Iluka Resources : QUARTERLY REVIEW 30 SEPTEMBER 2018

Australian Securities Exchange Notice

24 October 2018 ASX: ILU

QUARTERLY REVIEW 30 SEPTEMBER 2018

KEY FEATURES

•  Market conditions for Iluka's zircon and high grade titanium dioxide products remained strong through the quarter, with sales volumes largely being limited by production rather than the market.

•  Zircon/rutile/synthetic rutile (Z/R/SR) revenue was up 19% year-to-date from the prior corresponding period to $872 million, driven by price increases. Weighted average prices achieved in Q3 were 11% higher for rutile, and 10% higher for zircon from the first half average prices. The Zircon Reference Price increased US$170 per tonne (12%) effective 1 October 2018 to US$1,580 per tonne delivered.

•  Group Z/R/SR production of 194 thousand tonnes in Q3 2018 was 14% higher than Q2

  • - Q3 2018 zircon production of 97 thousand tonnes, was up 25% on June quarter and almost double relative to same period last year.

  • - Rutile production was up slightly in Q3 from Q2, though ~10 thousand tonnes below management's expectations for the quarter, reflecting ongoing runtime issues at Sierra Rutile.

  • - Synthetic rutile production was in line with Q2, with full year production guidance increased to 210 - 215 thousand tonnes from 205 thousand tonnes reflecting strong run rates.

•  As described in Iluka's announcement on 23 October, mining operations have been halted at Sierra Rutile as a result of unlawful strike action.

•  The Ambrosia mine move has received Board approval, which is expected to extend steady Group zircon production levels of ~335ktpa out to and including 2021, with the mine move scheduled to be completed by October 2019. Capital expenditure in 2019 is expected to be ~$35 million with deferred capital of $20 million to be spent across 2020 and 2021 for tailings management.

•  Development of the Cataby mine continues on time and within budget.

SUMMARY OF PHYSICAL AND FINANCIAL DATA

Sep-17 Quarter	Sep-18 YTD vs
	Sep-17 YTD
Production Zircon Rutile Synthetic Rutile	kt 49.4 96.0 58.1	kt kt kt kt 77.3 38.4 96.5 43.7 253.1 255.4 245.8 126.4 53.8 53.7 157.7 163.0	% 0.9 (48.6) 3.4
Total Z/R/SR Production Ilmenite	203.5 90.3	169.5 111.9 193.9 118.3 656.6 544.8 318.4 329.2	(17.0) 3.4
Total Mineral Sands Production	293.8	281.4 312.2 975.0 874.0	(10.4)

Iluka Resources Limited • ABN 34 008 675 018 • Level 23 140 St Georges Terrace Perth WA 6000

GPO Box U1988 Perth WA 6845 • T [phone] • F [phone] •www.iluka.com

Sales Zircon Rutile Synthetic Rutile	Sep-17 Quarter 110.8 89.3 41.2	Sep-18 YTD vs Sep-17 YTD (3.4) (12.0) (12.9)
Total Z/R/SR sales Ilmenite	241.3 26.4	234.1 75.4 198.1 47.8 695.1 636.7 121.5 167.3				(8.4) 37.7
Total Mineral Sands Sales	267.7	309.5 245.9 816.6 804.0				(1.5)
$ million Z/R/SR revenue Ilmenite and other revenue1	261.6 6.9	319.5 25.4	303.4 13.5	731.7 40.5	872.1 53.8	% 19.2 32.8
Mineral Sands Revenue	268.5	344.9	316.9	772.2	925.9	19.9
$ million Production cash costs of Z/R/SR Ilmenite concentrate and by-product costs
	269.8	325.7	20.7
	8.7	9.0	3.7
Total Cash Costs of Production	278.5	334.7	20.2
$ per tonne Unit Cash Production Costs per tonne of Z/R/SR Produced Unit Cost of Goods Sold per tonne of Z/R/SR Sold
	411 743	598 744	45.4 0.2
Revenue per tonne of Z/R/SR Sold2	1,084	1,365	1,532	1,053	1,370	30.1
Average AUD:USD cents	78.9	75.7	73.2	76.6	75.8	(1.0)

All currency is Australian dollar denominated unless otherwise indicated.

