ILUKA RESOURCES LIMITED — Call Transcript 2003

Nov 20, 2003

Attention ASX Company Announcements Platform. Lodgement of Open Briefing.

ILUKA RESOURCES LIMITED

Iluka Resources Limited Level 23 140 St Georges Terrace Perth WA 6000

Date of Lodgement: 21-Nov-2003

Title: Open Briefing. Iluka Resources. CFO on Outlook

corporatefile.com.au

Iluka Resources Limited has stated that it is facing a challenge of forecast declining grades at its WA operations. How are you tackling that challenge and other challenges and what's the general outlook for the company?

CFO Mark Hughes

The general outlook is very positive from an operational perspective. We're doing the right things in light of the challenges. The first significant challenge on the operational front is this declining grade position in WA. The WA operations are old orebodies, which have been mined for some 40 years. The main issue is an expected drop in zircon grade and that will have quite a significant impact on earnings. Initially it will be through cost and later through volumes. However, we're tackling that issue in three ways. These are through the MnM business improvement program, improving our US operations and developing the new Murray Basin project. The MnM program is delivering exceptionally good results and it will more than offset declining grades. We expect the US operations to be profitable in 2004 and the Murray Basin is on track to commission in H1 2005. Also, Consolidated Rutile will improve in 2005 when mining is fully established in the Enterprise orebody.

Prices are looking good. We're looking at substantial increases for zircon. Rutile is holding up nicely and we believe we'll receive some modest price increases for synthetic rutile (SR). However, the weakening US\$ will have quite a large impact on the bottom line, given that our sales are priced in US\$. The other corporate factor is that we're going to incur the full tax rate next year, which we haven't in the past.

In summary, those last two, non-operational factors are going to make 2004 a difficult vear.

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What is your capital expenditure program for the next couple of years and how will you fund it?

CFO Mark Hughes

Capital expenditure over the next two years will be significant in relation to previous years for several reasons. In 2004, total capital expenditure is expected to be around \$300 million, consisting of \$135 million on the Murray Basin, \$27 million on MnM, which is mainly debottlenecking and about \$130 million on sustaining operations, of which roughly \$75 million relates to mine moves in WA. In 2005, we're talking around \$200 million, consisting of \$55 million on the Murray Basin, \$15 million on MnM and about \$130 million on sustaining operations, of which approximately \$43 million relates to mine moves in WA.

We're very confident we can fund the capital expenditure program off our balance sheet and from operating cash flow. We have un-drawn bank facilities of more than \$200 million. So we'll utilise those facilities and our cash flow and we won't jeopardise our BBB rating.

corporatefile.com.au

What's Iluka's profit sensitivity to movements in the A\$ exchange rate?

CFO Mark Hughes

Like most resource companies, we have a significant exposure to the A\$. At current exchange rate levels, our 2004 profit before tax and hedging changes by around \$5 million for every one cent movement in the A\$. We have some hedging in place for 2004, although not as much as we have in 2003. Hedging for 2004 is around US\$105 million at US\$0.54. That's equivalent to about 50% of the forecast US\$ revenue from our WA Operations.

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Can you describe your production profile for TiO₂ feedstock and zircon in light of the declining grades at the WA operations, the expansion of the US operations and the expected start up of the Douglas project in H1 2005?

CFO Mark Hughes

Firstly, on the $TiO₂$ side, we don't experience the same grade decline that we have in zircon. The TiO₂ grades are pretty consistent over the next 10 to 15 years. Production will increase slightly from the US Operations, as they improve, and also at Consolidated Rutile as we get into the Enterprise orebody. However, the major expansion growth occurs in 2005 when we commission the Douglas project, or stage one of our Murray Basin development. That project will deliver substantially more rutile production.

Zircon is a slightly different story but one which enables us to actually improve our market position. Zircon grades fall away fairly substantially in WA from 2005 through to 2006 in particular but that will be offset by Douglas. Although the net result for Iluka is a flat zircon production curve over the next ten years, the world zircon market will also exhibit flat supply growth in a period when demand is growing quite significantly, mainly from China. That gives Iluka the ability to achieve earnings growth from our zircon business through price increases. These could be quite significant.

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The Detailed Feasibility Study for the Douglas project is not yet complete but can you outline the broad project parameters such as capital expenditure, commissioning date, production, ramp up schedule and operating cost structure?

CFO Mark Hughes

I'll just talk through where we're at with the project. Firstly, we've ensured that the project parameters will enable us to meet our hurdle rate of investment return. Like any resource project, we started with very broad parameters and have continued to refine those. We're well advanced with the DFS, which is really just about fine-tuning and getting to the level of accuracy that we're comfortable with.

As we advised the market in August, we're committed to making a final investment decision early in the second quarter 2004 with construction to follow soon after. Total capital expenditure for stage one is \$190 million. Full scale mining with the wet concentrator should commence in Q1 2005 and the MSP should commence commissioning in Q2 2005. We'll ramp up the project through the balance of 2005. For 2005 and 2006, the average annual production is expected to be 54,000 tonnes of rutile, 64,000 tonnes of zircon and 200,000 tonnes of wet magnetic HMC (mainly ilmenite). For 2007 to 2015, the average annual production is expected to be 154,000 tonnes of rutile, 96,000 tonnes of zircon and 500,000 tonnes of wet magnetic HMC (mainly ilmenite). This assumes KWR starts up in mid-2007.

