Iluka Resources Limited
Annual Report 2012

Plain-text annual report

I l u k a R e s o u r c e s L m i i t e d 2 0 1 2 A n n u a l R e p o r t A B N 3 4 0 0 8 6 7 5 0 1 8 www.iluka.com Iluka Resources Limited 2012 Annual Report CREATE AND DELIVER VALUE FOR SHAREHOLDERS Iluka Resources Limited ABN 34 008 675 018 Annual Report - 31 December 2012 Contents Directors' Report Remuneration Report Corporate Governance Financial Report Directors' Declaration Independent Auditor's Report to the Members Five Year Physical and Financial Information Shareholder Information Corporate Information Page 3 16 38 43 93 94 96 97 99 Iluka Resources Limited Directors' Report 31 December 2012 Directors' Report The Directors present their report on the group consisting of Iluka Resources Limited and the entities it controlled at the end of, or during, the year ended 31 December 2012. DIRECTORS The following individuals were Directors of Iluka Resources Limited during the whole of the financial year and up to the date of this report: G J Pizzey G J Rezos J A Seabrook S J Turner W G Osborn D A Robb On 20 December 2012, Mr J H Ranck and Mr G J W Martin were appointed as Directors, with effect from 1 January 2013. PRINCIPAL ACTIVITIES The group is a major producer of zircon globally and one of the largest producers of the high-grade titanium dioxide products of rutile and synthetic rutile, with operations in Australia and Virginia, USA. The group has a royalty associated with a tier one iron ore operation - BHP Billiton’s Mining Area C province in Western Australia. SIGNIFICANT CHANGES There were no significant changes in the state of affairs of the group during the financial year. REVIEW OF OPERATIONS1 Overview of results Iluka recorded a profit after tax for the year ended 31 December 2012 of $363.2 million, compared with $541.8 million for the previous corresponding period. Sales volumes year on year were significantly lower, with combined zircon, rutile and synthetic rutile (Z/R/SR) sales volumes down 52.9 per cent at 488.9 thousand tonnes compared to 1,038.1 thousand tonnes in 2011. Lower sales volumes were influenced by a combination of external factors, including: low demand associated with global economic conditions and fragile business confidence levels; inventory de-stocking and lower levels of zircon usage in tile manufacturing in China. Revenue per tonne of Z/R/SR sold during 2012 of $1,991 was 41.6 per cent higher than the corresponding 2011 figure of $1,406 per tonne. There was a weakening in prices received, especially in the latter part of the third quarter and into the fourth quarter. In response to a period of weak sales and low mineral sands product demand, exacerbated by large price disparities existing in the market for the same or similar Ti02 products in 2012/13 as remaining legacy contracts unwind, Iluka reduced production. The actions were aimed at more closely matching supply with demand and resulted in the group operating its largest kiln, SR2, at lower throughput rates from mid year and mining Jacinth-Ambrosia through a lower grade part of the ore body from the second quarter. Further production responses have been announced since the end of the year as outlined later in this report. 1 The Directors’ Report uses non-IFRS financial information including mineral sands EBITDA, mineral sands EBIT, Group EBITDA and Group EBIT which are used to measure both group and operational performance. Non-IFRS measures are unaudited but derived from audited accounts. A reconciliation of non-IFRS financial information to the audited Profit before income tax in the Consolidated Income Statement is included in the Iluka 2012 Full Year Results Presentation Slide Pack located in the Investors and Media section of the Iluka website. 3 Iluka Resources Limited Directors' Report 31 December 2012 Mineral sands EBITDA was $726.0 million, a 21.6 per cent decrease compared with the previous corresponding period. Mineral sands EBIT decreased by 29.0 per cent to $523.3 million (2011: $737.3 million). Mining Area C (MAC) iron ore royalty earnings reduced by 17.9 per cent to $72.3 million, including capacity payments of $3.0 million (2011: $1.0 million) driven by a weakening in the iron ore prices over 2012 combined with a strengthening of the Australian Dollar. Group EBIT was $545.7 million, compared to $790.3 million in the previous corresponding period. Profit before tax was $512.2 million (2011: $760.7 million). A net tax expense of $149.0 million was recognised in respect of the profit for the period, at an effective tax rate of 29.1 per cent. Basic earnings per share for the period were 87.1 cents compared to 130.1 cents in the previous corresponding period. The number of shares on issue at 31 December 2012 of 418.7 million was unchanged during the period. Free cash flow of $81.2 million compared to $589.6 million in the previous corresponding period decreased mainly due to the impact of lower mineral sands revenues. The reduction in free cash flow is also a result of higher tax payments of $159.1 million (2011: $12.5 million) due to payment of tax in Australia after utilisation of remaining tax losses in the prior year. Net debt at 31 December 2012 was $95.9 million with a gearing ratio (net debt/net debt + equity) of 5.8 per cent, compared to net cash of $156.7 million at 31 December 2011. Undrawn facilities at 31 December 2012 were $718.7 million and cash at bank was $54.3 million. Directors have determined a fully franked dividend of 10 cents per share, payable on 4 April 2013 with a record date of 7 March 2013. Overview of sales and production Sales (kt) Zircon Rutile Synthetic rutile Total Z/R/SR sales Ilmenite - saleable Total sales volumes Z/R/SR revenue ($m) Ilmenite and other revenue ($m) Total mineral sands revenue1($m) Revenue per tonne of Z/R/SR sold2($/t) Production (kt) Zircon Rutile Synthetic rutile Total Z/R/SR production Ilmenite - saleable Total saleable production volume Ilmenite - upgraded to synthetic rutile HMC produced HMC processed Cash costs of production ($m) Unit cash cost per tonne of Z/R/SR produced ($/t) 2011 % change 2012 213.8 105.5 169.6 488.9 443.2 932.1 973.8 96.0 1,069.8 514.5 265.9 257.7 1,038.1 570.9 1,609.0 1,461.2 75.5 1,536.7 1,991 1,406 343.2 220.3 248.3 811.8 385.6 1,197.4 288.5 1,529.7 1,468.1 583.5 719 601.5 281.3 285.7 1,168.5 459.7 1,628.2 201.9 2,121.6 1,937.6 628.9 538 (58.4) (60.3) (34.2) (52.9) (22.4) (42.1) (33.4) 27.2 (30.4) 41.6 (42.9) (21.7) (13.1) (30.5) (16.1) (26.5) 42.9 (27.9) (24.2) 7.2 (33.6) 1 Mineral sands revenues include revenues derived from other materials not included in production volumes, including activated carbon products and iron oxide. 2 Revenue from the sale of zircon, rutile and synthetic rutile products 4 Iluka Resources Limited Directors' Report 31 December 2012 Mineral sands sales volumes Sales volumes for zircon for the full year were 213.8 thousand tonnes (2011: 514.5 thousand tonnes), a 58.4 per cent decline, with sales of 87.4 thousand tonnes in the first half and 126.4 thousand tonnes in the second half of 2012. Sales volumes for rutile for the full year were 105.5 thousand tonnes (2011: 265.9 thousand tonnes), a 60.3 per cent decline, with sales of 85.4 thousand tonnes in the first half and 20.1 thousand tonnes in the second half of 2012. Sales volumes for synthetic rutile for the full year were 169.6 thousand tonnes (2011: 257.7 thousand tonnes), a 34.2 per cent decline, with 2012 sales of 101.1 thousand tonnes in the first half and of 68.5 thousand tonnes in the second half of 2012. The lower second half sales volumes for rutile and synthetic rutile reflect the preference by pigment producers for lower grade feedstocks, as they sought to work down pigment inventories as well as take advantage of lower priced, lower titanium grade feedstocks priced under "legacy" contracts from other feedstock producers. The group sold 443.2 thousand tonnes of ilmenite in 2012 (2011: 570.9 thousand tonnes), with the level of ilmenite available for sale dependent on production levels of other products and internal requirements for synthetic rutile production. Mineral sands production Overall production volumes of Z/R/SR were 356.7 thousand tonnes (30.5 per cent) lower than in the previous corresponding period. As noted above, the group reduced production during a period of low demand for mineral sands products. Jacinth-Ambrosia was mined in a lower grade part of the ore body from the second quarter of 2012 and the associated processing of less heavy mineral concentrate through Narngulu mineral separation plant in Western Australia resulted in reduced zircon production. Reduced synthetic rutile production was a result of the decision to operate the largest of the two kilns, SR2, at lower throughput rates from mid year. The planned move during the first half of the year from three mining operations in the Murray Basin in 2011 (Douglas, Echo and Kulwin) to one mining operation in 2012 (Kulwin and then Woornack, Rownack, Pirro) resulted in reduced rutile production for the year. The group further reduced production via the temporary suspension of a major part of the operational base during the Christmas and New Year period. This included idling the Virginia mining and processing operations, the Hamilton and Narngulu mineral separation plants, the mining operations at Eneabba in the Mid West of Western Australia and the Tutunup South mine in the South West of Western Australia. 