Iluka Resources' Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug.21.13 | About: Iluka Resources (ILKAF)

Iluka Resources Limited (OTC:ILKAF) Q2 2013 Earnings Conference Call August 20, 2013 8:00 PM ET

Executives

David Robb - Managing Director

Alan Tate - Chief Financial Officer and Head of Strategy and Planning

Chris Cobb - General Manager, Sales and Marketing

Simon Green - General Manager of Finance and Risk

Rob Porter - General Manager of Investor Relations and Corporate Affairs

Doug Warden - Head of Resource Development

Analysts

Clarke Wilkins - Citi

Chris Terry - Deutsche Bank

Mark Busuttil - JPMorgan

Matthew Hope - Credit Suisse

Matthew Hodge - Morningstar

Paul Hissey - Goldman Sachs

Peter Arnold - Merrill Lynch

Glyn Lawcock – UBS

Michael Evans - CIMB

Brendan Fitzpatrick - Morgan Stanley

Valerina Changarathil - News Corporation

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Iluka Resources 2013 Half Year Results Webcast. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today Wednesday 21, August 2013.

I would now like to hand the conference over to your speaker today Mr. David Robb. Thank you. Please go ahead.

David Robb

Thank you, Annie, and good morning everybody.

As always thank you for spending some time with us in what is a very busy reporting period for many of you, I know. With me, I have Alan Tate, CFO and Head of Strategy and Planning; Simon Green, General Manager of Finance and Risk; and Rob Porter, General Manager of Investor Relations and Corporate Affairs. Also joining us today, particularly for the Q&A session is Doug Warden, Head of Resource Developments; and Chris Cobb, Head of Marketing. I expect the presentation to take roughly half an hour. It will focus on the results on market conditions and on growth and about 30 minutes for Q&A.

At slide 2, the usual disclaimer which I must highlight to you particularly with respect to any forward-looking statements we might make.

Slide 3, after a breakthrough in 2012 and a despite what has obviously been a very challenging year for our management and staff in terms of the changes that we made. It is particularly pleasing to all of us in the company to see safety performance continue to improve as you see in that declining total recordable injury frequency rate were inline.

Slide 3, we said previously that we expected conditions to improve over the course of 2013 and the first half saw stronger than budgeted zircon demand and to titanium dioxide that market subdued as expected.

Treatment feedstock demand recovery preconditions are emerging I believe, for example when you see to that inventory draw down in pigment making plans that’s a positive sector. We have done what we said we would do to manage through a low cycle period. Our balance sheet remains in strong shape as we flag the full year results has been a net cash outflow in the half largely due to a tax maintenance cash up. And we are paying a small interim dividend despite that cash outflow.

Slide – sorry, I got my slides all over there. Slide 5, the main features, obviously, there are some more red errors than 12 months ago, which I think highlights the big impact of confidence and inventory management priorities through a long industry value chain. There are also some positives in terms of zircon sales, the cost production we have achieved and the capital efficiencies that we see but still a significant fall in earnings returns and distributions. But, I believe that to be cyclical and not structural.

Slide 6, the interim, we maintain our focus on distribution as a key element in TSR generated over time and we think about them in line with our framework. In 3.5 years to the 30th of June 2013, we have distributed 75% of free cash flow. Note as I mentioned that first half tax payment see us fully caught up. So what we’ve referred to and do on the slide as free cash flow or as adjusted free cash flow become one and the same.

Slide 7, that shows that history graphically and you can see there in fact blue and the red lines coming together, the free cash flow and the adjusted free cash flow being the same thing.

Slide 8, I want to emphasize that we do see short-term demand cyclicality largely inventory driven. So we necessarily think about business free cash flow and dividends over time not just period to period. This chart shows what we have generated, what we have declared, what we have paid and what we have retained since the start of 2010. Total, it’s a significant cash flow generated and a significant distribution of that cash flow to shareholders.

I would now like to hand over to Alan for a few slides covering the results in more detail.

Alan Tate

Thank you, David.

Turning to slide number 9, and focusing on the half one 2013 results the left-hand column of the table. The 30th of June 2013, the mineral sands EBITDA was $136.6 million representing an EBITDA margin of about 36% and while this is down for half two 2013 margin of 60% still represents the healthy EBITDA generation at a lower point of the cycle. Lower EBITDA while coupled with one-offs restructure costs of $31 million associated with the operational adjustments as David mentioned resulted in an after-tax profit of $34.3 million, this is relative to H2 2012 of $88.8 million and H1 2012 of $274.4 million.

Our net debt in the half was $197 million, up $101 million from the start of the year and this is mainly a result of the payment of the $0.10 final 2012 dividend, which is $42 million, coupled with a free cash outflow for the half of $44.5 million.

Turning to slide number 10, and this is a comparison of net profit after-tax relative to the second half 2012, which is a more relative comparative period. The impact for H2 2012 was $89 million and that’s versus the first half 2013 of $34 million. The key drivers to this decline has been the lower realized prices for our products of Z/R and SR which was $1,178 a ton versus H2 2012 of $1,655 a ton.

Overall, sales volume of zircon, rutile and SR were up at [297,000] [ph] tons versus 215,000 in H2 2012. And this had a positive margin impact of [$17] [ph] million. Our overall unit cost of goods sold were also down which had a positive $7 million impact.

