Iluka Resources Limited (OTCPK:ILKAF) Q2 2022 Earnings Conference Call August 23, 2022 7:00 PM ET
Company Participants
Tom O’Leary – Managing Director and CEO
Adele Stratton – Chief Financial Officer
Luke Woodgate – Group Manager, Investor Relations and Corporate Affairs
Matt Blackwell – Head, Projects and Sales and Marketing
Conference Call Participants
Paul Lian – Goldman Sachs
Rahul Anand – Morgan Stanley
Hayden Bairstow – Macquarie
Peter O’Connor – Shaw and Partners
Al Harvey – J.P. Morgan
Glyn Lawcock – Barrenjoey
Operator
Thank you all for standing by. And welcome to the Iluka Resources Half Year 2022 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]
Please be advised that today’s conference is being recorded. And I’d now like to hand the conference over to your first speaker, Tom O’Leary, Managing Director and Chief Executive Officer. Thank you. Please go ahead.
Tom O’Leary
Hello and welcome. Thanks for joining the call. Adele Stratton and Luke Woodgate are with me here in Sydney this morning to discuss Iluka’s half year results. We also have Matt Blackwell on the line from Perth.
It’s been a busy period for the company. We have successfully completed the demerger of Sierra Rutile, we have made good progress on our diversification into rare earth and we continue to progress our internal growth pipeline.
The half year results demonstrate the strength in our business with pleasing operational and financial performance. We have continued to deliver pricing traction across our product suite with expanding margins despite the inflationary backdrop.
On safety, our serious potential injury frequency rate has fallen, which is pleasing, but our increased total recordable injury frequency rate is an area of focus going forward.
Against a backdrop of global macroeconomic and geopolitical uncertainty, mineral sands markets continue to be characterized by tight supply. Reflecting these conditions, Iluka’s operational portfolio is configured at maximum settings.
Both producer and customer inventories are low in industry production, which has been experiencing long-term grade depletion for some time, has been further tested by the war in Ukraine and challenges in South Africa. With few sources of new production coming online, these factors are driving customers to prioritize security of supply and demand for Iluka’s products continues to be strong.
Adele will now cover how these factors have translated to financial performance. Over to you, Adele.
Adele Stratton
Thanks, Tom, and good morning, all. We have delivered a pleasing financial scorecard. Iluka achieved material increases in NPAT, revenue, EBITDA and free cash flow relative to last year. In fact, many of these metrics are record H1 results for the company. Most pleasing was the growth in our margins with the benefit of our sustainable approach to pricing clearly observable.
NPAT was $369 million for the half, which actually exceeded the full year earnings from last year. However, we are not immune to the inflationary environment, especially increasing cost of fuel, consumables and labor, and as we said at the quarter end in July, full year guidance on cash costs of production for the Group is expected to increase for the full year by $55 million.
Slides six and seven in our presentation highlight the further strengthening of Iluka’s balance sheet. We recorded a net cash position of $600 million at 30 June and this includes the cash we contributed to Sierra Rutile on demerger, which was a total of $106 million and that’s inclusive of the US$45 million contribution to a rehab trust.
We also have significant funding capacity for our development pipeline over the coming years, both our Multi-Option Facility Agreement and the separate non-recourse loan we have in place with Export Finance Australia to fund our rare earths business.
Our stake in Deterra contributed $20 million to earnings and we have received a $12 million dividend during the half. Given the timing differences between when a dividends declared and paid, we are expecting to receive cash of $23 million, representing the H2 dividend just declared by Deterra in the second half. Thanks to BHP’s continued ramp-up of the South Flank development. This will be passed through in full to our shareholders.
And while on dividends, we have declared a $0.25 per share fully franked dividend in line with our framework. That represents payment of 100% of cash flows received from Deterra, delivering three of those $0.25. We are also paying 40% of free cash flow from the mineral sands business, excluding the $106 million contributed to Sierra Rutile as part of the demerger.
So, overall, a very pleasing financial results for the half. And with that, back to you, Tom.
Tom O’Leary
Thanks, Adele. In parallel to delivering the result that Adele just outlined, we have also made substantial progress on our strategic priorities. As you are aware, in April, we announced the final investment decision for the rare earths refinery at Eneabba, Western Australia, underpinned by a risk sharing arrangement with the Australian Government, including that $1.25 billion nonrecourse loan.