5 Income statement analysis $ million Z/R/SR revenue Ilmenite and other revenue Mineral sands revenue Cash costs of production Inventory movement Restructure and idle capacity charges Rehabilitation and holding costs for closed sites Government royalties Marketing and selling costs Asset sales and other income Product, technical development and major projects Exploration expenditure Mineral sands EBITDA Depreciation and amortisation Impairment reversal Mineral sands EBIT Mining Area C Corporate and other costs Foreign exchange Group EBIT Net interest and bank charges Rehabilitation unwind and other finance costs Profit before tax Tax expense Profit for the period (NPAT) Average AUD/USD (cents) Mineral sands operational results Iluka Resources Limited Directors' Report 31 December 2012 2012 2011 % change 973.8 96.0 1,069.8 1,461.2 75.5 1,536.7 (583.5) 346.9 (14.8) (9.8) (19.6) (30.2) 10.3 (13.6) (29.5) 726.0 (202.7) - 523.3 72.3 (45.7) (4.2) 545.7 (6.6) (26.9) 512.2 (149.0) 363.2 (628.9) 147.7 (8.5) (36.2) (25.2) (34.5) 7.5 (13.7) (19.0) 925.9 (224.2) 35.6 737.3 88.1 (35.5) 0.4 790.3 (8.0) (21.6) 760.7 (218.9) 541.8 103.6 103.2 (33.4) 27.2 (30.4) 7.2 134.9 (74.1) 72.9 22.2 12.5 37.3 0.7 (55.3) (21.6) 9.6 (100.0) (29.0) (17.9) (28.7) n/a (31.0) 17.5 (24.5) (32.7) 31.9 (33.0) (0.4) $ million Australia United States Exploration and other Total Revenue 2012 EBITDA EBIT 2011 2012 2011 2012 2011 958.2 111.6 - 1,069.8 1,400.8 135.9 - 1,536.7 706.3 70.0 (50.3) 726.0 907.9 51.9 (33.9) 925.9 513.7 63.0 (53.4) 523.3 732.1 41.5 (36.3) 737.3 An overview of performance for Australian operations and United States operations is provided later in this report. Commentary in respect of the income statement analysis is provided below. 6 Iluka Resources Limited Directors' Report 31 December 2012 Mineral sands revenue Mineral sands sales revenue decreased 30.4 per cent to $1,069.8 million from the previous corresponding period. The significant reduction in revenue has been driven by a reduction in combined Z/R/SR sales volumes of 52.9 per cent (549.2 thousand tonnes) offset partially by an increase in average realised Z/R/SR sales revenue per tonne to $1,991, which was 41.6 per cent higher than the previous corresponding 2011 figure of $1,406 per tonne. There was a weakening of prices received, especially from the latter part of the third quarter to the end of the year, with average revenue per tonne of Z/R/SR in the second half of 2012 of $1,654 being lower than the first half average revenue per tonne of $2,255. Cash costs of production Cash costs of production for the full year of $583.5 million were 7.2 per cent lower than 2011 cash production costs of $628.9 million. Unit cash costs of production of $719 per tonne of Z/R/SR increased relative to the 2011 level of $538 per tonne by 33.6 per cent, reflecting materially lower production in 2012. Inventory movement Inventory of finished product has increased by $323.7 million to $484.6 million due to the low sales volumes experienced during 2012. The production of Z/R/SR exceeded sales by 322.9 thousand tonnes during the year. Restructure and idle capacity cash charges The charges reflect costs incurred during the transition of operations in the Murray Basin to the new WRP deposit, during which time there was no HMC production, together with costs incurred during the scheduled major maintenance outage for the SR2 kiln during the period. The charges also include fixed costs for operations during periods of no production during the period. Rehabilitation and holding costs for closed sites The charge relates mainly to increased cost assumptions based on work completed on closed sites. Government royalties and marketing costs Government royalties decreased with lower sales revenues. Marketing and selling costs, including fixed port charges, reflect lower sales activity during the year partially offset by an increase in global sales locations. Product and technical development Costs are comparable with the previous corresponding period. Exploration Expenditure on exploration activities has increased by $10.5 million compared to the previous corresponding period with an increased focus on overseas “greenfields” activities. Depreciation and amortisation The reduction from the previous corresponding period reflects the transition to the single mine in the Murray Basin, including a cessation of depreciation during the three month transition, partially offset by a full year charge for the Tutunup South operation that was commissioned at the end of the previous corresponding period. Impairment reversal The amount in the previous corresponding period relates to the reversal of the depreciated value of impairment charges recognised in 2005 during development of the Murray Basin operation and also for the Cataby deposit, based on revised economic assumptions and an upgrade of the Cataby reserve. Mining Area C Iron ore sales volumes increased 6.4 per cent to 47.4 million dry metric tonnes. The average AUD realised price of $118 per tonne (2011: $156 per tonne) upon which the royalty is payable decreased by 24.4 per cent from the previous corresponding period driven by a weakening in the iron ore prices over 2012 combined with a strengthening of the Australian Dollar. The EBIT contribution of $72.3 million includes $3.0 million of annual capacity payments for production increases in the year to 30 June (2011: $1.0 million). 7 Iluka Resources Limited Directors' Report 31 December 2012 Corporate and other Corporate costs were $6.8 million higher than the previous corresponding period reflecting increased investment in sustainability initiatives (environment, health and safety) and business evaluation activities. Other costs of $2.7 million were $3.4 million higher, including charges relating to now closed pension schemes. Foreign exchange Foreign exchange translation losses were $4.2 million compared to a gain of $0.4 million in the previous corresponding period. Interest and rehabilitation unwind Higher rehabilitation unwind costs reflect changes in the timing of rehabilitation expenditure in future years and amounts related to new mines such as WRP. Finance costs are comparable to the previous corresponding period. Tax expense The income tax expense of $149.0 million is at an effective tax rate of 29.1 per cent compared to 28.8 per cent in the previous corresponding period. Balance sheet, cash flow and net cash/net debt 31 December 2012 AUS US MAC Corp Group Receivables Inventories Payables and accruals Employee and other provisions Rehabilitation provisions Property, plant & equipment Intangibles Capital employed Net tax liability Net debt (cash) Total equity Net funding 99.8 744.7 (52.1) (15.8) (394.9) 1,373.0 - 1,754.7 16.8 32.7 (9.2) (8.7) (49.6) 48.6 - 30.6 15.5 - - - - - 6.3 21.8 7.4 3.1 (14.8) (13.7) - 8.7 - (9.3) 139.5 780.5 (76.1) (38.2) (444.5) 1,430.3 6.3 1,797.8 134.8 95.9 1,567.1 1,797.8 31 Dec 2011 256.1 426.1 (126.4) (43.1) (426.9) 1,430.4 6.7 1,522.9 144.9 (156.7) 1,534.7 1,522.9 Lower receivables are mainly associated with the reduction in sales volumes. Receivables from mineral sands sales of $111.9 million represents approximately 32 days sales, comparable to those in the previous corresponding period of 31 days. Higher inventories reflect mainly increased finished product stocks, up $323.7 million from the previous corresponding period to $484.6 million. Inventories include $257.9 million of predominantly concentrate material classified as non-current. Lower payables and accruals reflect the completion of the major capital projects that were in existence at the end of the previous corresponding period, including the major maintenance outage on both of Iluka’s operational kilns and works undertaken in regards to the mine move in the Murray Basin. Higher rehabilitation provisions reflect mainly the expansion of footprint at new operations such as WRP and the unwind of the discount on the liability, offset partially by payments of $49.4 million. Property, plant and equipment reflects the completion of construction and successful commissioning of operations at WRP as well as the expanding rehabilitation footprints at new operations noted above, offset by the current year depreciation charge of $202.7 million. The net tax liability represents mainly tax payable in Australia, due for payment in the first half of 2013. 