I noted earlier the NPAT of the one–off restructured costs which had a net $30 million NPAT for the half and these costs were also concluded in the first half of 2013. MAC is positive $15 million and corporate costs were a positive $11 million due to cash conservation measures, but also coupled with the positive FX translation relative to H2 2012 of about $8 million. To this point, that’s highlighted in the box on the graph, the changes represents a decrease in EBITDA from H2 2012 of $84 million to the group EBITDA for the half of $160 million. This change in EBITDA of $84 million coupled with the D&A positive rehab [unwinds] [ph] in interest and lower tax cost [of course on a lower] [ph] before profit, earnings in H2 takes us to a H1 2013 NPAT of $34 million.

Turning to slide number 11, and as I noted, MAC was up about $15 million from the second half 2012 and this is a result of three key components we had higher sales volume which were up 11.8% that 26.6 million dry metric tonnes coupled with a higher realized Australian dollar price which was up 20.2%. In addition, we realized $4 million capacity payment on the higher annual production as a result the EBIT for MAC in the half totaled $45.4 million.

Turning to slide number 12, and this slide describes the movement in net debt during the half from the beginning balance of $96 million to the closing balance of $197 million an increase of $101 million. Operating cash flow was $92 million and MAC receipts for the half were $36 million. The largest impact for the half as noted by David was a tax payment of $124 million and this includes $118 million in respect to 2012 profits.

And I note that the first half the 2013, the actual tax expense was $13 million so it’s a relative measure of the underlying tax for the half that would be the number.

These changes coupled with CapEx for the half of $31 million represents a free cash outflow of $45 million. [When combined] [ph] with the payment of the 2012 final dividend of $42 million and the revaluation we had on the U.S. debts which was valued at 104 cents at 31st December down to 93 cents at the close of 30 June that had a negative impact of $15 million resulting in an overall net debt 30 June of $197 million.

Slide number 13 highlights the inventory within Iluka, from a cash flow perspective, it is worth noting that for the half overall inventory increased by $38 million, worked out finished goods which is represented by a green box $20 million with sales being above production. We have had a field being in work in progress which is mainly a concentrate at our mine sites and this increased $58 million, a net $38 million impact. This material represents a significant asset which when realized obviously through sales and further processing will be highly cash flow accretive. Total inventory is $819 million with finished goods of $464 million and work in progress of $354 million.

Slide 14, and it reflects the Iluka’s balance sheet, Iluka remains in a very strong position, the blue bar represents the net debt position and that phase 113 as I talked to of $197 million. The facilities available to Iluka represented by a grey block are over $800 million and undrawn at the end of the half obviously with $600 million. And these facilities are available as to April 2017. Again, the level is the modest at 11.2% and with that I will hand back to David.

David Robb

Yes, thanks Alan and obviously anyone who wants the equivalent of those slides that is first half 2013 to first half 2012 comparison are in the supplementary slides, should you prefer to refer to those.

Slide 15, I say that the full year results that we were – I think from memory I said we were feeling better about the zircon demand outlook and that’s some positive signs had emerged, well, those positive signs builds into a stronger recovery than we had been prepared to plan for or budget for in the late 2012, early 2013. And as we have already announced we had decreased the production somewhat accordingly.

We do remain cautious about sales liking up to half, we are typically quite strongly second half weighted, we feel this year might be more even in nature, high in our confident about our recovery back to industry trend worth levels over the next 18 months or so.

16, again, I say at the start of the year, I felt there was a perhaps dangerous or still serving consensus “within the industry about the second half 2012 recovery.” We said in our case we believe, we have a very slow first half as market distortions slowly dissipated. And so it has turned out despite what I think significant and encouraging for long-term industry dynamics, industry production adjustments that have been made in this slow cycle period. And I will return to that a little later.

As with zircon, we have seen the powerful impact of inventory build versus draw priorities on short-term apparent demand. And in high grade ores, in high grade feedstocks important markets for us particularly in the spud or merchant sales not supported by long-term contracts that has flowed through to lower prices. But, we do see the preconditions emerging for demand recovery as I have mentioned.

And finally, the last thought on the slide, a reminder that’s not necessary but I feel I need to say it anyway, the fundamentals not inventory drive industry demand and supply and therefore attractiveness over time those fundamentals in TiO2 are good.

Turning now to what is titled here growth, I’m impressed this by saying within Iluka, we like to match to the beat of our own drum, simplistically one aspect of that philosophy is to invest when others or not. We did it in the GFC for example and we saw a great benefit flow to our shareholders in 2010 and 2011 particularly. So we are very busy right now on future option development.

In terms of our marketing for example what we refer to as wave two is essentially increasing our market presences and improving the ease with which customers can deal with Iluka. And we firmly believe, I certainly, personally, strongly hold the view that there is a big long-term payoff for the whole industry in rightly sponsored R&D in the application of common standards in trend analysis, in new application development and so on. And we are active in our support in most areas of industry work.

Slide 19, exploration, in exploration our reach is also spreading to new search bases within Australia and increasingly internationally and increasingly in true greenfields work. Occasionally, we may see a benefit in acquisitions to add future development potential to our project pipeline.

