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Executives

David Robbs - Managing Director

Alan Tate - CFO and Head of Strategy and Planning

Simon Green - General Manager, Finance and Commercial

Analysts

Brendan Fitzpatrick - Morgan Stanley

Clarke Wilkins - Citi

Mark Busuttil - JPMorgan

Christopher Terry - Deutsche Bank

Owen Birrell - Goldman Sachs

Matthew Hope - Credit Suisse

Matthew Hodge - Morningstar

Kim Christian - AAP

Michael Evans - CIMB

Glyn Lawcock - UBS

Matthew Smith - Macquarie

Iluka Resources Limited (OTC:ILKAF) Q2 2014 Results Earnings Conference Call August 21, 2014 9:00 PM ET

David Robb

Thank you, everybody. With me today as usual are Alan Tate, CFO and Head of Strategy and Planning; Simon Green, GM of Finance and Risk; Rob Porter, GM, Investor Relations and Corporate Affairs and Doug Warden, Head of Resources Development in Iluka. As usual we will try and move through the slides quickly to provide maximum time for questions.

So if we might start with slide two the disclaimer and as usual I would urge you to pay attention to that disclaimer.

Slide three, I’ll begin with a reminder of our approach, an approach that we have spoken to for quite a long time now. I make no apologies for its repetition. You all know that we’ve a simple objective which is to create and deliver value for shareholders and this approach as articulated on this slide, is we believe the best way to achieve that objective.

Slide four and we don’t talk about my team enough and I think I’m very fortunate, my senior exec’s competence, they are very experienced in mineral sands and elsewhere and motivated. It is a team that I believe very strongly seeks to manage the day to day well but also address the longer term in tandem with that.

Slide five, the ground we will cover today. Obviously first our performance, some reports on the market and the industry landscape and areas upon which we are focused.

So through slides six to seven as I think about the first half, point I would make clearly we have maintained what we think about as our flexed production stance, despite low prices we generated $64 million in free cash flow. We determined to pay a slightly higher interim dividend than last year. We’ve lowered our already low gearing, our costs are well under control and in the half we did receive a pleasing recognition for our environmental performance in a very challenging setting in South Australia.

Slide eight goes without saying that there are more red arrows on this slide than we would like to see but good cost control, and margin capture resulted in cash flow used to pay dividend, used to reduce debt and used to invest for the future across a number of options. You may well have some questions about those options later.

Slide nine, sustainability, you will observe that our step change in safety performance is being maintained. And their environmental performance I think is in many ways appropriately described as excellent as it was in that South Australia’s Premier’s Award and we are a good company that tries to do the right thing in these areas.

Slide 10, an interim dividend of 0.06 fully franked. It is consistent with our distribution framework, albeit in this period that at the low end but I would draw your attention to the cumulative payout ratio of 72% as an indication of what we have achieved and done over time with the cash flow that we have generated.

And with that I will now hand over to Alan to run through the results in a little more detail. Alan?

Alan Tate

Thank you David. Turning to slide number 11, and as noted on previous slide eight, mineral sands revenue has declined by 10% and this was predominately due to 14% decline in AU dollar prices. And the lower price of course cost leads to reduced margins and we have seen that impact on earnings with EBIT down $38 million to $126 million and ultimately net profit after tax of $11.7 million down $22 million from H1 2013 and a return on equity of 1.5%. And while this result obviously remains disappointing and [inaudible] on the year we remain with subdued business conditions which are persistent and in those conditions in which our operations remain flexed downwards in our cash production cost controls.

And with this setting I would note that it’s quite pleasing to see that the group EBITDA margin has been maintained above 30%, at 33% which positions Iluka well for significant cash and earnings leverage of volume and cost recoveries. Free cash flow at the half was $63.9 million with net debt reduced to $155 million representing a conservative gearing ratio of 9.2%.

And with that I turn to slide number 12. The slide outlines the earnings from our Mining Area C Royalty; earnings for the half of $38 million were down $7 million on softer pricing and a lower capacity payment. The royalty continues to generate quality earnings and cash flow for Iluka and as I have noted previously the Area C mine is a low cost high quality mine and whilst the capacity payment was not as high as previous period it does reflect the continuing increase in production capacity we have now seen for a number of periods.

Slide number 13, the graph shows the key changes in earnings between H1, 2013 and H1, 2014. As noted earlier the key driver is the lower prices which on a US dollar basis had a negative $62 million impact, offset partially by the lower AU dollar which had a positive impact of $38 million and high alumina and other product sales which had $11 million positive impact.

This [letting] down of operations did lead to some continuing inefficiencies which from a cash unit cost of goods sold perspective had a negative [$14] million impacts and the one-off restructuring idle costs that we had in H1 2013 led to a positive variance of $24 million in H1 ‘14 and I note that the reduction in net income was $7 million and the items of the [inaudible] at this point representing the decrease in EBITDA that we saw at $34 million. That decrease was partially offset by lower D&A and tax charges which combined cumulatively resulted in an impact of $12 million for the year -- at the half.

Slide 14 now, and this slide shows the overall change in net debt compared to December 2013 and the free cash flow for H1 2014. There was free cash flow of $64 million in H1 2014. Operating cash flow was $102 million and Mining Area C contributed $41 million. Now these inflows were partially offset by exploration, interest, tax, CapEx and the Metalysis investment payments which combined totaled $79 million. And the components to these points represent the net cash inflow of $64 million for the half.

Dividends payments were $17 million representing the 2013 final dividend of $0.04 and there was a positive impact of FX on debt of $5 million resulting in a debt at the end H1 2014 of $155 million and a modest gearing ratio of 9.6%.

On debts in our balance sheet this is set out on slide 15, now the slide outlines the level of debt held and the gearing ratio it represents at the end of each period, the blue bar and dot respectively representing the level of debt and gearing ratio. With the level of finance facilities that we have available represented by the shaded area in the background, during the period Iluka increased the facilities by $50 million with an additional facility added, with a maturity day of five years out to April 2019.

