Iluka stung by gas shortage

July 17, 2008

Iluka Resources, the world's biggest zircon producer, said second-quarter mineral-sands production fell 20% after declaring force majeure at its Western Australia operations because of a power outage.

Iluka produced 592,089 tons of the sands in the three months to June 30, down from 741,765 tons a year earlier, the Perth-based company said today in a statement.

Sales still rose 22% to $260 million.

The company declared force majeure on June 10 after an explosion at Apache Corp's Varanus Island plant that cut gas supplies in the state 30%.

Mining companies and small businesses have been scrambling to secure fuel since the blast as the government gave hospitals and other vital services priority.

"Iluka recorded lower production across all of its products in the June quarter, mainly associated with the interruption to gas supplies,'' it said. There may be "appreciable second-half price increases'' for products, the statement said.

Iluka shares dropped 9 cents, or 2.1%, to $4.20, after initially having risen by as much as 3%. The stock has fallen 25% over the past year.

As well as powering its Western Australia operations, Iluka needs natural gas to dry heavy mineral concentrate as part of the metallurgical process.

The "adverse financial impact'' from the blast may be offset by higher selling prices, use of inventory, insurance payments and cost cuts, today's statement said.

Iluka said June 30 it was restarting its Western Australian operation after securing gas from the North West Shelf venture and energy retailer Alinta.

The operations normally consume about 3.6 terrajoules of natural gas a day, according to Iluka.

UBS said June 19 the company may operate at one-third capacity in the September quarter. Iluka will have a loss this financial year, partly because of the affect of the shortages, Citigroup said in a report last month.

Iluka will be less reliant on its Western Australian mines when new projects in the Murray Basin in Victoria state and Eucla Basin in South Australia start in 2009 and 2010.

In May, the company said it approved development of the $420 million Jacinth Ambrosia mineral-sands project in the Eucla Basin, for which it raised $353 million in an April share sale.

"Iluka has been particularly successful in increasing zircon sales into China, the major growth market for this and other mineral-sands products,'' today's statement said.

The company boosted first-half sales of the product, used in ceramic glazes and electron absorbers in nuclear reactors, to China by 75%.