Example of that slide 20, our return to Sri Lanka, we have been there before or at least the predecessor company has announced on the 5th of August, this is a case in point. This is a very large addition to our resource space with potentially a lot more to come. Slide 21, we believe these resources have the potential to be very competitive as to scale in grade, therefore, one would assume cost, they augment our ability to serve our traditional core customers far into the future and they position us also to serve existing and possibly future supply/demand.

Slide 22, I’m really very excited about the work we are doing and the initiatives we are taking which could conceivably transform our industry for obvious reasons they in the last point that’s all we will be saying on that for now.

Slide 23, we are investing for the future as I mentioned particularly when others are unable or unwilling to do so. You would all appreciate that now is a good time to build things certainly in Australia that is the case. And we are investing for the future a long list of projects, they are in various stages, a number of them approved this month at our Board meeting and reasonably significant sums of money to buy it all up, somewhere between $150 million to $200 million time will tell. And obviously, this further spends in areas that I touched upon relating to innovation and technology.

Slide 24, the cycle, well, I have discussed this before, I included not to make a statement of where we think we are but as a reminder of how we think about cyclical aspects and the challenge we have to be flexible. That flexibility is all about trying to shorten the time that we and indeed perhaps the industry spend in a low cycle environment albeit as Alan mentioned in percentage terms margins are still okay even in that low cycle but clearly a not as high as they might they in other times. The logic is that if we can do that shorten the time in the low cycle period then in effect you create asymmetrical cycle. As you think about that what it produces over time is more value for shareholders than a simple mid-cycle average. And that’s what we try and do.

Slide 25, our approach, well, first and foremost it’s to do what we say we will do. We have a terminology within in the company about keeping our feet on the ground which is all about managing the date to-date and the short-term challenges. But they are highest on the horizon which is about preserving a long-term focus, developing options and remembering that growth is important for the creation and delivery of shareholder value.

I think allied to that I would say that we don’t like to follow the herd particularly, obviously, there are major forces be it global economic ones or other that influence us, the same as everybody else. But where we can, we try and march to the beat of our own drum. I’m really quite excited about what I think lies ahead for us now and the shareholder value we can create and deliver especially given my sense that zircon has turned and the TiO2 turning point is near.

And with that obviously, there is a lot of information in the supplementary slides, we have to take questions on those or upon anything else. So Annie, we will throw open to questions please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Clarke Wilkins from Citi. Please ask your question.

Clarke Wilkins - Citi

Hi, David. Just a question on the pricing strategy, this is dynamic and you have alluded to in, with the pigment produced at the moment that are lowering - running at low utilization rates and [preferring] [ph] slag over the high grades feedstock do that change a little bit the pricing approach for rutile and syn rutile and if that strategy continues and you also get this sort of continued build up capacity or sulphate capacity in China, what does that mean for the SR kilns in WA in terms of [inaudible] closure rather than [inaudible] temporary closure we’ve seen on some of those facilities?

David Robb

To deal with the second one first Clarke, we certainly see those kilns as valuable assets that are idled, they are not closed. So that’s certainly not how we think about their future. And time will tell. And you need in this industry very definitely not to be pressured into cyclical decision making and I think we have demonstrated, we try and avoid that, the same is true for kilns, a couple of those project developments I mentioned and some of the innovation work that we are pursuing is and could be even more so hugely influential about the role of those kiln s in our business.

So certainly Cataby for example, very, very good ilmenite feed and if there are things that we can do that effectively free up material to go into those kilns at very low cost they become very competitive. So, we are focused on that. So very definitely idled, not closed.

On the pricing question, well, again, you need to be thinking medium to long-term here. You know Clarke that our goal is our preserve margin where we can, you also need to recognize market realities through the different points of the cycle. As I have said before, the trick is to be competitive in the short-term, i.e., you can’t stick your head in the sand ignoring all that is going on around you but try and do it in a way that does not lock in low cycle economics through the mid and high cycle which follows and that was I believe a failing of our part of the industry in the past. And we are very keen to avoid that.

The building of inventory, well, it’s a mixed bag, zircon is down and rutile and SR is up a bit. We have always said we maintain a balance sheet to enable us to do exactly that. There is a lot entrained value in that inventory be it concentrate or finished product. And I would expect that value to flow to shareholders in due course. So, it doesn’t concern me that it sits there. I think – good time to be just a little bit patient at the moment frankly.

Perhaps that answers your questions Clarke.

Clarke Wilkins - Citi

All right. Thanks David.

David Robb

Next please?

Operator

The next question comes from the line of Chris Terry from Deutsche Bank. Please ask your question.

Chris Terry - Deutsche Bank

Hi, David. I got two questions, you touched on parts of both a little bit in those answers, but just trying to get a little bit more detail. The first question relates to your growth from this point forward and now that you got more exposure and you are more nimble with that sulphate purchase going forward are you happy with where the company sits or do you see still some gaps in maybe opportunities for M&A on the horizon?

And the second question, it’s more a bigger picture argument, again, you have touched on this through the presentation but just interested in what the key learning from the last cycle that we have been just through and where do you think that Iluka is now better at forecasting and can better I guess predict where you want to actually target your inventory levels et cetera to be and hit those and be able to manage costs up and down through the cycle?

David Robb

Yes, thanks Chris. Look, it’s a good question. Can I deal with the sulphate one first and sorry, Clarke, I recall now that you raised that one as well.