In addition of the $800 million in banking facilities we put in place in April 2012 for five years out to April 2017, $625 million of these were extended back out by these to April 2019. So in summary this provides finance facilities available to Iluka of $850 million out to April 2017 and $675 million out to 2019, which when coupled with our current debt of only $155 million and modest gearing ratio retains Iluka’s very strong balance sheet position which is in line with the philosophy of the balanced approach for shareholder value of maintaining a prudent balance sheet and providing flexibility to managing business cycles for investing in growth and for returning excess capital to shareholders.

And with that I'll pass back to you, David.

David Robb

Thanks Alan. It's always good to have a strong balance sheet. Moving through slide 16 to slide 17, market conditions dealing first with Zircon, what we've attempted to do here is contrast, if you like, in many cases emphasize the similarities between the first half of ‘14 and what we observed in 2013. If I stand right back from it for a minute I would just observe that and the world is, really whether you look at economic, political, military developments there’s an absence of synchronicity, positive synchronicity if you like. That is with a world that is moving in fits and starts and some time much of that we think is positive but clearly there is also some contrary indicators. So the definitive trends therefore are pretty hard to identify.

Overall though no big changes in our zircon or indeed TiO2 market conditions. If you reflect back that’s pretty much in line what we said in our most recent quarter. There are variable demand patterns, there is an inventory work down that continues, prices are stable and in our view they are too low to induce new production or substantial new investment in the industry.

Slide 18, China is tracking in line with its recent past and supplies principally from Australia and to a lesser extend South Africa.

Slide 19, we have lots of indicators, lead indicators that we track and think about, you have seen our [heap maps] in the past, this is the sum of those we think are relevant to China and zircon and while risk obviously remain around prospective owner confidence, buyer confidence completions are up year-on-year and sales in terms of area maybe heading back into positive territory versus last year.

Slide 20, China is not just about housing in terms of zircon demand, as you know and in other segments activity is positive and it does appear to us that the downward trend in industrial product has eased, while still being at a healthy year-on-year growth level.

Slide 21, in the U.S. and as you know the U.S. market and zircon is much more impacted there by manufacturing trends and industrial applications and manufacturing is demonstrably a positive story in both absolute and trend terms in the U.S.

Slide 22, turning now to TiO2. Well in TiO2 it is our view that the material market inventory overhang has largely been addressed and plant operating regimes are returning to more normal levels and there has certainly been some historical depiction of that utilization level over many years and how it’s adjusted up and down in some recent pigment maker relations that you could look at for a sense of perspective on where that are now versus history. We see that we return to more normal operating rates as a positive for [hard dried ore].

Slide 23, the long-term recovery trend in U.S. housing continues and for lots of reasons both new build, renovation, sales et cetera that’s an important aspect in pigment demand in the U.S. and the July data, the most of the most recent data we have was very positive.

Slide 24, industry context. I would like now to step back a little from the data of the half and short-term market dynamics if you like and consider the broader industry context that we see, slide 25. If I try and sum up this quite detailed slide I would say that in a nutshell we think grade and assemblage declines and sustaining CapEx requirements mean supply may not rise to the challenge of increased demand in the medium to long term. China has been a major factor in global zircon dynamics and now increasingly must be seen in a similar light in terms of TIO2, [I will take] questions on that quite detailed slide later obviously.

Slide 26, we’ve said exactly these things before. This is nothing new. Our industry is evolving quite rapidly, associated risks and opportunities are to the fore as you would expect of us in our thinking. But I would emphasize that those kinetics, if you like, we have discussed them with you before.

Slide 27, also material that we've released previously. What I would say to this is do not be misled by headline growth at either the industry level or as quoted by project proponents. You should ask about trash percentage, you should ask about slimes content and these are very important factors in the true economics of the industry and indeed of specific projects based on our assessment and it does involve obviously looking into the future where information becomes a bit more patchy based on what we assess today, that valuable traction, net of trash if you like referred to as VHM, valuable heavy mineral growth as we look forward they will decline steeply in the ore bodies this industry has to rely upon.

Moving to slide 28, I would just say that with that as context what are the areas on which we think we should focus, turning to slide 29. First area really is that on the back of continuous improvement and the achievement of best practice in our existing operations which you would expect us to do but also I know I have said to you all in the past if you think about people's tendency to underestimate the challenges of mineral sands ore bodies and their variability and so on than you need to be at best practice levels or close to it in your operations. It's fairly unforgiving industry if you are not.

We are certainly focused on identifying new resources, in finding efficient and increasingly on finding innovative ways to access those resources and then working also with the other ends of the chain, if you like, to enhance demand and position our marketing efforts accordingly; the resources, resource to reserve conversion and how you position yourself in the marketplace.

Slide 30. We think having a range of options is valuable attribute in our industry at this time. What we have preferred -- what we have referred to in different ways in previous discussions and presentations really are all around the benefits that we see in having flexibility and being able to flex production. We do that around innovation and improvement, you’ve heard me speak to them on many occasions and obviously the benefit of optionality in the discussion making. And the balance sheet that I referred it was clearly part and parcel of that picture.

In terms of our project development you have seen this slide before, it hasn’t change we are busy with our in-house projects. I would make the comment or [two of which the sign] and I guess that’s one of the things that makes life interesting for your Doug in your role.

Slide 32, Tapira, Brazil we are pleased to have got underway in our work with Vale on this large complex, this large mineralization area in Brazil and teams are being formed and the valuations beginning in the various areas mentioned on the slide.

Slide 33, Sri Lanka, the major challenges there are as we were well aware in going back in just Sri Lanka revolve around the absence in that country of mining and indeed of large project development precedent. So it’s a landscape that has those challenges. We were encouraged to have our key Exploration License renewed recently for a further two years.

Metalysis, slide 34, very happy with our positioning investment there. Already seeing some of the upsides in our feedstock discussions and research consistent with what we have referred to you before as you know wanting to bring more than a check book to opportunities.

