Mineral Sands Sector Overview (December 2009)[1]

8/10/2019 Mineral Sands Sector Overview (December 2009)[1]

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1

Iluka Resources Limited

Mineral Sands Sector Overview

December 2009



2

Disclaimer – Forward Looking Statements

This presentation contains forward-looking statements that are subject to risk factors associated with exploring for, developing,mining, processing and sale of minerals. Forward-looking statements include those containing such words as anticipate, estimates,should, will, expects, plans or similar expressions. It is believed that the expectations reflected in these statements are reasonablebut they may be affected by a range of variables and changes in underlying assumptions which could cause actual results ortrends to differ materially. These include, but are not limited to: price and currency fluctuations, actual supply versus demand,production results, reserve and resource estimates, loss of market, industry competition, environmental risks, physical risks,legislative and regulatory developments, economic and financial market conditions in various countries and regions, political risks,project delay or advancement, approvals and cost estimates.

Specific Risks & Sensitivities

The information contained in this presentation is subject to, but not exclusively to, the following:• Changes in exchange rate assumptions• Changes in product pricing assumptions• Major changes in mine plans and/or resources• Changes in equipment life or capability• Emergence of previously underestimated technical challenges• Environmental or social pressures which impact licence to operate

All currency referred to is Australian denominated unless otherwise indicated.



3

Iluka ResourcesOverview & Investment Proposition

Market capitalisation ~ A$1.4 billion (418 million shares on issue)

Industry Sector Materials (minerals sands exploration, project development, operations andmarketing; iron ore royalty deriving from BHP Billiton’s Mining Area C, Western

Australia)

Substantial shareholdings M&G (London) 19.2%; Schroders (Sydney & London) 9.5%

Objective To create and deliver shareholder value

Key Deliverables Capital efficient transformation of the asset base - complete end 2009Delivery of two new globally significant, high margin production sources- Murray Basin (completed 2009) & Jacinth-Ambrosia (completed 2009)

Balance sheet headroom maintained to protect project deliverySupply discipline through global economic crisis - especially as market leader in zirconStrengthened position in growth markets - especially China

Investment Proposition: Improved Financial Characteristics (2011 - 2013 vs 2006 - 2008)

Significantly lower capital expenditure cash flow generation & balance sheet flexibility

Higher production/sales of higher value products (rutile and zircon)Higher EBITDA/revenue margin and return on capitalIncreased contribution from low risk Mining Area C royalty stream



4

Mineral SandsIndustry Context

Key Themes

• Positive demandfundamentals, influencedby urbanisation &

increased per capitaconsumption in developingeconomies, especiallyChina

• Supply constraintsmedium term - of highervalue products - zircon and

rutile

• Severe demand reductionin 2009; recovery speed totrend line dependent onshape of global economicrecovery

• Additional production notinduced at current prices

Minerals Uses Industry Supply and Demand

• 90% of all mined ilmenite, rutile

and leucoxene used as

feedstocks of titanium dioxide for

pigment manufacture

• Rutile and leucoxene are also

raw materials for flux coated

electrodes and flux core welding

wire

• Titanium metal is a strategic and

growing market

• Over 60% of zircon is milled into

fine flour for use in tiles and other

ceramic applications

• 25% used as feedstock for

zirconia, zirconium chemicals andmetal production

• Zircon sand used in specialty

refractory and foundry

applications

• 53% of world’s titanium is supplied by IlukaResources, Rio Tinto/BHPB, Exxaro Sands

• Demand for pigment linked to GDP per

capita- “Late cycle” demand characteristics

- Titanium in pigment not readily or cost-effectively substitutable

• 67% of world’s zircon is supplied by Iluka,Rio Tinto/BHPB, Exxaro

• Zircon milling customer base is fragmentedand capacity is moving from Europe toChina and Asia/Pacific

• Demand for floor and wall tiles linked tourbanisation, particularly in China and Asia

• Not readily or cost-effectively substitutable

Ilmenite

Rutile

Leucoxene

Zircon



5

Mineral SandsTitanium Minerals Summary Characteristics

End Uses

• TiO2 Pigment is used in

- Paints, coatings, inks

- Plastics

- Paper

- Textiles- Cosmetics

• Welding fluxes are used in steel fabrications

• Titanium Metal is used in

- Aerospace, defence

• Emerging specialist applications- Photo voltaic cells

Supply and Demand Dynamics

• Supply of minerals

- Majors: Iluka, Rio Tinto/BHPB, Exxaro

- Pigment end use demand

- Consumption linked to GDP/capita but“late cycle” and lags infrastructurecommodity stage demand