Look there is a very big installed base in China mainly sulphate but some chloride pigment capacity. China represents now something like 30% of global pigment capacity. So, it’s too big to ignore. And even if nothing is added to that sulphate capacity and all the future capacity is chloride then it’s a big market that I think it’s in our shareholders’ interests that we should have a capability of competing in.

On the chloride in China though let me just emphasize that you should pay attention to that. It’s official government policy, now government policy has a habit of working in China and as anecdote for you, we know of a large sulphate producer there, private, looking to IPO, but no government permission for the IPO because they don’t have a credible, active chloride pigment capacity or strategy.

So, the government is serious about its preference and I think that will have an effect. So, we have been doing a lot of work with probably – it’s not sensible for us to share it at the moment but that work highlights the chloride potential in China.

So I don’t think it’s an either/or fundamentally Chris, I think there will be very healthy chloride opportunities for us in China in due course. Clarke, I hope that addresses your point as well.

Key learnings, I don’t know, my key learnings are that I got no chance of ever predicting anything probably Chris and I think pragmatically we will recognize that in the resources game that’s probably an honest assessment. We are doing a lot of work on understanding where we can -- with more granularity what’s going on downstream of us.

If I go back in history, we used to be somewhat taken on a ship and forget about it. We are now much more deeply engaged further down the value chain showing to people, we are searching what’s going on collecting data. For example, last time you may recall, I discussed the results of the file. Something we have done in China, which was somewhat counter-intuitive and quite contrary to just some thinking to about what was going on there. And well, we are just replicating that something we will do regularly to do certain trends.

The inventory challenge knowing independently what inventory is held at all levels from all places in the very deep value chains below us. You know that’s still a difficult task. And because that can create a (inaudible) or what we have referred to as a (inaudible) effect, quite significant movement in apparent demand short-term, it’s a thing we are working on assiduously, but I certainly wouldn’t rule out the prospect of future surprises, I think that would be -- from a naïve to do that.

We do think, we are better across the board like I said diligence and research into all aspects of the industry, will that translate into better predictive capabilities of (inaudible). We are certainly working very hard on being able to flex more efficiently, I do not want to incur the kind of restructuring costs that we are seeing in the half. And we think we can build a business model which is optimized around the mid-cycle if you like and the complex to low and high more seamlessly. There is a lot of work going within our option, within our procurement and within our marketing to put that in place. So that you see less of those one-off restructuring costs as we flex in the future.

Okay. Better move on to the next question I think.

Operator

The next question comes from the line of Mark Busuttil from JPMorgan. Please ask your question.

David Robb

Mark, are you there?

Mark Busuttil - JPMorgan

Can you hear me?

David Robb

Yes, Mark.

Mark Busuttil - JPMorgan

Sorry, about that. Just a couple of questions from me. Firstly, and this something you may have alluded to on the front on your feedstock side but specifically on zircon, last year, when demand sale materially you cut your sales volumes in the order of about 60%, 65%. This year as you have seen demand recover you seem to be reintroducing your sales, you are doubling sales volumes potentially from last year. But we really haven’t seen the price increase at all. So, I’m just sort of wondering, have you prioritized increasing sales volumes for zircon over price maybe somewhat different point than last year?

And then, secondly, just a quick thing, you had a slide with your debt facilities in your presentation, I’m just wondering why you have so much debt available to you given the fact you talked about $150 million to $200 million worth of project spend you are sort of free cash flow positive excluding the tax payments. I’m just wondering why you have so much debt available?

David Robb

Okay. On the first one about prioritizing sales over price, no, we don’t do that. We prioritize margin dollars, a combination of the two at all times. We are prepared to take a hit short-term particularly on the volume front in order to protect the price. You heard me talk before about what do you want to avoid is marginless volume recovery and I see that happen in many other industries where prices fall to a level that is – destroys the fourth quartile of the cost cut perhaps and margins go to zero. I mean, volume comes back but nobody makes any money still.

So, we try and create a landing that is better than that. I have also said that I see these things as a bit sequential, recovery tends to happen first in the form of returning confidence inventory work downs, these kind of factors that’s usually accompanied by a cross stabilization period.

And then only after that do you get traction potentially in terms of both volume and price together. So, you work with the forces that are applied I think I have said previously, not a lot of point pushing price when the door is sort of lock shut and everyone is confidence is too fragile, much better the push price when the door is unlocked. The metric I hope that helps explain the thinking.

On the debt facilities, we are – I don’t know, in the world that we have seen over the last few years can you ever had too much, I think Alan and Simon and the team did a fabulous job taking advantage of the conditions today to put in place long guided, very flexible, very attractive debt facilities. The capital numbers I mentioned Doug to get largely feasibility study oriented and you got large sums potentially further out too it’s fair to say on execute CapEx.

So, we don’t think very long-term when we think about capital programs, project development timing and balance sheet capacity. And I hope that answers your question Mark. Alan, anything you want to add or some?

Alan Tate

No.

David Robb

Mark, thank you. Next please?

Mark Busuttil - JPMorgan

Thank you.

Operator

Your next question comes from the line of (Adam Oleander from Berger Markets). Please ask your question.

Unidentified Analyst

Good morning, gentlemen. It’s nothing new that you look for growth opportunities external to your existing portfolio, you just said just now, you invest in others and march just to the beat of your own drum and in that do you might do acquisition opportunities. And the second question, what were the catalyst potential M&A and have you set targets on projects or assets in any particular geographical location, you would like to target?