8 Movement in net (debt) cash $ million Opening net cash (debt) Operating cash flow MAC royalty Exploration Interest (net) Tax Capital expenditure Asset sales Share purchases Free cash flow Dividends Net cash flow Exchange revaluation of USD net debt (Decrease)/increase in net cash (debt) Closing net (debt) cash Iluka Resources Limited Directors' Report 31 December 2012 2012 2011 156.7 (312.6) 368.7 76.1 (34.4) (0.7) (159.1) (167.3) 1.4 (3.5) 81.2 (333.7) (252.5) (0.1) (252.6) 706.2 90.3 (23.6) (10.9) (12.5) (142.5) 3.9 (21.3) 589.6 (117.0) 472.6 (3.3) 469.3 (95.9) 156.7 Lower operating cash flow reflects lower sales revenue in the second half of 2012. Lower second half sales volumes for rutile and synthetic rutile reflect the preference by pigment producers for lower grade feedstocks, as they sought to work down pigment inventories as well as take advantage of lower priced, lower titanium grade feedstocks priced under legacy contracts. Total operating cash flow includes $49.4 million for rehabilitation payments (2011: $26.7 million). MAC royalty cash flows in 2012 were lower than the previous corresponding period due to lower realised prices for iron ore. The increase in tax outflows reflects payment in the second half of 2012 of tax in Australia in respect of 2011, after utilisation of tax losses. Capital expenditure of $167.3 million in 2012 was mainly for the development of the WRP mine in Murray Basin, commissioned in May 2012 and for the major maintenance outage on the SR 2 kiln, also in the first half of 2012. Share purchases represent on-market purchases associated with the group’s equity based incentive plans. Dividend payments in 2012 of $333.7 million represent the 55 cent fully franked final dividend for 2011 and the 25 cent fully franked interim dividend for 2012. Dividend payments in 2011 of $117.0 million represent the 8 cent unfranked final dividend for 2010 and the 20 cent unfranked interim dividend for 2011. 9 Review of Australian operations Production volumes Zircon Rutile Synthetic rutile Total Z/R/SR production Ilmenite - saleable Total saleable production volume Ilmenite - upgradeable to synthetic rutile HMC produced Unit cash cost of production - zircon/rutile/SR Mineral sands revenue Cash cost of production Inventory movements Restructure and idle capacity charges Rehabilitation and holding costs for closed sites Government royalties Marketing and selling costs Asset sales and other income EBITDA Depreciation & amortisation Impairment reversal EBIT Iluka Resources Limited Directors' Report 31 December 2012 2012 2011 % change 293.8 220.3 248.3 762.4 183.1 945.5 276.3 1,206.6 687.0 958.2 (523.6) 328.3 (12.8) (9.1) (19.6) (18.1) 3.0 706.3 (192.6) - 513.7 541.2 281.3 285.7 1,108.2 171.6 1,279.8 201.9 1,683.8 518.0 1,400.8 (574.5) 140.4 (8.5) (1.4) (25.2) (27.3) 3.6 907.9 (211.4) 35.6 732.1 (45.7) (21.7) (13.1) (31.2) 6.7 (26.1) 36.8 (28.3) (32.5) (31.6) 8.9 (133.8) (50.6) (550.0) 22.2 33.7 (16.7) (22.2) 8.9 (100.0) (29.8) kt kt kt kt kt kt kt kt $/t $m $m $m $m $m $m $m $m $m $m $m $m Total saleable production decreased from the previous corresponding period reflecting a number of factors including initial production responses to softer demand, decreased rutile production during the transition of operations to the WRP deposit in Murray Basin and a scheduled major maintenance outage on the largest synthetic rutile kiln in early 2012. Cash costs of production are lower than the previous corresponding period primarily due to initiatives to reduce production due to the lower global demand conditions. Higher unit cash costs of production reflect production due to global demand conditions. lower Z/R/SR production resulting from initiatives to reduce Rehabilitation and idle capacity costs include holding and maintenance costs during periods of no production at both the SR2 kiln during the scheduled major maintenance outage and during the transition of operations to WRP in Murray Basin. Lower government royalties reflect lower revenues driven by lower sales volumes partially offset by higher sales prices across the product range. Lower marketing and technical costs reflect lower sales volumes. Lower depreciation and amortisation charges are due mainly to the changes in the mix of the operating mine sites including the transition from Kulwin and Douglas to WRP. The inventory movement reflects mainly the increased finished goods stocks reflecting the impacts of a softening in demand. 10 Review of United States operations Production volumes Zircon Ilmenite - saleable Total saleable production volume Ilmenite - upgradeable to synthetic rutile HMC produced Unit cash cost of production - saleable product Mineral sands revenue Cash cost of production Inventory movements Rehabilitation costs for closed sites Marketing and selling costs EBITDA Depreciation & amortisation EBIT Iluka Resources Limited Directors' Report 31 December 2012 2012 2011 % change 49.4 202.5 251.9 12.2 323.1 238.0 111.6 (59.9) 18.6 (0.7) 0.4 70.0 (7.0) 63.0 60.3 288.1 348.4 - 437.8 156.0 135.9 (54.4) 7.3 (34.8) (2.1) 51.9 (10.4) 41.5 (18.1) (29.7) (27.7) n/a (26.2) 52.4 (17.9) 10.1 154.8 (98.0) (119.0) 34.9 (32.7) 51.8 kt kt kt kt kt $/t $m $m $m $m $m $m $m $m Lower saleable production reflects lower grades associated with a revised mine schedule which was adopted in mid-2011 following re-optimisation of ore reserves for a longer life operation. Lower sales revenue is due to lower sales volumes, partially offset by higher prices. The inventory increase reflects lower zircon sales. Costs for rehabilitation in the previous corresponding period are mainly associated with costs for the former Florida operation. Lower depreciation and amortisation results from an increase in mine lives compared to the previous corresponding period following the adoption of the revised mine schedule. 11 Iluka Resources Limited Directors' Report 31 December 2012 DIRECTORS' PROFILES George John Pizzey, BE(Chem), FellDip(Management), FTSE, FAICD, FAIM, Chairman Mr Pizzey was appointed to the Board in November 2005. He has extensive experience in mining and mineral processing. Mr Pizzey was Chairman of Alcoa of Australia and held a number of senior executive positions with Alcoa Inc (USA). He is Chairman of Alumina Limited and a director of Amcor Limited. He was formerly a director of St Vincent’s Medical Research Institute (retired November 2011) and of the London Metal Exchange UK from 1997 to 2003. Directorships of Listed Entities (last 3 years): Alumina Limited (appointed June 2007) Amcor Limited (appointed September 2003) Gavin John Rezos, BA, LLB, B.Juris, MAICD Mr Rezos was appointed to the Board in June 2006. He has extensive Australian and international investment banking experience and is a former Investment Banking Director of the HSBC Group with regional roles during his HSBC career based in London, Sydney and Dubai. Mr Rezos has held chief executive positions and executive directorships of companies in the technology, energy and resources areas in the UK, US and Singapore and was formerly a director of Amity Oil NL (Antares). He is Chairman of Alexium International Group Limited, a principal of Viaticus Capital Pty Ltd and a director of Rowing Australia. Mr Rezos is a member of the Audit and Risk Committee and the Remuneration and Nomination Committee. Directorships of Listed Entities (last 3 years): Alexium International Group