minerals. Forward-looking statements include those containing such words as anticipate, estimates, should, will, expects, plans or similar expressions. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a range of variables and changes in underlying assumptions which could cause actual results or trends to differ materially. These include, but are not limited to: price and currency fluctuations, actual supply versus demand, production results, reserve and resource estimates, loss of market, industry competition, environmental risks, physical risks, legislative and regulatory developments, economic and financial market conditions in various countries and regions, political risks, project delay or advancement, approvals and cost estimates. Specific Risks & Sensitivities The information contained in this presentation is subject to, but not exclusively to, the following: Changes in exchange rate assumptions Changes in product pricing assumptions Major changes in mine plans and/or resources Changes in equipment life or capability Emergence of previously underestimated technical challenges Environmental or social pressures which impact licence to operate All currency referred to is Australian denominated unless otherwise indicated. 2

3 Iluka Resources Overview & Investment Proposition Market capitalisation Industry Sector ~A$1.4 billion (418 million shares on issue) Materials (minerals sands exploration, project development, operations and marketing; iron ore royalty deriving from BHP Billiton s Mining Area C, Western Australia) Substantial shareholdings M&G (London) 19.2%; Schroders (Sydney & London) 9.5% Objective To create and deliver shareholder value Key Deliverables Capital efficient transformation of the asset base - complete end 2009 Delivery of two new globally significant, high margin production sources - Murray Basin (completed 2009) & Jacinth-Ambrosia (completed 2009) Balance sheet headroom maintained to protect project delivery Supply discipline through global economic crisis - especially as market leader in zircon Strengthened position in growth markets - especially China Investment Proposition: Improved Financial Characteristics ( vs ) Significantly lower capital expenditure cash flow generation & balance sheet flexibility Higher production/sales of higher value products (rutile and zircon) Higher EBITDA/revenue margin and return on capital Increased contribution from low risk Mining Area C royalty stream 3

4 Mineral Sands Industry Context Minerals Uses Industry Supply and Demand Key Themes Ilmenite Rutile Leucoxene 90% of all mined ilmenite, rutile and leucoxene used as feedstocks of titanium dioxide for pigment manufacture Rutile and leucoxene are also raw materials for flux coated electrodes and flux core welding wire Titanium metal is a strategic and growing market 53% of world s titanium is supplied by Iluka Resources, Rio Tinto/BHPB, Exxaro Sands Demand for pigment linked to GDP per capita - Late cycle demand characteristics - Titanium in pigment not readily or costeffectively substitutable Positive demand fundamentals, influenced by urbanisation & increased per capita consumption in developing economies, especially China Supply constraints medium term - of higher value products - zircon and rutile Zircon Over 60% of zircon is milled into fine flour for use in tiles and other ceramic applications 25% used as feedstock for zirconia, zirconium chemicals and metal production Zircon sand used in specialty refractory and foundry applications 67% of world s zircon is supplied by Iluka, Rio Tinto/BHPB, Exxaro Zircon milling customer base is fragmented and capacity is moving from Europe to China and Asia/Pacific Demand for floor and wall tiles linked to urbanisation, particularly in China and Asia Not readily or cost-effectively substitutable Severe demand reduction in 2009; recovery speed to trend line dependent on shape of global economic recovery Additional production not induced at current prices 4

5 Mineral Sands Titanium Minerals Summary Characteristics 90% of all titanium minerals are used as feedstocks in the manufacture of titanium dioxide (TiO2) pigment TiO2 Minerals Ilmenite Rutile Leucoxene (value based on titanium dioxide content) Segment Consumption (2008) 6 million tonnes Ti02 equivalent units Pigment, 89% Metal, 6% Other, 5% End Uses TiO2 Pigment is used in - Paints, coatings, inks - Plastics - Paper - Textiles - Cosmetics Welding fluxes are used in steel fabrications Titanium Metal is used in - Aerospace, defence Emerging specialist applications - Photo voltaic cells Supply and Demand Dynamics Supply of minerals - Majors: Iluka, Rio Tinto/BHPB, Exxaro - Pigment end use demand - Consumption linked to GDP/capita but late cycle and lags infrastructure commodity stage demand - China and developing economy urbanisation a major driver but pigment intensity of use in developing economies still only ~20% of mature economies Titanium metal - Strong demand in specialty applications Key Pricing Components US$ based price Typically multi-year volume, annual pricing, contractual arrangements Technical buying decision 2.5% historical CAGR ( ) China imports ~1/3rd of its pigment requirement Geographical Consumption of Pigment (2008) 4.7 million tonnes pigment Other Asia 17% China 18% Other 11% Europe 29% North America 25% 5