David Robb

Thanks Adam. Well, the catalyst is simply determining on any opportunities that the numbers add up. And that the risk versus return to shareholders equation is a good one. That’s it, quite simple.

I’m very financial I guess when I think about these things, I cannot believe everyone that knows me knows strategy with a grandiose because in my experience that’s a great (number) of people destroying shareholder value.

And therefore, we do not have target for in market exploration or ex-percent of revenues coming from wide geographies by year 5. I think all of that can lead to value distortion rather than value creation. So, which is not to go there. Do we have things we think about, do we think about major global dynamics and sectoral appeal or otherwise, of course, we do. And we do a lot of work internally thinking about where it maybe productive to go but that does not acquit to the setting of targets or feeling driven by any particular timeframe to do.

Next one please?

Operator

Your next question comes from the line Matthew Hope from Credit Suisse. Please ask your question.

Matthew Hope - Credit Suisse

Hi, David. Just a couple of questions, you mentioned the recovery to trend over 8 months or so. I just wonder, if you could and what you see trend is? And secondly, in the quarterly you expect – in the quarterly you mentioned that you think some sort of recovery in Europe. I was just wondering how that’s playing out. Is it (inaudible) out, its about – its beating up in strength, what we can expect from Europe?

David Robb

Europe, I mean, obviously, you would have read the latest circle into the recession in Europe driven by Germany, particularly but I will ask Chris in a minute to just to comment on the market that we see there. The recovery trend its sort of defile, I have already said that I can’t predict anything. So, that’s a big ask that you have given me.

I think we just have to wait and see, I had emphasized than use the word confidence many times over the last 6 to 12 months. And it is such a powerful force globally in all industries. And it’s a bit hard to predict. What I will say is, it has been emphasized to me in discussions with our customers and so on. And with industry veterans of the TiO2 space that when it – if I see the phrase, was when it returns it tend to return with a rush and people have also used language like snap backed. Now that is not a prediction by any means but that is why we have carefully used words like pre-conditions. How long it takes between preconditions and actual return in demand, we will have to wait and see.

The fundamentals if you look at China grows at 7% to 8%, I don’t really care whether its 7% or 8% or any other number, thankfully its still a big engine for us. If you look at U.S. housing for example, if you look at U.S. growth in manufacturing, if you look at – I think many other positive signs, Japan conversely, you might look at India and say that’s a bit of a concern but on balance I think the fundamentals look better now than they did a while ago for a couple of really large engines of the global economy. And that will drive the fundamentals of demand for our product.

So, I’m quite relaxed about that frankly. Chris, do you want to mention anything specific on Europe?

Chris Cobb

Yes. Matthew, obviously on zircon, China was – we first have to block some that was very strong to the first and second quarter, U.S. steady. Europe was – I describe as came live to the party. But, in the last two to three months we have seen a number of increasing enquiries that slows through to greater supply in the zircon market. TiO2 have been fairly quite as the rest of the world but again, we are starting to see enquiries that we haven’t seen for a few months in that part of the world as well.

Matthew Hope - Credit Suisse

Thanks very much.

David Robb

Thank you. I will try and speed up my answers. I’m sorry, I haven’t had any more we got to go. Let’s take the next question.

Operator

Your next question comes from the line of (Fred Charles from Bellport). Please ask your question.

Unidentified Analyst

Good day, David. Just few questions from me, firstly, just on the HMC build up, just want to understand, how we should be thinking about the HMC build at JA going to Q3 and Q4. And to further assume that the amount of JA HMC pre-process at Narngulu will save the amount of HMC produced in Q3 and Q4?

David Robb

Hey, sorry. For just to answer that one. Look, I think that will be balanced that’s the tie, we try and reach, it will depend on the demand that we see obviously and it may not go just to Hamilton by the way, sorry to Narngulu some may go to the Murray Basin, the post-session as well. Sorry, your next one was?

Unidentified Analyst

Just going back to the sulphate market, how you got progressing with (inaudible) trials and when can we expect first commercial production from that product?

David Robb

Trials have gone well, it’s a journey that will take some time. It’s really important to us that we have really stress tested this concept to do that we have got to produce commercial quantities, we have got to get it in the hands of customers. We got to test it in the real world. And we have to vie it up frankly against our ability to sell all the sulphate ilmenite that we can produce at the moment into a market that’s quite change the type of ilmenite rather than the upgraded product.

So there is a margin balance we have to discuss. Doug, you have to make? That area of work sits under Doug Warden, do Doug, do you want to comment on?

Doug Warden

That is much to say though.

David Robb

Certainly, we have not encountered technical disappointments, is it fair to say Doug in the journey so far?

Doug Warden

Sorry, results will grow more, the trial will grow more.

David Robb

Okay. Can we have the next question please?

Operator

Your next question comes from the line of Matthew Hodge from Morningstar. Please ask your question.

Matthew Hodge - Morningstar

Hi, David. I just wanted to ask about Sri Lanka, how do you think that continues to tell you for Iluka, how do you think it helps potentially extend or enhance the company’s competitive advantage?

David Robb

Well, I will ask Doug to comment on this specifics to -- what we know is that Chris what we surmised might be there. But, it will be a long way off, is the first exercise. This is not something it’s going to be in our product mix tomorrow. I hope you should think about it because 50% roughly addition to our resource base. That’s how you should think about it possibly more.

