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Ladies and gentlemen, thank you for standing by, and welcome to Iluka Resources September 2018 Quarterly Report. [Operator Instructions] I must advise you that this conference is being recorded today, the 24th of October 2018.I would now like to hand the conference over to your first speaker today, Managing Director, Mr. Tom O'Leary. Thank you. Please go ahead.
Good morning, everyone, and thank you for joining us. With me on the call today are Adele Stratton, our CFO; Matthew Blackwell, Head of Marketing; and Melissa Roberts, General Manager, Investor Relations and Commercial Operations. I'll cover some aspects of our quarterly review before handing over to Matt to update on the market. I'll then open up the call for questions.First, I'll go straight to the announcement we made here today in relation to the unlawful strike at our mining operations in Sierra Leone. The workforce on strike represents about 15% of the Sierra Leone workforce but all of the operational workforce on the dredge and the dry mining unit. So none of the mineral separation plant employees, no one at the port, no one in maintenance, power and other utilities, and no one in admin and the support staff generally nor any of our security personnel. Irrespective of that though, it means no production once stops of heavy mineral concentrate in front of the mineral separation plant have been exhausted, so in just a day or 2. As we said in the release, we're engaging with the workforce and the union to understand the rationale for the strike. A prominent factor is job security, and the context there is that the dredge will, after very long service and remembering its life being extended throughout 2018, it will actually close in the third quarter next year. Now that's been known for a while, but earlier this month, we announced the specific date the dredge would cease production, being 15th February 2019. So job security, redeployment and end-of-service benefits feature. Clearly, though, the dredge closure is something we've planned and we've been transparent with the workforce about in terms of timing and process but inevitably, there's been a level of uncertainty. So those issues are of the type that we can understand and will work through. Some members of the workforce have also expressed other broader concerns relating to work conditions and pay as well as the supervision of the mining operations. So we're taking steps to look through some of the noise to get to the heart of the matter and that may take some time. We will, of course, endeavor to get there as quickly as practicable. We'll continue to seek the help of the government of Sierra Leone, which to date has been welcome and prompt. And most importantly, we'll engage with the workforce to find a way to a resolution.Of paramount importance, of course, is the safety of our people. Now we have in the order of 3,800 people employed or contracted to Sierra Rutile on site. And while the strike action has been peaceful, we need to manage the situation carefully, so our steps will be measured and they'll be guided by that principle.Turning to our production performance during the quarter, frankly, it's been a disappointing outcome at Sierra Rutile. Although the Q3 rutile production was 5,000 tonnes above the second quarter, demonstrating that we're making some progress, it is below our expectations, and that has led to a downgrade in full year production to a maximum of 135,000 tonnes of rutile from Sierra Leone. This guidance remains at risk, though, due to both the strike action, which quite obviously we can't quantify until the action is resolved, and it also assumes improved operational performance in Q4.The expected run rate of the dredge has been downgraded to 600 tonnes from 800 tonnes per hour, reflecting the performance that's been able to be achieved consistently from an asset that nears the end of its life. Clearly, the poor production performance of Sierra Rutile is unacceptable. I've spoken a lot about Iluka's emphasis on delivery. With respect to Sierra Rutile, we're not meeting that mark and we need to address that. With that in mind, we're working to resolve both the specific identified issues as well as looking at what additional steps can be taken to accelerate performance improvement. At the same time, we're progressing with the mine expansion plans, which have already been approved, like the doubling of capacity of Lanti and Gangama, and these are progressing on time and on budget and are not at this stage impacted by the strike action.Looking at the broader picture on Sierra Rutile expansion projects for a moment, we're continuing work we referred to at the half year to optimize value from the options available to us in line with our focus on the disciplined deployment of capital. As we've set out in today's release, some initial work to reevaluate options regarding the development of Sembehun has enabled us to compress that project's early work schedule but that it may not commence until later in 2019. This will give us further time to develop our value optimization work around Sembehun and the operation in general. Getting it right operationally in Sierra Leone and making rational and disciplined capital deployment decisions at the right time and with that deployment over the right time frame are all key priorities for us. I was in Sierra Leone back in June for a week and will be back at the mine again in coming weeks.Turning to our Australian operations. The situation is markedly different with Jacinth-Ambrosia in South Australia continuing to operate at capacity in the quarter. Furthermore, ore grades mined have been higher than forecast, and this has allowed us to build heavy mineral concentrate inventory with stocks of HMC up 94,000 tonnes since we restarted mining in December.The Iluka board has approved the accelerated mine move to Ambrosia and the move is expected to be complete by October 2019 at an initial capital cost of around $35 million. The move to Ambrosia as well as the processing of heavy mineral concentrate built over 2018 will sustain group zircon production levels at around 335,000 tonnes out to and including 2021. This is a positive outcome because through further mine optimization, we've been able to prolong steady levels of zircon production. Our SR2 kiln in Western Australia has also performed well over the year. And while there's a risk that the kiln lining approaches its end of life before the major maintenance outage in Q1 2019, the strong run rate achieved to date suggests full year synthetic retail production may be closer to 210,000 to 215,000 tonnes for 2018. Finally, we're progressing well with the Cataby mine development with construction nearing completion and first production schedule for the first quarter next year. With that, I'll hand over to Matt to give an update in relation to the market.