- China and developing economyurbanisation a major driver but pigmentintensity of use in developing economiesstill only ~20% of mature economies

• Titanium metal

- Strong demand in specialty applications

Key Pricing Components

• US$ based price

• Typically multi-year volume, annualpricing, contractual arrangements

• Technical buying decision

• 2.5% historical CAGR (1975-2007)

• China imports ~1/3rd of its pigmentrequirement

TiO2 Minerals

• Ilmenite

• Rutile

• Leucoxene

(value based on titaniumdioxide content)

90% of all t itaniumminerals are used asfeedstocks in themanufacture oftitanium dioxide (TiO2)

pigment

Segment Consumption (2008)6 million tonnes Ti02 equivalent units

North America

25%

China

18%

Other Asia

17%

Other

11%

Europe

29%

Geographical Consumption of Pigment

(2008)4.7 million tonnes pigment

Other, 5%

Metal, 6%Pigment,

89%



6

Mineral SandsZircon Summary Characteristics

End Uses

• Ceramics (53%)

- Wall and floor tiles

- Sanitary ware

- Tableware

• Refractory & foundry applications (25%)- Bricks for glass and steel furnaces

- Precision Casting

• Fused Zirconia, Zirconium Chemicals (16%)

- Nuclear industry (fuel rods)

- Desalinisation plants

- Electronics

Supply and Demand Dynamics

• 2/3rds of supply by Iluka, Rio Tinto/BHPB,Exxaro

• Zircon milling is fragmented with capacity

moving from Europe to China and Asia/Pacific

• China the major zircon consumer (30% ofglobal demand) with import growth of17.2%pa (1990 – 08). Demand for floor andwall tiles is linked to urbanisation

• Zirconium chemicals and metal demand is

growing strongly

Key Pricing Components

• Historically similar to titanium minerals

• Moving to shorter dated contractual pricingarrangements, including ‘spot’

• 4.5% historical CAGR (1970-2007)

• Zircon prices have averaged 1.2 times rutileprices & 6 times chloride ilmenite prices (2001-2007)

Zircon is usedpredominantly inceramics manufactureand 45% of all zirconconsumption is in

China

Segment Consumpt ion (2008)1.2 million tonnes Zircon

Geographical Consumption of Zircon

(2008)1.2 million tonnes Zircon

Asia

19%

China

35%

North America

28%

Europe11%

Other

7%Foundry,

12%

Ceramics,

54%

Chemicals,

22%

Refractory,

12%





8

Mineral Sands Key ParticipantsMain Operations by Three Major Raw Material Suppliers

2008 Market Share*

Company TiO2 Zircon Operation Location

Annual Mine

Production Comments

• RBM Sth Africa Ilmenite 1000kt

Zircon 250kt

• Large scale/low ore grade mining - mainly ilmenitewith low cost upgrading and pig iron credits

• QMM Madagascar Ilmenite 700kt • Large scale, low ore grade ilmenite mine

• MurrayBasin

Victoria, NSW Rutile 200kt

Zircon 150kt

• High grade mineral assemblages and revenue fromrutile and zircon

• Virginia Virginia, USA Ilmenite 200kt

Zircon 50kt

• Low cost and efficient producer close to customerbase in US

• Tiwest JV West Australia Ilmenite 400kt

Zircon 50kt

• Mainly upgraded ilmenite for feedstocks to 50% JV

pigment plant (co-owned with Huntsman)

IlukaResources

15% 30%

29%

9%

19%

• QIT Quebec, Canada Ilmenite 2000kt • Hard rock Ilmenite mine without zircon but with pigiron and value added steel products

•

EuclaBasin South Australia

West. Australia

Sth Africa

Sth Africa

Zircon 300ktIlmenite 150kt

•

Exceptionally high zircon grades in ore relative toilmenite

• Perth Basin Ilmenite 1000kt

Rutile/Leuc. 100kt

Zircon 250kt

• Declining production but with spare ilmenite upgradingassets

• KZN Ilmenite 300kt

Zircon 50kt

• Started up in 2003 as an ilmenite upgrading facilitywith iron by products

• NamakwaSands

Ilmenite 300kt

Zircon 200kt

• Acquired in 2007 from Anglo American. Has goodzircon revenue

Exxaro 18%

Rio Tinto/ BHPB

* All operations on 100% basis



9

Mineral SandsIndustry Financial Drivers

Cash Cost Drivers

• Depth of mining, andvegetation/overburden removal

• Scale of mining operation

• Levels of clay, waste and other mineral

trash that require removal

• Material handling during transport andproximity to export port

• Power, water, other infrastructure

Prices of minerals in ore relativeto ilmenite (2001 - 2007)