• 1. Ilmenite and other revenue include revenues derived from other materials not included in production volumes, including activated carbon products and iron concentrate. Iluka receives a royalty payment from its Mining Area C iron ore royalty. This is not reported as part of quarterly reports but is disclosed in the financial statements.

• 2. Represents FOB revenue.

PRODUCTION COMMENTARY

Total Z/R/SR production for the third quarter was 194 thousand tonnes, up 14% from the June quarter of 170 thousand tonnes.

Australian Operations

The Jacinth-Ambrosia mine in South Australia continued to operate at capacity, producing 491 thousand tonnes of heavy mineral concentrate (HMC) during the first three quarters of 2018. Production performance at Jacinth-Ambrosia since the restart in December 2017 has been better than expected, largely as a consequence of higher grade ore than had been anticipated in the mine plan. This has contributed to a 94 thousand tonne increase in HMC inventory, which will help to smooth future zircon production from the site.

Iluka's synthetic rutile kiln at Capel, SR2, operated at full capacity for the quarter, as it has done over the year. Full year SR production is expected to be 5 to 10 thousand tonnes above previous guidance of 205 thousand tonnes. SR2 is being fed by previously stockpiled and externally sourced ilmenite until the commencement of the Cataby mine in the first half of 2019. Plans for a major maintenance outage for SR2 in the first quarter of 2019 are progressing on schedule ahead of the next four-year kiln campaign.

Sierra Leone Operations

Year-to-date rutile production from Sierra Rutile was 93 thousand tonnes, while production for the September quarter was 32 thousand tonnes, up from 28 thousand tonnes in the previous quarter. Although the September quarter saw an improvement from the previous period, production was affected by lower than expected ore throughputs and runtimes across the operation reflecting:

•  harder digging conditions and mechanical issues at the Lanti dredge;

•  a bearing failure within the Lanti dry mining unit and unplanned outages due to higher than expected rates of wear; and

•  higher than expected rock content of ore at Gangama and a requirement to run at a reduced rate while recently replaced parts were bedded in before achieving targeted throughput rates.

The continued poor production performance is disappointing and Iluka and SRL management continue to review carefully the underlying causes of that operating performance and assess additional steps to improve outcomes.

As announced on 23 October, mining operations were halted at Sierra Rutile as a result of unlawful strike action. SRL management has engaged with employees and union officials to understand the rationale for the strike action which predominantly relates to security of jobs in the mining areas of the operation (the dredge operation will be decommissioned in February 2019, following depletion of the resource). Concerns have also been raised relating to work conditions and pay, as well as supervision of the mining operations.

Iluka is focused on achieving an appropriate resolution to the strike action and will keep the market informed of progress toward that resolution.

Due to the lower runtimes and production in the quarter, full year maximum rutile production has been reduced to ~135 thousand tonnes, with final outcomes dependent on when the strike action is resolved.

GROUP MINERAL SANDS PRODUCTION

Sep-17 Quarter	Jun-18 Quarter	Sep-18
		Sep-17 YTD	YTD vs Sep-17
		YTD
kt	kt	kt 91.7 -	kt	kt 240.9 0.1	%
Zircon Eucla/Perth Basin (SA/WA) Murray Basin (VIC)	24.2 25.1		72.7 0.1		188.6 54.6	27.7 (99.9)
Australia Sierra Leone Virginia (USA)	49.3 0.1 -	72.8 - 4.5	91.7 - 4.8	243.2 3.0 6.9	241.0 5.1 9.3	(0.9) 69.1 35.0
Total Zircon Production	49.4	77.3	96.5	253.1	255.4	0.9
Rutile Eucla/Perth Basin (SA/WA) Murray Basin (VIC)	4.3 44.5	10.8 -	11.4 -	30.8 88.8	33.1 -	7.3 (100.0)
Australia Sierra Leone	48.8 47.2	10.8 27.6	11.4 32.3	119.6 126.2	33.1 93.4	(72.4) (26.1)
Total Rutile Production	96.0	38.4	43.7	245.8	126.4	(48.6)
Synthetic Rutile (WA)	58.1	53.8	53.7	157.7	163.0	3.4
TOTAL Z/R/SR PRODUCTION	203.5	169.5	193.9	656.6	544.8	(17.0)
Ilmenite Eucla/Perth Basin (SA/WA) Murray Basin (VIC)	51.8 21.9	68.0 30.6	81.6 20.2	198.1 77.1	236.3 50.8	19.3 (34.1)
Australia Sierra Leone Total Ilmenite	73.7 16.6 90.3	98.6 13.3 111.9	101.8 16.5 118.3	275.2 43.2 318.4	287.1 42.1 329.2	4.3 (2.6) 3.4
TOTAL MINERAL SANDS	293.8	281.4	312.2	975.0	874.0	(10.4)