Thank you, Tom. Good morning, everyone. Start -- another strong quarter on the revenue side, bringing year-to-date revenues to $872 million, which is up 19% on the prior corresponding period, and fleeting from my perspective to see good strong contributions from both titanium and zircon. Something we don't speak about often, one of our byproducts, activated carbon, sales going very well there year-on-year. And we think about it as an offset to SR, costs contributing $100 a tonne approximately of credit against the production of SR. So let me start with zircon and I'll talk about it in a bit more detail. As we said at Q3, weighted average price was up 10% on the first half average. And as previously disclosed, we've announced a further 12% increase in the reference price effective Q4, and this has been accepted by all of our customers.Late in the third quarter, we did start to see -- or observed some easing of -- in the tightness of supply. We don't ascribe this to any -- to a material uptick in supply or a material downshift in demand, rather small changes, which have eased some of the tension in the market. Now as I shared at the half, customers report the Chinese ceramic industry is experiencing a more difficult environmental -- more difficult business conditions than this time last year, and we talked about the reasons for that and there are really 4 key challenges. The environmental compliance costs, which are forcing smaller producers to close. Not entirely a bad thing. We talked about the uncertainty in the housing market, such as the changing rules in property ownership, which is reported to have a drag on tile demand. Manufacturers facing increased competition on exports from lower-cost countries, for example, India and Vietnam. Again, we really have a net position because we sell to customers in both of those countries. And general cost pressures on manufacturing.Now elsewhere in China, in the sanitary and refractory, sanitary ware and refractory applications remain very solid. So on balance, Chinese demand in Q4 is expected to be subdued, although we do not expect any impact on Iluka's sales. In India and Europe, zircon memos report opacifier prices have softened a little. But it's -- to what is regarded as more reasonable levels, there was a degree of speculation creeping into the market. Now although this has affected confidence in the short term, demand, which has weakened a few months ago, remains generally positive. So similar to China, Q4 expected to be slightly slower with customers holding a more positive outlook for 2019, but no impact to Iluka sales.In the Americas, zircon demand continues to grow steadily and business sentiment remains positive.Now on the supply side, we understand there remains some delivery backlogs for Q3 and those backlogs are slipping into Q4, partially offset by some minor increases in exports from Indonesia. I think because of the subtle shift in the supply-demand tension and Iluka and others' recent price movements, zircon sand prices have converged to a more narrow range. We remain very confident that we're priced appropriately, giving due consideration to market conditions, customers' capacity to pay and optimizing the returns for our shareholders. Pleasingly, customers have not given any indication to Iluka that they want to wind back orders. In fact, the opposite is true. Many of our customers are seeking higher allocations of zircon sand for 2019.Turning to titanium dioxide, our third quarter weighted average rutile price was up 11% on the first half. We have also locked in a further 5% increase in price of rutile to the welding market effective in the fourth quarter. I'm particularly pleased with the team's effort in this -- in the welding market as we're on track to sell more industrial-grade rutile to the premium welding market than has been sold in SRL's history. In effect, our sales to this market will be certainly higher this year than we even had in 2011. Lower sales quarter-on-quarter -- lower sales volumes quarter-on-quarter, and compared with the prior corresponding period, did not represent a weakness in the end markets, rather a production-constrained environment that we've talked about. There was also approximately 25,000 tonnes of Z/R/SR that's sold in -- that was scheduled to sell in September that sold in October. Turning to the markets more broadly. Demand for titanium feedstocks remains strong in all markets. In China, a moderation in pigment demand has resulted in exports increasing to Europe, Asia and, to a lesser extent, North America, as you would expect because of the recent imposed tariffs.As reported in the quarterly, some Western pigment producers, especially those in Europe, are reducing prices in response to lower-priced Chinese imports. Now just to put that in context, Europe has been pricing premium-grade and lower-quality pigment significantly higher than the U.S. and other markets up until very recently. And it's fair to say that pigment-producing margins remain robust.Today, Iluka's customers have not shown any signs of reducing capacity utilization rates in response to the lower pricing environment. The strong demand, coupled with the unprecedented number of supply disruptions over the year, has created a tight supply situation of high-grade feedstocks heading into 2019. So while pigment prices may be softening, the tightness in the chloride feedstock market availability should support pricing momentum into 2019. Iluka's SR prices will continue to appreciate based on contract formulas, like the market a little, and we also leave behind us the SRL ilmenite contract that was signed before we executed the acquisition.So with that, I'll hand back to Tom.