This positions us at the forefront of the global shift to electrification and a low carbon economy, with a partnership we have agreed with the Commonwealth, mitigating risk in a way that recognizes the substantial contributions of both parties.
We awarded further EPCM contract in June and ground works are set to commence shortly. We acknowledge this is a significant project for Iluka and have recently appointed a new Project Director, Kerry Matthews, to Iluka’s executive. I look forward to working with Kerry, who joined us from BHP, where she was the Deputy Project Director for the South Flank Project and where she also worked with Fluor.
In addition to our rare as diversification, we are progressing a number of mineral sands developments, and these are covered on slides 18 to 21. By way of overview, synthetic rutile kiln 1 at Capel is scheduled to restart production in the fourth quarter, having been idle since 2009. This will deliver around 110,000 tonnes per annum of additional synthetic rutile into a tight market.
The definitive feasibility study for Balranald is scheduled for completion by year end. This development is focused on a new internally developed mining technology designed to access a high grade ore body at a depth of around 50 meters with lower environmental impact.
Also scheduled for completion by year end are the preliminary feasibility studies for the Wimmera and Atacama project. Wimmera is a large, potentially long-life zircon and rare earth development in Western Victoria with its rare earth being an attractive supplementary feed source for the Eneabba refinery.
Atacama represents a potential extension to our existing Jacinth-Ambrosia operation in South Australia and the material source of zircon and ilmenite. So as you can see, it’s been a busy and productive period for Iluka, one that I think sets the scene for the company to evolve considerably over coming years.
And with that, I will open up the line for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Paul Lian at Goldman Sachs. Please go ahead.
Paul Lian
Thanks. Good morning, Tom, Adele, Matt and Luke. Hi, everyone. First question, Tom, is on the market. Firstly, start with zircon have noted that maybe some of the smaller producers out there selling to China, such as the Indonesians and a few of the African producers or base producers, have seen a bit of a moderation in pricing recently around maybe the China property piece and demand outlook. Just curious around the sustainability of your pricing ore are maybe leading into the fourth quarter. I guess the sense I get is that you didn’t push prices up as much as others, so therefore, you are better positioned. But just curious around how you are seeing China at the moment and just – and any color you have on sort of those price retracement from other producers?
Tom O’Leary
Yeah. Thanks, Paul. Look, I might let Matt talk to some of the sectoral and regional dimensions, i.e., Indonesia, you touched on and so on and perhaps our approach to sustainability of pricing generally. But I thought before going into that, it might be just worth providing a bit of context around our perspective on the outlook more generally.
We are not oblivious to the fact that the world is an uncertain place at the moment, both from macroeconomic and geopolitical perspective and there’s a lot of talk around the uncertainties you mentioned in China and there’s also uncertainties in Europe and the U.S.
What we have emphasized in our materials and I think is really important to note is the supply side, both in terms of grade decline, but also in terms of inventory levels and we have put a lot of materials in the pack around inventory as well as disruptions to the supply chain.
And that’s the key theme I think I’d like to leave you with today. We have had a really strong half and that was despite China property market concerns, which have really been a focus for the last year.
While there could be some softening from time to time, as zircon sold out, as we have said in the third quarter. And in the titanium side, high grade feedstocks production is also pretty much sold out for the half.
In terms of what guidance we can provide at a high level, we can really only talk to what we are observing with our customers and the key thing that we are observing is that they are seeking security of supply. That’s the key thematic.
On China, in the property sector, you touched on that. China is continuing to push stimulus, and quite obviously, the property sector is a really significant component of the Chinese economy. In turn, the strength of that economy is mission critical for China.
But coming back a bit to where I started, the overwhelming scene in mineral sands continues to be around supply, as we have emphasized for a long time, it’s not about demand, and in recent times, that supply side has been exacerbated by the war in Ukraine and the issues in South Africa, and that’s, I think, where our focus should be.
South Africa is the largest supplier into the mineral sands sector and across the world, we are seeing genuine concern around the stability there and that in particular is driving an enormous focus on security of supply for all of our products with customers no longer prepared to accept that level of insecurity in their supply chains. They are really turning to look to reliable production from a reliable jurisdiction.
But Matt, I hope I haven’t stolen all the answers. I mean it would be really, I think, useful for you to touch on Indonesia in particular, what you are seeing there. And maybe also, I know you asked about China, Paul, but I think there’s some interesting dynamics playing out in Europe, as well as at the moment. Matt?