Limited (appointed March 2010) Niuminco Group Limited, formerly DSF International Holdings Limited (appointed November 2008, resigned 30 August 2011) Jennifer Anne Seabrook, BCom, ACA, FAICD, Chairman of the Audit and Risk Committee Ms Seabrook was appointed to the Board in May 2009. She is also a non-executive director of IRESS Ltd and Export Finance and Insurance Corporation. Ms Seabrook is a member of ASIC’s External Advisory Group and a Special Advisor to Gresham Partners Limited. She was formerly a member of the Takeovers Panel (2000 to 2012), and previous directorships include being a non-executive director of Amcor Limited, Bank of Western Australia Limited, West Australian Newspapers Holdings Limited, Australian Postal Corporation, Alinta Gas and Western Power. Ms Seabrook is Chairman of the Audit and Risk Committee and a member of the Remuneration and Nomination Committee. In her executive career Jenny worked at senior levels in chartered accounting, capital markets and investment banking businesses. Directorships of Listed Entities (last 3 years): IRESS Limited (appointed August 2008) Amcor Limited (appointed December 2011, resigned July 2012) Stephen John Turner, BCom, ACA Mr Turner was appointed to the Board in March 2010. He is a founder of the London Stock Exchange listed company, International Ferro Metals Limited. He was the Chief Executive Officer of International Ferro Metals Limited from 2002 to 2009 and continues as a director of that company. He is also a director of South American Ferro Metals Limited and Chairman of Vantage Goldfields Limited. Mr Turner has had responsibility for resource projects in Australia, Africa and the Pacific Islands. He was a founding director of the Australian subsidiary of PSG Investment Group, a South African investment bank. He is an Australian Chartered Accountant. Mr Turner is a member of the Audit and Risk Committee. Directorships of Listed Entities (last 3 years): International Ferro Metals Limited (appointed January 2002) South American Ferro Metals Limited (appointed November 2010) Vantage Goldfields Limited (appointed October 2009) Timpetra Resources Limited (appointed May 2010) 12 Iluka Resources Limited Directors' Report 31 December 2012 Wayne Geoffrey Osborn, DipEng, MBA, FTSE, MIE(Aust), FAICD, Chairman of the Remuneration and Nomination Committee Mr Osborn was appointed to the Board in March 2010. He is a former Managing Director of Alcoa of Australia Limited. He is a director of Leighton Holdings Limited, Wesfarmers Limited and Alinta Holdings. Mr Osborn is Chairman of the Australian Institute of Marine Science. He was formerly a director of the Australian Business Arts Foundation and Vice President of the Chamber of Commerce and Industry, Western Australia. Mr Osborn is Chairman of the Remuneration and Nomination Committee. Directorships of Listed Entities (last 3 years): Leighton Holdings Limited (appointed 6 November 2008) Wesfarmers Limited (appointed 24 March 2010) David Alexander Robb, BSc, GradDip (Personnel Administration), FAIM, FAICD, Managing Director Mr Robb was appointed to the Board in October 2006 after his appointment as Managing Director and CEO of Iluka Resources Limited. After graduating from the University of Western Australia, Mr Robb worked in the downstream oil industry with BP in Australia, the UK, the USA and Asia. He joined Wesfarmers in Perth in 1995 and was appointed General Manager, Business Development the Wesfarmers Group in 1996 and subsequently as Managing Director of Wesfarmers Energy in 1999. In 2004 he was appointed an Executive Director of Wesfarmers Limited, a role relinquished in 2006 on joining Iluka. Other previous roles include Chairman of Consolidated Rutile Limited and Deputy Chair of Methodist Ladies College, Perth. for Gregory John Walton Martin, BEc, LLB, FAIM, MAICD Mr Martin was appointed to the Board with effect from 1 January 2013. He has over 30 years' experience in the energy, utility and infrastructure sectors, having spent 25 years with The Australian Gas Light Company, (AGL), including five years as Managing Director and CEO. After leaving AGL, Mr Martin was Chief Executive of the infrastructure division of Challenger Financial Services Group and, subsequently, Managing Director and CEO of Murchison Metals Limited. He is currently Chairman of Prostar Capital and a non-executive Director of Santos Limited, Energy Developments Limited and the Australian Energy Market Operator. Mr Martin is a member of the Audit and Risk Committee. Directorships of Listed Entities (last 3 years): Energy Developments Limited (appointed May 2006) Santos Limited (appointed October 2009) Murchison Metals Limited (appointed May 2011, ceased November 2012) James Hutchison Ranck, BSE (Econ), FAICD Mr Ranck was appointed to the Board with effect from 1 January 2013. He has held senior management positions with DuPont, both in Australia and internationally in finance, chemicals, pharmaceuticals and agriculture for over 30 years. He also served as a Director of DuPont’s Hong Kong based subsidiary, Titanium Technologies, for seven years. Mr Ranck retired as Managing Director of DuPont Australia and New Zealand and Group Managing Director of DuPont ASEAN in May 2010. He is currently a non-executive Director of Elders Limited and the CSIRO. Mr Ranck is a member of the Remuneration and Nomination Committee. Directorships of Listed Entities (last 3 years): Elders Limited (appointed June 2008) COMPANY SECRETARY The Company Secretary is Mr C Wilson LLB. Mr Wilson was appointed to the position of Company Secretary in 2004. Before joining Iluka Mr Wilson held a range of legal and commercial roles at WMC Resources Limited and prior to that worked as a solicitor with a major legal practice. 13 Iluka Resources Limited Directors' Report 31 December 2012 MEETINGS OF DIRECTORS Board of Directors' meetings Audit and Risk Committee meetings Remuneration and Nomination Committee meetings Number attended Number held Number attended Number held Number attended Number held 14 14 13 14 13 14 14 14 14 14 14 14 - 6 5 6 2 6 - 6 6 6 6 6 - 4 3 4 4 3 - 4 4 4 4 4 D A Robb G J Pizzey G J Rezos J A Seabrook W G Osborn S J Turner Although not members of the respective committees, Mr Pizzey attended six Audit and Risk Committee meetings, Mr Osborn attended two Audit and Risk Committee meetings and Mr Turner attended three Remuneration and Nomination Committee meetings. DIRECTORS SHAREHOLDING Directors shareholding is set out in note 21. REMUNERATION REPORT The Remuneration Report is set out on pages 16 to 36. INDEMNIFICATION AND INSURANCE OF OFFICERS The company indemnifies all Directors of the company named in this report and current and former executive officers of the company and its controlled entities against all liabilities to persons (other than the company or the related body corporate) which arise out of the performance of their normal duties as Director or Executive Officer unless the liability relates to conduct involving bad faith. The company also has a policy to indemnify the Directors and Executive Officers against all costs and expenses incurred in defending an action that falls within the scope of the indemnity and any resulting payments. The terms of engagement of Iluka's external auditor includes an indemnity in favour of the external auditor. This indemnity is in accordance with PricewaterhouseCoopers' standard Terms of Business and is conditional upon PricewaterhouseCoopers acting as external auditor. Iluka has not otherwise indemnified or agreed to indemnify the external auditors of Iluka at any time during the financial year. During the year the company has paid a premium in respect of Directors' and Executive Officers' insurance. The contract contains a prohibition on disclosure of the amount of the premium and the nature of the liabilities under the policy. NON-AUDIT SERVICES The group may decide to employ the external auditor on assignments additional to their statutory audit duties where the auditor's expertise and experience with the group are important. The Board of Directors has considered the position and, in accordance with advice received from the Audit and Risk Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the external auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • • fees paid to external auditors for non-audit services for the 2011 year were within the group policy; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. 