HE’S unlikely to admit it, but there must have been times David Robb would have wondered whether he had made a mistake jumping from Wesfarmers to mineral sands miner Iluka Resources in 2006.
HE’S unlikely to admit it, but there must have been times David Robb would have wondered whether he had made a mistake jumping from Wesfarmers to mineral sands miner Iluka Resources in 2006.
Today, as he sits atop what is far and away the best performing stock in Australia’s S&P 200 index, any earlier doubts would feel a world away.
Iluka shares are surging as prices for its key products zircon and titanium oxide, used in ceramics and paint pigment respectively, soar.
Iluka shares have risen more than 600 per cent off their July 2009 low and 85 per cent this year alone, making it the best performer on the Bloomberg World Mining Index this year.
It would be easy to say that Iluka, having missed out on the fruits of much of the boom, is finally getting its piece of the action courtesy of simply being in the right commodity at the right time. But long-term followers of Iluka are certain it is Mr Robb, rather than mineral sands prices, that deserve the credit for the company’s turnaround.
While prices have certainly improved, the Iluka of today is maximising its leverage after jettisoning its older underperforming mines, particularly those in Western Australia’s South West.
Today, Iluka runs the sort of high-margin operations best placed to take advantage of the current favourable conditions; and Mr Robb has also had a direct role in developing the dynamic pricing mechanisms that are now in place in the mineral sands market.
“David Robb has gone through and restructured the company in a way the previous management teams were either not prepared to do or were not capable of doing,” Stock Resource analyst Grant Craighead told WA Business News.
So stark has been the turnaround in the fortunes of the mineral sands miner that some analysts are beginning to wonder if Iluka could restart some of its mothballed capacity.
JP Morgan analyst Fraser Jamieson believes a restart to mining at its old Eneabba operations north of Perth, and the development of a new mine nearby at Cataby, are among two of a suite of expansion options available to Iluka at present.
Mr Jamieson believes Iluka is on track to generate more than $1 billion in free cash flow in 2012, a far cry from 2009 when the company slid to an $82 million loss.
It is now clear that 2009 was the nadir for Iluka, as Mr Robb endured a torrid first few years in the job.
Mr Robb, a widely respected executive who had previously been running Wesfarmers’ coal division, inherited an Iluka burdened by a number of old and barely profitable mines, with rising cost pressures and flat prices for its stable of commodities.
In Mr Robb’s favour were the Jacinth and Abrosia discoveries in South Australia’s Eucla Basin, which had been made just before his appointment. Together with promising assets in Victoria’s Murray Basin, Iluka appeared to have the next generation of projects needed to reinvigorate the company.
However, even the development of those assets was to prove painful. An already cashed-strapped Iluka was pumping in huge amounts of money – peaking at $520 million during 2009 – just as the global financial crisis was playing out.
Critically, Mr Robb also oversaw the overhaul of the company’s approach to pricing, moving from annual to six-month contracts and seeing Iluka take a more active role in negotiations. The company has also not been afraid to ‘idle’ less profitable capacity.
One analyst from a major investment bank told WA Business News that Iluka had played a major role in overhauling the market dynamics.
“Iluka was previously a price taker, producing at 100 per cent of capacity whatever the market price was. That behaviour has matured into much more fundamental analysis of which assets are making a material return and which ones were not,” the analyst said.
“They’ve shut a number of operations, which has taken supply out of market, and that’s contributed to matching supply and demand a lot better.”
The most telling indication of the favourable pricing environment was in early June, when the company announced it expected a 70 to 75 per cent lift in titanium oxide prices and a 35 to 40 per cent increase in zircon prices.
The turnaround has offered more than just vindication for Mr Robb. According to the company’s 2010 annual report, he took home a $10.7 million retention payment that lifted his total package to $14.5 million.
The surge in Iluka shares has made it the biggest single holding of listed group Mirrabooka Investments.
Mirrabooka chief investment officer Mark Freeman said the company decided to back Iluka after Mr Robb’s appointment, and the result had been “a wonderful investment”.
“When David Robb joined the company as CEO, we were just incredibly impressed with the way he talked about running the business,” Mr Freeman said.
Particularly important has been Iluka’s new approach to pricing.
“It’s an industry that hasn’t been very rational in the past and he brought a whole lot of rational pricing strategy,” Mr Freeman said.
Importantly, according to Mr Robb, there are no signs at this stage of the higher mineral sands prices affecting end-user demand.
Speaking at the company’s most recent set of results, he said customers had absorbed the higher prices due to the tightness in supplies.
“There is ample capacity for the end user in our business to pay a bit more
in order to accommodate very large increases in raw materials pricing,” Mr Robb said.
The biggest threat to Iluka’s ongoing momentum is a dramatic supply response inspired by the higher pricing.
But long-term followers of the story, and Mr Robb himself, believe an imminent and substantial supply response is unlikely.
“I do not see where the new supply is coming from in the near term, whether you look at higher grade TiO2 or whether you look at zircon,” Mr Robb said.
The current bull market for mineral sands presents a gold-plated opportunity for the smaller players like Mineral Deposits and Gunson Resources.
“There’s been lot of projects that have often been talked about but which have always struggled to get over the line,” Mr Craighead said.
“This will be the best chance they’ll ever get to get those up and running.”