Matt Blackwell
Yeah. Sure, Tom. Good day, Paul. Turning to the matter prices, you have said correctly, some of the pricing has softened from record highs on the Indonesian. They were selling about US$3,000 at the peak per tonne and on very small volumes, mind you, and those volumes have been curtailed this year by COVID. It’s impacted the Indonesian suppliers quite significantly.
Excuse me, sorry, so they are more in the — they have come off that and there might be around US$2,400, US$2,500 at the moment and but the bulk of zircon that’s being sold into China from the multinationals with the more consistent supply chain is in the range of US$2,150 to US$2,250 is probably the range where people are selling and that hasn’t come off, and in fact, customers are seeking stability in pricing as they enter the year.
What I would also say and to, I guess, echo a bit what Tom is saying is that, all of our customers are still asking for more product and so whilst there is this uncertainty, and Tom talked about the, property market in China, we are seeing continued demand for our product, particularly the premium zircon market.
And maybe one other thing that I could just point out just on China before I touch on — I will mentioned Europe and a couple of other places that we have solid exposure today to the pure ceramic sector in China than we did previously.
So for example, in 2020, 50% of those zircon sand went to the — through the opacifying process into ceramics in China, that’s now 42% deliberately. So I think certainly less exposed to that sector if there was concern about that in the fused zirconia and refractory sectors are continue to be quite stable, if not robust in China, but…
Paul Lian
Yeah. Thanks, Matt. That’s – yeah. That’s — Matt, that’s a really good wrap actually. I think it probably answers a lot of people’s questions around the market. Can I just switch to the feedstock marketplace, just two things on this one is, can I just confirm that the low double-digit price increase for the second half for retail is referencing the first half rather than a year-on-year change?
Matt Blackwell
Yes.
Paul Lian
Okay. Excellent. That’s great. And then second part before I move on lots of questions on the projects, but I will just keep it to the market to now and round back. But on synthetic rutile, can you maybe just talk through the contracting strategy there, but more so around is SR2 and SR1. Was SR2 up for recontracting those volumes at the end of the year and what are your thoughts around potentially pushing price parity between SR and retail this time around?
Tom O’Leary
Look, before I hand over to Matt for an update there. Look, what we are seeing, Paul, is really strong interest from all of our suite of existing synthetic rutile customers, as well as new synthetic rutile customers. Not all of the existing synthetic rutile contracts expire at the end of this year. There’s a significant one that goes for many years yet.
And Matt’s working with customers and around the extent to which we see it as appropriate to put in place extensions or new contracts for remaining uncommitted synthetic rutile volumes in total, recognizing the aggregate of SR1 and 2.
But given the circumstances, there’s a lot of benefit in staying merchant, as I touched on earlier, given security of supply issues. But nonetheless, we are engaging genuinely with our key and new customers. But, Matt, I don’t know if you want to add to that?
Matt Blackwell
Yes. Tom, maybe just coming back to Paul’s question on SR price parity with rutile. We sell — we try and maintain and we look at a relative economic value when we sell and we run REV models across all of our products and what value they can create for our customers by individual asset that they own.
And so we are very mindful when we are selling SR to capitalize, I guess, on that knowledge and also make sure that we are getting what we think is a fair price for the value that they are receiving and so it’s not just going through rutile, but it’s also against competitor’s offerings as well.
And I am very confident that we are achieving a premium to REV on our SR and rutile sales when you compare – when you have a look at what else is out in the market, so on the pricing. Paul, does that answer your question?
Paul Lian
Yeah. No. That’s helpful. Listen, that’s a lot on the market, so I really appreciate it and I will pass the call.
Operator
Our next question comes from Rahul Anand at Morgan Stanley. Please go ahead.
Rahul Anand
Hi, team. Good morning. Look, first one is on the rutile side of things. So, firstly, congrats on successfully demerging SRL, I mean, but I did note that the price increase on the rutile side was more than 2x of synthetic rutile, and obviously, with the business now heavily tilted towards synthetic rutile as opposed to natural, I wanted to perhaps touch upon the project pipeline. And the one thing that I noted on Balranald was that previously you were saying FID by the end of this year and now it says DFS, is there a change here that we should be aware of, Tom?