14 Iluka Resources Limited Directors' Report 31 December 2012 A copy of the auditors' independence declaration as required under section 307C of the Corporations Act 2011 is set out on page 37. Fees that were paid or payable during the year for non-audit services provided by the auditor of the parent entity, its network firms and non-related audit firms is set out in note 22 on page 81 of the financial report. ENVIRONMENTAL REGULATIONS The group's Australian operations are subject to various Commonwealth and State laws governing the protection of the environment in areas such as air and water quality, waste emission and disposal, environmental impact assessments, mine rehabilitation and access to, and use of, ground water. In particular, some operations are required to be licensed to conduct certain activities under the environmental protection legislation of the state in which they operate and such licenses include requirements specific to the subject site. So far as the Directors are aware, there have been no material breaches of the group's licences and all mining and exploration activities have been undertaken in compliance with the relevant environmental regulations. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR On 17 January 2013, Iluka announced its intention to idle the Eneabba mining operation (Mid West, Western Australia) in March 2013. On 21 February 2013, Iluka announced a continued idling of synthetic rutile kiln 3 at Narngulu, Western Australia and other production changes and cost reduction initiatives to reduce production include a total of approximately 200 positions being made redundant. Total costs of and fixed costs that will implementing the announced production cuts and cost reductions of approximately $50 million, including redundancy costs, are expected to be incurred and expensed during 2013. LIKELY DEVELOPMENTS AND EXPECTED RESULTS In the opinion of the Directors, likely developments in and expected results of the operations of the group have been disclosed. Disclosure of further material relating to those matters could result in unreasonable prejudice to the interests of the group. ROUNDING OF AMOUNTS The company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the 'rounding off' of amounts in the Directors' Report. Amounts in the Directors' Report have been rounded off in accordance with that Class Order to the nearest hundred thousand dollars, or in certain cases, to the nearest thousand dollars. This report is made in accordance with a resolution of the Directors. G J Pizzey Chairman Perth 20 March 2013 15 Iluka Resources Limited Remuneration Report 31 December 2012 Remuneration Report CONTENTS The Remuneration Report is presented in the following sections: SECTION 1 SECTION 2 SECTION 3 SECTION 4 SECTION 5 SECTION 6 SECTION 7 SECTION 8 SUMMARY BOARD OVERSIGHT OF REMUNERATION EXECUTIVE REMUNERATION PRACTICES NON-EXECUTIVE DIRECTOR REMUNERATION MANAGING DIRECTOR REMUNERATION EXECUTIVE EMPLOYMENT AGREEMENTS NON-EXECUTIVE DIRECTOR AND EXECUTIVE SHAREHOLDINGS DETAILS OF STATUTORY REMUNERATION DISCLOSURES Details of the remuneration of the directors and other Key Management Personnel (as defined in AASB 124 Related Party Disclosures) of Iluka Resources Limited and the Iluka Resources Limited Group (together 'the group') are set out in the following tables. Other key management personnel of the company and the group are the executives who have authority for planning, directing and controlling the activities of the company and the group. KEY MANAGEMENT PERSONNEL – DIRECTORS (i) Non-execuitve Directors W G Osborn G J Pizzey (Chairman) G J Rezos J A Seabrook S J Turner (ii) Managing Director and Chief Executive Officer D A Robb All above persons were directors of Iluka Resources Limited for all of the financial year, as well as for the financial year ended 31 December 2011, except for Mr D M Morley who retired on 25 May 2011. On 20 December 2012, Mr J H Ranck and Mr G J W Martin were appointed as Directors, with effect from 1 January 2013. KEY MANAGEMENT PERSONNEL - EXECUTIVES C Cobb A Tate S Wickham General Manager Sales and Marketing Chief Financial Officer General Manager Australian Operations H Umlauff and C Wilson were included as key management personnel in the prior year under the requirement of the Corporations Act 2001 to disclose the five most highly remunerated officers, which is no longer required due to a change in the Corporations Act 2011. 16 Iluka Resources Limited Remuneration Report 31 December 2012 SECTION 1: SUMMARY 1.1 Remuneration Principles Iluka’s remuneration practices are designed to support the company’s objective - to create and deliver value for shareholders. Iluka operates in a highly competitive market place for skilled people in the globally buoyant resource industry. Accordingly, Iluka’s remuneration approach is focussed on attracting, retaining and motivating employees and ensuring shareholder value creation and delivery over the medium term. As such, Iluka’s remuneration policies are designed to achieve remuneration which is: Market Competitive • • fixed remuneration which reflects skills, experience and performance and which is comparable and competitive within the resources sector an appropriate balance between fixed and variable (at risk) components of remuneration Performance Based • • focused on both short and long term business performance reward for achievement aligned to company and individual performance Aligned to Shareholder Returns • • objectives set that support business profitability, sustainability and growth and, thus, improved shareholder returns share ownership, including trailing exposure to company performance Transparent • • clear and concise disclosure that takes account of market practice compliant with relevant legislative frameworks 1.2 Components of Executive Remuneration Executive remuneration is made up of fixed (TFR) and at risk (STIP and LTIP) components. A significant portion of total remuneration is at risk. The components of executive remuneration are as follows: Total Fixed Remuneration (TFR) Competitively positioned to support attraction and retention strategies. Short Term Incentive Plan (STIP) Long Term Incentive Plan (LTIP) Strong link to financial performance and delivery of results requiring the achievement of individual growth objectives and regional or group profitability and sustainability targets before any award is payable. The STIP is designed to incentivise applicable employees whilst promoting equity ownership through an award partly in deferred equity. Provides alignment with shareholder interests with incentives based on Return on Equity (ROE) and Total Shareholder Return (TSR) over a three year period. 1.3 2012 Overview The following explains how remuneration and incentive outcomes reflect company performance in 2012. Fixed Remuneration • Non-executive director fees were not increased in 2012 (last increase effective 1 March 2011) • Managing Director’s fixed remuneration was not increased in 2012 (last increase effective 1 January 2011) • Executive fixed remuneration (other than for the Managing Director) was increased on average by 5.15 per cent, effective 1 March 2012 • Overall, the 2012 salary review process for general staff increased fixed remuneration on average by 5.2 per cent Fixed remuneration increases were based on individual performance and market alignment. 