Iluka slashes dividend and highlights challenges in rare earth refinery’s costs

Analysts believe Iluka could face a $400m blowout on its rare earth refinery build, but the company says the final figures won’t come until late in 2023.

Iluka Resources' rare earths tailings project at Eneabba in WA.

Iluka Resources has hinted at rising costs in its plan to build a rare earth refinery in WA, as the company slashed its interim dividend after booking a 44 per cent drop in its half-year profit.

Iluka will pay a 3c-a-share dividend on Wednesday, effectively a simple pass-through of its share of distributions from ASX-listed royalty company Deterra.

The dividend came on the back of Iluka’s $203.8m half-year profit, which was down 44 per cent from the first half of 2022. This time a year ago Iluka declared a 25c-a-share interim dividend.

Iluka will not put a final cost on its rare earth refinery at Eneabba in WA until the company delivers its front-end engineering and design (FEED) study, expected by the end of the year.

Amid a wave of cost blowouts declared by other mining companies this reporting season, Iluka noted the “challenging project environment” in WA, and flagged scope changes that might also shift costs in the $1.3bn project.

“For the avoidance of doubt. We’re not looking to guide you to a higher or lower capex number,” managing director Tom O’Leary told analysts on Wednesday.

Iluka Resources managing director Tom O'Leary.

“But clearly it’s a challenging environment in Western Australia to build projects in the post-Covid period in terms of labour, supply chains and general levels of activity.

“We’ve all seen this reflected in the capital increase associated with other companies’ projects. We’re obviously alert to this environment and we’re seeing a range of outcomes in our own project at Eneabba.”

The Eneabba refinery will be largely funded by a $1.25bn loan extended by the federal government.

Iluka chief financial officer Adele Stratton told analysts the company’s agreement with the government was silent on the issue of funding for project overruns, and the company would open discussions about the matter when it had delivered the FEED study.

Barrenjoey analyst Glynn Lawcock noted that Iluka had pulled back its forecast capital spending for the rest of 2023, on delays at both Eneabba and Iluka’s Balranald mineral sands project in New South Wales.

“But Iluka did say it is pursuing value optimisation measures, as well as operational efficiency improvements, to deliver a competitive refinery at an appropriate cost,” he said in a client note on Wednesday.

“Sounds like an increase is coming. Barrenjoey’s estimate is $1.6bn versus initial cost guidance of $1bn to $1.2bn.”

While Iluka said it had achieved better pricing for its traditional mineral sands products compared with the first half of 2022, the company noted that subdued demand was having an impact on sales volumes, with revenue down 10 per cent for the period to $712m.

Iluka booked earnings before interest, tax, depreciation and amortisation from its mineral sands business of $353m, down 22 per cent, on operating cash flow of $228m – less than half of the $481m from the first half of 2022.

In response to the poor market outlook, Iluka announced on Wednesday it would idle its SR1 kiln at its Cataby operations in WA as mineral sands prices fall, pulling the synthetic rutile kiln – which only returned to the market in late 2022 – from production in October, at the same time as the SS2 kiln at the operation is due for a major maintenance campaign.

The decision is part of Iluka’s longstanding tradition of withdrawing supply from the market in times of uncertain pricing. Mr O’Leary described the decision as one that “prioritises the value of what we produce and demonstrates genuine market discipline”.

Iluka shares fell 11.3 per cent or $1.05 to $8.27.

Originally published as Iluka slashes dividend and highlights challenges in rare earth refinery’s costs