During the DFS we're working our operating cost parameters down to a degree of accuracy that we're comfortable with and at this stage I don't want to disclose details but we've made several operating cost improvements already.

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Is the Douglas project viable under current project parameters, particularly with the higher A\$?

CFO Mark Hughes

We've examined all the potential project stoppers and have effectively dealt with all of them. We take a long term view of the A\$ rather than simply using today's exchange rate. This, after all, should be a 20 year plus project. Our longer term A\$ assumptions are consistent with economic forecasters and the project certainly meets our hurdle rate using a longer term forecast. The other thing I alluded to earlier was the potential for price increases with zircon and, to a lesser extent, rutile and SR. The improving price outlook is adding to the attractiveness of the project.

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How has the project scope and forecast capital expenditure changed under Iluka's ownership?

CFO Mark Hughes

It's more a case of the project evolving under Iluka's ownership rather than it changing. Part of the project management involved an options analysis which made sure that we analysed every development option. We're comfortable that we're now pursuing the most attractive option, which is developing Douglas as stage one along with a Mineral Separation Plant near Hamilton. The MSP will process both Douglas and KWR material. Capital expenditure for stage one is around \$190 million and developing KWR will involve an additional \$105 million.

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Iluka's share of world zircon production will increase beyond the current 33% when Douglas starts. Can you talk in more detail on the implications that might have for your zircon prices and can you comment on current price negotiations for zircon and $TiO₂$ feedstock?

CFO Mark Hughes

World zircon supply will not grow significantly over the next 10 years based on our assessment of current and new projects. On that basis, with growing demand, you would naturally expect an increase in prices. We expect our share of the zircon market to increase to probably just short of 40% with production from Douglas. That significantly improves our position in world markets.

Regarding the current price negotiations, we expect good rises in the zircon price. On the $TiO₂$ side, rutile prices have stabilised at an acceptable level and we see them holding for the foreseeable future. For SR, we sell into the high quality end of the market and prices are steadily increasing because supply and demand are in balance but showing signs of moving into a supply deficit over the next few years.

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Are there any issues which might threaten the project and how will you deal with its high clay content?

CFO Mark Hughes

As I was saying earlier, we don't believe there are any issues which will threaten the project. We have systematically knocked off the potential show stopper issues one at a time. The issue of clay content is one of the more significant issues but one which we believe we can deal with effectively. This is more about settling the clay and is therefore a process or throughput issue rather than a recovery issue. The solution we've found for dealing with clay content is very exciting because it's something we can apply across the rest of our group to achieve significant operational benefits, which ultimately translate into lower costs or higher throughputs.

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The current proposal is to stockpile ilmenite, which is high in chrome. What progress have you made in finding a way of economically processing the ilmenite and what impact could that have on project returns?

CFO Mark Hughes

The attractiveness of the Murray Basin, as we've said all along, is its rutile and zircon content. It has plenty of ilmenite but that is high in impurities and therefore not readily saleable. However, if we can find a way of dealing with those impurities, it provides an opportunity to sell a high margin product on upgrading because we would have already incurred the costs in mining and separating.

The impurities in the ilmenite cannot be easily dealt with using our traditional Becher SR process but we believe we have a viable alternative technology which has been tested by Lurgi and Outokumpu and involves a circulating fluid bed process followed by leaching. Apart from effectively removing the impurities, the new process is an improvement on Becher because it's able to treat lower grade feed. The SR produced is very high quality, at around $95\%$ TiO₂, which will enable us to sell into the premium end of the market.

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What permits do you still need for Douglas and what remains to complete the DFS?

CFO Mark Hughes

All our permitting requirements have been received including all environmental and planning approvals apart from for the water pipeline. That planning approval is being challenged and, in fact, is being heard at a VCAT sitting today.

The remaining issues to complete the DFS are more fine-tuning, particularly on the engineering side.

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Iluka's current reserves in the Murray Basin are 47.4 million tonnes with a Heavy Minerals grade of 9.8% and in-situ HM of 4.6 million tonnes. Resources are 362.9 million tonnes with a HM grade of 10.4% and in-situ HM of 36.9 million tonnes. The reserves support a mine life of 10+ years. What mine life could the project ultimately have in view of the large resources and greenfield exploration upside?

CFO Mark Hughes

We have a resource base at most of our operations which is significantly greater than the reserve base because it's our normal approach to ensure that we have a minimum of 10 years reserves for our projects. There's no point spending exploration capital on defining reserves further out than about 10 years. We've taken that approach to the Murray Basin where we've defined a minimum 10 year mine life at Douglas.

I mentioned earlier a potential mine life of 20 plus years for the Murray Basin project. Although that is an estimate, the size of current resources and the prospectivity right across the basin certainly points to a project of that length.

corporatefile.com.au

Thank you Mark.

For previous Iluka Open Briefings visit www.corporatefile.com.au

For further information on Iluka Resources Limited visit www.iluka.com