• Zircon

• Rutile

6 times

5 times

• Variable but generally <1%in ore

• Zircon

• Rutile andLeucoxene

• Ilmenite

Relative quantity of minerals in ore

• Variable but generally <1%in ore

• Dominant mineral andusually 4-10% in ore

Cash cost of production is not the only differentiator for mineral sands producers.Revenue per tonne is a key driver of value - influenced by assemblage

Ilmenite Upgrading Technology

• Ilmenite can be upgraded into rutileequivalent product usingtechnologies developed by Iluka,Rio Tinto and Exxaro

•

Pig iron can also be economicallyproduced as a by-product whenthere is a sufficiently high level(>30%) of iron oxides in the ilmenite



10

0

50

100

150

200

250

300

350

400

450

500

Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

I n d e x 2

0 0 4

= 1 0 0

Gold (US$/oz) Copper (US$/t) Nickel (US$/t) Zinc (US$/t)

Lead (US$/t) Rutile (US$/t Aus. FOB) Zircon (US$/t Aus. FOB) Silver (US$/oz)

Source: TZMI and Bloomberg

Notes: Monthly average prices, zircon and rutile annual average prior to 1999

1990 to 2009, US$, Index 2004=100

Mineral sands has not seen comparable price appreciation compared with infrastructure stage commodities.Similar factors are at work – resource scarcity, strong demand from developing economies and, in the case ofhigh quality mineral sands products, medium term supply tightness.

Mineral Sands Price RelativityHistorical Pricing of Various Commodities



11

Pigment DemandPigment GDP-linked Demand Growth with Developing Economy

Pigment Demand Growth

• China 1/3rd import dependent (high quality chloridepigment not produced within China)

•

Mature economy consumption typically flat to declining• Developing economy demand at relatively early stage

of growth

- China pigment consumption intensity low

- demand profile strengthening from low base inBRICs and developing Asian economies

Small Sector Metal/Other Demand Growth• Titanium metal - aeropsace/defence applications

CAGR 8.4%

• Welding electrodes flux CAGR 12.8%

China Pigment Intensity of Use (per capita cf USA)

China’s pigment use per person is 20% of US pigment use

China’s pigment consumption CAGRsince 1990 is 18.9% compared to the restof world of 1.8%

0%

20%

40%

60%

80%

100%

Steel Copper Alum inium Nickel Pigment

0

1

2

3

4

5

6

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Pigment (mt)

World China Rest of World

1970-90 CAGR

= 2.9%

1970-90 CAGR

= 2.9% 1990-08 CAGR

= 1.8%

1990-08 CAGR

= 1.8%

1990-08 CAGR

= 2.8%

1990-08 CAGR

= 2.8%

1990-08 CAGR

= 18.9%

1990-08 CAGR

= 18.9%

0

1

2

3

4

5

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

Real GDP / Capita (US$)

Pigment ( kg) / person

Nor t h Amer ica

W e s t e r n

E u r o p e

Japan

Eastern Europe

C h i

n a

W o r l d

India

Asia0

1

2

3

4

5

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

Real GDP / Capita (US$)

Pigment ( kg) / person

Nor t h Amer ica

W e s t e r n

E u r o p e

Japan

Eastern Europe

C h i

n a

W o r l d

India

Asia

Pigment/Person vs Regional GDP/capita

(1980-2007)

Rest of World vs China Pigment Demand





13

Titanium Dioxide DemandRio’s Mid Cycle View – Similar Characteristics Apply to Zircon Demand

Infrastructure

Based Growth Urbanisation

2007 Population

distribution in bands of

income levels**

Average Wealth per

capita in PPP terms

Inflection Point for

growth phase

Source Rio Tinto TZMI Conference Singapore

Typically mid to late cycle demand characteristicsUrbanisation and increased GDP per capital

strong indicators to demand growth



14

Zircon DemandDemand Influenced Predominantly by Developing/Urbanising Economies

Zircon Consumption Trends

Rest of World vs China Growth

Global Zircon Consumption CAGR since 1990 is3.4% while China’s CAGR is 17.2%

Zircon Demand Growth

• Demand 3.4% CAGR globally

• China demand CAGR of 17.2%; largest global consumer ofzircon:

- largest producer & exporter of ceramics;

- largest producer of zirconium oxychloride; and

- import dependent

• Urbanisation & construction are strong indicators to demand

growth• Demand profile strengthening from low base in BRICs and

developing Asian economies

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Zircon (kt)

World China Rest of World

1980-89 CAGR

= 2.8%

1990-08 CAGR

= 1.3%

1990-08 CAGR

= 3.4%

1990-08 CAGR= 17.2%

1980-89 CAGR

= 2.8%

1980-89 CAGR

= 2.8%

1990-08 CAGR

= 1.3%

1990-08 CAGR

= 1.3%

1990-08 CAGR

= 3.4%

1990-08 CAGR

= 3.4%

1990-08 CAGR= 17.2%

1990-08 CAGR= 17.2%

0

0.04

0.08

0.12

0.16

0.2

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Z

i r c o n k g / T i l e s q m

15%

20%

25%

30%

35%

40%

C h i n a T

i l e P r o d u c t i o n ( %

o f T o t a l )

% Chinese TileProduction (RHS)

Global ZirconIntensity ofUse (LHS)

China’s Urban Residential Floorspace

• China used 2.8 bn sqm of tiles in 2008

• Future growth in China’s urban floorspace will influenceincreases in China’s tile use, along with expected increase inceramics quality.

Zircon Intensity of Use

• Intensity of zircon per tile currently low in China

• This is forecast to rise as quality of tiles produced and demand inChina and for exports increases

Source: McKinsey Consultants

0

10

20

30

40

2000 2008 2015 2025

Total Floorspace

bn sqm Installed



15

Evidence of Zircon Demand RecoveryMost Notably in China

• China’s 1st half import demand for zircon was weak, due to prior year inventory build in late 2008, and destocking during the course of 2009• Import recovery has become evident since July with August and September import levels above pre GEC monthly averages• As at the end the end of September, Chinese zircon imports were 58% of 2008 import volumes, with a strong recovery trajectory evident

0

10

20

30

40

50

60

70

80

J a n - 0 6

M a r - 0 6

M a y - 0 6

J u l - 0 6

S e p - 0 6

N o v - 0 6

J a n - 0 7

M a r - 0 7

M a y - 0 7

J u l - 0 7

S e p - 0 7

N o v - 0 7

J a n - 0 8

M a r - 0 8

M a y - 0 8

J u l - 0 8

S e p - 0 8

N o v - 0 8

J a n - 0 9

M a r - 0 9

M a y - 0 9

J u l - 0 9

S e p - 0 9

N o v - 0 9

kt

Austra lia South A f ricaIndonesia Other 3 Month Avg

China Zircon Imports - Monthly China Zircon Imports - Cumulative YTD

-

50

100

150

200

250

300

350400

450

500

J a n - 0 9

F e b - 0 9

M a r - 0 9

A p r - 0 9

M a y - 0 9

J u n - 0 9

J u l - 0 9

A u g - 0 9

S e p - 0 9

O c t - 0 9

N o v - 0 9

D e c - 0 9

kt

Others

RSA

Indonesia

Australia

2009

2008

2007

2006



16

A China Perspective on ZirconTZMI Singapore Conference October 2009

China Zirconium Advisor (Jian Dongmin)

Director of China Zirconium and Hafnium Committee

Source: TZMI Conference October 2009

• Zirconium industry is an important part of China’s national economy

• Zircon is an important strategic material for China’s modernization and defense construction and alsothe mainstay of China’s new materials industry

• China is the largest producer and exporter of ceramics in the world

- production of sanitary ceramics – 120 million pieces (58% increase since 2005)- architectural ceramics – 5 billion m2 (37% increase)

• China – the world’s largest producer of zirconium oxychloride

• The nuclear grade zirconium processing industry is the most prospective area

• China has entered a new period of development by importing nuclear grade zirconium technologyfrom Westinghouse Electric Corp

•

The consumption of zircon sand in the zirconium industry in China will reach 630,000 tonnes by 2015(current estimated at 400,000 tonnes)



17

• Domestic production of chloride pigmenrestricted due to closely heldmanufacturing technology

• Also, China mines mainly sulfate gradefeedstocks. With or without domestic

chloride pigment plants, China willremain reliant on imported chloridetitanium feedstocks

