20 16 ILUKA REVIEW CREATING AND DELIVERING SHAREHOLDER VALUE 2016 ATTRIBUTES Disappointing financial performance ■ Mineral sands revenues declined by 11.4 per cent to $726.3 million ■ Modest free cash flow of $47.3 million ■ Total reported loss of $224.0 million after tax including non-recurring ■ Net debt of $506.3 million and a gearing ratio (net debt/net adjustments of $182.8 million after tax in relation to impairment debt + equity) of 31.5 per cent, associated with Sierra Rutile and rehabilitation provisions acquisition (equity and transaction costs of $389.5 million and ■ Lower Mining Area C royalty earnings of $47.1 million assumption of Sierra Rutile net debt of $79.7 million) (2015: $61.2 million), due to 2015 agreement modification one-off ■ In the context of the company’s potential investment opportunities, receipt of $10.4 million and no annual capacity payments in 2016 including Cataby and the Sierra Rutile expansion options, the directors have determined that no final dividend will be declared for 2016 Continuation of low-cycle market conditions in 2016 ■ Total zircon/rutile/synthetic rutile sales volumes increased by ■ Weighted average received zircon price declined 19.6 per cent to 7.2 per cent to 697.7 thousand tonnes (kt) (2015: 651.0 kt) US$773/tonne, reflecting both lower received prices and mix factors ■ Average revenue per tonne of Z/R/SR sold declined 12.1 per cent ■ Weighted average received rutile price was stable at US$716/tonne to $999/tonne (2015: $1,136/tonne) Signs of market recovery evident ■ Downstream chloride pigment market conditions most favourable ■ Zircon market inventory position of competitors believed to since 2012 – positive demand and pricing dynamics for high grade have reduced materially – Iluka partially achieved announced chloride feedstocks (including rutile and synthetic rutile) US$60/tonne price increase in third quarter 2016; US$50/tonne ■ Iluka contracted rutile volumes in first half 2017 with prices up to price increase announced from 15 February 2017 4 per cent higher than 2016 weighted average received prices Quality projects ■ Cataby project – major potential source of ilmenite to sustain synthetic ■ Pre-feasibility study for large Sri Lankan sulphate ilmenite deposit rutile production from synthetic rutile kiln 2 for over eight years underway ■ Sierra Rutile acquisition provides major, long life rutile resource ■ Iluka has a number of high quality opportunities and has reviewed its base with three expansion opportunities, subject to evaluation Ore Reserves in context of Sierra Rutile acquisition and 10 year mine plan ■ Balranald development in the Murray Basin – continued, ■ Iluka announced an inaugural Sierra Rutile rutile Ore Reserve of phased evaluation of rutile-rich deposit, with associated zircon 3.9 million tonnes and ilmenite production Sustainable cost base ■ Sustainable business review commenced to ensure suitable cost ■ Reduction in expenditures in a number of areas including structure and focus for efficient growth exploration and resource development, marketing and procurement ■ Approximately 90 roles redundant out of 440 functional support ■ Production adjustments contributed to 10.2 per cent lower unit positions cost of goods sold to $700/tonne of zircon/rutile/synthetic rule (2015: $780/tonne) Sustainability ■ Lost Time Injury Frequency Rate decreased from 0.9 to 0.4 ■ F ourth consecutive year of reducing “open” area via land ■ Total Recordable Injury Frequency Rate decreased from 6.7 to 4.4 rehabilitation activities ■ D efined product stewardship and commenced product risk ■ Voluntary Tax Transparency Report published, which supports the principles of the Extractive Industries Transparency Initiative assessments IILLUUKKAA RREEVVIIEEWW 22001166 CONTENTS Business Review From the Chairman 2 From the Managing Director 4 Financial summary 6 Production and sales summary 8 Ore Reserves and Mineral Resources 12 Mineral sands markets 14 Operational and production overview 16 Sierra Rutile 18 Mineral sands projects 20 Metalysis 22 Exploration 23 Sustainability 24 Physical, Financial and Corporate Information Five year physical and financial summary 26 Operations summary 28 Ore Reserves and Mineral Resources statement 30 Board of Directors and Executive 38 Shareholder and investor information 40 Corporate information 43 Iluka’s full financials are available in its 2016 Annual Report. Currency is in Australian dollars unless otherwise indicated. Production and financial information is inclusive of Sierra Rutile as of 7 December 2016. 