So, finish slide 35 by returning to where we began. You can expect this approach. You can expect our actions to be consistent with it. We are running our operations safely and efficiently, generating cash, paying dividends and investing for short and long-term horizons and the best that we are able to do we are positioning ourselves for both the upturn and for those evolving industry dynamics that we have discussed today and then with you previously.

Thank you and with that I am happy to move on to questions.

Question-and-Answer Session

Operator

Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions). Your first question today comes from the line of Brendan Fitzpatrick from Morgan Stanley. Please ask your question.

Brendan Fitzpatrick - Morgan Stanley

Thank you, good morning everyone. Two questions, one specific to working capital and the other one’s more broad. The working capital question, if I look at the inventory of finished product and also the heavy mineral concentrate we can get an implied cost per tonne looking at the volume differentials and the change in the inventory value. Can I just confirm that the implied cost per tonne is a [big] order or inventory held and so far as it’s -- the inventory is held at an average price across all the tonnes.

David Robb

Simon?

Simon Green

Yeah, Brendan, Simon Green here. The inventories held at the weighted average for each product so the implied price that you get, even a price per tonne of Z/R/SR that’s the weighted average of all of that different Z/R and SR tonnes so zircon produced in the Murray Basin for example would have a different carrying cost to zircon that comes from [inaudible] reflecting the underlying cost structures of the mining and processing operations.

Brendan Fitzpatrick - Morgan Stanley

Okay.

David Robb

In terms of the balance Brendan between [ICN C] inventory and finished goods inventory we have said before and you would be aware that the majority [Technical difficulty] of the costs are in the mining and the processing rather than in taking material through an [MSP] to finished goods and we have said previously that what we are trying to do with our production settings is achieve the right balance between inventory objectives and efficiencies in production and therefore unit costs in that HMC production phase. So you’d also be aware that holding HMC is not a thing that bothers me or that I think very much about frankly. I think we are producing at a reasonably efficient cost. So are you okay with that answer on that point, Brendan?

Brendan Fitzpatrick - Morgan Stanley

Yeah, that helps clarify the way I was thinking and the way [Iluka] is going forward. The other question was just reconciling two of the statements, one was in your view the pricing seemed below the inducement level for the industry but also innovation still coming through in the industry. Is the innovation a competitive advantage to the established producers such as yourself and that low inducement pricing still applies to the projects not yet coming into the market place?

David Robb

Yeah, a quick question. The pricing below inducement levels, we have in the past outlined on more than one occasion how we think inducement levels sat at particular times. Obviously inducement levels are partly a function of the resource that you have available and the cost of accessing and developing and producing. They are also a function of demand and how much if you like of second tier, third tier whatever resources that you need to bring on.

The innovation piece while it is a good time to have a good balance sheet because you can afford to do the right thing by your shareholders in our view by being active in these areas. I know the language I have used previously is that this industry in my view is overdue for some innovation contribution. We run on pretty old technologies, I know I said in the context of Metalysis, for that’s the cold process, I think it is all the process in terms of Titanium metal manufacturers. So whatever you look in our industry it’s hard to identify recent big advances in terms of technology and we think that’s an opportunity for us. Is it a competitive advantage for established players, possibly? I mean you need to know where to look, probably need to have some industry experience to help you with that, rather than it be too generic.

And secondly, even if you are an industry player you need to be prepared to invest in and have the capacity and the intellectual property and everything else in your organization to do it. But in aside I have certainly had another executive in this industry say to me in relationship to in Metalysis transaction in fact words to the effect of I’m so jealous I wish we had the capacity to do that. So I think it’s a good time for us to do it whether it’s demonstrable advantage or not, time will tell.

Brendan Fitzpatrick - Morgan Stanley

Great, thanks very much for the time.

David Robb

Thanks Brendan. Okay, next?

Operator

Your next question comes from the line of Clarke Wilkins from Citi. Please ask your question.

Clarke Wilkins - Citi

Hi, David, question in terms of the utilization rates that you are seeing in terms of the pick-up of the core [inaudible] produces. Are they taking the sort of normal amount of high grade feedstock offering to their plant that you expected to see given the pick-up utilization or are you still seeing some sort of impact from effectively the low grading or taking low grade product because of where prices are sitting in the mine? And the other side of the question, [inaudible] obviously not mentioned it at all, is there anything additionally you can say in terms of timing, what’s the next steps et cetera please.

David Robb

Okay on the first one would be a longer answer then the second one, Clarke.

Clarke Wilkins - Citi

I know, sorry.

David Robb

But on that first one I think it’s clear that there is a lag, right in terms of how is demand translating into pigment demand, in turn translating into feedstock demand. They are not concurrent. But secondly there was a fair bit of and I’ve referred to this before, about the final roll of the legacy contracts, some of the use-it or lose-it nature of those contracts, we think they kind of [stuffed] the ore inventory threefold at the end of last year and that's flowed through into the early part of this year and as people talk legacy priced material because it wouldn't be available to them beyond the end of the contract.

So that's had a lingering effect how material are these today, have to judge. I think we would also have a view about value and use relativities between high grade ore and low grade ore, haven't quite normalized yet and we think that's upside for us to come. These things tend to happen in sequence. You get decent housing, decent paint demand, decent pigment demand from the U.S. for example and overtime that translates into feedstock demand, then particularly high grade feedstock demand just by moving to the -- into the period when they are willing to maximize production distinct from run at average rates because the way they tend do that is sweating the blend and more high grade ores goes in.

On Kenmare and the status of that, the short answer that I alluded to is that due to the restrictions under the Irish takeover code, I’m unable to comment at this time.

Clarke Wilkins - Citi

Was worth a shot. Thanks David.

David Robb

Okay, next.

Operator

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

Mark Busuttil - JPMorgan

Hi guys. Just a couple of things from me; with the buildup of the HMC stockpiles and the end of mining at WRP, how long do you think post at the end of WRP you can continue to run the Hamilton MSP? And then -- still based on those stockpiles. And then secondly I am a little confused about your rutile sales strategy. It seems half-on-half you expect your sales volumes to get down. So that means you would have sold more on that first half in a declining price environment than the second half of the year when you expect prices to be stable and you're talking about potential shortage of rutile supply into next year. It seems to me it would have been -- it makes more sense to have sold less in the first half in a declining price environment and more in the second half when the market was tightening.