Note: The above table details Iluka's total production by product group, with the source of that production attributed to the regional operating mines and basins. Processing of final product occurs in mineral separation plants located in Australia at

Narngulu, Western Australia and in Sierra Leone. Iluka also has a mineral separation plant at Stony Creek in Virginia, United States (closed) and Hamilton, Murray Basin (idled).

MINERAL SANDS MARKET CONDITIONS

Zircon Market

Zircon sales for the third quarter were 108 thousand tonnes, a 9% increase from the second quarter volumes, with year-to-date sales of zircon totalling 298 thousand tonnes.

The previously announced 12% increase to the Zircon Reference Price, effective 1 October 2018 to 31 March, has been accepted by Iluka's customers. Iluka has observed that pricing for zircon has narrowed to a tighter range recently, with some producers increasing prices by a similar quantum to Iluka and several opportunistic suppliers moderating their pricing from levels that were creating volatility and uncertainty in the broader market. Feedback from downstream customers on Iluka's approach to the market remains positive as the company seeks to provide both sustainability and predictability in pricing.

Late in the third quarter Iluka started to observe some easing in the tightness of supply, despite what the company understands are ongoing delivery backlogs from some other zircon producers. Iluka does not believe there are any material additional quantities of zircon available for sale or that there has been a material reduction in overall global demand; rather, small changes in some markets have eased the tension on tight supply.

Customers suggest that, while there is a softening in demand for opacifier (milled zircon) into the ceramics sector, it is temporary in nature; and that they expect a slower fourth quarter followed by improved conditions in 2019. Indications are that stocks of zircon and opacifier held downstream are within normal operating limits for customers. All of Iluka's major accounts have indicated that they plan to take their full allocation in the fourth quarter.

As disclosed with the half year results, Iluka increased its zircon production guidance for 2018, by releasing additional product into the market in the form of zircon in concentrate (ZIC). This action was taken to mitigate potential supply shortfalls. Iluka has the capacity to release more finished goods and ZIC into the market should competitors' supply disruptions continue through Q4 and into 2019. The company continues to monitor the market for evidence of substitution and thrifting and while some thrifting is apparent, there is no evidence of attempts to substitute zircon out from formulations.

The weighted average achieved price YTD for zircon premium and standard is up 36% from 2017 to US$1,307 per tonne.

Titanium Dioxide Feedstock Market

Year-to-date sales of rutile and synthetic rutile were 339 thousand tonnes, compared to 387 thousand tonnes for the same period in 2017. The comparatively lower sales are a result of depleting all of the Murray Basin inventory and lower rutile production at Sierra Rutile.

The market for high-grade titanium feedstocks remained tight through the third quarter as pigment customers maintained high levels of plant utilisation, creating strong demand during a period in which production disruptions at feedstock producers limited supply. Ongoing issues with feedstock suppliers have led to some downstream customers noting concerns as to whether there will be sufficient high-grade ore available in 2019. The rutile market remains particularly tight, with no available inventory being reported in the supply chain. All of Iluka's high-grade titanium feedstock production remains contracted or allocated to customers for the remainder of the year, with sales limited by production.

Western pigment producers are reported to be reducing prices in some regions. This follows a peak in the second quarter of the year, with some market commentators expecting pigment prices to continue to track lower over the fourth quarter and possibly into the first quarter 2019 before stabilising in the second half 2019. Iluka has observed operating rates remaining elevated during this time while pigment producers re-build inventory, which is positive for high-grade feedstock demand. So, while pigment prices may be softening in some regions, the tightness in chloride feedstock availability should support pricing momentum well into 2019.