Iluka delivers a satisfactory full-year result in a difficult trading environment

About Iluka Resources Limited

Iluka Resources Limited (Iluka, ASX: ILU, or the Group) is the world’s largest producer of zircon and a major producer of high-grade titanium feedstocks, rutile and synthetic rutile. Iluka has also established a significant position in rare earth elements (rare earths). The Group’s products are used in a variety of applications including technology, construction, medical, lifestyle and industrial uses.

Iluka has projects and operations in Australia and a globally integrated marketing network. Headquartered in Perth, Iluka was formed following the merger of Westralian Sands and RGC Limited in 1998. It holds a 20% stake in Deterra Royalties, the largest ASX-listed resources focused royalty company.

Satisfactory full-year result in a difficult trading environment

Iluka’s disciplined and dynamic approach to operational settings such as production and inventory levels minimises price volatility and has enabled the Group to deliver a satisfactory full-year result in an environment characterised by persistent inflation, subdued demand, and geopolitical uncertainty. Calibrating zircon production levels to softer demand from Chinese customers and the use of take-or-pay offtake contracts in the Group’s titanium feedstock business de-risks the Group in times of macro-economic uncertainty.

Against this difficult trading background Iluka has reported a full-year December 2023 Underlying Net Profit After Tax (NPAT) of $343 million, a 42 percent decrease on the December 2022 NPAT of $589 million. Revenue was down by 19 percent to $1,238 million and cash costs of production were 10 percent higher at $947 million. The full-year dividend has been cut to 7 cents per share fully franked, down from 45 cents. The final fully franked dividend of 4 cents per share will be paid on 28 March. The Group maintains a conservative balance sheet and has net cash of $225 million at 31 December 2023.

Investing for the future

The Group strategy is to continue to invest in projects that deliver future growth and so capital expenditure in the period was $161 million on mineral sands projects and $121 million on the Eneabba rare earths development. The Eneabba development is only the third rare earths refinery outside China and the first for Australia, adding to its strategic long-term value for Iluka shareholders.

The Eneabba development will process rare earths from waste rock and is of significant strategic importance to Iluka because it provides a secure Western supply for critical metals that are essential components for clean energy technologies because without critical minerals processing there is no energy transition. The other strategic significance of this development project is that much of the world’s supply of strategic metals comes from China and a supply chain disruption event would have serious negative outcomes for Western economies, especially the US which is seeking to diversify its dependence on strategic metals away from China. Strategic metals have an important military application, including being used in key components necessary for weapons manufacture. China’s ban on the export of heavy rare earths technology in December 2023 has heightened US interest in the Eneabba development which is being funded by a $1.25 billion non-recourse loan from the Australian Government. The non-recourse nature of the finance facility de-risks the project from a funding risk perspective and this has become important now that the capital cost of delivering the refinery has lifted to $1.7-1.8 billion, well above the US$1.25 billion Critical Minerals Facility loan that underpinned Iluka’s decision to construct the refinery in early 2022. Negotiations are underway between Iluka and the Federal government to reach an agreement on revised funding terms. While it is likely that Iluka will bear the cost over-runs, the refinery project is not under threat and will be completed in 2026.

Completion of the Eneabba refinery is a material share price catalyst for Iluka and as the construction phase is completed and commissioning commences, shareholders can expect re-rating of the business valuation supported by higher ongoing earnings and future shareholder dividends.

Iluka supplies critical minerals to customers in 40 countries and so long-term product demand is assured. The short-term strategy of matching volume production to demand volume is reducing price volatility which is supporting sales margins at a time when buyers are exercising caution.

Iluka’s short-term pricing initiatives and long-term strategic initiative in supplying the world with critical metals is likely to support higher earnings and fully franked dividends over the long-term.