So just trying to understand the rutile sales strategy, thanks.

David Robb

Okay, Hamilton MSP will process their [annual] concentrate. It already processes JA concentrate to a greater or lesser extent. We've done some experimentation actually about just how much JA HMC can go into that plant. As you know plants are designed, MSPs tend to be designed around particular ore bodies and you get different bottlenecks occurring in the plant depending on which feed you're putting in. So putting a resource rich feed you might have capacity spare in your zircon circuits and the reverse is also true. So Hamilton is not an asset in any way that is just linked to WRP HMC. You should not think about it in those terms.

On the rutile question and the strategy there, well I am not quite sure that I agree with your logic on pricing at all. I mean if prices are flat or stable, that’s the language we've used then there is no price incentive really around when you sell, while that applies. Indeed if prices are trickling down then your weighted average price realization in that trickle down period is logically higher than in a stable period that represents the [local in particular]. So I don’t agree with you on the price logic but let me say actually quite a few more things about all of that because I think it’s a very valid line of enquiry and I am pleased you asked it frankly, rutile demand is steady. So if we gather that tactics and assets and where -- what’s going on in market it’s steady.

Prices are stable as we said before. You should also be aware you would know that there is a small percentage of the market really that is truly rutile dependent alone. You need to think in terms of high grade ore rather than just Rutile or just slag or just SR. You also need to think about idle SR [inaudible], in that context, and even I am not sure Mark, I think but CapEx, quantum and CapEx timing are important factors in shareholder returns. We obviously in that regard like to deploy equipment and we do so in major mine moves, we did when we moved from Kulwin to WRP and we had a gap.

Those gaps are usually covered by processing concentrate from the old site and to an extent that’s exactly we will be doing with WRP, because the concentrate from WRP is earmarked for [Rownack]. So that’s how we think of about rutile. I’m comfortable that our thinking on it is consistent with our objective of creating and delivering value for shareholders.

Mark Busuttil - JPMorgan

Okay, thank you.

David Robb

Next.

Operator

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

Christopher Terry - Deutsche Bank

Hi, David. Just following on, I guess in a bit more detail hopefully on some of the things you touched on already but in terms of that slide 31 in the presentation pack looking at the future project developments are you able to give some more clarity on the likely release dates of when you might present the data and the specific time development timescale and then how that flows through to CapEx I think the guidance is probably $ 200 million to $250 million per year for the next four years. Just looking at how that may actually play out on a trajectory level if we go from this year with quite low CapEx through that cycle.

The second question I had just relating specifically to 2014, first-half of the year you’ve done a good job of managing the cost and the CapEx, I guess as well both of those I guess coming in a less than half of the full year guidance number. Is there a step up in the second half or you are looking likely to come in well under those numbers for the full year?

David Robb

Okay, I will deal with the second one, first, if I may. Look we certainly are trending below guidance on costs [this quarter]. We haven’t issued any revised guidance, depends a little bit how much cost we choose to incur in finished production conversation rates and seasons with those kind of things, the transport associated with that. So the trend might indicate that we will come in under. I agree with that but we have not revised our guidance at this stage.

On the CapEx, we have a very low run rate in the first half. There is some Metalysis CapEx that was -- is in the second half, a further injection in this project and DFS timing aspects, again we haven’t altered that guidance. It might be that we come a little under, it’s not really material and it will just be timing issues if we do.

So turning to timing and your question about slide 31, look in the normal course it is difficult to be absolutely specific about project timing. That’s what DFS has ruled out and it’s a very bright person who calls in advance the absolute end date of a feasibility study and the decision to move to execute. For various reasons, commercial and competitive whilst I realize it maybe a little frustrating to people, I don’t think it’s in our interest to try and be explicit about these project timings right now. And so I’m not prepared to do that.

We standby the capital high level guidance we have given, Chris. We haven’t altered that. If we thought that was somehow wrong we would obviously have updated that. So there is nothing there that we should be concerned about. Am I able to really narrow that gap and be much more explicit about the [ESEU] shape, no. And some of that goes to the innovation issue. Most of you would be aware of the work we are doing on innovation in various areas, including mining and some of that work, may well be worthwhile for us. So that’s another uncertainty because there are potential upside investigations on work that we are running in parallel that may impact our overall project thinking and therefore timing.

We would not want to build a project in a less effective way then if you had been just a little more pressured. We will provide obviously not only a continuous disclosures since and otherwise if there is any material information it will be disclosed.

Christopher Terry - Deutsche Bank

Thanks David.

David Robb

Thanks Chris. Realize that’s a little frustrating but I have my reasons. Okay, next please and I will try and be shorter with my answers so we can cover everybody’s questions.

Operator

Your next question comes from the line of Steven [Gornstein] from Merrill Lynch. Please ask your question.

Unidentified Analyst

Hi, guys, just a quick question on the [inaudible]. I know you touched couple of time, you mentioned in the release the conditions for reactivation might be emerging. Can you elaborate a bit on that? And what do you need to see to bring those back on and how close do you think you might be?

David Robb

Well the conditions include things I referred to around high grade ore market trends, TiO2, demand trends, pigment plant utilization and so on. So it’s really all around demand. Beyond that though frankly to be too explicit about pre-conditions for anything at the moment I think is unwise. It’s unwise competitively, it may be unwise in terms of negotiations, to be too explicit about what we may or may not need. So I’m sorry I just can’t answer that question in the detail that you would like. We standby what we’ve said around conditions emerging that maybe encouraging in relation to a re-start but putting a timeframe on I am not able or prepared to do that at the moment, I’m sorry.

Unidentified Analyst

Thanks.

David Robb

Okay, next one.

Operator

Your next question comes from the line of Owen Birrell from Goldman Sachs. Please ask your question.