Yes. I think we need to open the lines for questions now. Thanks, Matt.
[Operator Instructions] Your first question is from the line of Paul Lian from Goldman Sachs.
Matt, a few questions for you on the zircon market to begin with. You'd commented there about you're observing some easing and tightness of supply. What do you think out of South Africa more recently on supply side?
Thanks, Paul, welcome back. We understand that there continues to be some production constraints from one of the producers in South Africa that has had a number of interruptions this year. Their customers -- or customers of theirs tell us that they can't get some of the material that they're after. We hear Tronox, or one of the other competitors, is shipping okay. And it's a bit of a wait-and-see at the moment to see how the events of this year play out into next year.
Okay. And then on -- you said that you haven't seen a material reduction in overall global demand. What is your -- do you have a revised estimate or what demand or percentage change you're expecting this year?
No, we haven't come up with a view on overall global demand and I could point you to TZMI's latest report where they're expecting demand to still increase this year but a little bit less than they had expected, sort of in the order of -- even announcing that 1.2 million, 2 million tonnes, if I recall correctly. What we've just seen is a bit of softening in Q4, which we actually talked about at the half and in the account statement.
Yes. And then lastly on zircon, about the opacifiers, seeing a softening demand in fourth quarter and then improved conditions in 2019 what gives them the confidence, when you talked to them about improved conditions and demand in 2019?
So some of our customers talked about a bit of build in tile inventory. Some, for example, in Spain, some of the producers ran through the summer months, which they haven't always done, to try and take advantage of lower energy prices, which are available during the summer holidays. And so they went into this period with higher inventories than perhaps they would have at the same time last year. And...
It's Europe rather than China, basically?
Well, certainly, in Europe and in China, too. None of our -- as I've said, none of our Chinese customers, or any of our customers globally, are asking for any less product next year than they received this year. Those things...
Tom, maybe turning to you in Sierra Leone, more mishaps here, obviously pretty challenging. You imagine this operation from 10,000 kilometers away. But I'm actually more interested -- less about the strike because I'm sure someone will ask about that more so. But I'm actually interested about, I guess, the operational issues you had during the quarter. If I just read them: you had bearing failures at Lanti dry mining unit; higher-than-expected wear rates; higher-than-expected rock content at Gangama. More issues and ongoing and unexpected operational concerns. What gives you guys the confidence that you're pumping in a lot of capital into expanding both Lanti and Gangama that you're not going to actually realize the same issues with the new equipment and -- on the mining operation itself?
Yes, look, I think the issues not so much around the new equipment now. And I'd have to say that the bottlenecks tend to be shifting downstream, which I think you'll agree is a good sign. But I think what gives us confidence is that the steps we're taking to address these issues are going to resolve them. And let me just give you an example. You mentioned some of the issues we referred to in the release. And one of them was increased wear rates. And that was driven largely by -- one example was driven by corrosion rate as a consequence of higher than typical acidity in the system. And that was really a consequence of some pyrites in the ore, which gives rise to acidity in the system. And it wasn't as it should have been detected early and acted upon by dosing, which is what we would typically do anywhere. So the issue is not that the equipment is inadequate or incapable of doing the task, it's really the way it's been operated and the way we're maintaining our [ lag ]. And so in that particular example, we measured, as we always do, acidity in the system and the measurements received were not interpreted -- not entirely properly. And so it's kind of a monitoring and action as a consequence of what would it take being in the system. That's the issue. It's not about the quality of the equipment. So what are we doing to address that? And that's really what we've talked about at the half and what we're continuing to do. And that is, deliver a sustainable improvement in the capability of our people, which can only be done through better leadership and better training of not only our supervisors but at the operational level. So I mentioned at the half that we're getting -- we're increasing the level of supervision, increasing the number of people who are experienced at running these systems and diagnosing issues. And we are -- and that takes some time. We've talked about getting on with that at the half, but it takes some time, particularly in Sierra Leone because -- one, because of remoteness but also, I think as I've talked about before, the requirements for local labor. And there's an obligation to pursue labor in-country if it's available. And while we have found resources in-country sometimes and more often than not, we've been unable to find resources in-country, and so it really is a -- is a time-consuming delay in delivering those high-quality resources to site. So it is taking some time, but we've got plans in place at an asset-by-asset level to address sorts of issues we've identified in the quarterly. But the issues we've identified are really more around people. And we've been onto that issue for quite a while, and the answer to that is really increasing those high-quality resources on site and we're making headway there.