1 FROM THE CHAIRMAN The safety of our people and the integrity of Iluka’s operations, including the newly acquired Sierra Rutile operation, remain the priority focus of the company from Board level to mine face ■ a s a consequence of the Managing Director’s business review and priorities, $201 million pre-tax of non-cash impairments in relation to idled property, plant and equipment, project development costs and evaluation expenditure; ■ a n increase in rehabilitation provisions of $45 million (pre-tax), mainly related to the now permanently closed United States’ operations and projects; ■ a review of Ore Reserves in the context of the acquisition of the Sierra Rutile operation as well as the company’s current 10 year mine plan. This review led to a reclassification of approximately 27 per cent of Iluka’s (non-Sierra Rutile) Reserves to Mineral Resources; and ■ the continued commitment to the highest standards of business sustainability, with a focus in the areas of health, personal and process safety, community engagement, environmental performance, land management and remediation. Financial performance Iluka’s full year financial result was a loss of $224 million after tax. The loss included non-recurring items of $244 million pre-tax or $183 million after tax, as detailed on Dear Shareholders, page 6. The underlying result before adjustments was also This year’s Iluka Review sets out a number of matters which influenced by lower mineral sands revenues, mainly attributable will be of interest to you. These include: to lower received product prices and a lower contribution from the Mining Area C iron ore royalty. Iluka generated modest ■ the impact of continued subdued zircon market conditions free cash flow of $47 million. After the assumption of Sierra Rutile on the financial performance of the business, as reflected by net debt of $80 million, Iluka ended the year with net debt of lower zircon sales and zircon prices. Your Board is cautiously $506 million. optimistic that market conditions for the company’s products may be beginning to improve after an extended period of In the context of the company’s potential investment opportunities, bottom-of-cycle market conditions; including Cataby and the Sierra Rutile expansion opportunities, the directors have determined no final dividend will be declared ■ the appointment in September 2016 of Tom O’Leary as Iluka’s for 2016. Iluka’s interim dividend was 3.0 cents per share, fully new Managing Director and CEO; franked. On a cumulative basis since 2010, the payout ratio has been 66 per cent. ■ consistent with previously announced strategy, securing of a new long-life, high quality reserve and resource base for the company, through the acquisition of Sierra Rutile Limited in December 2016; ■ t he review by the new Managing Director of the company’s current project set, exploration activities and associated resourcing levels and cost base resulting in a refocus on fewer, high quality, near-term value accretive opportunities, resulting in an approximate $20 million reduction in non-production cash costs expected in 2017, relative to 2016 on a like-for-like basis; 2 ILUKA REVIEW 2016 New Managing Director Business sustainability Tom O’Leary commenced as Iluka’s Chief Executive Officer on The safety of our people and the integrity of Iluka’s operations, 5 September 2016 and was invited to join the Board as Managing including the newly acquired Sierra Rutile operation, remain Director in October 2016. Tom succeeded David Robb, who the priority focus of the company from Board level to mine served as Managing Director from October 2006 until face. In 2015 Iluka committed to progressively aligning its September 2016. Tom has a depth of business development, sustainability practices with the International Council on Mining major transactional and capital deployment experience and and Metals (ICMM) Framework for Sustainable Development. has also led complex operating businesses.Importantly, Tom This is particularly relevant to Iluka’s increasing international has committed to providing continuity in terms of the capital activities. Iluka has separated the sustainability content from disciplines and capital allocation decisions that have been a the 2016 Iluka Review into a more detailed sustainability report distinguishing feature of Iluka. to be released in April. This report will demonstrate Iluka’s progressive alignment with ICMM and be in accordance with the Tom has pursued the completion of the Sierra