Owen Birrell - Goldman Sachs

Hi, thanks for the question. Just wanted to take a look bit more broadly and looking in terms of the marketing strategy for both zircon and TIO2 feedstocks and understanding moving downstream you set up marketing hubs and inventory hubs for your customers for both Zircon and feedstock. Just wanted to understand, I guess what the key drivers behind that strategy given that you’re pretty much the only producer that does it. Do you believe that the value was actually transitioned to downstream or is it just an attempt to better meet customer needs? And just following on from that if the markets for say, zircon starts becoming a little weaker than it is today do you think that provides a more extensive position within that zircon market for you.

David Robb

Well, look the marketing strategy and the moving product closer to customers et cetera, new marketing offices, the numbers tell me that it’s the right thing to do. And as Alan mentioned we still have a healthy EBITDA margin per ton. So extra tons that we can generate through being closer to customers and more responsive and so on that well the numbers tell us that is the right investment to make and we have the capacity to do it when others cannot.

It leverages our strengths, particularly in zircon as the largest supplier. And remember too the zircon market is very fragmented, you've got a lot of small players, smaller deliver sizes and so on, are helpful to some of our customers and to do that you need warehouse facilities nearby. I don't see any change in that roll out that we are pursuing.

On the question of if Zircon drops does that -- sorry, can you just -- I am not sure I quite understand that question.

Owen Birrell - Goldman Sachs

It was more around the, if your peers start becoming little less rational in zircon about pushing product to the market, at I guess market clearing prices, does this provide you I guess a bit of defensibility in terms of the effect you have with the ultimate customer in terms of holding your margins?

David Robb

Regarding the markets already cleared, if you think about it other than the majors and there is certainly no sign of irrationality there. We identify in the slides that other big producers are also flexed down and I don't detect any change to that approach. And by definition what we do is allow others to be close to fully sold. So there isn't the risk in that regard that I see in the way you perhaps do unless it comes from one of the other major producers and I don't see how they would be incentivized to do that when margins overall are under pressure and where the history tells you that if one major were to attempted the others follows immediately, and everybody is a loser. So why would you do that.

Lever the process and sell no more tons, that doesn't seem to be very sound approach to me. And we have absolute proof of that. If you think about what happened a little while ago there are some marketing strategies that can work, I don’t know where else. So I think lessons have been learned and zircon pricing is as we have described it in the release.

Owen Birrell - Goldman Sachs

That's right. Thanks so much.

David Robb

The next please.

Operator

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

Matthew Hope - Credit Suisse

Hi, [inaudible] and a bit more what's happening in the Telesis, I mean it seems pretty important to stimulating demand but what exactly are you doing there and can we expect a plant and your slide 34 seems to be talking about tantalum but not a lot about titanium. So I was just interested in how that's going to work? And secondly on with some of these the big projects, I mean how anxious are you about replacing Jacinth-Ambrosia and Murray Basin and if -- is there a point in if you use it you're not really getting success in replacing from great deals exploration where you might start about some other approach by buying something or investing in slag production or whatever.

David Robb

Okay, so what’s in there, so quickly Metalysis I have said three buckets of value, obviously we think it’s a company with bright financial potential. Therefore our shareholding is one into profit or values that will be realized we hope. Secondly it’s around a rush to participate in plants that use the technology in the titanium space not the tantalum. Third, it’s about fixed stop supply and what we can bring in that regard. Yes, there is a reference to tantalum because that is a way of making the business self-sustaining reasonably quickly and reducing any calls on shareholders for further funding. So that is a thing we support.

The demand if you look from the world being able to convert a lots of applications to Titanium metal that are currently stainless steel or whatever, that’s a long run strategy that’s what I referred to our ability to think about long term as well as short. What I have observed categorically is the benefit of that dialogue with them around TiO2 feedstock around SR customization into that process and SR is a product we make. It’s not one that comes out of the ground and is what it is. It is -- it may well be very well suited to that process and I don’t know yet, but Doug’s saying they are doing a lot of work on that area and I am very confident that our logic in that regard when we made the investment is already demonstrated to us about the benefits of that involvement and discussions.

JA and Murray Basin replacements well obviously you know mines have a finite life. I refer you to the Sonoran, Atacama, Typhoon deposits though that are adjacent to JA. There is a lot of work going on around those satellites and I’m encouraged by all of that work. And yeah, Murray Basin replacement we have that in train. In terms of Balranald we also have it in the [inaudible]. We have -- there is an innovation contribution in that area as well and did I cover the first, yeah, you are right, obviously logically eventually all ore bodies are depleted and if you haven’t done anything well then that’s time over. But that’s not our plan and Greenfields versus buy and I don’t see anything in competition with one other unnecessarily. We think about both in parallel all the time and always have.

You need to have the capacity to pursue either at all times because you don’t know which one come along first in some cases and we are positioned to do that. We are investing in exploration and there is in the public domain a transaction that we have proposed, so both at once. And we keep going, I guess otherwise we will run out of time and not get [to them].

Operator

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

Matthew Hodge - Morningstar

Hi, David. Just a couple of questions around incentive pricing, has your view around those prices changed at all and how do you think about how the incentive price will move in the medium to longer term. Obviously we probably have some cost coming up in Australia, so that’s probably perhaps pull it down a little bit but then there will some offsetting factors longer-term the challenges and headwinds that you talked about. So just how do you see that playing out in the longer-term?

David Robb

I will just draw your -- well our view on inducement pricing in the year now hasn’t changed. I would draw your attention to slide, whatever it was, the assemblage one, what one was it, 29, no, my apologies, 27. This is what the industry has ahead of it, less zircon proportionally, less chloride Ilmenite proportionately, perhaps in the long run and lots of Sulphate Ilmenite, so proportional, proportional.

Bear in mind also geographic risk, regulatory risk, these resources are not in the most hospitable of places, they are in -- some of them will be but they are not in my backyard. So all of that will have an effect on inducement pricing ultimately, unless innovation rises to the rescue. That’s why innovation is so important.