Tom O’Leary
No. I wouldn’t…
Matt Blackwell
[Inaudible]
Tom O’Leary
Yeah. Go ahead. Yeah. Go ahead, Matt.
Matt Blackwell
Yes. Rahul, I wouldn’t — I think Tom is going to say, I wouldn’t read too much into that and if you actually read the 4D, I think the language is pretty consistent with what we have said previously that fourth quarter, we have always said the fourth quarter.
And in terms of the talk between rutile and SR, sorry, this sort of the more weighting to SR. I think what you can see a little bit of in the rutile contracts. First of all, there was a renegotiation or that the rutile contract for it, it’s SRL, I think, people would know came to an end at the end of last year. We had more rutile on spot this year out of Australia. We don’t generally sell rutile on long-term contracts.
And the other thing, which is a positive, I believe, is that under the SR agreements, most of our volume is sold under these longer term contracts, which have market mechanisms in them, which tend to lag the market.
And so whilst it may not have been kind of face has big an increase in the first half of this year, those mechanisms will continue to operate, and as I said, lagged the market a little providing more runway going forward regardless of what happened in rutile or the market in general.
Rahul Anand
Okay. No. That’s really helpful. And just keeping with the projects and rutile, I mean, Houston is obviously another project where you have rutile and ilmenite rich ore body. Can you perhaps remind us of the potential challenges there and why it sits behind Balranald, which is a new mining technology?
Tom O’Leary
It’s not so challenged as a whole. It’s more where we are at in terms of the feasibility studies. We are at an earlier stage for Houston. It’s not scheduled to finish, I think, Adele, until…
Adele Stratton
Yeah.
Tom O’Leary
… 2023.
Adele Stratton
Yeah.
Tom O’Leary
…sometime in 2023.
Adele Stratton
Yes. Yeah.
Tom O’Leary
Yeah.
Rahul Anand
Okay. Perfect. Look, for the second one, perhaps if we talk railroads, we saw China increasing the quota a bit recently. I just wanted to touch upon and get your views on, I mean, whether you are starting to see or any sort of market participation in terms of diversifying the way supply and people actually being willing to pay extra for it. I mean have you had any initial conversations perhaps in the market? And do you think a bifurcation is possible in terms of the price sort of perhaps being different to what the China price might be for supply security, perhaps?
Tom O’Leary
Yeah. That’s an interesting area of discussion, Rahul. And we are, as you would expect, having a range of conversations with potential end users and intermediaries, and so look it’s an open question. What I would emphasize is that there’s certainly a high level of interest around diversification of supply, and again, security of supply for different reasons.
But nonetheless, customers looking for diversification, the extent to which customers are prepared to pay a premium. I think that, that’s, that, I think, it’s quite likely and we are seeing an interest in that.
I think customers inevitably want to understand what they are getting for that and they want to see, for example, some DSG certification in respect of the benefits they get from a Western supplier like ourselves. So it’s a pretty nascent area at the moment, but it will develop over the coming years.
I mean given that we are fully funded for the refinery, the key point is that we are not in a major rush to put those contracts in place. We don’t need to put contracts in place to get the project done, which is what many hopeful to giving away value and in a sense, not getting away value because the projects may never eventuate, but we are not in that position and so we will be prudent about the steps we take in contracting our product.
Rahul Anand
No. Absolutely. And I think the government regulations perhaps similar to the U.S., perhaps, another reason for that supply bifurcation. Anyway. Thank you very much. That’s my two. I will pass it on.
Tom O’Leary
Thanks, Rahul.
Operator
Our next question comes from Hayden Bairstow at Macquarie. Please go ahead.
Hayden Bairstow
Good morning, Tom and Adele. Just a question on the growth projects, obviously, there’s a lot of capital risks in Western Australia. I mean we are getting close to some decisions on these key projects. Just keen to understand your confidence in what capital assumptions you will be able to put out later this year, just given where the inflationary environments are and is the locations that you are potentially building these things in not as — the issue is not as acute as what we are seeing in Western Australia?
Matt Blackwell
Yeah. Thanks, Hayden.
Tom O’Leary
Adele, do you want to take it?
Adele Stratton
Oh! Yeah. I was just going to say, obviously, we are, Hayden, going through those definitive feasibility studies at present and hence they factor in the market conditions at present as well. So that gives us a degree of confidence in terms of when we come out with the guidance for that capital that it’s a fresh number unlike some of the projects that have had their results out there for a while.