Yes. Again, Tom, lastly, you addressed the people issue. You've talked about that wear rate is really a maintenance issue. What about the tile and expected rock content? Should I be -- should we be concerned about this? Is drilling -- has drilling been insufficient? Can you actually expand on that and what impact that had on the quarter?
I'm not going to go into the impacts specifically that item had, but the resource drilling does show the extent of rock but not specific of the characteristics of the average and, in this case, the average and maximum lot size are both larger than expected. And we don't yet have the sophistication of mine planning and grade control to manage that. So that is something we're addressing to mitigate it going forward. So we've also made some refinements to our ore receiver systems to improve handling of those larger lumps. So with more sophisticated mine planning, which we're implementing, and modifications to equipment, we are addressing that issue. So we're not expecting it to be a recurring issue going forward.
The next question we have is from the line of Hayden Bairstow from Macquarie.
Just a couple for me. Is there any update on the Sierra Leone mining charter, just obviously, they only approved it back in the last month but there's sort of been no real data on it last time? And then just on the zircon market, I mean, just we've seen some price softening on the Indonesian prices, have we seen any volume softening as a result on that? And are we seeing sort of direct reaction to price moves? And do you think that given what your sort of comments on zircon markets are that pushing prices much higher than here is going to start to impact some more of that demand distraction?
Yes, look, I'll let Matt talk to the Indonesian arm and the -- and then I'll comment about demand. But on the Sierra Leone mining charter, the -- I think you're referring to the Extractive Industries Revenue Act, which was passed some months ago now. The Sierra Rutile Agreement Act obviously predates that and -- so we're now operating under -- effectively, we are operating under both regimes. But the Sierra Rutile Agreement Act provides us with the fiscal certainty that it has done in the past.
Yes, thanks, Hayden. So look, in Indonesia, we have actually just had our person that goes in-country every sort of 3 months, which just completed another in-house or in-country survey, got back. His observations were that there are some more infrastructure being built in Indonesia. August export volumes were 4,500 tonnes, approximately. That's the highest year-to-date. September's numbers aren't out yet, they'll be out in the next couple of days. Look, in terms of the pricing in Indonesia, you're right. There has been some softening in the Indonesian pricing. And $200 a tonne. But it's not alarming because it was a price -- they were trying to price at 17, 18 -- or close to $1,800 a tonne last quarter. And so they're way out of the market. It was very opportunistic and it was, we think, driven by traders. It's come back more in line and is now -- and Indonesian prices are now within this sort of band where most of the major producers are and us. So I'm not alarmed by that. It was expected, that there would be some more material come out and that -- and we would expect to see exports continue at the current prices. So it's probably -- you'd be a bit cautious about spending hundreds of millions of dollars or investing hundreds of millions of dollars in a new mine when Indonesia is starting to bring some more material on the current prices, I would think. To the question about can prices go any higher? Well, look, we don't try and predict future prices. What I might just draw your attention to is where we are today in our Australian dollar revenue-denominated pricing. We are only about 10% off the prices that we were receiving back in 2012, at the height of the market, in Australian dollars, obviously. We're bearing the benefits of the change in exchange rate. So -- and our customers are 30% lower. So they haven't -- they're not seeing the same impacts. So the market, I think, is in pretty solid shape.
[Operator Instructions] The next question is from the line of Glyn Lawcock from UBS.
Just 2 quick ones. Firstly on Sierra Rutile, is there any impact from the strike on the project team and the project progress? And then just secondly, just on inventory, I hear the commentary about rutile from Murray Basin. Just wondering where is -- could you provide a little bit an update on where the business is as a whole? From an inventory perspective, should we now expect rutile sales to match production going forward and sort of how much longer can you keep running miles above production [ is considered off ]. And any color around inventory positioning would be great.
Sure, Glyn. The strike activity is really restricted to the operational workforce on the dredge and dry mining unit. So there's no impact, for the moment at least, on the projects, the doublings at Lanti and Gangama. And Matt will address the inventory.
Yes, Glyn. So on rutile, yes, sales will match production. We don't have any more Murray Basin rutile to sell. And on zircon, potentially a slight decrease in finished goods' inventory going into next year but basically production matching sales, supplemented by our ZIC production, which is recognized as production upon sale.
[Operator Instructions] There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.
Okay, thank you all for your time today. Have a good day. We look forward to seeing some of you at the Janney site next week.
Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may now disconnect.