We intended -- and I know I’ve alluded to this before and some of you would know that I started my career in oil and gas, and you look at the contribution of innovation in energy market, so oil and gas markets, horizontal drilling, ultradeep water capabilities, all the way through to fraccing and so on, and [child] gas, and are there analogs that you can literally look at in minerals? I don’t think so, certainly they don’t exist in our industry.

I am very excited about, both the need for innovation and our ability to be at the forefront of this, because when we look at the resource endowment of this, to support this industry we think it is needed, otherwise the cost issues that you alluded to are potentially require stacked.

Okay, Mark?

Operator

Your next question comes from the line of [Mike Harlow from DBY]. Please ask your question.

Unidentified Analyst

Thanks, just on guidance you haven’t, -- on the way change…

David Robb

Sorry Mike I can’t hear you quite, could you speak up a little?

Unidentified Analyst

Yes is that better?

David Robb

Yes, thank you.

Unidentified Analyst

Okay. Just on guidance, in particular the cash, I just wanted to know, the implication is that $150 million of the cash cost that you are going to have a step up of about $50 million in the second-half relative to what’s been reported so far. So you are still maintaining guidance obviously but what would that additional cost be related to? And I guess, one of my other questions [inaudible].

David Robb

Sorry, Mike the question is what are the additional costs…

Unidentified Analyst

Yeah, it looks like you relative to what you have incurred so far there are quite large step up in other costs in the second half, is that correct? I guess is the first and the second is, can you point us to why would be the case?

David Robb

Mike, as usual you have asked a question that I can’t answer. So I will hand it over to the experts, Alan and Simon.

Simon Green

Mike it’s Simon here. As David mentioned elsewhere no change in any of the relation to guidance, but I think what you are seeing there is a bit of phasing between first half and the second half?

Unidentified Analyst

Okay. And just on the unit costs, the guidance for the year on cash cost is 625 and it was higher than that in the first half. Would you also be seeing a [inaudible] way in the second-half or round and that is the non -- the non -- that’s production cost related calculation obviously?

David Robb

Mike if I understand you correctly you say, I mentioned earlier, on trend that total cash cost number might be a little on the high side but we are just not calling that as definite yet. It does depend a little bit on decisions we may make in the second half, hypothetically doing some prep work for preliminary stock that would, at list cost -- there is a number of decisions that we might make that would bring us back closer to that guided number versus the trend that we see.

Unidentified Analyst

Yeah.

David Robb

So that’s why we haven’t changed the guidance.

Simon Green

And on the unit cost prices, Mark

David Robb

Mike

Simon Green

Mike, sorry, yeah production in the first half of 350, Z/R/SR against the full year guidance number around 550, so that’s more to [inaudible], as David commented earlier on the incremental cost that we incur to actually produce finished goods is relatively modest. So just in terms of when the finished goods are produced obviously influences that unit cost calculation, whilst not really changing the underlying cost incurred. And Mike we can discuss with you that kind of detail, subsequently if you like and if that’s okay I’d like, to come back later if we got time on the call, but I would like to try and move through this, still there are quite a number of questions, we’d like to try and address if we can.

Unidentified Analyst

Thank you.

David Robb

So next one please.

Operator

Your next question comes from the line of Kim Christian from AAP. Please ask your question.

Kim Christian - AAP

Hi, David. I just wonder if I can get your view on the Chinese housing market and how further possible…

David Robb

Sorry again, Kim you are little indistinct, I’m sorry about that, whether it’s the system or whatever, could you just start again?

Kim Christian - AAP

Okay, is that better?

David Robb

Yeah.

Kim Christian - AAP

Yeah, I’d just like to get your view on the Chinese housing market and how further [inaudible] might affect Iluka’s business?

David Robb

As we indicated in our materials, Kim you can’t generalize about the Chinese housing market in the same way as you can’t generalize anything about China. I am somewhat frustrated at really simplistic thesis about China housing and its correlation with Iluka, as that is just such a simplistic thesis that I find it frustrating. We do know that in China in the ceramic sector and remember that even in China ceramics i.e. housing if you like is only a little more than half of demand typically. So you are talking about half of global zircon demand divided by half divided by our market share, whatever. It’s not the only factor in our outlook.

But it’s really about completions and sales. And because that’s when pick-up occurs, is when occupancy occurs. Yet the pipeline and the investment in real estate and construction is important, long term but in the near term it’s really around, as I say, housing completions and housing sales. I can actually think of a scenario in which price corrections incentivize developers to offer better deals to get occupants into their properties and make it easier for people to become homeowners, that would be good for us. And we have also mentioned the issue of digital printing and how embryonic that is in China relative to other places and I refer you to a slide that’s not in this pack, but was in the supplementary slides, isn’t that Rob I think no it’s not, okay anyway.

There is a slide about digital printing and you see that the adoption of that as yet in China is very low. As China does adopt that’s good for zircon intensity based on our survey and our most recent survey have told us. So I can actually easily talk to a scenario where pricing adjustments in housing in China are actually good news for us. There are also the developments as you would know around hukou system and the ability of people who move within China to actually be re-categorized as legitimate residents of the city and therefore able to buy property, which has not been the case up until now.

So clearly a major upheaval in the Chinese economy or in the Chinese housing is bad news for everybody including us. But do we see that, no. I have said before China’s a market that runs on sentiment as well as kind of observable fact. It tends to move [En masse]. So sentiment’s important. A lot of price is good for purchaser’s sentiment or bad, which are [inaudible]. Okay, next question please?

Operator

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

Michael Evans - CIMB

Good morning David. Thanks very much. A couple of questions. One is a bit of a follow-up from an earlier question. On the Hamilton MSP and you made the point that HMSP is designed around that particular ore body but you are putting JA ore through that plant at the moment. I mean can give us a feel for the quantum of just how much JA ore or HMC you can put through there as a percentage of the total and do you have to make any sort of modifications and to what extent can that -- can that potentially delay CapEx, that [inaudible] will delay that decision until you sort of, I don't know, have more confidence on the market outlook.