So its about making sure that the longevity of the business and its capacity to serve what has grown to be a very important part of the market. But it is enhanced. Doug, you want to make any comments on the nature of what’s there?

Doug Warden

Sure, David. Look, what we have disclosed in the 56 million tons of HMC that’s what we got access to at this time obviously we are there for a considerable period of time in the late 90s and early 2000s with a pretty good handle in what is in that region and there is certainly more material in that region. It’s just a matter of getting access to it.

Also, we think that Sri Lanka is a very prospective client and as it continues to develop and open up plus the conflict. We think that will present killer opportunities from exploration perspective.

David Robb

It’s ground we knew. So, we really have to wait for the right conditions to go back there frankly.

Matthew Hodge - Morningstar

And do you think the conditions are right now, what do you see –

David Robb

I will tell you now, last week we met with senior ministers, we met with Australian high comm and so on. We were very welcomed, its fair to say, this is country that realizes it needs to attract investment, its prepared to offer concessions in order to get at. Obviously, its looking all countries do to get investment is value adding rather than just extractive, so there are compensations we will need to have with the government about that. I might just observe to that Doug and I, flew in and out commercially unlike an Australian businessmen in the gaming business. We flow in and out just before in his own plane, so we don’t have one of those.

Matthew Hodge - Morningstar

All right, good.

David Robb

But, now I look, it’s just the journey we are on and I think we can play in a global sense in terms of our exploration and production and this is another step in that direction.

Matthew Hodge - Morningstar

Yes. Just a second quick question if I may. Do you see sufficient opportunities in your sense, Iluka longer term or there other markets that you would perhaps think about getting into the forms of time?

Doug Robb

Yes and or both is the answer to that question.

Matthew Hodge - Morningstar

Right.

David Robb

Paul, I think you’re next is it?

Operator

The next question comes from the line of Paul Hissey from Goldman Sachs. Please ask your question.

Paul Hissey - Goldman Sachs

Yes, I’ll go next, Dave, thanks. Just a question perhaps more on strategy and growth and you probably tackled this in some parts already but just you mentioned the potential for the material in Sri Lanka to be used as a feedstock for the slag upgrading process. And I guess I just wanted to hear a few thoughts quickly on, if it met your stated goal of continuing to add shareholder value whether you would be interested in perhaps moving your business sideways to capture that processing method and perhaps even downstream to the kind of people that buy particularly your titanium dioxide feedstocks. Would that be off limits or again is that sort of really evaluated on a – the potential to add value?

David Robb

Well, fundamentally that the last point you made Paul is how we think about it. I’ve always been quite ambivalent really about how we create value. And I think I’ve said that on a number of occasions, I’m not vetted to a particular unchanging view of the world.

And I do think you have to be careful about backing today’s technologies in an industry where those technologies have not changed for a very long time and where it is possible but there might be some more disruptive technologies but we’ll in time take their place. So you want to make sure you’re backing the right horse. That clearly there are companies in our industry at high level and downstream of us that have a very significant competitive advantages.

And it could be satisfied that those advantages are sustainable before you would put a lot of shareholder money to work in those spaces. Perhaps, you never say never and I think anyone who knows me would know that’s the way I think about value generation. Good use of our crude oil for those five forces analysis how do you think about the sustainability and competitive – sustainability of competitive advantage where you look to go, we feel we have value in our sector of mineral sands growth. We’d want to make sure you headed also if you went outside that.

Paul Hissey – Goldman Sachs

Understood. Thanks.

David Robb

Okay. Next question please.

Operator

The next question comes from Peter Arnold from Merrill Lynch. Please ask your question.

Peter Arnold - Merrill Lynch

Thank you. Look just a couple of quick questions. Firstly, if you were able to confirm your production and sales guidance on the TiO2 side for rutile and syn rutile of around 200,000 tons. I know you’ve specifically retraded this for guidance but just if you could confirm that hasn’t changed?

And secondly is maybe Chris could provide a bit of an update on near term trends in demand and pricing in early second half, we’re seeing most of the mineral producers already reporting and they’ve stated their inventory levels are at normal levels. So I just came to find out, if that has actually started translating into improved customer enquiries, what your visibilities are in terms of forward buying?

David Robb

Thanks Peter. I’ll answer the first and then get Chris to answer the second. If we had any departure from our guidance within the market, we would update it, it’s -- I have to say frankly it’s been interesting to know that people are shifting something we haven’t told the market because that’s we getting into trouble stuff. So, we don’t do that and it’s very early in the second half, its really call anything let’s just wait and see I mentioned that I think the TiO2 turning point is near and time will tell us our judgment is correct or not. Our guidance is our guidance until we change it. Chris you want to deal with that second question?

Chris Cobb

Thank you, David. Yes, I think I’d characterized 2013 is a year that’s improving in the zircon lines. As I say both our stocks and competitors stocks declining and improving enquiries. I think the year especially as we go through into the second half in TiO2 signs of that outlook reduced pigment stuff sell by our customers and potentially then starting to windup the yields from that pigment plans, guiding into Q3, Q4 to hope that inventory levels as it appears to paint companies have also had a pretty good year.

David Robb

Next question, please.

Operator

The next question comes from Glyn Lawcock from UBS. Please ask your question.