As you know, it’s obviously a different locations, Balranald, for example, is not in Western Australia. So, yeah, that will come into play as well. Matt, I don’t know if there’s anything else you wanted to add there?
Matt Blackwell
I think, Adele, that the key point you have made and it’s important for people to take away is that, as these studies are live today, we have got the benefit of and the people who we are partnering with to do the studies, are building assets around Australia all in every jurisdiction at the moment.
And so we are getting live feedback on material costs, labor costs and availability of both of those resources. So as Adele said, it’s a live number and when we do go to the Board with investment decisions, we are able to do so with really up-to-date and relevant information.
Hayden Bairstow
Okay. Great. And the second one is just on the rutile market. I was kind of noted your commentary around the low level of inventory for some of the key customers. But I mean, given particularly one of them the behavior in the last couple of years. I mean, are you expecting to see a big inventory build or are you more comfortable now that we are going to see these low level of inventories may well be how those customers continue to operate going forward?
Matt Blackwell
Yeah. Look, on the high grade feedstock, there’s a couple of things to note. One and it’s in our slide pack is the low level of inventory that we have and that — I think that’s pretty characteristic across the sector on the titanium feedstock side, particularly on the high grade feedstock. So starting at the mine, the miners don’t have much material.
Moving down to and moving up or downstream to the pigment producers, again, not significant amounts of feedstock. They are probably not as lean as they were at the beginning of the year or at the end of last year, but still inventories are very low and you will see Kronos’ inventory of days sales and they are quite low compared to historic periods of high demand.
And what I am hearing from customers and as recently as yesterday, is that the demand for high grade feedstocks will continue to be strong and that’s driven by a couple of things. So, one, the pigment market has changed significantly over the last — if we want to go back to over the last decade, and more importantly, over the last three years.
There’s been this introduction of let’s call them value stabilization contracts, each pigment producer calls it something different and as we understand that some of the big multinationals will have up to 70% of their volumes under these types of contracts, right?
So and these contracts are a quid pro quo, they guarantee of supply during difficult times like we have had and then there’s an offtake and there’s sort of a — there’s the other side of that coin that they will continue to buy from these people who we sell to through the cycle. So the market is much — it’s moved away from this sort of ridiculous 90-day pricing options that characterize the pigment market with no volume commitments 10 years ago.
These multinationals, I think, are far more disciplined in the past — than in the past. They have got strong balance sheets. Most of them enjoy the benefits of good margins, so they are stronger than where they were. So you don’t need to have Christmas sales, for example.
And there are also most of them are listed now, right, so they are investor focused and their investors are focused on their earnings and earnings multiples. So all those contribute to a more disciplined and I think more stable industry in the pigment market.
And the other thing, I think, that’s important to note, particularly in our sector and where we play, which is in the high grade chloride market, there’s two interesting or a couple of interesting dynamics at the moment.
One is you will have heard about high chlorine costs, particularly in the U.S. When chlorine costs are high, that sort of pushes you towards using high grade feedstocks, because you use — you lose less chlorine through waste.
So that’s one thing. And when people want to continue to produce, they are going to — at the lowest cost at the moment, they are going to want high grade feedstocks. And in the chloride market more generally, Tom mentioned some of the uncertainties in Europe and there are some, I am sure everyone on this call knows well that gas prices are up in Europe and that means electricity prices are up.
Well, a sulfate pigment plant consumes or where sort of estimate it’s between, I think, 3 times and 4 times the amount of electricity per ton of pigment produced in a chloride plant. So if you are chloride only, you are in a pretty good position and if you have got chloride and pigment plants in that environment or you are going to run your chloride plant and that all goes well for Iluka, I think, because of what we supply and our high grade mix of SR and rutile.
Hayden Bairstow
Okay. Great. Thanks, Matt. I will live it there.
Operator
Thank you. Our next question will come from Peter O’Connor at Shaw and Partners. Please go ahead.
Peter O’Connor
Tom and Matt, good morning. Matt, you left your last answer with the question, European mix sulfide chloride, what is that in terms of tonnes or percent?