Rutile acquisition Global Reporting Initiative public reporting guidelines. with professionalism and he is focussed on ensuring that the integration and operational performance objectives are Board and governance delivered. Tom has taken early and valuable steps to focus On Board and governance matters, the company’s governance the business and reduce costs, to review asset configurations and risk management practices have been reviewed and, where and operating regimes for the company, and has evaluated the necessary, enhanced. Several areas, such as anti-bribery and timing and nature of the organic project options the company has corruption, have been enhanced through an external professional available to it. review. Sierra Rutile acquisition Board evolution continued during the year with the retirement Iluka acquired Sierra Rutile Limited in 2016. Sierra Rutile is a in December 2016 of Gavin Rezos, who had served as a large, long life rutile deposit and provides Iluka with a significant non-executive director since 2006 and since 2014 as an addition to its strong position in high grade titanium dioxide Iluka-appointed director to the Board of Metalysis Ltd, the products. UK based titanium technology company in which Iluka has a significant shareholding. On behalf of the directors, I’d like to Your directors are cognisant that acquiring an operating mine in acknowledge and thank Gavin for his contributions to Board West Africa represents a change in the company’s risk profile. decision-making and effectiveness over his time on the Board. During due diligence, careful attention was given to the risks identified with such an acquisition and to the risk mitigation Finally, on behalf of my fellow directors, I would like to plans and arrangements that were required to ensure an acknowledge the valuable contribution David Robb made as effective integration process, involving senior Iluka management Managing Director of Iluka in nearly a decade of service. and drawing on the skilled and experienced local Sierra Rutile In what was yet another tough year for the company, the workforce. Efforts continue to focus on integration, safety and sustained commitment and contribution of Iluka’s people is both operational improvements and on developing dependable and acknowledged and greatly appreciated. And by no means least, enduring relationships with both the local community, as well as I would like to thank our shareholders for their continuing with government. interest and support for the business. Greg Martin Chairman 3 FROM THE MANAGING DIRECTOR Iluka has the people in place to responsibly develop its assets and to optimise outcomes These factors were all key components of the context in which I joined Iluka. The finalisation of the Sierra Rutile acquisition consumed much of my time initially, but in December 2016, on completion of the acquisition, I noted the company’s priorities as follows: ■ the commencement of an effective integration process for Sierra Rutile; ■ t he conclusion of the five year corporate planning and 2017 budgetary process; ■ a detailed review of the existing production portfolio and projects, including assets, configurations and operating regimes; ■ an assessment of the feasibility, attraction and timing of the expansion projects available to the company; and ■ a review of all non-production costs of the business to ensure a sustainable cost structure. By way of update on progress on these priorities: ■ t he Iluka team to oversee the Sierra Rutile integration and Dear Shareholders, assume management of the operation has been in place since December and is making steady progress. An initial focus has I joined Iluka on 5 September 2016 and I am conscious that I been on recognising and respecting the cultural norms and have assumed this role at a time when market conditions are traditions of Sierra Leone and the people of the Sierra Rutile generally regarded as having been unfavourable for an extended operation. Operational and safety improvement measures are period for the company’s main products. being advanced; feasibility studies are planned for production I am also aware that returns and cash flows have not met expansion options, and the output from Sierra Rutile is now a expectations. While an element of financial performance for part of Iluka’s overall product suite; any company in the resources sector reflects the cyclical ■ t he five year planning profile for the company, as well as 2017 characteristics of the industry, since joining Iluka, I have