Iluka exploits ANU's 'ethical' assault
Summary: Despite recent bad publicity, green shoots are evident for Iluka Resources. The fundamentals for its key products are improving after a period of tough market conditions. Production cutbacks are helping to reduce stockpiles and acquisition talks have resumed. |
Key take-out: As mothballed mines and processing facilities for titanium dioxide and zircon are re-opened, a steady recovery is likely if miners stay disciplined. If too much material hits the market too quickly, prices will stay depressed. |
Key beneficiaries: General investors. Category: Commodities. |
After two years of depressed prices and mine closures the last thing Australia's biggest producer of titanium and zircon needed was to be named and shamed by consultants advising the Australian National University on environmentally appropriate investments.
Unfortunately for Iluka Resources that's what it got two weeks ago. But the reaction from the company's management to the ANU mini-crisis was so different to other “named” miners that it re-kindled interest in the company and the wider mineral sands sector (for more on the ANU decision, see Ethical funds' surprise wins).
Rather than complain or threaten legal retaliation, management at low-key Iluka quietly met with the advisory firm behind the report commissioned by ANU's investment committee to better understand what they were looking for – and then treated it like a storm in a teacup.
Once Iluka understood the process used by ANU's consultants to assess mining company investments, management returned to focus on something far more interesting, the improving fundamentals for titanium dioxide, which is mainly used in making paint, and zircon, which is mainly used in making bathroom and kitchen ceramics.
Iluka's external affairs manager, Robert Porter, said that rather than get into a brawl about the ANU report it seemed best to engage and see what was needed to change the assessment.
Having done that, it was soon realised that the ANU consultants' criteria would be hard for most small companies to meet.
“They have criteria such as whether we have a senior manager dedicated to carbon dioxide emissions, or a senior manager dedicated for water management,” Dr Porter said. “We're not big enough to have senior posts like that.”
Despite playing down the company's size, Iluka is not a small mining company. It ranks among the top 100 stocks on the ASX with a market capitalisation of $3.1 billion (which is $200 million more than Qantas). However, it has a small management team and has been battling tough market conditions.
The low-key nature of the company also reflects past environmental battles over mining mineral sands deposits close to the coast which has meant that most publicity is bad publicity.
The industry-wide policy of staying out of the news has coincided with the rise of other bulk commodity exports from Australia, especially coal and iron ore, but if recent market signals are a guide those positions could change.
Essentially, prices for titanium and zircon fell long before the fall of iron ore and coal, although the cause of the industry-wide collapse is identical – over-production and slowing demand.
Being first into a downturn means it is possible to be first out if demand is strong enough and stockpiles of excess material are being absorbed.
Iluka and other “sands” miners have recently reported that production cutbacks and steady demand from the paint and ceramics industries have had the desired effect on stockpiles of surplus material.
Rio Tinto, which has a big titanium and zircon division, reported in June that inventories of titanium had “normalised” to between 45 and 60 days of consumption after blowing out to double the usual level.
Base Resources, another ASX-listed sands producer with a mine in Kenya, said in its September quarter report that inventories continued to be “worked down”, though they were likely to stay at elevated levels for the remainder of 2014.
No-one in the sands industry is talking about a significant recovery in prices yet, but the signs of early preparation for a change can be seen in two recent developments at Iluka, one operational and one corporate.
At an operational level Iluka has taken the first steps to re-opening a mothballed mine in WA.
At a corporate level talks have resumed which could lead to the acquisition of a London-listed titanium-producing rival which is being crushed by the weak market and high debts.
Until recently survival was the keyword in the sands industry with mergers and acquisitions off the agenda.
That is changing with Iluka and Kenmare Resources talking about a possible share-swap merger which would see Iluka acquire control of the big Moma sands mine in the east African country of Mozambique.
At the operational level, Iluka said in its September quarter report filed last week that its mines in WA remained “idled” as do kilns used to produce a type of titanium dioxide called synthetic rutile, a material derived from upgrading the industry's primary ore, ilmenite.
Iluka said in the quarterly report that: “activities are underway to prepare for a possible re-start of mining at Tutunup South in January to produce and stockpile ilmenite in advance of a kiln restart”.
What's happening in the titanium dioxide and zircon markets is precisely what's supposed to happen when producers of any commodity behave rationally.
Excess investment in new mines during the China-driven boom led to a sharp build-up in stockpiles. That surplus material is now being drawn down with stockpiles effectively back to their long-term average.
The key to the next step is how quickly mothballed mines and ore-processing facilities are restarted.
If too much material hits the market too quickly depressed prices will remain, but if the miners remain disciplined a steady recovery is likely.
Corporate and operational events at Iluka recently are the first positive signs for several years, and even the perceived negative of being named and shamed by ANU has been handled in a positive way.
Despite the ANU receiving a report recommending divestment of its Iluka shares the mining company is yet to notice any change in the university's holding.