I mean your capital numbers I appreciate you can't be too specific on your development projects but your CapEx has been running relatively low, relative to your guidance that we've got these big numbers in our models and difficult to allocate exactly where it’s going. So perhaps some color around that and secondly and related to this your $110 million CapEx expenditure guidance for this year, can you give us a sense I know that's probably a bit tricky on what you regard as sustaining and what you consider sort of project capital in that $110 million figure.

David Robb

Okay. Yes, MSP is -- some are flexible some are not. Our MSP in Narngulu example is two quite distinct trains, it can run in a modular fashion, it can run in an integrated fashion. It is actually more flexible than Hamilton in that regard. It's really not much CapEx to de-bottleneck an MSP. So for example as I said if you run more JA in the blend you hit a zircon bottleneck because JA is mainly zircon and your zircon circuits you reach the capacity even though you may have spare capacity in the TiO2 circuits and the rutile circuits and the reverse is also true.

We have been, I think in our most recent trials, and they are only trials, but we've been up to about 40%. We're still holding fingers up in the room. We're not quite sure whether it’s 30 or 40 or 50, so let's pick the mid-number 40. And that is, let me put that in context, we have used this low to do lots of envelope pushing around blend flexibilities, feedstock flexibility, logistics, efficiencies, different Ilmenites that might make different SRs, all of those things that you are aware of now is a wonderful time and we're not trying to maximize production to play around with those things.

So any of that really bear on Balranald timing or CapEx now, I don't think there is much CapEx in the Balranald CapEx if you like that's linked to Hamilton. So, the Balranald CapEx whatever it may be is all around the mining and the processing and the logistics of getting that to Hamilton.

On the current split, look, I guess where we’re on that with the CapEx is and it’s not -- obviously it’s not material to anything given the time we are 100 odd million or so in our guidance. I am holding to that guidance because there’s discretion if you like about some things that we may or may not do in the second half and there are also some timing uncertainties as to the split between sustaining and growth in all of that, well Metalysis is clearly not sustaining categorically other than that.

We don't really think about in those terms. We’ve said previously that overall our sustaining CapEx is not surprisingly, not that different to our DNA and that's about $200 million a year and we are below that run rate now. That's why the lumpiness has been referred to about we play catch up as these projects are executed over the next few years. We're not at that sustaining run rate this year quite clearly. So your observation is correct.

Within the 110 when we are down that low, I don’t have the answer to which is sustaining and which is growth other than clearly Metalysis growth.

Michael Evans - CIMB

That’s very helpful, thanks David.

David Robb

Thanks a lot Michael. Next one please?

Operator

Your next question comes from the line of Glyn Lawcock from UBS. Please ask your question.

Glyn Lawcock - UBS

Hi, David. David I just wanted to think a little bit about how you kind of approach the development of your new projects. You have already said inducement or price is not sufficient to induce them now. But obviously if you are right on slide 27 as you get closer to exhaustion of say WRP prices will have to go up because you are not going to be able to produce it, so as you get out there as you and your team think about it, do you think about your pricing strategy like we use to have an industry which was fixed prices for long durations.

Are you happy with the current pricing regime or do you sort of try and say to people we have -- we want to lock in the price to actually guarantee you get this project to market just wondering if it’s -- if you are already thinking about that?

David Robb

Good question. First point inducement pricing is always an industry [average talk]. It doesn’t give you direct launch inside to what any specific project you may think it needs in terms of prices. We have been through a period of some [inaudible] as you know well around changing the pricing horizons within the industry from old style legacy contracting which we think worked in favor of customer to the disadvantage of our shareholders. It wouldn’t surprise you therefore that having done that yet if you like we’re pretty reluctant to go back to the ways of the past. Does that mean that you could not be creative about underpinning economics, do we think about de-risking projects in lots of ways, not only engineering solutions and low CapEx and all the usual stuff to reduce risk.

In some cases there is merit in thinking about offtake risk, less important where your products are really quite fungible and of clear market acceptable quality which is the case with us. Harder to do in zircon maybe in TiO2 clearly because generally the balance sheet and the capacity to deliver a long term commitment downstream of offsetting zircon are much more limited than they are in TiO2. And so look it’s really a horses for courses thing. We try and balance return on risk to state the obvious. And there can be a trade-off sometimes when you might accept a little lower risk in return for a little more -- sorry a little lower return in return for more certainty around risk.

That will likely lead to an undoing of the changes that we been a part of in our industry, not well, not on my watch, I don’t think. I mean some of them might become long enough for the time the previous peak price forever clean, how much is that.

Glyn Lawcock - UBS

Yeah, but that might not happen but obviously, [inaudible] but I was just curious.

David Robb

No, a lot of, in fact you said my, now that’s good.

Glyn Lawcock - UBS

But this is more about just if you could lock in a price north of here that gives you the returns you want on the project. I mean long-term price but at a decent return just what you would -- to give you -- to lower the risk?

David Robb

Yes, and across your portfolio having a kind of blend of arrangements that produce the best aggregate outcome Glyn.

Glyn Lawcock - UBS

Yes.

David Robb

You know it’s a project specific call and it’s as Doug reminds me product specific. So I agree with your sentiment if you like that you shouldn't be too rigid in your thinking about how you generate the best returns for shareholders and in some project cases or some products across our whole portfolio a blend of arrangements probably works best through the cycle.

Glyn Lawcock - UBS

And sorry, just then finally on that same topic, when you talk to your customers and show them slide 27 and I am sure they can see it, is there a sense of nervousness dawning upon them yet that you guys aren't prepared or did they think you cope in the last minute and develop it anyway.

David Robb

You have to go and ask them. People's time horizons top of market and bottom of market tend to get very short. It's hard to get people thinking really longer term on the Chinese pigment maker when half of our capacity only is running or whatever on the plant, margin wise. I think there is an awareness and a recognition, is there a willingness to act yet on that, well time will tell. I think -- and someone may make a discovery tomorrow that turns out and it’s hit in which cases we're wrong. So it is clear that we are the only one really looking seriously with good credentials, so it’s [lucky] to be us.

I think the people who have the capacity to think longer term are aware of this issue.