budgetary settings, have been completed; emphasised to employees, the Board, customers and shareholders my belief that we need to be structured and ■ the Chairman has touched on a number of outcomes of resourced such that we’re sustainable through the cycle, and the review including asset impairments, the reserves that Iluka’s first half result did not demonstrate that resilience. reclassification and the increase to the rehabilitation provision, With the idling of the Jacinth-Ambrosia mine last year, the and these were described in detail in the ASX release of production base has been constrained in light of market 30 January 2017. The Ore Reserves and Mineral Resources conditions; and non-production cash costs have not been associated with Sierra Rutile have now been added to Iluka’s similarly constrained. statement and the updated statement can be viewed later in this Iluka Review; and Prior to the acquisition of Sierra Rutile Limited in December 2016, Iluka’s reserves base had not been replenished despite a ■ a s reported in the 31 January release, in December 2016 we consistent exploration effort. made the difficult decision to make approximately 90 roles redundant, largely within the support functions of Iluka, and a number of exploration and other activities have been ceased or the expenditure associated with them has been reduced. 4 ILUKA REVIEW 2016 Internal portfolio opportunities being progressed in 2017 Notwithstanding challenging financial conditions, Iluka has include: the Cataby project, Western Australia, which is at an maintained its commitment to rehabilitation activities, with execute-ready stage; feasibility studies for the expansion of the 803 hectares of land subject to mining rehabilitated in 2016. Sierra Rutile operations; the continuing evaluation, on a phased This has meant the reduction in the total open area for the basis, of the Balranald mineral sands deposit; and progressing fourth consecutive year. A key achievement for 2016 was the the evaluation of the Sri Lankan deposits. Department of Mines and Petroleum in Western Australia formally releasing Iluka’s environmental liability on two mining The company’s sustainability performance is of core importance leases in the South West of the state. This was a significant to me, as well as to Iluka’s management team and the Board. milestone. All Iluka’s rehabilitation and mine closure obligations I realise this responsibility and challenges have increased with for this area have been met and the land has been returned to the Sierra Rutile operation and with it over 1,600 additional productive farming land use. employees in the wider Iluka group. In this regard, the company is committing capital to safety infrastructure arrangements on Iluka has the people in place to responsibly develop its assets site in Sierra Leone and has commenced the implementation of and to optimise outcomes on a number of fronts: operational safety awareness programs. and financial performance; high standards of health, safety and environmental performance; and in terms of governance and In 2016 Iluka had 12 recordable injuries compared to workplace culture and diversity. 22 recordable injuries in 2015, including one lost time injury compared to three lost time injuries in 2015. I thank employees for their commitment during a period of This improvement is reflected in the total recordable change and challenge and I look forward to leading the company’s injury frequency rate reducing from 6.7 to 4.4 and the efforts to create and deliver value for shareholders. lost time injury frequency rate reducing from 0.9 to 0.4. During the period commencing 7 December when Iluka took control of Sierra Rutile, through to 31 December 2016, Tom O’Leary there was one lost time injury recorded at Sierra Rutile. Managing Director and Chief Executive Officer Injury reporting systems and practices at Sierra Rutile are currently being reviewed, and Iluka’s acquisition of Sierra Rutile comes with a commitment to implement a range of safety improvement measures and achieve the progressive alignment of the operation with the Iluka safety and risk mitigation frameworks. 