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Sierra Rutile acquisition by Iluka costs more than expected

Iluka Resources Ltd.'s costs following the acquisition of Sierra Rutile Ltd. are forecast to be much higher in 2017 than the Australian mineral sands producer expected at the time it acquired the company.

Following a review of its operations, Iluka revealed that it is now expecting total costs of US$87 million this year, higher than its three-year average guidance of between US$75 million and US$85 million.

However, Managing Director and CEO Tom O'Leary played down the increase, saying he is confident costs will return to within guidance in 2018.

"The team is confident, though, we can do the heavy lifting to get back on track this year," he said during a Jan. 31 conference call following the release of Iluka's December-quarter production results.

"So I don't see the miss versus our acquisition case expectations as being a major concern. We remain confident of our three-year average guidance, albeit we're expecting rutile production to be at the lower end of that three-year average guidance on volume."

Production from the Sierra Rutile operations for 2017 is forecast to be about 150,000 tonnes of rutile, which is below Iluka's three-year guidance range of 160,000 tonnes to 175,000 tonnes of rutile.

O'Leary attributed the lower production and higher costs to mine schedule changes undertaken by Sierra Rutile's previous management that will result in lower ore grades.

"As a consequence, in order to meet our production volumes we've guided this year, we're simply going to need to mine more tonnes to get the same amount of heavy mineral material," O'Leary said.

"So that significant increase in mining and processing is contributing to the additional cost."

While expansions are planned at the Gangama and Lanti rutile mines in Sierra Leone, the operations are not expected to add extra tonnes to 2017 production.

"The additional expansions that we've flagged for Gangama and Lanti, they wouldn't effectively come into the production numbers until the back end of 2018 and into 2019," CFO Doug Warden said during the conference call.

Iluka is continuing its cost-cutting drive, focusing on procurement and not ruling out possible further redundancies.

Although further job cuts might be a possibility, O'Leary did say personnel changes will not be as extreme as they have been.

"I don't think one ever says that there is never going to be any further redundancies in an organization, because we really need to focus on continuous improvement," the executive said.

"Having said that, I think there has probably not been a focus in the recent past or the long past on continuing to seek efficiencies in our support functions. So we've had to have a dramatic change over the last period. I'm not anticipating a further dramatic change in the numbers of our support functions at Iluka."