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COMPANY NEWS & UPDATES

Iluka Resources Limited ( ILU )

Hold Valuation $ 7.50

Earnings Forecast

* Profit & EPS adjusted for options , goodwill , notional earnings and nonrecurring items .

Sierra Rutile Operations Disappoints

Iluka Resources ' Sierra Rutile operations have again disappointed . Problematic since acquired in late 2016 , the latest challenges are exacerbated by :

�

COVID-19 and

� restrictions on specialised expatriate labour .

Iluka has told the Sierra Leone government it intends to temporarily close the mine from November 2021 . In the interim , management will attempt to lower unit costs to underpin sustainable profitability , further evaluate development of the Sembehun deposit and seek potential new investment . Iluka cannot suspend the operations for more than two years , and if so , would move to close and rehabilitate the mine .

The news follows a series of setbacks and , as a result , we halve our output forecasts for Sierra Rutile , implicitly factoring in a 50 % probability the mine will close . However , we make no change our valuation with the Sierra Rutile issues offset by an expected increase in synthetic rutile production , recent strength in rare earth minerals prices , and the time value of money .

Iluka ' s shares are materially down with the news and we now think the shares are close to fairly valued . Ironically , the suspension of Sierra Rutile could be positive for Iluka ' s valuation . The titanium dioxide feedstock market , which includes rutile and synthetic rutile , is strong . Demand for paint into the DIY channel particularly robust . Pigment accounts for about 90 % of titanium dioxide demand and paint and coatings represent more than half of the end use for pigment .

Sierra Rutile is a key producer of high-grade natural rutile and if closed , will reduce global high-grade feedstock supply by approximately 5 %. There is still some uncertainty whether this closure will come to pass , and if it does , it is still six months away . But there is potential for the closure to lead to earnings upside from prices later this year .

An initial planned three to six month hiatus in synthetic rutile production , to lower inventories , was cut to two months with the resumption of sales to a key pigment producer customer . We think this reflects the underlying strength of the market . We have incorporated Iluka ' s upgraded guidance for synthetic rutile accordingly and increase our production forecast by 27 % to 190,000 tonnes for 2021 . This is still a decline from the five-year average ended 2020 of 213,000 tonnes , but not as severe as we previously expected . If the market recovers more quickly than expected , Iluka has further mothballed synthetic rutile production capacity in Western Australia it could restart . Alternatively , success with the Balranald feasibility study could see a new source of high-grade rutile supply established in the Murray Basin . A decision on whether to proceed with the Balranald feasibility study is expected this year .

We continue to see the recovery in the global economy flowing through to demand for the company ' s key products--zircon and titanium dioxide feedstocks . So far , the recovery has been faster than we expected . Longer-term , we remain optimistic on the outlook for supply and demand . Declining grades and depletion at key mines represent a challenge for Iluka and the industry . But given the general lower quality and grade of the industry ' s undeveloped deposits , we think sustained high prices for zircon and high-grade titanium dioxide feedstocks , rutile and synthetic rutile , are likely . We think high prices will be needed to incentivise the development of new deposits to offset grade declines , depletion and demand growth .

Importantly , Iluka and the industry did a nice job of adjusting supply through the downturn , which meant prices were sustained at a reasonable level despite lower demand . The company enters this cyclical

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