Matt Blackwell
Good question, Peter. Off the top of my head, I am not going to, I guess, it’s about, I am sorry, it’s about 50-50, but I don’t have the exact number. I mean you have got — so Venator have a mix of sulfate. They have got a couple of sulfate plants in sort of in or three in Europe, including one in Italy, which is partially shut down at the moment and they have got their main chloride plant at Graton, which is a customer of ours and then Tronox have a mixture of plants in Europe and/or across the globe. And Kronos also a European-based customer, two chloride plants, one sulfate. It’s about — probably about 50-50.
Peter O’Connor
And what’s the proportion of European pigment production versus rest of world?
Matt Blackwell
Well, pigment consumption is about one-third Europe, one-third China, one-third Americas. Pigment production, I’d have to come back to you on that. I just can’t remember off the top of my head and I don’t want to give you the wrong number.
Peter O’Connor
Because it goes to the point you are trying to make about that’s split between the two and European gas prices is fairly important takeaway, if you could, that would be great. Adele, to Hayden’s question about CapEx, I totally get you guys are so focused on prudent and disciplined and you do your math right. So the numbers you will come out within there will be perfect. But I think what to Hayden’s question, what is the pricing differential you are seeing period-on-period for when you started looking? We hear across the industry in WA, 20%, 30%, 40%, is that the ballpark you are in?
Adele Stratton
Yeah. It’s a really good question. Peter, it depends on from what starting point you are talking to. What I can really talk to is some of the recent cost increases that we have experienced. So you can see in terms of the cash production costs, a lot of that is driven by fuel. So fuel into projects getting stuff delivered, et cetera.
I think in terms of that general consensus of what the market is seeing that 20% to 30% for some projects wouldn’t be out the ballpark. But we haven’t guided previously some of those capital numbers. So there’s no starting point on which people to really determine the change.
Peter O’Connor
Okay. And the dividend you talked specifically about the timing of the Deterra dividend. Just you sound like that was very nuanced. So the dividend that you just announced or declared that will include…
Adele Stratton
Yeah.
Peter O’Connor
… just the dividend received during the period, is that what you are trying…
Adele Stratton
Yeah. That’s…
Peter O’Connor
…to speak to?
Adele Stratton
Yeah. That’s exactly right. So we got in 12, so we will pass out 12. So there’s just a timing difference, Deterra obviously just came out with their results last week. They have had stellar results as a result of that ramp-up in sales line, which means they have declared a much stronger dividend.
And again, that will flow through to us in essence, doubles in the second half. So we have got line of sight of what that cash is coming in and hence shareholders have got line of sight of what that component of the dividend will be for the second half.
Peter O’Connor
Got it. Just — and lastly, Matt, there’s probably one person on this call who doesn’t get the acronym REV, do you mind explaining it to them?
Matt Blackwell
Oh! Sorry, relative economic value. So when we assess our products and the value, excuse me, that it can create for us and our customers, we look at things like TiO2 content impurities and we look at our customers, for example, the thermodynamics of their plant waste disposal, all those sort of things, because every — you look at slag, it’s got a lot more waste than say SR and so there’s a cost to dispose that, that there’s a cost to chlorinate it first.
And so when we price our products, we consider all those factors when we engage with pigment. So we do that on an individual plant basis to make sure that we are capturing the appropriate amount of value for our product.
Peter O’Connor
And Tom, just lastly on security supply, the commentary you talked about in the first question of the answers. You talked about Africa, I guess, you are specifically referring to South Africa. Where does rutile within the African construct of risk and that global need for security of supply versus a country like Australia?
Tom O’Leary
Yeah. Look, Peter, I think, where Sierra Leone sits is probably a question best directed at Sierra Leone management. But our experience there has been relatively predictable. It was relatively predictable in terms of a range of things, a range of factors, which have become completely unpredictable in South Africa from government administration to importation, exportation — export logistics. From a range of perspectives it’s — in my opinion, a far more attractive jurisdiction, but it’s really a question best directed at the Sierra Rutile management I think.
Peter O’Connor
Thank you, Tom.
Operator
Our next question comes from the line of Al Harvey at J.P. Morgan. Please go ahead.
Al Harvey
Good morning, team. Just one from me, just wanted to get a bit of clarity on the synthetic rutile kiln 1 restart. You have noted that you will be taking both internal and external ilmenite fee. I was wondering if you would be able to break down for us the relative split and if you are able to speak to the terms of the external feed and then maybe just a follow-up, will that shift to all Iluka feed beyond the initial 18-month to 24-month campaign?
