“Our approach has been to meet market demand; our history of production clearly reflects that we do not seek to push product into the market if there’s no demand.”
By Mark Scott
17 April 2015
AFTER a soft few years in the mineral sands market, producer Iluka Resources is set to boost production in 2015 in a sign of confidence in renewed demand.
Iluka produces two titanium dioxide feedstocks – rutile and synthetic rutile – as well as zircon from its operations in WA, South Australia, Victoria and the US.
The company’s results took a hit last year amid weak demand for mineral sands and following an $86.5 million non-cash impairment charge related to plans to close its US operations in 2015, resulting in a $63 million loss.
Its mineral sands revenue dropped to $724.9 million, down 5 per cent on 2013 and a long way from the lofty heights of 2011, when the company sold $1.54 billion worth of product.
Iluka’s average revenue per tonne of zircon-rutile-synthetic rutile (ZRSR) dropped to $1030 in 2014 from $1173, while its production increased 13.5 per cent and its unit cash costs of goods sold dropped from $890/t in 2013 to $862/t last year.
However monetary figures alone ignore a key part of Iluka’s strategy – demand-drive production.
Unlike big miners in the iron ore industry, whose strategy to flood an already-soft market with new production has seen commodity prices dive, Iluka has tailored its production levels to match demand.
In 2011, as ZRSR prices and demand peaked, Iluka’s production soared to 1.17mt of ZRSR; in 2013, with demand at a low, it brought its ZRSR production down to 471,100t.
The company has tipped increased demand in 2015 and beyond, based on constrained global supply and stronger economic conditions across the board, and plans to increase its production accordingly.
On the back of a bad run in the market, Iluka chief operations officer Steve Wickham remained confident in the company’s demand-driven production strategy.
“Our approach has been to meet market demand; our history of production clearly reflects that we do not seek to push product into the market if there’s no demand,” he said.
“Over the last five years we’ve proved that we can do that successfully and it has a positive impact on our costs.”
The strategy, combined with the impact of increased production on unit cash costs, puts the company in good stead to return to profit in the future, Mr Wickham said.
“With a 13.5 per cent increase in production of rutile and zircon in 2014 relative to 2013, there was an improvement in our unit cash cost,” he said.
“We’ve guided a 28 per cent in combined ZRSR production, reflecting demand recovery, so unit cash costs should decrease while revenue will increase.
“Given the low cycle market conditions, it’s a robust financial situation that the company is in with a good basis to improve financial performance in the future as demand returns.”
Iluka’s focus on meeting demand has seen two major operational decisions made in the past six months: one to boost production by reopening the synthetic rutile kiln in Capel in WA’s South West, and another to cut production by closing its US operations.
The company operated mining and processing facilities at two sites in Virginia – Brink and Concord – as well as a mineral separation plant at nearby Stony Creek.
In a statement in December, Iluka said its corporate plans for the past eight years had considered closing the US operations across a period from 2012 to 2027, with the wide range reflecting a number of factors including operating costs, production, sales volumes and prices.
“A decision has been taken to maximise cash flow from the Virginia ore bodies and minimise commitment of further development capital to this part of the business at this time,” the company stated.
“This option entails mining out the Brink and Concord deposits in the most effective manner, which is expected to lead to the completion of mining and processing activities in the US at the end of 2015.”
The resulting non-cash impairment charge of $86.5 million drove Iluka to a loss-making position for the year.
While Mr Wickham expressed disappointment at the situation, he said the company would hold on to the assets with an eye to a potential restart when market conditions improve.
“One of the most important things for us is to ensure we look after our employees as we go through this process,” he said.
“But we’ll also ensure that when we’re closing those operations, it will be done in a state that if the market returns we will be able to restart quickly if required.
“They’re good assets, and in the future that market will definitely come back and we will have good assets ready to go.”
Iluka’s long-term plans for its US operations are modelled partly on what the company has done at its North Capel kiln this year.
The kiln, which can produce 200,000t of synthetic rutile per annum, was idled in 2013 given poor product demand.
In February 2015 the company announced that with demand once again on the rise, the time had come to restart both the kiln and feedstock mining at the nearby Tutunup South mine.
Ramp up began in March and the company aimed to be in full production mode by April.
“We’ve said consistently that we would reactivate idle capacity if the appropriate returns would be delivered; we’ve been able to structure an agreement with our clients for synthetic rutile at North Capel, and that means the appropriate returns are being generated,” Mr Wickham said.
“We retained approximately half of our workforce through the period of idle, which was about 18 months, so we had the experienced people there ready to restart.”
Iluka’s decision to restart its operations and employ about 80 employees and contractors in the area provided a rare glimmer of good news in a tough period for the mining industry.
“It’s good for morale, especially for our people in Capel…for us as an organisation, for the people and the community, it’s a good thing,” Mr Wickham said.
In a further sign of confidence in the market, Iluka is progressing three minerals sands projects in Australia, including a rutile operation that could make up as much as 10 per cent of global rutile supply.
The Balranald project in NSW’s Murray Basin includes two rutile-rich mineral sands deposits, with material levels of zircon and ilmenite.
Concentrate produced on site would be transported to Iluka’s Hamilton mineral separation plant for processing, and the operation would form a major part of Iluka’s rutile production once other Murray Basin deposits were exhausted.
The Cataby chloride ilmenite deposit, north of Perth, would offer a high-quality feed source for synthetic rutile production, while the Eucla Basin satellite deposits would complement Iluka’s Jacinth-Ambrosia zircon production in South Australia.
As of early 2015, feasibility studies were underway at Balranald and Cataby, while the Eucla deposits were at the pre-feasibility stage.
Mr Wickham said the company would not make any decisions in the current market conditions; however it was confident the financial returns would be above the hurdle rate and as much would continue to support investment in the projects.
“This is an industry where the supply of high quality material is challenged in the medium term,” he said.
“These projects will, in our view, be required to meet market demand, and the timing will be determined by that demand.
“We’re going to continue with our feasibility studies, then as the market requires we will bring them on.”