Glyn Lawcock - UBS

Okay. Thanks David.

Operator

Your next question...

David Robb

We've got three more to wrap up.

Operator

Your next question comes from the line of Andrew Knuckey from Bank of Australia. Please ask your question.

Andrew Knuckey - Bank of Australia

Hi, David. Just two questions, on slide 18 where you show the trend of zircon imports in to China for 2014, directionally it’s well below the step change that we saw in 2013. Can you just confirm the commentary that you make in the written notes that you still expect the second half to be greater than the second half of 2013. Looking at that chart it looks like quite an order of magnitude step change and then what gives you confidence that we're going to see that given the current conditions. And then the second question just refers to again the slide 27, are you able to give any indication on that access around, perhaps timeframes that you see the decline in terms of those assemblage mixes?

David Robb

Okay, the answer to the second one is no. These are representation of a trend. I don't think it's actually intellectually honest to try and be too prescriptive about timeframes when you're looking at an overall industry picture with, we believe that is the outlook. Your first question I am not sure I quite agree with you about step change, really the step change was post-GSC in China but it has maintained numbers that are pretty commensurate with that. Year-to-date versus the dotted 2013 one we're tracking similarly. You know that Chinese New Year et cetera tends to mean that second half is bigger than first half.

We also know and we said before that if prices go up paradoxically in the short term volumes go up depending on what people think about what that [presages]. So no I don't agree with you that there is anything fundamental about that other than China is tracking roughly in line with how it has in the past, that guidance around aggregate sales in our commentary around relativities, we have not changed.

Andrew Knuckey - Bank of Australia

Okay. So based on that we should expect to see that great 2014 line sort of kick up just like we saw in 2013 dotted line, and in fact to profit, given that you expect sales to be greater than the second-half of ’13?

David Robb

Well I think what we deliberately not done is guide specifically by product and we have got only the aggregate, rutile, zircon, MSR and I am not going in to more specific guidance around zircon than we have given and that we stand by. We discussed China housing, I gave you my view it could be wrong. There is lots of uncertainties still as we sit here in August.

Andrew Knuckey - Bank of Australia

Yeah, you did say that specific to the comment on page three of your note you do expect sales to be greater in the second half of ‘13?

David Robb

Yeah, well if you do math it’s clearly what we expect given our guidance.

Andrew Knuckey - Bank of Australia

Okay, thanks.

David Robb

Okay, a couple of more questions?

Operator

Your next question comes from the line of Matthew Smith from Macquarie. Please ask your question.

Matthew Smith - Macquarie

Hi, David. Just picking up on your comments on slide 26 on technology shift in pigment, are you able to provide any information on some of the changes that you were saying in terms of technology in those markets and following on from that has your thinking changed at all over the past six months in terms of the outlook for the build-up of core capacity in China?

David Robb

No, beyond that has not changed, technology shifts really related to China also and the government explicit encouragement of chloride. So that’s really around the sulphate chloride balance, that technology shift’s coming and China is a big part of that. And we are in country and working hard with the embryonic chloride pigment manufacturers to help them and as you are aware we also have a view to developing our capacity to service the large in store sulphate pigment capacity perhaps with a higher grade product to help them minimize their environment footprint. That’s also a part of our thinking.

So it’s sulphate versus chloride and it’s feedstock innovation to service both, is what is behind that technology shift, [short hand], Matthew.

Matthew Smith - Macquarie

Okay, great, thank you.

David Robb

Final one, Clarke and then we’ll have to call it a day.

Operator

Your next question comes from the line of Clarke Wilkins from Citi. Please ask your question.

Clarke Wilkins - Citi

Sorry, thanks for taking the follow-up. Just the restructuring [auto] cost is there still further of those cost to be incurred in the second-half of the year, I think the guidance is about $45 million for the full year originally. And also just around money, the royalty, have you seen any of that change and the cash flow that comes in from that does that sort of some influence in terms of gearing if you are looking at doing acquisition in the marketplace?

David Robb

Well the restructuring and all capacity cost and idle charges we haven’t changed our guidance on that Clarke, so the $45 million or thereabouts is still a number we think for the full year

Simon Green

Clarke I mean the [inaudible] is the restructure element was one off last year, and non-recurring this year but idle cost we have incurred in the first half we would expect to see that in the second-half given the production setting for both [inaudible].

David Robb

So $45 million or thereabouts is still the number, Clarke. And all vital charges. And on [M&G] if you are -- are you actually asking would we monetize it in some way as part of the transaction, is that?

Clarke Wilkins - Citi

Well actually it works both ways, do you monetize at all this ability to borrow against that revenue stream, also make it valuable to keep in terms of if you are looking to sort of [inaudible] into I mentioned nine of course, but in terms of acquisition that are being announced?

David Robb

Well, it’s a wonderful cash flow and we don’t worry about sort of its specific utilization. It is a part of the mix. It is a very helpful part of the mix in the mineral sands business and at the low point in the cycle, I can assure you there are plenty of people in this industry, including people who have operational problems of which there is another big one at the moment in the public domain, I think proving how difficult it can be to get projects up and whatever in this industry the kind of stuff we have purchased before and [inaudible] technical challenges, that is a live issue obviously.

Next in the comments we have said, it has been commented upon publically and we have said that our proposal in relationship to the transaction was 0.036 Iluka shares for each share. So in that context monetizing net cash flow or bifurcating it’s value to some particular transaction is actually not relevant. It’s also the case that we are not limited in what we can do and we have said this before that there is no particular limit in our banking arrangements that relates to what we do in M&G and Alan and Simon and the guys did a very good job in all that refinancing to make sure we had not only good capacity but lots of flexibility in terms of how we use our balance sheet. So here is no restrictions on what we do in making in terms of our financing, but it is not in the mix at all, in any big significant amount.

Okay, with that I think hour and half or near about, thank you for your patience everybody and thank you for your interest. Follow-up questions obviously feel free. Thanks for your time.

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Source: Iluka Resources' (ILKAF) Management on Q2 2014 Results - Earnings Call Transcript
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