Iluka Not yet realizing much from its rutile investment

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By Sam Pratt

In a latest development, the mineral sands miner, Iluka Resources, has announced an impairment charge of $290-million in the 2019 full year for the carrying value of the assets associated with its Sierra Rutile operation, in Sierra Leone.

Iluka also announced a write-down of some $115-million of deferred tax assets at Sierra Rutile, reflecting a more conservative outlook for the business following the impairment review.

Based on that, the remaining net assets at Sierra Rutile have been reduced to around $50-million, as the mine continue to perform below the acquisition investment case, and the fact that Iluka did not have a defined development approach for the Sembehun deposit,  resulting
in difficulties in ascribing any meaningful value to the asset in the impairment assessment. Iluka acquired the Sierra Rutile operation in 2016 for A$455-million, with the investment case underpinned by the proposed doubling of dry mining operations at Lanti and Gangama, and the development of the Sembehun deposit to increase rutile production capacity from 175 000 Since the acquisition, Iluka has spent approximately $75-million on capacity increases at Gangama and Lanti, and a further $75-million on sustaining capital.

Despite improving production over the second half of 2019 as the mining expansion ramped up, the overall performance of the operation has been less than the original investment case, with rutile production in the full 2019 reaching only 135 000 t. For the 2020 full year, the Sierra Rutile operation is now expected to produce some 170 000 t of rutile, and 175 000 t of total zircon and rutile, with a further 70 000 t of ilmenite also expected, at a cash cost of $125-million and a unit production cost of $715/t of zircon and rutile.

“The strategic rationale for the acquisition was that it provided Iluka access to a long-life rutile asset, in excess of 20 years, with identified production growth potential from expansion projects, which were then at feasibility stage,” said Iluka MD Tom O’Leary. “While production from Sierra Rutile has been improving over 2019 following the completion of the expansion projects at Lanti and Gangama, the acquisition has not lived up to its investment case. This is a disappointing outcome. We remain focused on continuing to improve Sierra Rutile’s existing operations, including in relation to throughput, reliability, production and cost.”

O’Leary said that for the Sembehun development, Iluka’s approach has been to revisit and broaden the project studies to determine a development option that optimizes value. “The impairment announced today does not detract from the potential we see in this world-class rutile deposit. We expect to provide an update by mid-2020,” he added.

Meanwhile, the miner also told shareholders on Tuesday that it was expecting to include a change related to the risk-free discount rate used to calculate rehabilitation provisions, due to the decline in Australian dollar bond rates, which will increase the Australia rehabilitation liability by A$60-million.

Due to the sustained declined in the bond rate to around 1.3%, from the current 3% discount rate, the value of the Australian rehabilitation provision has increased by A$60-million, comprising an A$18-million pre-tax charge to the profit and loss for closed sites in 2019, and a A$42-million increase to the balance sheet for open sites.

 

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