ILUKA RESOURCES LIMITED — Interim / Quarterly Report 2005

Aug 17, 2005

Notice to the Australian Stock Exchange

18 August 2005

ILUKA ACHIEVES RECORD HALF YEAR NET PROFIT

Iluka Resources Limited today announced a record net profit result of A\$79.3 million for the first half of 2005. This represents a A\$42 million (113%) ncrease compared with the 2004 first half profit result of A\$37.3 million (see attached chart and explanatory note which outlines the year-on-year significant movements in net profit after tax and minority interests)*. Return on equity (annualised) was 17.6%.

Directors have declared an interim dividend of 10 cents per share, franked to 5 cents (compared with 10 cents per share last year, franked to 8.7 cents) payable on 30 September 2005 to all shareholders registered at 16 September 2005.

Iluka's Managing Director, Mike Folwell said "the record profit result was underpinned by a strong production performance, increased demand for Iluka's products and higher overall US dollar product prices in particular, significantly higher zircon and rutile prices."

"The result also reflects a larger earnings contribution from Iluka's diversified assets. which include a royalty entitlement from BHP Billiton's Mining Area C (MAC) iron ore operation in Western Australia and coal interests in New South Wales" said Mr Folwell.

"These factors, together with the proceeds from property sales, more than offset the negative impacts of declining grades at the Eneabba operations, the appreciation of the Australian dollar and a lower contribution from currency hedging, compared with the first half of 2004" he added.

Mr Folwell said "the Company made good progress in other key areas during the first half of 2005. Achievements included further performance improvements in the areas of environment, health and safety, operational efficiency and cost management. Two new mining and mineral concentrating operations in Western Australia were also completed during the period."

"The one disappointing aspect of the first half of 2005 was the slower than expected progress with construction of key components of the Douglas project in the Murray Basin" he added (for further information see separate ASX release dated 18 August 2005 titled "Douglas Project Update").

* Note

²⁰⁰⁵ represents the first period of reporting under the Australian equivalents of International Financial Reporting Standards (AIFRS). The 2004 comparatives are also AIFRS compliant.

2005 First Half Financial Performance

The Company's financial performance is summarised as follows:

• revenue increased by A\$67.0 million to A\$464.3 million. This includes mineral sands sales revenue of A\$428 million (up A\$52.3 million), coal revenue of A\$18.6 million (up A\$1.7 million) and MAC iron ore income of A\$16.2 million (up A\$13.2 $m$ illion $)$ :
• income tax expenses increased by A\$8.2 million to A\$24.8 million (mainly as a result of a higher level of underlying profitability):
• borrowing costs decreased by A\$11.9 million to A\$17.4 million (mainly due to $\bullet$ . 2004 losses on the revaluation of US denominated borrowings and higher capitalisation of interest costs in respect of the Murray Basin project);
• operating cash flow remained strong despite a decrease of A\$21.6 million to $\bullet$ A\$121.9 million (the decrease was mainly a result of the large volume of product sales in late 2003 for which payment was received in early 2004);
• capital expenditure increased by A\$83.7 million to A\$172.8 million (principally the $\bullet$ Murray Basin Douglas project):
• net debt increased by A\$88.1 million to A\$492.5 million (mainly as a result of $\bullet$ . increased in capital expenditure);
• gearing (expressed as net debt divided by net debt plus equity) was 33.8%; $\bullet$
• earnings per share increased by 18.1 cents to 34.1 cents; and $\bullet$
• return on equity (annualised) increased from 9.7% to 17.6%. $\bullet$

2005 Full Year Outlook

Mr Folwell said "the sales outlook for the balance of 2005 is very positive as Iluka remains fully sold for all products and zircon prices have increased by around US\$50 per tonne at the beginning of July".

"However, net profit after tax (NPAT) in the second half is expected to be lower than the first half. The key factors impacting NPAT in the second half include increased costs from mining substantially lower-grade material at Eneabba and a smaller contribution from Mining Area C" he added.

"The Company expects to achieve a 2005 full year NPAT of between A\$130 and A\$140 million, assuming an average spot exchange rate of 77 cents for the year. This includes the potential for A\$10 to A\$20 million NPAT from asset sales in the second half of 2005" Mr Folwell said.