Glyn Lawcock - UBS

Good morning David. Just wanted to talk a little bit about Sri Lanka, I just wanted – you said something on your watch that you might – we might see developed or is it an option you leave to your successor? And in answering that question, you’ve made that comment, zircon has turned -- turning point near for feedstock.

And just going back to your favorite chart 24, we’re obviously coming out of the bottom hitting up again hopefully. Seven years on now you’ve been with the company just thinking what’s your future hold as well anything you answer that question. Thanks.

David Robb

Yes, Glyn. I don’t know probably even less about my future than I know about the companies is future frankly. And will it be on my watch and it depends how fast third can run, depends how long the Board and shareholders want me around. So I think I have said that I think that there is some unfinished business, I alluded Glyn. And clearly growth option has been – walks with a pretty (dough) around it is something unchanged it leaves behind.

So, I think that we have that right at this minute I think we got a bit of work to do and I’m enjoying what I’m doing.

Time is everything in life isn’t it so go ahead and see I – there is a very good team of this company, there is a very good field within a very good field within a we’re confident that we’re on the right path our culture is strong and cohesive I think I would just point to have we coped with dynamic circumstances in that regard. I think we’re transparent in what we do it’s a – that’s a good question, member of the leadership of group I think Glyn, so I’m enjoying it.

Glyn Lawcock - UBS

All right.

David Robb

Was that it?

Glyn Lawcock - UBS

Yeah, that’s great. Thanks David.

David Robb

Next question.

Operator

Your next question comes from the line of Michael Evans from CIMB. Please ask your question.

Michael Evans - CIMB

Good morning, David. Just a couple of questions.

Just in the context any comments around the China’s sulphate pigment capacity utilization are being bit negative at the moment. Do you see the value for Iluka over the short to medium term in China sort of sulphate pigment or chloride pigment or you sort of positioning yourself to have options in both of those markets. And secondly a simple sort of question on the numbers, the temporary guidance on sort of cash costs. How does that fit in the context of the slide 23 discussion around 150 that turned to mean in business development expenses, is that within that February guidance or since your both Sri Lanka and you’re looking at a couple other projects, is that increased to that lots of timeframe you think that $150 million to $200 million.

David Robb

Okay. The second one the $150 million to $200 million capital dollars doesn’t really go to cash costs. And as I said earlier, our guidance stands until such time as we change it and we haven’t done so associated with this release. So you should take that guidance as the guidance still. On the value equation on China sulphate was called – clearly it’s already 30% the global pigment capacity and that’s overwhelmingly sulphate. The really interesting question is how much going forward continues to be sulphate in the light of – or in the face of the government policy which is clearly saying in effect, so you showed the chloride capacity and developed technology. Therefore, having capabilities both to serve the existing base and support the development of chloride capability in China to me is a sensible thing to do. So we are going to have a foot in both camps.

Michael Evans - CIMB

Okay. Thanks very much.

David Robb

All right. Next one?

Operator

Your next question comes from (inaudible). Please ask your question.

Unidentified Analyst

Good morning, David. The first thing is just on the currency sensitivity, if the currency stays where it stuck, it is now for the next year or so that should be a pretty good kick for you. I just want to just mention that. And the other thing is what’s been the reaction of Rio in recent times both from inventory and processing particularly in zircon and if you could comment on that.

David Robb

Well, thank you for the observation about the currency sensitivity, as you know it’s not a thing we should talk about anymore. We get away with hedging a long time ago. We cope with its ups and down and we try to build a business that tolerates movement in both directions and certainly we posted record years in times when the currency was at historically anyway elevated levels. So, I think we’ve shown we can do that. If we get a bit of a tailwind from it over the rest of the year well so be it but it might also be associated with also in global growth which would be a negative for the moment. The second one, sorry can you just repeat the second question?

Unidentified Analyst

What’s Rio, what will be likely?

David Robb

I mean I got it. Certainly well it’s not for me to comment on what our major competitor is doing, I think that made that ambitions of the profitability of that part of the business is pretty clear and there is presentations and I alluded to how they see the end of legacy contracts and associated processing is in the public domain that also closed capacity which was supportive actions of – Alan remains of titles just like we have not necessarily close. It’s a company from everything I lead is perhaps increasingly got religion about shareholder returns and truly that’s a good thing for Alan and his team.

Unidentified Analyst

Right, right.

David Robb

Next one?

Operator

The next question comes from the line of (inaudible) BT Investments. Please ask your question.

Unidentified Analyst

Good morning, gents. Two things, just for the uninitiated, can you just remind me what your CapEx guidance is within a context that comment about the $150 million, $200 million for this year. And then secondly could you just expand a little bit about any of the outstanding payments for Sri Lanka should just got a production and more or less what do you expect fiscal regime to be there?

David Robb

Okay. Well, Doug can talk to the second one. The payments other than what we choose to spend on the project absolutely tiny. Our CapEx guidance for this year is unchanged it was about a $100 million. Yes, Doug you want to talk about that?

Doug Warden

Yes, sure. Alan, the time is we outlined it’s a very (inaudible) 32 few weeks ago. Brett that essentially its US$5 million upfront and further US$2 million on the ground, I think have a mine lease, which is effectively a pre-payment although future royalty should mining commence. And then a third payment on Iluka Board approving the development of the mine at the (NYSE:PQ) asset of US$8 million. So they are trailing by royalty payment that are referred to – is 1% of that gross sale proceeds and the $2 million that I mentioned would be netted off that it represents the $2 million of the royalty if you like.