5 FINANCIAL SUMMARY Summary financial results 2016 2015 2014 2013 2012 1. Mineral sands revenue 726.3 819.8 724.9 763.1 1,069.8 2. Underlying mineral sands 103.0 231.8 189.2 204.1 603.7 EBITDA1 EBITDA margin % 14.2 28.3 32.9 32.6 67.9 3. Mining Area C EBITDA 47.5 61.6 66.8 88.3 72.7 4. Underlying Group EBITDA1 150.5 293.4 256.0 292.4 676.4 5. Net profit (loss) after tax (224.0) 53.5 (62.5) 18.5 363.2 6. Operating cash flow 137.3 222.2 254.8 124.0 368.7 Free cash flow 47.3 155.0 196.3 (27.5) 81.2 7. Net (debt) cash (506.3) 6.0 (59.0) (206.6) (95.9) Gearing % 31.5 n.a 3.9 11.8 5.8 8. Return on equity (17.1) 3.8 (4.1) 1.2 23.2 Return on capital (18.3) 6.8 (2.0) 2.2 31.3 1 Underlying Group EBITDA excludes non-recurring adjustments including impairments, Sierra Rutile Limited transaction costs, changes to rehabilitation provisions for closed sites. Underlying EBITDA also excludes Iluka’s share of Metalysis Ltd’s losses, which are non-cash in nature. 1. Mineral sands revenue The impairments relate to the following assets: Mineral sands revenue declined by 11.4 per cent to $726.3 million. ■ Zircon/rutile/synthetic rutile (Z/R/SR) revenue was 5.8 per cent idle and surplus equipment in the Murray Basin of $156.0 million; lower at $696.8 million, primarily reflecting lower zircon prices, ■ $20.4 million of capitalised costs associated with feasibility work for with sales volumes also slightly lower. Rutile and synthetic rutile the previous conventional development approach for the Balranald sales volumes increased in 2016 and prices were relatively deposit in New South Wales; and stable. Ilmenite and by-product revenue declined 63.2 per cent to $29.5 million as Iluka increased its internal use of mined ilmenite for ■ $ 24.6 million related to exploration and evaluation assets previously synthetic rutile production. capitalised and mine reserves in the Perth and Murray Basins. 2. Underlying mineral sands EBITDA1 Rehabilitation provision increase Underlying mineral sands EBITDA declined 55.5 per cent to Provisioning for rehabilitation and mine closure activities increased by $103.0 million. This result reflects the combination of lower zircon $44.8 million to $528.1 million. For Iluka’s discontinued United States’ revenue and increased costs across several business areas including operations, now undergoing rehabilitation, the provision has been restructure and idle capacity charges (relating to operational settings at increased by US$30.2 million or $40.9 million. Of the $44.8 million Jacinth-Ambrosia and the United States) and resource development costs increase, $42.6 million relates to closed sites, which is charged against (associated with Balranald development evaluation). Cash production the profit and loss statement, and $2.2 million relates to open sites, costs were lower in 2016, reflecting lower operational settings, in line which is reflected on the balance sheet. with market conditions. An income tax benefit of $53.7 million on a pre-tax loss of $277.7 million 3. Mining Area C EBITDA reflects no tax benefit in respect of United States operating loss, nor for Royalty income from Mining Area C declined 22.9 per cent to international exploration. $47.5 million. 2015 royalty income included a one-off payment of $10.4 million associated with modification of the royalty agreement with 6. Cash flow BHP Billiton. In 2015 capacity payments of $3.0 million were received; nil Operating cash flow of $137.3 million and full year free cash flow of in 2016. Net royalty income in 2016, excluding the one-off payment, was $47.3 million. slightly lower due to lower iron ore sales volumes. Lower 2016 operating cash flow reflects lower mineral sands EBITDA. 4. Underlying Group EBITDA1 Higher capital expenditure in 2016, including $19.0 million for increased Underlying Group EBITDA decreased 48.7 per cent to $150.5 million, equity in Metalysis Ltd (Iluka’s equity stake is now 28.1 per cent), reflecting factors referred to above. contributed to reduced free cash flow. 5. Net loss after tax Changes to cash flow over recent years also reflect the utilisation of The 2016 net loss includes the impact of impairment charges and trade purchase facilities, entered into late 2014, affecting the timing of increased rehabilitation provisions. These are detailed as follows. cash collections from customers. Non-recurring items - asset impairments 7. Net (debt) cash Non-cash impairments of $201.0 million pre-tax ($140.7 million after-tax). Net debt increased to $506.3 million following the acquisition of Sierra Rutile in December 2016. Iluka assumed Sierra Rutile’s net debt of $79.7 million. Total acquisition and transaction costs were $389.5 million. 8. Return on capital and return on equity Return on capital was (18.3) per cent and return on shareholders’ equity was (17.1) per cent, reflecting a reported loss inclusive of non-recurring items. 