Adele Stratton
Yeah. Hi. It’s Adele. Yeah. No. I am not going to provide any further clarity in terms of what that split is. We have got a number of sources that feed that, so really the focus is on the 18-month to 24-month period.
And as you correctly note, in terms of post that period, the focus will almost definitely be in terms of securing further supply. We have got a pipeline of projects that have got ilmenite in them and hence you should expect that would be a focus.
Al Harvey
All right. Thanks, Adele.
Operator
Our final question comes from the line of Paul Lian at Goldman Sachs. Please go ahead.
Paul Lian
Yeah. Thanks, again. A follow-up question, Tom, on the rare earths refinery and just the feed strategy around the rare earths refinery, you have a fair bit of time to sort of work through project studies with respect to your own feed versus third party, et cetera. But to start with, I am just curious around any other Phase 2 and production of concentrate and what the strategy will be there starting point. Have you made a decision whether you will produce at a full run rate there during construction period, stockpile and material with the aim of filling the refinery to full capacity from day one?
Tom O’Leary
Yeah. We have, Paul. What — I guess, progress we didn’t talk much about it. But the EP2 is — has been fully commissioned and it can produce product on spec — has produced product on spec and at required rates. So — and so we are very pleased with that. It’s been a really smooth process and the team has done a great job.
But the question that arises, as you point out, what do you do with that facility, do you build a stockpile or what? At the moment, given we have got plenty of time. We are not planning on building a stockpile.
Instead, what we have done is we are using that facility to process a range of what would otherwise be waste streams to eke out a little bit of ilmenite and zircon for the time being, so we might do that for the next couple of years. But at any time we could change course and start building a stockpile, but we are not planning on doing that at this stage. There’s no need.
Paul Lian
Got it. Yeah. Okay. That makes sense. And then just on the decision, Tom, and studies around Wimmera versus third-party fees. And again, you have got a fair bit of time to make these decisions and whether push out with a feasibility study on Wimmera, et cetera. But when you do these studies, what are you trying to solve for here, is it maximizing NPV for Iluka or is it maximizing returns? I am just trying to think about how you think about decision on Wimmera with obviously a significant capital decision on that project if you proceed versus, say, topping up the refinery at some point with third-party feed, just the approach to that would be interesting.
Tom O’Leary
Yeah. Look, it’s an interesting question. I think we are looking at both overall NPV and nearer term returns. We don’t see those as necessarily mutually exclusive in almost all circumstances. So what I’d say is that we remain very confident about where we are at with Wimmera.
And we are also, as you know, exploring more carefully the rare earth credits that come with our internal project portfolio, because we can now put a value on the rare earth monozite xenotime credits that come from all of our internal mineral sands projects.
But we are also — and it’s part of the NPV discussion you touched on, but we are also looking at procuring feedstock for the long-term. We want to have this refinery going at maximum capacity for many decades to come and so we are interested in a range of third-party feeds and deposits. So we are exploring that as well. But we will make any material announcements in due course, Paul.
Paul Lian
Yeah. Thanks. Just a final one maybe for Adele, when you start spending on the refinery, do you start drawing down on the government debt?
Adele Stratton
Yeah. Yeah. Paul, that’s exactly right. So there will be a little bit some money that would deploy without drawing down just through that process. But, yeah, when you are starting to draw down, it’s in that ratio that we have talked about in terms of the one for three, if you like. So we put in $200 million of equity, and they put in the $600 million after that, it all comes up to 100% from the ESA, so, yeah.
Paul Lian
Yeah. Great. Okay. Thanks very much again.
Tom O’Leary
Thank you, Paul.
Operator
We will just take one final question from Glyn Lawcock at Barrenjoey. Please go ahead.
Glyn Lawcock
Good morning, Tom. Tom, I know you have said…
Tom O’Leary
Hi, Glyn.
Glyn Lawcock
… you are not oblivious to the world issues and supply is tight. But just wondering maybe if you could share some thoughts, I mean, we are going to see like paint producers talk about DIY being perhaps a bit lower now in the U.S. Kronos called out on their call. They are seeing pigment demand weakness across Europe and China. I understand supply is tight, but just trying to appreciate like your customers want your product today, because their customers want it today. But it does feel like things are staying to soften downstream. When does it start to come back up to bite us, like, what is the lag and like, because when demand goes down, it seems that always seems to hurt no matter how high the supply side is. So it just feels like Matt maybe has some more comments to share, if he could.