6 Mineral Sands Zircon Summary Characteristics Zircon is used predominantly in ceramics manufacture and 45% of all zircon consumption is in China Segment Consumption (2008) 1.2 million tonnes Zircon Refractory, 12% Chemicals, 22% Foundry, 12% Ceramics, 54% End Uses Ceramics (53%) - Wall and floor tiles - Sanitary ware - Tableware Refractory & foundry applications (25%) - Bricks for glass and steel furnaces - Precision Casting Fused Zirconia, Zirconium Chemicals (16%) - Nuclear industry (fuel rods) - Desalinisation plants - Electronics Supply and Demand Dynamics 2/3rds of supply by Iluka, Rio Tinto/BHPB, Exxaro Zircon milling is fragmented with capacity moving from Europe to China and Asia/Pacific China the major zircon consumer (30% of global demand) with import growth of 17.2%pa ( ). Demand for floor and wall tiles is linked to urbanisation Zirconium chemicals and metal demand is growing strongly Key Pricing Components Historically similar to titanium minerals Moving to shorter dated contractual pricing arrangements, including spot 4.5% historical CAGR ( ) Zircon prices have averaged 1.2 times rutile prices & 6 times chloride ilmenite prices ( ) Geographical Consumption of Zircon (2008) 1.2 million tonnes Zircon Europe 11% China 35% Other 7% Asia 19% North America 28% 6

7 Mineral Sands Price Relativities Historical Iluka Prices to 2007 (TZMI 2008) US$/tonne FOB Historical Pricing Iluka Average Prices TZMI Chloride Ilmenite Sulphate Ilmenite Rutile SR Premium Zircon Prices from TZMI these prices do not necessarily reflect Iluka 2008 prices

8 Mineral Sands Key Participants Main Operations by Three Major Raw Material Suppliers 2008 Market Share* Company TiO2 Zircon Operation Location Rio Tinto / BHPB Iluka Resources 29% 19% 15% 30% Exxaro 9% 18% Annual Mine Production RBM Sth Africa Ilmenite 1000kt Zircon 250kt Comments Large scale/low ore grade mining - mainly ilmenite with low cost upgrading and pig iron credits QIT Quebec, Canada Ilmenite 2000kt Hard rock Ilmenite mine without zircon but with pig iron and value added steel products QMM Madagascar Ilmenite 700kt Large scale, low ore grade ilmenite mine Murray Basin Eucla Basin Victoria, NSW Rutile 200kt Zircon 150kt Virginia Virginia, USA Ilmenite 200kt Zircon 50kt Perth Basin KZN Namakwa Sands South Australia West. Australia Sth Africa Sth Africa Zircon 300kt Ilmenite 150kt Ilmenite 1000kt Rutile/Leuc. 100kt Zircon 250kt Ilmenite 300kt Zircon 50kt Ilmenite 300kt Zircon 200kt Tiwest JV West Australia Ilmenite 400kt Zircon 50kt High grade mineral assemblages and revenue from rutile and zircon Exceptionally high zircon grades in ore relative to ilmenite Low cost and efficient producer close to customer base in US Declining production but with spare ilmenite upgrading assets Started up in 2003 as an ilmenite upgrading facility with iron by products Acquired in 2007 from Anglo American. Has good zircon revenue Mainly upgraded ilmenite for feedstocks to 50% JV pigment plant (co-owned with Huntsman) * All operations on 100% basis 8

9 Mineral Sands Industry Financial Drivers Cash cost of production is not the only differentiator for mineral sands producers. Revenue per tonne is a key driver of value - influenced by assemblage Prices of minerals in ore relative to ilmenite ( ) Zircon Rutile 6 times 5 times Relative quantity of minerals in ore Ilmenite Dominant mineral and usually 4-10% in ore Ilmenite Upgrading Technology Ilmenite can be upgraded into rutile equivalent product using technologies developed by Iluka, Rio Tinto and Exxaro Pig iron can also be economically produced as a by-product when there is a sufficiently high level (>30%) of iron oxides in the ilmenite Cash Cost Drivers Depth of mining, and vegetation/overburden removal Scale of mining operation Levels of clay, waste and other mineral trash that require removal Material handling during transport and proximity to export port Power, water, other infrastructure Rutile and Leucoxene Zircon Variable but generally <1% in ore Variable but generally <1% in ore 9

10 Mineral Sands Price Relativity Historical Pricing of Various Commodities Mineral sands has not seen comparable price appreciation compared with infrastructure stage commodities. Similar factors are at work resource scarcity, strong demand from developing economies and, in the case of high quality mineral sands products, medium term supply tightness to 2009, US$, Index 2004= Index 2004= Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Gold (US$/oz) Copper (US$/t) Nickel (US$/t) Zinc (US$/t) Lead (US$/t) Rutile (US$/t Aus. FOB) Zircon (US$/t Aus. FOB) Silver (US$/oz) Source: TZMI and Bloomberg Notes: Monthly average prices, zircon and rutile annual average prior to

