Iluka Another Dollar Victim

By Glenn Dyer | More Articles by Glenn Dyer

Mineral sands miner Iluka Resources has revealed a sharp 50% fall in sales revenue for the year to date blaming the global financial crisis for a significant drop in demand and the impact of the higher Australian dollar.

The company, which is the world’s largest zircon producer, yesterday reported sales revenue after currency hedging of $300.4 million for the year to September, down from $611.4 million at the previous corresponding period.

But there are signs it could see an improvement in the current quarter.

Already, Iluka said, the September quarter saw a 30% rise in revenue.

"With the recovery in sales in the quarter, overall sales on a year-to-date basis are treading in line with the company’s expectations," Iluka said in a statement.

 "Iluka sales for 2009 are weighted to the second half and majority weighted to the fourth quarter, especially for higher value products of zircon and rutile."

Iluka said its mineral sands sales revenue (before currency hedging) for the 9 months to September 30 was $348.7 million, down sharply on the same period last year, reflecting the significant adverse effect on demand for mineral sands products, particularly in the first half of 2009, associated with the global economic crisis ("GEC").

After currency hedging, sales revenue was $300.4 million. That means the impact of hedging cost the company 13% of revenue, a substantial impost.

September quarter sales revenue after hedging of $151.1 million was up 30% on the June quarter, and similar to total first half sales revenue, despite the average AUD/USD exchange rate moving from 71.2 cents in the first half to 83.2 cents in the September quarter. 

The dollar has since moved over 90 US cents this month and there’s every chance it could remain there into 2010.

The company said that "September quarter combined zircon, rutile and synthetic rutile ("SR") sales volumes of approximately 200 thousand tones were around double the level of the first six months of the year.

"Year-to-date sales of these products are lower than 2007 and 2008 levels, due to demand weakness, as well as decisions by the company to remove some lower margin production capacity (for example, the idling in late 2008 of one of the company’s four SR kilns, and a subsequent kiln in the first half of 2009, with each kiln normally producing approximately 125 thousand tones of SR per annum). 

"High-grade titanium dioxide sales are trending in line with company expectations, with the majority of these volumes underpinned by contractual arrangements for 2009.

"Zircon sales are strengthening, relative to a very low first half base; with stronger demand emerging in China (which constituted approximately one third of global demand in 2008) as inventory has been drawn down and as government stimulus measures contribute to a recovery in construction and housing activity.

"Demand in Europe and North America for zircon has also improved, from a very low first half, but remains relatively subdued.

"Zircon production overall in the September quarter declined by 20.4 per cent relative to the June quarter and year-to-date is 23.7 per cent lower than the previous corresponding period.

"The reduction in 2009 is associated mainly with curtailment of mining activity in Western Australia. The main contribution to higher zircon production, as demand recovery occurs, will be from the Jacinth-Ambrosia and Murray Basin projects. 

"Synthetic rutile production in the September quarter, compared with the June quarter, was 19.2 per cent lower, due to the idling of two of the company’s four SR kilns, although on a year-to-date basis, production was down only 4.1 per cent.

"The company has been able to meet its sales commitments, which do not represent this order of decline year-on-year, by achieving higher output from one of the two operating kilns and through the draw down of finished product inventory. Iluka is currently operating two SR kilns, with future output, including potential recommencement of one or two of the idled kilns, dependent on pricing and assessed margin outcomes, as well as availability of suitable feed. 

"Rutile production was down 11.8 per cent in the September quarter relative to the June quarter. On a year-to-date basis, rutile production was reduced by 15.2 per cent. Iuka’s current rutile production base will be supplemented by additional production from the Murray Basin Stage 2 development." 

Iluka said it has the capacity through its new production sources of Jacinth-Ambrosia and Murray Basin to increase zircon and rutile production above pre-GEC levels as demand recovers and then grows.

"The company also has expansion potential at Jacinth-Ambrosia, and latent SR capacity in Western Australia dependent on suitable limonite feed and pricing arrangements. 

"As a consequence of Iuka’s supply response to the GEC, combined sales for zircon, rutile and synthetic rutile in the September quarter exceeded production in that quarter, allowing finished goods inventory to be drawn down, in part or whole, depending on product.

"As Iluka has stated previously, based on achievement of full year sales expectations, the company expects to finish the 2009 year with minimal if any inventory of high grade titanium dioxide products.

"Zircon stocks are expected to be drawn down during the second half, with a result that the company’s zircon inventory at end

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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