Tom O’Leary
Yeah. Look, he may do. We will come back to — I will pass it on to you, Matt, in a moment. But, Glyn, for all the commentary that you draw on, for example, the paint players and talking about DIY, at the same time, they are saying that professional painters are experiencing a backlog.
So even at the pigment and in the paint tin, the products that’s at that end of the supply chain, there’s a shortfall in product. Our customers in the U.S. have actually had to reduce production of pigment at a time when pigment prices are extraordinarily strong, because they could not procure adequate feedstock.
Matt’s talked about chlorine issues and so on. Glyn, it’s about supply and demand, and what we are seeing is a supply crunch and I have talked about that ad infinitum. Really, what we are seeing very clearly from our customers is a focus on security of supply.
The overwhelming majority of feedstocks come out of South Africa and that’s a position that our customers are no longer prepared to expose their shareholders, too. So I don’t know, Matt, do you want to add anything to that, but I’d just say that, the outlook for high grade feedstock producers like Iluka in Australia continues to be pretty robust.
Matt Blackwell
Yes. Tom, I think, you are right. The commercial and the pro paint in Europe is certainly, now I heard a figure the other day, there’s a nine-month backlog on propane. And but I think other sectors to think about, too, is welding when infrastructure kicks in and stimulus drives infrastructure, you have a demand for welding consumables. So that, I think, sits all as well for our rutile set or demand for rutile.
Titanium slag, there is a significant uptick in the demand for titanium metal on a backlog of aircraft orders, small sector granted, but an important sector and one that almost exclusively uses high grade feedstocks. And so we are getting inquiries from producers of titanium slag for our SR that haven’t bought it before, because again, as Tom said, they want security supply. That’s on the feedstock side and then on…
Tom O’Leary
Titanium, if you would like to add…
Matt Blackwell
Sorry, titanium — yes, titanium metal – yeah, to produce.
Tom O’Leary
Yeah.
Matt Blackwell
Yeah. Sorry. Correct. And so we are seeing that continued pull-forward. We have got significant interest in our SR and SR1, as Tom said, I think, reflecting both a genuine demand, underlying demand, which is supported by these multinationals having built up a far more sort of stable contracting base and demand base for their products.
And the zircon industry is going, as we said, we are getting pull ask — being asked to pull forward shipments, I mean, for the first time in our own marketing, I think, one of our warehouses is empty. So it’s a pretty a pretty interesting dynamic at the moment.
And just while I got you, I know you didn’t ask the question, but roughly Europe is about 1.2 million tonnes or 7 million tonnes of global pigment supply and if you look at that in a western context, that’s 1.2 million tonnes of about 3 — 0.3, sorry, about, yes, 4 million tonnes of Western supply in total, so just over third of Western supply that’s trading. I don’t know if that answers your question there, Glyn?
Glyn Lawcock
No. It does. It does. It’s just an interesting debate, I guess, when demand starts to fall versus supply. Maybe just two quick follow-ups, do you have a sense or could you let us help me understand how much of your feedstock goes into, say, the pigment market now versus the metal market?
Matt Blackwell
Yeah. Look, I don’t think we have actually not sure that we have actually gone and shared this split, but we would be…
Adele Stratton
Yeah. That’s right. I think post the SRL demerger, Glyn, that composition will change and with the SR1 restart coming on, so we haven’t got an updated perspective there, we can come back on that.
Glyn Lawcock
That’s fine. And then maybe just a final one, if you then look at the relativity, say, of your rutile pricing versus what’s happening on the pigment pricing side, do you feel you have extracted everything you can now versus where the pigment price is or is there more to extract even if pigment prices were to stay flat?
Tom O’Leary
Yeah. Again, Matt may have a comment, but Glyn, it’s a matter of supply and demand. We have talked about what the rutile pricing and SR pricing outlook is for the second half and we will continue to provide intermittent updates on that. But I think that’s probably it. But thank you for your interest, Glyn. I look forward to reading about your thoughts.
Glyn Lawcock
Thanks very much.
Tom O’Leary
Okay. Look and I think there are no more questions. So, look, thank you all for joining the call, a strong first half for Iluka. Appreciate your interest. Bye for now.
Operator
Thank you so much. This does conclude today’s conference call. Thank you all for joining. You may now disconnect.
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