11 Pigment Demand Pigment GDP-linked Demand Growth with Developing Economy China s pigment consumption CAGR since 1990 is 18.9% compared to the rest of world of 1.8% China Pigment Intensity of Use (per capita cf USA) China s pigment use per person is 20% of US pigment use Rest of World vs China Pigment Demand Pigment (mt) 6 World China Rest of World CAGR = 2.8% 100% 80% 60% CAGR = 2.9% CAGR = 1.8% CAGR = 18.9% Pigment Demand Growth China 1/3rd import dependent (high quality chloride pigment not produced within China) Mature economy consumption typically flat to declining Developing economy demand at relatively early stage of growth - China pigment consumption intensity low - demand profile strengthening from low base in BRICs and developing Asian economies Small Sector Metal/Other Demand Growth Titanium metal - aeropsace/defence applications CAGR 8.4% Welding electrodes flux CAGR 12.8% 40% 20% 0% Steel Copper Aluminium Nickel Pigment Pigment/Person vs Regional GDP/capita ( ) Pigment (kg) / person 5 China Eastern Europe World Western Europe Japan North America 11 Asia 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 India Real GDP / Capita (US$)

12 Pigment Demand Recovery from Historic Lows kt Monthly US Pigment Exports (all destinations) kt Monthly China Pigment Imports and Exports Imports Exports Imports 3mth avg Exports 3mth avg Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul Monthly Averages Oct Monthly Averages Severe reduction in first half pigment demand Higher pigment production and export rates becoming evident For the first half of 2009, pigment imports into China were down nearly 25% compared with a year previously China imported 70kt of pigment in Q2 09 which is only 10% lower than 12 months previously China increased pigment exports to the US and Asia in Q2 09, but exports to Europe were down by around 65% 12 Source: Datamyne and TZMI

13 Titanium Dioxide Demand Rio s Mid Cycle View Similar Characteristics Apply to Zircon Demand Infrastructure Based Growth Urbanisation 2007 Population distribution in bands of income levels** Average Wealth per capita in PPP terms Inflection Point for growth phase Typically mid to late cycle demand characteristics Urbanisation and increased GDP per capital strong indicators to demand growth Source Rio Tinto TZMI Conference Singapore 13

14 Zircon Demand Demand Influenced Predominantly by Developing/Urbanising Economies Global Zircon Consumption CAGR since 1990 is 3.4% while China s CAGR is 17.2% Zircon Consumption Trends Rest of World vs China Growth Zircon (kt) World China Rest of World CAGR = 3.4% China s Urban Residential Floorspace China used 2.8 bn sqm of tiles in 2008 Future growth in China s urban floorspace will influence increases in China s tile use, along with expected increase in ceramics quality Total Floorspace bn sqm Installed CAGR = 2.8% CAGR = 1.3% CAGR = 17.2% Zircon Demand Growth Demand 3.4% CAGR globally China demand CAGR of 17.2%; largest global consumer of zircon: - largest producer & exporter of ceramics; - largest producer of zirconium oxychloride; and - import dependent Urbanisation & construction are strong indicators to demand growth Demand profile strengthening from low base in BRICs and developing Asian economies Zircon kg / Tile sqm Source: McKinsey Consultants Zircon Intensity of Use Intensity of zircon per tile currently low in China This is forecast to rise as quality of tiles produced and demand in China and for exports increases Global Zircon Intensity of Use (LHS) % Chinese Tile Production (RHS) % % 35% 30% 25% 20% China Tile Production (% of Total)

15 Evidence of Zircon Demand Recovery Most Notably in China China Zircon Imports - Monthly China Zircon Imports - Cumulative YTD kt Australia Indonesia 3 Month Avg South Africa Other kt Others RSA Indonesia Australia Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 China s 1st half import demand for zircon was weak, due to prior year inventory build in late 2008, and destocking during the course of 2009 Import recovery has become evident since July with August and September import levels above pre GEC monthly averages As at the end the end of September, Chinese zircon imports were 58% of 2008 import volumes, with a strong recovery trajectory evident 15

16 A China Perspective on Zircon TZMI Singapore Conference October 2009 China Zirconium Advisor (Jian Dongmin) Director of China Zirconium and Hafnium Committee Source: TZMI Conference October 2009 Zirconium industry is an important part of China s national economy Zircon is an important strategic material for China s modernization and defense construction and also the mainstay of China s new materials industry China is the largest producer and exporter of ceramics in the world - production of sanitary ceramics 120 million pieces (58% increase since 2005) - architectural ceramics 5 billion m 2 (37% increase) China the world s largest producer of zirconium oxychloride The nuclear grade zirconium processing industry is the most prospective area China has entered a new period of development by importing nuclear grade zirconium technology from Westinghouse Electric Corp The consumption of zircon sand in the zirconium industry in China will reach 630,000 tonnes by 2015 (current estimated at 400,000 tonnes) 16