• In 2008, China’s pigment imports werelargely from Asia-Pacific basedproducers and the US

• Iluka has significant exposure to theseoffshore pigment producers as a major

supplier of chloride grade titaniumfeedstocks

Pigment Imports

• In China, chloride pigment is predominantlyused in the coating of manufactured goods(cars, whitegoods etc)

• As China increasingly becomes amanufacturing base for global companies, thismarket is likely to grow strongly

• Higher quality chloride grade pigmentconsumed in China is imported

• In 2008, China imported around 275kt ofpigment, of which 260kt was chloride grade

China Pigment Market

• Titanium based pigments either sulfate orchloride grade

• 68% of pigment used in China was sulfategrade pigment, sourced from domestic pigmentplants

• Chinese sulfate pigment is lower quality andused mainly in construction (interior andexterior painting)

• The remaining 33% of pigment used in China,or around 275kt in 2008 was chloride grade

China

China Titanium Dioxide Demand OutlookPigment Market

Other, 24%

Japan, 15%

Taiwan,

24%

Aus tral

20%

US, 17%

0

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008

k

t

China consumed approximately850kt of titanium-based pigment in2008, having grown by an average of18% p.a. since 1998

Chloride

import

31%

Sulfate

domestic

65%

Sulfate

import

2%

Chloridedomestic

2%





19

Industry Zircon:TiO2 RatioDespite Advent of Jacinth-Ambrosia, Industry Z:TiO2 Ratio Remains Stable

• Decline in zircon:TiO2 ratio forecast from existing producers (excluding Iluka)

• Despite Jacinth-Ambrosia (largest new supply source in 30 years) industry Z:TiO2 ratio stable

• Given zircon demand growth historically > TiO2, zircon availability may come under further pressure if projected TiO2volumes do not materialise

Source: TZMI and Iluka analysis

Zircon/TiO2 Ratio All

Feedstock Producers(including J-A)

Zircon/TiO2 Ratio

Excluding Iluka

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1990 1995 2000 2005 2010F 2013

mt of TiO2 or Zircon

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35Ratio t Zircon/t TiO2

TiO2 Historical Supply Zircon Historical Supply



20

Iluka Capital Expenditure, Cash Flow and Debt Profile

2006 2007 2008 2009 20102011-2013(average)

Capital Expenditure $m 156 111 198 ~500

Operating Cash Flow1 110 59 230

Net Debt 594 602 216 500-600

Gearing(net debt/debt+equity) %

45.3 44.5 17.4 ~30-352

Increase versus 2006 - 2008 Decrease versus 2006 - 20081 Operating cash flow, pre cash flows from investing activities and financing activities2 Based on $500-600 million closing year end debt (book equity at 30 June of $1,175 million)



21

Other Iluka Revenue/EBIT StreamsMining Area C Iron Ore Royalty

• Royalty on iron ore produced from specific parts of BHP Billiton’s Mining Area C (MAC) province in Western Australia

• The royalty results from a 1994 restructure of deferred payments owed by Consolidated Goldfields Australia

• The agreement provides for a revenue-based royalty and production capacity payments consisting of the greater of :

− (i) ongoing quarterly royalty payments of 1.25% of free-on-board sales revenue from the MAC Royalty Area (lessall export duties and export taxes), or

− (ii) A$0.25 per tonne of all ore produced from the MAC Royalty Area in that quarter;

− and a series of one-off capacity payments of A$1 million tonne increase in the annual production level from the MACRoyalty Area during any 12 month period ending 30 June above the previous highest annual production level, paid

within 30 days of the relevant amount of production being produced

• The MAC royalty is, arguably, a superior royalty stream to many existing royalties by nature of its:

− pure nature as a revenue royalty with no exposure to underlying profitability

− exposure to significant volume expansion, as conveyed in BHP Billiton iron ore presentations

− expected long resource life

−low sovereign risk

− low counterparty or credit risk (BHP Billiton)

− minimal administrative costs

• It could be argued that broker valuations of MAC may not reflect these superior characteristics when compared with otherroyalties and royalty trusts



22

For further information, contact: Dr Robert Porter

General Manager, Investor Relations

+ 61 8 93604751; + 61 (0) 407391829

[email protected]

www.iluka.com

mailto:[email protected]

http://www.iluka.com/

http://www.iluka.com/

mailto:[email protected]

Mineral Sands Sector Overview (December 2009)[1]

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