Iluka Resources will need to find another $600m to keep rare earth refinery dream alive

Iluka Resources is discovering what plenty in the market already suspected – it’s not going to be easy to challenge China’s dominance of the rare earth industry.

Iluka Resources has joined the litany of WA resources companies hit by soaring construction costs, saying its Eneabba rare earth refinery is likely to cost up to $1.8bn, up to 50 per cent beyond its initial cost estimates.

Iluka joined the race to create a non-Chinese source of rare earth oxides in 2022, courtesy of a commitment for a $1.25bn loan to back the refinery from the Morrison government.

At the time Iluka initially said the loan would cover the costs of building the refinery, including contingency costs.

But rising wages, tight supply chains and broader inflation pressures across the economy have pushed up construction costs of major infrastructure projects across Australia, as Iluka worked through the numbers on a front-end-engineering and design study on the refinery, which the company had promised would be completed by the end of 2023.

Analysts had been tipping likely costs of $1.3bn to $1.6bn, based on blowouts at other major resources projects.

On Friday the mineral sands major pushed back the delivery of its FEED study, telling shareholders it would deliver a “project update” by the end of March.

The specialised nature of the refinery is also likely to be pushing up engineering and construction costs, given the only other major rare earth refiner outside of China is the Lynas facility in Malaysia, which was built more than a decade ago.

But indicative costs published by Iluka still suggest the company is looking at a big price escalation, with the company saying it was likely to cost up to 20 per cent above consensus estimates of $1.5bn – putting its likely cost around $1.8bn.

The bulk of the funding for the refinery was to come from the federal government’s critical minerals fund in the form of a cheap loan. Iluka has previously said that the federal government facility was “approved” and “committed” as part of a strategic partnership over the refinery.

Final costs will not likely be available for several months, given Iluka traditionally delivers its market and project updates after its annual financial report in February.

The company has previously indicated that the original loan agreement is silent on the issue of additional funding needs, and it is not clear whether Iluka will need to find additional funding from its own sources to cover the costs of any blowouts or whether the Albanese government – or allied governments such as that of US President Joe Biden – might authorise additional funding lines to ensure its construction.

The blowout comes amid tough markets for Iluka’s traditional mineral sands products, however.

Former Iluka subsidiary Sierra Rutile warned this week it had no contracted sales of its rutile products for the first quarter of 2024, as inflation and rising interest rates hit household budgets across the globe.

Mineral sands products are used in paint pigments, and in tiles and other ceramic products, and pricing is often heavily reliant on the health of housing construction and home renovations.

Iluka is one of the biggest mineral sands companies in the world, and has often been seen as a proxy for spending patterns in the middle classes in Europe, the US and other developed countries.

The company warned in October it faces slowing demand for its products, with analysts expecting a slow second half to the year.

Iluka finished September with net cash of $372m.

Iluka shares closed down 3.4 per cent at $6.57.