This Post Market Wrap is presented by KOSEC – Kodari Securities

• Refined products essential for use in electric vehicles, sustainable energy and medical applications. 
• Financing model includes $1.27B Federal Government non-recourse loan facility.
• Iluka entitled to retain up to $81M in annual royalties payable from refinery cash flows.
• Construction scheduled to commence H2 2022, production of alloys from 2025.
• Debt free and $295M cash supports strong growth outlook and fully franked dividends.
• Iluka well positioned to meet rising global demand for critical minerals used in clean energy industry.

Iluka Resources Limited (Iluka or the Company) specialises in mineral sands exploration, with expertise that covers processing, marketing and rehabilitation. Iluka is the world’s largest producer of zircon and high-grade titanium dioxide-derived rutile and synthetic rutile.

Iluka also has an emerging portfolio in rare earth elements. Rare earths are essential elements of an electrified global economy and are considered as critical inputs in the production of electric motors. Iluka’s Eneabba stockpile is the world’s highest grade operational rare earths deposit. The Company holds a 20% stake in Deterra Royalties, the largest ASX-listed resources focussed royalty company.

Green light for Rare Earths Refinery 

Iluka will proceed with the construction and commissioning of Australia’s first fully integrated rare earths refinery. The refinery represents a significant downstream, value-adding infrastructure asset, comprising roasting, leaching, purification, solvent extraction, and product finishing. The Final Investment Decision follows completion of the feasibility study that confirms the significant economic value of the project. The refinery will produce separated rare earth oxides including neodymium, praseodymium, dysprosium and terbium. These rare earth metals and alloys are critical inputs that have application across various technologies including electric vehicles, sustainable energy, and advanced electronics, as well as medical and defence applications.   

The refinery will build on the existing screening and concentrating plant currently in operation and will employ 300 people in the construction phase and 270 people in the operational phase. Construction of the refinery will commence in the second half of 2022. Initial production of metal oxides is expected in 2025. 

Financing Arrangements

The Australian Government has agreed to co-fund the refinery with a non-recourse Critical Minerals Facility Loan for $1.27 billion, at an interest margin of 3 percent above the 90-day bank bill swap rate. The loan comprises a $1050 million, 16-year debt facility, plus a $200 million cost overrun facility and $20 million for plant. Repayments commence from completion of the refinery in 2025, with repayments scheduled over 12 years. Under the financing arrangements, Iluka is entitled to annual royalty payments of up to $81 million from refinery cash flows, ranking in equal priority to scheduled loan repayments. The royalty payments are capped at $900 million. The non-recourse funding arrangement and the annual royalties of up to $81 million from project cash flows payable to Iluka, substantially de-risk the financing of this milestone project.   

Looking Ahead

Iluka have cleverly structured the refinery project funding facility such that the mineral sands business will not be impacted, leaving free cash flow to fund growth capital expenditure and fully franked shareholder dividends. Operating cash flow generated in the December 2021 financial year was $528 million. After providing for tax, capital expenditure, shareholder dividends and the return of JobKeeper payments, free cash flow was a strong $300 million.    

At December 2021, Iluka was debt-free with $295 million cash. This strong net cash position and steadily growing free cash flow, supports the payment of fully franked dividends which in the 2021 financial year totalled 24 cents. The final fully franked dividend of 12 cents per share will be paid on 7 April. 

The substantial sales growth forecast for passenger electric vehicles from 6 percent to 40 percent of global passenger vehicle sales by 2030, representing about 34 million vehicles annually, ensures consistent demand for Iluka’s rare earth metals and alloys.    

 This rising global demand for the Company’s critical minerals together with its strong shareholder return bias of rewarding shareholders with fully franked dividends as cash flows become available, should ensure a positive outcome for shareholders over the medium to long term. 

This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.