David Robb

Can I –

Alan Tate

Renting to be discussed but there are significant (inaudible) available, if the project could become an asset of strategic importance for the government.

Unidentified Analyst

I guess, it makes more sense trying to flush out $100 million CapEx guidance in the context of $150 million to $200 million comment –

David Robb

Well, that spend is not just in 2013.

Unidentified Analyst

I guess that’s why we try to understand.

David Robb

Well, we haven’t given out year guidance on CapEx yet. In the past we have seen guidance was – sorry, sustaining capital spend and its more like couple of $100 million or there about, a year on average. So, it’s a bit lumpy and clearly this year we have been conscious of cash flows and adjusting CapEx inline with cash flow maximization. So we haven’t yet finalized our latest corporate plan which deals with a sort of medium term horizon nor we have finalized 2014 budget obviously that’s six months or more away. And at that time you might expect that it would be renewed guidance.

Unidentified Analyst

Thank you.

David Robb

Okay, next, one, we have got a couple to go.

Operator

Your next question comes from Brendan Fitzpatrick from Morgan Stanley. Please ask your question.

Brendan Fitzpatrick - Morgan Stanley

Thank you, good morning. Slide 13 was the inventory, I think the comment was its now as significant asset and can potentially be highly cash flow accretive. In the context of the restructuring that’s taken place in the business, are we depending on the demand pick-up coming through to realize that cash flow accretion or is this still some optionality or efficiency flexibility being targeted between inventory draw down and production rates?

David Robb

I’m not really sure I understand the question, Brendan, but, we are I mean, obviously what you try and achieve is the right balance between production and sales and depending on where you are in the cycle you either build or draw inventory around that balance. It’s merit usually in clearing inventory rather than leaving it sit there and producing more to sell directly into a market but Alan or Simon, do you want to make any other specific comments on that question?

Simon Green

Brendan, it’s Simon. I will just give one illustration. Clearly, at June we got a volume of synthetic rutile that’s sitting in the finished goods inventory and as you know we have got (inaudible) idle so we are no longer producing certainly in the second half, not producing any synthetic rutiles nor we expect to sell something. So naturally that’s a monetization of that inventory as David alluded to.

David Robb

Yes.

Simon Green

I mean that’s a fairly extreme example of balancing (interruption) to sales but the rest is and the other example would be effectively increased or announced our upgrades to zircon production in the second half which is from processing more of the concentrate material. But, our mining operations which is where the bulk of our cash is spend its unchanged.

Brendan Fitzpatrick - Morgan Stanley

Okay.

David Robb

It’s all about having flexibility, the word that’s being used early on an optionality in terms of why we operate. And you should think of them as almost two separate decisions Brendan around how are we mining and producing concentrate. And then, secondly in addition how are we transport, how of that concentrate are transporting to mineral separation plants. And in turn how much of that are we putting through the mineral separation plant to produce finished products.

So there is a number of stages at which that decision making occurs. Does that answer your Brendan?

Brendan Fitzpatrick - Morgan Stanley

I think does. I guess, I was asking is there any ability to slow production further accelerate the inventory draw down or we already have the optimal ratio between work force capacity, utilization of the work force and equipment and maintaining operations and effective usage of assets as well as inventory draw down?

David Robb

We are not as slow as we could go. And I have said that before, we can still adjust cost, we could go back to the low grade strategy that we had at JI for example whereas we are not there now we are just mining JI normally. And equally we have demonstrated in 2010 and 2011, how quickly we can ramp up lead times to restart are fairly modest providing we retain the people and obviously JI can flex very quickly from prioritizing low grade material to prioritizing high grade material or operating as it is at the moment, which is sort of in the middle of those two strategies and basically just working across the full phase of the deposit and taking whatever comes.

So, we could go up or down from where we are today.

Brendan Fitzpatrick - Morgan Stanley

Okay. I appreciate that. Thank you.

Simon Green

Thanks

David Robb

Okay. Next question?

Operator

The last question comes from Valerina Changarathil from News Corporation. Please ask your question.

Valerina Changarathil - News Corporation

Hello, gentlemen thanks for the opportunity to ask question. I think David, you referred to JA in your past, so I think you have answered some of this. But, I will still ask you anyway, your comments overall are being quite optimistic, but you have had an asset full. And coming as they are after the period of lead processing losses of more than 200 jobs, I just wondering if we will see some of that optimism on the ground at the operations in terms of any production upgrades or jobs in the next half?

How are you planning for this optimism?

David Robb

I don’t think it will translate into a big hiring program quickly. Valerina, we are certainly taking advantage of the labor market that is hungry as it was a little while ago, so particularly around some of that technical and project related recruitment, we are certainly willing to add people and skills in that area. Do I see a big operational, we hiring campaign anytime soon, no. The priority will be to service, we will just supply early stage returning demand with the inventories that we have and progressively feeding in more production as confidence builds.

Valerina Changarathil - News Corporation

Thank you.

David Robb

Thank you. Well, look, I think that’s all the questions everybody. Thank you for your time, do appreciate it. And please feel free to follow-up with myself or with other members of my team, should you have any follow-up questions. Thanks very much.

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