17 China Titanium Dioxide Demand Outlook Pigment Market China consumed approximately 850kt of titanium-based pigment in 2008, having grown by an average of 18% p.a. since 1998 China Pigment Market Titanium based pigments either sulfate or chloride grade 68% of pigment used in China was sulfate grade pigment, sourced from domestic pigment plants Chinese sulfate pigment is lower quality and used mainly in construction (interior and exterior painting) The remaining 33% of pigment used in China, or around 275kt in 2008 was chloride grade Pigment Imports In China, chloride pigment is predominantly used in the coating of manufactured goods (cars, whitegoods etc) As China increasingly becomes a manufacturing base for global companies, this market is likely to grow strongly Higher quality chloride grade pigment consumed in China is imported In 2008, China imported around 275kt of pigment, of which 260kt was chloride grade Domestic production of chloride pigment restricted due to closely held manufacturing technology Also, China mines mainly sulfate grade feedstocks. With or without domestic chloride pigment plants, China will remain reliant on imported chloride titanium feedstocks In 2008, China s pigment imports were largely from Asia-Pacific based producers and the US China Other, 24% Taiwan, 24% Chloride import 31% kt Japan, 15% US, 17% Australia, 20% 50 Chloride domestic 2% Sulfate import 2% Sulfate domestic 65% Iluka has significant exposure to these offshore pigment producers as a major supplier of chloride grade titanium feedstocks 17

18 Mineral Sands Supply Main Characteristics Limited new, high quality supply (ex Iluka s projects) Resources projects frequently late/take time to meet production expectations Inducement of New Supply Project Ranking by NPV Illustrative Inducement Analysis Funding and/or country risk beset a number of mooted projects Most new capacity is ilmenite - does not compete with Iluka's key products Iluka s inducement analysis suggests very few projects logically induced at current zircon and rutile pricing Ilmenite upgrading capacity is utilised/controlled by major players Rutile Price (% Change) Iluka s inducement analysis suggests prices would need to be significantly higher to warrant additional upgrading investment Zircon Price (% Change) Iluka is logical producer of incremental zircon and high grade TiO2 supply faster, cheaper & at lower risk to customers 18

19 Industry Zircon:TiO2 Ratio Despite Advent of Jacinth-Ambrosia, Industry Z:TiO2 Ratio Remains Stable mt of TiO2 or Zircon TiO2 Historical Supply Zircon Historical Supply Ratio t Zircon/t TiO Zircon/TiO2 Ratio All Feedstock Producers (including J-A) Zircon/TiO2 Ratio Excluding Iluka F Decline in zircon:tio2 ratio forecast from existing producers (excluding Iluka) Despite Jacinth-Ambrosia (largest new supply source in 30 years) industry Z:TiO2 ratio stable Given zircon demand growth historically > TiO2, zircon availability may come under further pressure if projected TiO2 volumes do not materialise 19 Source: TZMI and Iluka analysis

20 Iluka Capital Expenditure, Cash Flow and Debt Profile (average) Capital Expenditure $m ~500 Operating Cash Flow Net Debt Gearing (net debt/debt+equity) % ~ Increase versus Decrease versus Operating cash flow, pre cash flows from investing activities and financing activities 2 Based on $ million closing year end debt (book equity at 30 June of $1,175 million) 20

21 Other Iluka Revenue/EBIT Streams Mining Area C Iron Ore Royalty Royalty on iron ore produced from specific parts of BHP Billiton s Mining Area C (MAC) province in Western Australia The royalty results from a 1994 restructure of deferred payments owed by Consolidated Goldfields Australia The agreement provides for a revenue-based royalty and production capacity payments consisting of the greater of : (i) ongoing quarterly royalty payments of 1.25% of free-on-board sales revenue from the MAC Royalty Area (less all export duties and export taxes), or (ii) A$0.25 per tonne of all ore produced from the MAC Royalty Area in that quarter; and a series of one-off capacity payments of A$1 million tonne increase in the annual production level from the MAC Royalty Area during any 12 month period ending 30 June above the previous highest annual production level, paid within 30 days of the relevant amount of production being produced The MAC royalty is, arguably, a superior royalty stream to many existing royalties by nature of its: pure nature as a revenue royalty with no exposure to underlying profitability exposure to significant volume expansion, as conveyed in BHP Billiton iron ore presentations expected long resource life low sovereign risk low counterparty or credit risk (BHP Billiton) minimal administrative costs It could be argued that broker valuations of MAC may not reflect these superior characteristics when compared with other royalties and royalty trusts 21

22 For further information, contact: Dr Robert Porter General Manager, Investor Relations ; + 61 (0) robert.porter@iluka.com 22