17 Iluka Resources Limited Remuneration Report 31 December 2012 Performance Based Reward Profitability targets for the 2012 STIP were set at the commencement of the performance year in line with global economic, market and company performance expectations at that time. Iluka’s full year financial results did not meet threshold targets and accordingly, no payments were awarded in respect to the profitability component of the 2012 STIP (which typically accounts for 60 per cent of total opportunity). Awards made in relation to the 2012 STIP relate to group sustainability objectives (accounting for 10 per cent of total opportunity) and individual business growth related objectives (which typically account for 30 per cent of total opportunity). Overall, the 2012 STIP outcome equated to an average payment of 26 per cent of maximum opportunity for all executives (including the Managing Director) compared with an average payment of 83 per cent for the 2011 STIP. The table below shows a comparison between maximum STIP opportunity for the Managing Director and executives as a percentage of TFR and what was actually awarded in 2011 and 2012. (cid:127) (cid:127) Executives (1) – those executives who’s maximum STIP opportunity is 90 per cent of TFR. Executives (2) – those executives who’s maximum STIP opportunity is 50 to 60 per cent of TFR. 18 Shareholder Alignment The graph below shows Iluka’s share price performance compared with the Materials and the Midcap 50 Indices over the corresponding three year period from 1 January 2010 to 31 December 2012. Iluka Resources Limited Remuneration Report 31 December 2012 2010 Long Term Incentive Plan In respect of the TSR target for the 2010 LTIP (for which the performance period was 1 January 2010 to 31 December 2012), the company achieved a TSR of 170.97 per cent and ranked at the 100th percentile of the Materials Index and MidCap 50 comparator groups. Accordingly, share rights granted in respect of this component of the 2010 LTIP vested in full. ROE performance for the 2010 LTIP was 22.97 per cent against a Threshold target of 10 per cent and a Stretch target of 14 per cent. Accordingly, share rights granted in respect of this component of the 2010 LTIP vested in full. 675,558 shares in total were awarded to participants under the 2010 LTIP. 2012 Employee Share Plan In 2012, the A$1,000 employee share plan was offered to eligible employees. Overall, a total of 616 of 620 eligible employees accepted the offer to participate in the plan for which 46,200 shares in total were awarded. Employees who participated in the STIP or LTIP were not eligible to participate in the 2012 Employee Share Plan. 2012 Restricted Employee Share Plan In 2012, an additional award of shares was offered to eligible employees in the form of restricted shares in lieu of the cancelled 2009/2010 Employee Share Plan. The offer was made to employees who would have been eligible for the employee share plan had it been offered in 2009/2010 for which 125,488 restricted shares in total were was awarded. Iluka Retention Plan including In March 2008, the Board approved the introduction of a Retention Plan for certain individuals, executives, identified as critical to business outcomes over the following three years. The aim of the Retention Plan was to ensure continuity of management and retention of critical technical and functional expertise to support the delivery of major projects and other growth strategies while the company had high debt levels and was experiencing difficult market conditions for its products. The Retention Plan offered participants a grant of share rights which vested in full at the conclusion of a three year retention period. Retention offers were made to a number of key executives during 2008 and early 2009. The retention periods for all but two of the participants concluded in 2011 with the retention periods for the two remaining participants concluding in 2012 for which a total of 29,000 shares was awarded. 19 Iluka Resources Limited Remuneration Report 31 December 2012 The retention plan was closed to new offers in early 2009 and no further shares will be awarded under this plan. 1.4 Iluka's five year performance Shareholder Returns For the five years to 31 December 2012, assuming full participation in the rights issue in March 2008, shareholders achieved total returns of 185% (before franking credits and tax). This is illustrated in the below chart. Source: S&P Capital IQ A. A shareholder invests $4.11 to acquire one share on the last day of trading in 2007. B. In March 2008, the shareholder participates in the 4 for 7 rights issue at $2.55 per share. For each share held, the shareholder purchases 0.57 shares1 for $1.46. C. Total amount invested was $5.57 (A+B). D. As at 31 December 2012, share price was $9.02. The shareholder’s 1.57 shares is valued at $14.17. E. Aggregate dividends paid over the five year period were $1.08 per share (before franking credits)2 which F. amounts to $1.70 on the shareholder’s 1.57 shares. Total value of shares plus dividends received as at 31 December 2012 was $15.87 (D+E), amounting to a return of 185% over the five year period. 1 In this example, the number of shares issued under the rights issue have not been rounded. 2 Comprised of 2010 final dividend (8 cps unfranked), 2011 interim dividend (20 cps unfranked), 2011 final dividend (55 cps franked) and 2012 interim dividend (25 cps franked). 20 Iluka Resources Limited Remuneration Report 31 December 2012 Earnings over the same five year period are set out in the table below: 31 Dec 08 31 Dec 09 31 Dec 10 31 Dec 11 31 Dec 12 Net profit after tax ($ million) Earnings per share (cents) Closing share price ($) Dividends paid (cents) 49.0 14.2 4.64 - (82.4) (20.2) 3.58 - 36.1 8.6 9.14 - 541.8 130.1 15.50 28 363.2 87.1 9.02 80 1.5 Executive Total Earnings in 2012 Details of the remuneration received by the Managing Director and executives prepared in accordance with statutory requirements and accounting standards are detailed on pages 33 to 36 of this Remuneration Report. The table below sets out the total earnings for the Managing Director and executives for 2012 - sometimes referred to as “actual” or “take-home” pay. These earnings include cash salary and fees, superannuation, non-cash benefits received during the year and the full value of incentive payments earned for which the performance period concluded in 2012. The table does not include the accounting value of share based payments consisting of share rights granted in the current and prior years. This is because those share based payments are dependent on the achievement of performance hurdles and so may or may not be realised. Name D Robb C Cobb A Tate S Wickham Base $ Super- annuation $ Other1 $ 2012 STIP2 $ $ 2010 LTIP3 $ 2012 Total Earnings $ 1,727,189 620,338 604,012 631,725 22,811 46,503 20,208 16,123 53,146 46,298 - 6,600 Cash 391,965 78,434 74,904 79,653 Restricted Shares 391,965 132,450 74,903 134,511 Shares 1,235,366 345,902 406,847 3,822,442 1,269,925 1,180,874 411,789 1,280,401 Includes non-monetary benefits. 1 2 Represents the value of the 2012 STIP which was awarded partly in cash and partly in deferred equity in March 2013. 3 Represents the value of the 2010-12 LTIP award for which the performance period concluded 31 December 2012 calculated at the closing share price of $10.13 at the date of award (1 March 2013). 21 Iluka Resources Limited Remuneration Report 31 December 2012 1.6 Executive Total Earnings in 2011 The table below shows the total earnings for the Managing Director and executives relating to the 2011 performance year for comparison purposes. Name D Robb C Cobb A Tate5 H Umlauff S Wickham C Wilson Base $ Super- annuation $ Other1 $ 2011 STIP2 $ Cash $ Restricted Shares 2009 LTIP3 $ Retention Plan4 $ 2011 Total Earnings $ Shares Shares 1,703,271 585,458 588,402 546,942 604,882 454,660 46,202 49,541 19,832 49,225 15,487 24,718 46,364 36,020 - 4,741 4,741 6,833 872,890 243,318 222,133 210,918 251,428 192,095 872,889 405,635 222,133 210,917 419,156 192,094 1,566,501 - 515,753 602,408 456,243 468,771 - - 1,595,280 844,240 567,440 1,508,560 5,108,117 1,319,972 3,163,533 2,469,391 2,319,377 2,847,731 Includes non-monetary benefits. 1 2 Represents the value of the 2011 STIP which was awarded partly in cash and partly in deferred equity in March 2012. 3 Represents the value of the 2009-11 LTIP award for which the performance period concluded 31 December 2011 calculated at the closing share price of $16.70 at the date of award (1 March 2012). 4 Represents the value of the Iluka Retention Plan award calculated at the closing share price of $13.84 at the date of award (13 April 2011). 5 Represents the value of the Iluka Retention Plan award calculated at the closing share price of $15.64 at the date of award (31 May 2011). SECTION 2: BOARD OVERSIGHT OF REMUNERATION 2.1 Board Oversight The Remuneration and Nomination Committee (Committee) operates in accordance with its charter as approved by the Board. The Committee is comprised solely of independent non-executive directors and is chaired by Mr Osborn. The Committee’s responsibility is to provide assistance and recommendations to the Board in support of the company’s objective of creating and delivering value for shareholders and in fulfilling its corporate governance responsibilities relating to the following: • • • • • • • overall remuneration strategy of the company; remuneration of non-executive directors; performance and remuneration of the Managing Director and executives; selection and appointment of, and succession planning for, non-executive directors; selection and appointment of, and succession planning for, the Managing Director; succession planning for key roles; and diversity strategy, policies and practices of the company. The Committee also makes decisions on behalf of the Board where such authority has been expressly delegated. 