6 ILUKA REVIEW 2016 Balance sheet and dividend framework As at 31 December 2016 Iluka had total facilities of DEBT, GEARING AND DEBT FACILITIES PROFILE $1,015.4 million. Iluka recorded a net debt of $506.3 million. $m Gearing % Iluka has a Multi Optional Facility Agreement (MOFA) which 1,000 100 comprises a series of five year unsecured bilateral revolving 1,010 1,015 credit facilities with several domestic and foreign institutions. 800 80 867 874 Drawings under the MOFA at 31 December 2016 were 832 $611.2 million (2015: $54.9 million). Undrawn MOFA facilities 600 60 at 31 December 2016 were $404.2 million (2015: $955.0 million). 400 40 Of the above interest-bearing liabilities, $611.2 million is 31.5 subject to an effective weighted average floating interest 200 20 rate of 2.7 per cent (2015: interest-bearing liabilities of 11.8 $54.9 million at 2.0 per cent). 0 5.8 3.9 6.0 N.A. 0 (95.9) (59.0) Note 18 of Iluka’s Annual Report provides details of the maturity -200 (206.6) profile and interest rate exposure. -400 Iluka assumed Sierra Rutile net debt of $79.7 million in 2016, (506.3) -600 following the acquisition. 2012 2013 2014 2015 2016 Net (debt) cash Total facilities Gearing (%) Dividend framework and approach Iluka’s dividend framework is to pay a minimum of 40 per cent of free cash flow, after investing and not required for balance sheet activity. The company also seeks to distribute the maximum franking credits practicable. Directors have determined no final dividend will be declared for 2016. Iluka’s interim dividend was 3.0 cents per share, fully franked. The dividend payment in 2016 represents 27 per cent of free cash flow generated. This is lower than the Iluka framework of a minimum of 40 per cent reflecting the company’s potential investment opportunities, including Cataby and the Sierra Rutile expansion options. From the end of 2010 and inclusive of the 2016 dividend, Iluka has paid out a cumulative 66 per cent of free cash flow. 2016 2015 Payout ratio % free cash flow 27 68 Cumulative dividend payout ratio (from 2010)% 66 68 7 PRODUCTION AND SALES SUMMARY Production volumes ZIRCON RUTILE AND ILMENITE* SYNTHETIC RUTILE k/tonne k/tonne k/tonne 388.6 674.1 343.2 357.6 347.1 248.3 584.5 285.1 210.9 466.1 164.9 365.4 329.4 220.3 59.0 177.2 136.5 127.0 117.6 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 * Includes chloride ilmenite and sulphate Rutile ilmenite for external sales and for Synthetic rutile internal synthetic rutile production Total zircon/rutile/synthetic rutile production for the 2016 year For the 12 months to 31 December, Iluka produced was 676 thousand tonnes (2015: 690 thousand tonnes) and in 395 thousand tonnes of heavy mineral concentrate and line with Iluka’s guidance. Lower production of zircon reflects the processed 967 thousand tonnes. This reflects the company’s company’s intent to draw down finished goods and concentrate approach to draw-down concentrate held in inventory. inventories over the year. This approach was also an attempt to At Jacinth-Ambrosia in South Australia, 144 thousand tonnes ensure Iluka did not contribute to typical year-end stock builds, of heavy mineral concentrate was produced before mining which can suppress demand recovery patterns at the beginning and concentrating was idled in April 2016, with 470 thousand of the following year. tonnes processed. In the Murray Basin, given the completion of mining at Woornack, Rownack and Pirro in 2015, there was no Rutile production was 118 thousand tonnes (including Sierra concentrate production and 166 thousand tonnes processed into Rutile volumes), or 13.8 per cent lower year-on-year, in the final product. context of the completion of mining activities in the Murray Basin – the company’s prime source of rutile – following During the December quarter, the only active mining operations the cessation of mining at the Woornack, Rownack and Pirro were conducted in Australia at Tutunup South and Sierra Rutile. deposits in Victoria in early 2015. Synthetic rutile production, at Iluka suspended production from its Narngulu mineral separation 211 thousand tonnes, was 27.9 per cent higher than the previous plant in October, while the Hamilton mineral separation plant was year, reflecting a full year of production from synthetic rutile idled for approximately two weeks over the Christmas period. kiln 2 in the South West of Western Australia. This kiln Both plants recommenced in January 2017. recommenced production in April 2015, fed by ilmenite predominantly from the Tutunup South mine in Western Australia. 8