Growth focus for Iluka’s Folwell

MIKE Folwell returned to his home town of Perth in 2002 after a 25-year absence, boasting an impressive CV and a reputation for getting the job done.

His arrival, as the newly installed head of mid-cap sands miner Iluka, was praised when first announced to fill the gap left by the departure of long-serving CEO, Malcom Macpherson.

Today, the praise from the market continues, as the pragmatic Mr Folwell’s tough restructuring and cost cutting bears fruit.

Since Mr Folwell’s appointment, Iluka says, costs have been reduced by almost $70 million, its share price is at record levels, and it has a new outwardly focused growth strategy that seems to appeal to an increasing global shareholder base.

And all this as takeover rumours have started to swirl around Iluka.

However, at the same time, Iluka’s historic operations in Western Australia face fresh challenges.

A rising Aussie dollar continues to erode export profits, while the company faces new taxes and declining prices for some products.

Meanwhile, potential competition is emerging in Africa, prompting the company to look beyond WA for key future growth, possibly even through acquisitions of its own.

The confluence of events clearly places Iluka at the crossroads of its corporate history.

Having put the company in good shape, Mr Folwell is plotting Iluka’s next move, even as the market adds a substantial takeover premium to the share price.

But rather than concentrating on what “other people are doing”, Mr Folwell says the company is mana-ging its own growth “full steam ahead”.

“It [being taken over] is not something that you have to worry about … the most important thing is to have a strong vision,” Mr Folwell told WA Business News.

That vision, for the moment, lies in Perth, where more than 70 per cent of the business is based around its operations in the State’s Mid West and South West.

The mines and processing facilities around Geraldton and Capel are some of the biggest global suppliers of titanium minerals and zircon.

Titanium minerals are used in protective coatings such as house and car paints, and underpin the business, while zircon, which is used in the ceramics industry, has skyrocketed recently and add decent upside to the business.

Mr Folwell said he expected the company’s centre of operations to slowly shift east to the Murray Basin on the border of New South Wales and Victoria, where it currently controls the lion’s share of the mineral sands deposits.

Declining reserve size and quality at Iluka’s operations in WA, which commenced production more than 40 years ago, is the principal reason the company is shifting its focus eastwards.

Iluka plans to spend up to $470 million developing mines and processing plants in the Murray Basin before the end of 2007.

Following that, the recent Jacinth discovery in the Eucla basin on the South Australian/WA border is another potential source of growth.

While analysts are cautious about parts of Iluka’s Murray Basin development, their more immediate interest centres on the implemen-tation of the company’s high grade SR technology at its Western Australian operations, and the high Australian dollar.

Known for their high fixed costs, the operations in WA have more recently benefited from improved operating efficiencies and some cost reductions. Some analysts believe technological advancement is the key to further improvement.

The high grade SR process, if it can be successfully commercialised, will allow Iluka to treat lower grade ilmenite to produce synthetic rutile.

The Australian currency’s rise against the US dollar also significantly affects the company’s profitability, and its debt structure.

 “If the currency went to 85 cents or 90 cents it would be all over, almost,” Paterson analyst Hayden Bairstow said. “They may need to get some more [debt], which is not going to be a big problem because they have a pretty steady business; however whether they can secure the same interest rate is an issue.”

While Mr Folwell is not keen to talk about the dollar’s outlook he does acknowledge the significant effect it has on Iluka’s business.

The Australian dollar’s move to 78 cents recently against the US dollar is a major issue for Iluka.

“For every one-cent movement it has about a $5 million profit impact on us, pre-hedging,” Mr Folwell said.

Iluka hedges to offset the effect of a strong dollar, although Mr Folwell admits this can be an expensive practice.

Since his appointment, therefore, one of Mr Folwell’s major business aims has been the implementation of a cost reduction program.

 “That tends get us in a fit shape to manage the Australian dollar,” he told WA Business News.

As well as finding strategies to counter the effects of a strong Australian dollar, the program aims to cut overall costs by 30 per cent to accommodate the onset of new taxes and high fixed costs at Iluka’s operations in WA.

The program, which is expected to be completed by the end of next year, has already shaved $70 million from the company’s costs, Mr Folwell said, with a further $10 million to $20 million in cost reductions targeted.

While Mr Folwell maintains the program hasn’t been a major issue for the company, sources close to Iluka say the process and associated upheaval has caused a significant degree of internal turmoil.

Early evidence of this emerged when the company’s respected operations manager Hamish Bohannen and human resources manager Geoff Weaver left the organisation six months after Mr Folwell’s arrival.

The restructure exercise has, however, won analysts’ support for both the company and Mr Folwell.

Analysts have welcomed the program as well as a new openness at the previously secretive organisation.

The improvement in the business and Mr Folwell’s international experience has helped increase the sales of shares in the company offshore in places such as the US and Europe.

It is also one of the reasons behind the increasing speculation of the takeover potential of Iluka, or the possibility for it to make an acquisition.

Analysts say a takeover is unlikely but traders continue to bet on a takeover bid, which together with the recent Jacinth discovery, has pushed Iluka’s share price up from $4.81 to $5.85 in recent weeks.

Australian nickel miner WMC Resources, and more recently London-based platinum major Lonmin have been connected with the sands miner in relation to a potential takeover.

WMC is eyeing a move into mineral sands through its large Corridor Sands African project and Iluka’s expertise is seen as a nice fit with this operation. It is a move that could also be part of WMC’s defence against acquisitive Swiss-based Xstrata.

For his part, Mr Folwell is giving little away on the company’s takeover potential. He said that while the company always explored opportunities it was not in discussions with WMC. He does, however, maintain that growth, whether organically or acquisitively, is key to a company’s success.

“All companies have to grow because companies that are standing still are really going backwards,” Mr Folwell said.

He said Iluka was growing by improving efficiencies, developing its own mines and processing plants, as well as exploring for new ore bodies. Despite this apparent focus on organic growth, Mr Folwell concedes he has thought about the potential for a takeover at the same time.

“Clearly you need to be focusing about both aspects here,” he said.

“I mean there is nothing wrong with being taken over if the shareholders get the right outcome and that delivers the most value; then that’s is great outcome.”

The key, Mr Folwell said, was in being able to maximise shareholder value.

“We need to find projects that will give high returns to share-holders and manage the business on a day-to-day basis so that our costs are low and our margins are high and therefore deliver the right result for shareholders,” he said.

Other long-running speculation concerns a possible acquisition by Iluka of the now failed gold and tantalum miner Sons of Gwalia’s tantalum assets in WA.

In a candid response to questioning on this issue, Mr Folwell said: “If the tantalum assets were available, which is something administrator Ferrier Hodson is deciding now we would certainly be prepared to have a look to see if there was an opportunity to develop shareholder value”.