2.2 Use of Remuneration Consultants The Committee has the resources and authority appropriate to discharge its duties and responsibilities, including the authority to engage external professionals on terms it determines to be appropriate. During 2012, external advisers were engaged by the Committee and provided input on several matters relating to remuneration. These advisers were: • • Ernst & Young - were engaged to provide assistance in relation to executive remuneration including market benchmarking data for non-executive director and Managing Director Remuneration, executive remuneration market trends and Iluka’s employee share plans; and Jackson McDonald - were engaged to provide legal advice in respect of share plans and executive contracts. 22 Iluka Resources Limited Remuneration Report 31 December 2012 During the year ended 31 December 2012 no remuneration recommendations, as defined by the Corporations Act, were provided by Ernst & Young or Jackson McDonald. SECTION 3: EXECUTIVE REMUNERATION PRACTICES The remuneration of an executive is linked to both annual business and individual performance outcomes and to the company’s ability to create and deliver competitive levels of shareholder value, as defined by total shareholder return (TSR) and return on equity (ROE), on a longer term basis. In the interest of transparent reporting, Iluka discloses its ROE target range measure which forms part of the LTIP. Directors and executives are prohibited from trading in financial products issued or created over the company’s securities by third parties, and from trading in associated products and entering into transactions which operate to limit the economic risk of their security holdings in the company. This prohibition extends to directors and executives taking out margin loans on their holdings of Iluka securities. 3.1 Relationship between reward and performance As discussed in detail performance measures underlying the incentive plans in 2012 were: in the "Performance and Incentive" section of this report (see page 24), the key • • STIP: Profitability (Return on Capital (ROC), Earnings Before Interest and Tax (EBIT) and Net Profit After Tax (NPAT)), Sustainability (total recordable injury frequency rate, severity rate and environmental incidents) and Growth (individual stretch objectives). LTIP: ROE and relative TSR. Performance against each of the above measures determines the quantum of STIP and LTIP awards. 3.2 Remuneration Structure Remuneration for executives comprises two components: • • total fixed remuneration (TFR) which is made up of base salary and superannuation, together with other salary sacrifice items such as novated leases and car parking (employees are required to meet any fringe benefits tax obligations applicable to salary sacrificed items); and variable remuneration, being the STIP and LTIP, which is linked directly to performance of both the company and the individual executive and, as such, is deemed to be “at risk”. The remuneration structure is designed to reflect an appropriate balance between fixed and variable remuneration to ensure that executive reward is aligned with the performance of the business. 3.3 Total Fixed Remuneration Iluka’s TFR structure is assessed against the median level of the market as defined by a comparator group of Australian companies within the resources market. Individual TFR is determined within an appropriate range centred at the market median by referencing job evaluation data and individual experience and performance levels. Allowance is also made for the competitive nature of the market for talent in the resources sector. 3.4 Superannuation Benefits Iluka has appropriate superannuation and pension arrangements in countries where it operates. In Australia, the company contributes superannuation at the minimum required rate to each executive’s nominated eligible fund. Individuals may elect to make further voluntary contributions from pre-tax salary. All Australian based employees (including executives) are entitled to contribute to the Iluka Superannuation Plan. The plan is administered by OnePath as part of a master trust of which approximately 86 per cent of Australian employees are members. The plan is primarily an accumulation style plan. A small number of employees have retained membership in a defined benefit sub-plan, a legacy from the 1999 merger of Westralian Sands Limited with RGC Limited. The defined benefit sub-plan is closed to new members. 23 Iluka Resources Limited Remuneration Report 31 December 2012 3.5 Remuneration Review The company conducts a review of the remuneration of executives and staff on an annual basis. Guidelines for reviews are approved by the Remuneration and Nomination Committee. Review guidelines are based upon the outcomes of direct and related market review data and external advice from the company’s remuneration advisers. All employees and executives participate in an objective setting and performance review process which is used in conjunction with market data to determine appropriate remuneration recommendations. Individual progress against objectives is reviewed throughout the performance year with formal reviews occurring at half year and at the conclusion of the performance year. Recommendations by the Managing Director for STIP and LTIP award outcomes and remuneration for executives are submitted to the Remuneration and Nomination Committee in February of each year. In respect of all other eligible participants, a one up approval process applies with final Managing Director approval prior to any remuneration review being implemented. 3.6 Performance and Incentives The current performance and incentive arrangements were introduced for the 2007 performance year. The incentive arrangements comprise a Short Term Incentive Plan (STIP) and a Long Term Incentive Plan (LTIP). These distinct plans balance the short and long term aspects of business performance, reflect market practice and support business needs. The incentive plans ensure a strong alignment between the incentive arrangements of executives and the creation and delivery of shareholder value and support Iluka’s aim of attracting, retaining and motivating experienced employees. The STIP and LTIP operate within the existing rules of the Directors, Executives and Employees Share Acquisition Plan (DEESAP), as approved by shareholders at the company’s Annual General Meeting in May 1999. Subject to satisfaction of vesting conditions and performance criteria, share rights issued under the DEESAP entitle the recipient to acquire fully paid ordinary shares in the company. No amount is payable by a recipient for the grant of any shares or share rights under the DEESAP. A summary of the DEESAP is contained in Schedule 2 of the company’s 2011 notice of annual general meeting released to ASX on 12 April 2011 [and can also be found on the Remuneration section of Iluka’s website (www.iluka.com)]. At target levels of performance, the STIP generally represents two-thirds of potential variable remuneration, and the LTIP generally represents one-third. Only nominated employees participate in the STIP and LTIP. The level of award opportunity is determined by an individual’s role within the business and capacity to impact the results of the company. In 2013, it is anticipated that 203 employees (representing 18 per cent of employees and including all executives) will participate in the STIP, and 114 employees (representing 10 per cent of employees and including all executives) will participate in the LTIP. In 2012, the corresponding percentages were 17 per cent and 10 per cent, respectively. Objectives, measures and targets for both the STIP and the LTIP are set on an annual basis and are subject to the approval of the Board. Executive Incentive Opportunity Plan STIP* LTIP Target (% of TFR) Stretch (% of TFR) 60% to 90% 30% 