Investment Community & Media contact: Geoff Wedawood Mobile: 0409 997 256

Attachment

June 2005 Net Profit after Tax & MIs versus June 2004 (ASM)

Explanatory Notes

$\mathbf{1}$ . Selling Prices (+ve \$29.7 million)

Iluka achieved US dollar price increases across the majority of its products compared with the previous corresponding period. In particular, zircon and rutile pricing improved significantly.

$2.$ 2004 Loss on Revaluation of US\$ Borrowings (+ve \$12.8 million)

The US dollar denominated borrowings (US\$100 million) were "swapped" back to Australian dollars in August 2004. As a result the revaluation losses recorded in the six months to June 2004, (\$12.8 million tax adjusted) have not recurred in 2005.

$\overline{\mathbf{3}}$ . 2004 Southwest Transition (+ye \$9.5 million)

In the first half of 2004, the Capel operations were impacted by a period of high cost remnant mining at the Yoganup Extended ore body prior to transitioning into the Yoganup West ore body. The improved grade encountered in the first half of 2005 significantly improved both output and unit costs.

$4.$ Mining Area C (+ve \$9.2 million)

Iluka holds an interest in the "Mining Area C" iron ore operation managed by BHP Billiton. Iluka's interest includes a royalty entitlement to 1.25% of FOB sales as well as an entitlement to "capacity payments" which accrue as production throughput exceeds predetermined thresholds. In the first half of 2005, Iluka booked \$16.0 million of pre-tax contribution versus \$2.8 million in 2004. This half on half variance of \$13.2 million equates to \$9.2 million after tax.

5. Asset Sales (+ve \$5.3 million)

The contribution of asset sales in first half 2005 was higher compared with the first half of 2004. This was primarily due to the sale of the Snapper Deposit (Murray Basin) in May 2005 for \$3.9 million and also the sale of property at Whitby (South West Western Australia) in June 2005 for \$2.7 million. The profits on both these transactions were largely sheltered by carried forward CGT losses.

6. Coal Interests (+ve \$5.2 million)

Iluka's coal interests contributed significantly more to net profit in the first half of 2005 compared with the first half of 2004. The key drivers were the receipt in 2005 of \$3.8 million from the NSW Coal Compensation Board in relation to compensation for mining leases compulsorily resumed in the 1980's. In addition, the Narama Joint venture (operated by JV partner Xstrata) substantially improved its performance in the first half of 2005 based on accelerated volume off-take by Macquarie Generation and by operational and coal quality improvements.

$\overline{z}$ . Hedge Profits (-ve \$13.8 million)

Iluka's hedgebook delivered a \$30.4 million pre tax contribution for the first half of 2005 compared with \$49.9 million for the first half of 2004. After the impact of tax and minority interests this difference represents \$13.8 million. The key driver of reduced hedge profit was the lower volume of hedging utilised in the first half of 2005. This lower volume reflects the change of approach in 2005 to quarterly designation of hedge contracts. This approach effectively spreads the hedge cover across the whole year in contrast to the 2004 approach whereby virtually all hedging was utilised in the first half.

8. FX on Australian Revenue (-ve \$5.8 million)

The sales weighted average A\$:US\$ exchange rate applying to Iluka's Australian based US\$ revenues for the first half of 2005 was 0.773 versus 0.740 for the first half of 2004. The stronger Australian dollar reduced the translated value of Australian sourced, US denominated sales by A\$8.8 million on a pre-hedge basis. After tax and minority interests this equates to a \$5.8 million negative impact on NPAT for the first half of 2005 compared with the first half of 2004.

9. Other (-ve \$10.1 million)

Other impacts of negative \$10.1 million primarily reflect the net impact of grade decline less the offsetting impact of Iluka's business improvement program. Grade decline has been most notable at the Eneabba operations in WA. Eneabba has been subject to some 40 years of mining and average grades reduced significantly between first half 2004 and first half 2005. Iluka's group wide business improvement program is targeted at preserving profitability in the face of grade decline by aggressively pursuing cost, throughput and separation efficiencies throughout all facets of Iluka's operations. In addition, Iluka actively engages in local "brownfield" exploration aimed at identifying new areas of superior grade to supplement the existing reserve base.