90% to 120% N/A *Varies for individuals according to job size and impact 24 Iluka Resources Limited Remuneration Report 31 December 2012 3.6.1 The Short-Term Incentive Plan (STIP) The STIP aims to provide an incentive to participants whilst also promoting equity ownership by providing awards partly in cash and partly in deferred equity. The STIP is linked to group and regional financial and operational performance and has a focus on ROC as a key metric. A combination of financial and non-financial targets (including safety, environmental and individual growth specific targets) are used to measure performance and determine outcomes including: • • Profitability - ROC and EBIT metrics reflect the organisational unit within which the individual is located (for example, regional versus corporate roles) and are measured independently. All participants are measured against group NPAT; Sustainability - metrics are group targets except where best practice has been achieved by an individual business unit in the prior year; and • Growth Targets - individual specific targets (eg delivery of a major project). The weighting of the growth measure is typically set at 30 per cent. However, the Board has discretion for a performance year to vary the growth weighting for any individual within a range from 20 per cent to 40 per cent in line with the company’s priorities. The process for the development and assessment of individual objectives is a rigorous one. Objectives are linked to major business opportunities and risks as typically identified in Iluka’s Corporate Plan and to the priorities for the relevant year. Specific and measurable deliverables and the timeframe for achievement are defined for each objective. The deliverables and the timeframes are set at a stretch level of performance. Objectives are set in conjunction with the Managing Director for all executives, followed by review and approval by the Remuneration and Nomination Committee. The process is designed to ensure a close alignment between the STIP and the company’s objective of creating and delivering value for shareholders. The STIP award is determined after the year-end. Profitability and sustainability performance must exceed the threshold target before any award is made for these measures. Growth outcomes are based on an assessment of the extent to which the individual’s objectives have been achieved. Outcomes are subject to rigorous one up assessment and, for the Managing Director and executives, assessment by the Board. 2012 STIP The measures and weighting of objectives for the 2012 performance year were: Profitability (ROC, EBIT and NPAT) 60 per cent Sustainability injury frequency rate, severity rate and level 3 and above environmental incidents) recordable (total Growth (individual objectives) 10 per cent 30 per cent STIP payments to the Managing Director and executives in 2012 were lower than those paid in 2011 due to profitability targets for the 2012 performance year not being achieved. Accordingly, no payments were made in respect to this component of the 2012 STIP. Awards made to the Managing Director and executives under the 2012 STIP reflect the achievement of sustainability and growth objectives. The STIP award is typically paid half in cash and half on a deferred basis in the form of ordinary restricted shares. The Board has discretion to increase the proportion of deferred equity (reducing the cash component). Fifty per cent of the restricted shares do not vest until one year after the end of the performance period, while the remaining fifty per cent does not vest until two years after the end of the performance period. The mandatory deferral also requires executives to remain with the company and to continue to perform satisfactorily for the shares to vest. As a consequence, executives have a significant trailing exposure to their own and company performance subsequent to the award. The deferred amount also supports executive focus on both annual and multi-year performance, as well as providing a retention element. 25 Iluka Resources Limited Remuneration Report 31 December 2012 The process for determining the number of restricted shares to be awarded to each participant is determined by dividing the dollar value of the deferred component by the Volume Weighted Average Price (VWAP) of Iluka shares traded on the ASX over the five trading days following release of the company’s full year results for 2012. 3.6.2 The Long-Term Incentive Plan (LTIP) The LTIP provides a grant of equity in the form of share rights for Iluka shares that vest after three years subject to performance over a three year period. The grant is split into two separate components, with one component (50 per cent) being assessed based on ROE relative to an internal target and the other (50 per cent) based on TSR performance relative to a comparator group of companies. The two performance measures are applied as follows: Return on Equity component: The ROE component of the LTIP grant vests based on a prospective three year average ROE performance measure. Vesting occurs on a straight line basis for performance between Threshold and Target. Targets are set giving consideration to: • • • the company’s ROE performance history; planned strategic and business plan activity throughout the performance period; and the performance of comparable companies in the ASX 200 Materials Index. Targets are reviewed annually and set for a forward three year period. It can be expected that as sustainable performance improves, targets will be increased - within the bounds of feasible achievement - creating a “staircase” effect over time. Similarly, because performance is measured over the three years as an average, a failure to achieve targeted levels of performance in any one year increases the hurdle in the remaining years. ROE targets for the 2010, 2011 and 2012 LTIP are shown in the table below: LTIP grant 2012 – 2014 2011 – 2013 2010 – 2012 Threshold 40% 12% 10% Target 50% 20% 14% The targets above may be compared with a three year history for Iluka (to 2011) in which the average ROE was 12.7 per cent, or with a three year average for the ASX 100 (less property trusts) of 16.29 per cent. Total Shareholder Return component: The TSR component of the LTIP grant vests based on TSR relative to a comparator group of companies. The comparator group consists of the companies which for the 2010 LTIP comprised the Materials Index and the ASX Mid Cap 50 Index at the commencement of the performance period (excluding property trusts and duplication). In 2011, following a review of Iluka’s combined Materials Index and Midcap 50 Index comparator group, a decision was made to remove the Midcap 50 Index and measure performance solely against the ASX 200 Materials Index as it better reflects the companies that operate within the same industry and with which Iluka competes for investment. The ASX 200 Materials Index comparator group has been applied to the 2011 and 2012 LTIPs. 26 Iluka Resources Limited Remuneration Report 31 December 2012 LTIP Vesting Schedule The table below outlines the LTIP vesting schedule for the TSR and ROE component: Measure ROE TSR Total Grant LTIP Vesting Schedule Performance Hurdle to be achieved Threshold Target 50th percentile 75th percentile Percentage of total grant that will vest 25% 50% 25% 50% Maximum percentage of total grant 50% 50% 100% Vesting occurs on a straight-line basis for performance between threshold and target for both measures. All offers and details of the maximum allocation for the Managing Director and executives are shown on page 36. It should be noted that the maximum allocations listed are subject to the respective performance criteria. If at the end of the performance period the performance criteria have not been met there will be no entitlement to shares. 2010 LTIP At the end of 2012, the 2010 LTIP grant completed its performance period (1 January 2010 to 31 December 2012). Performance was measured against both the ROE and relative TSR hurdles. Performance and resulting vesting was as follows: Component Performance target Actual performance Implication for vesting ROE (50%) 50% vesting for Threshold of 10% with full vesting at target of 14% 22.97 per cent Full vesting of the ROE component Relative TSR (50%) 50% vesting for 50th percentile and full vesting for 75th percentile 100th percentile Full vesting of the TSR component 3.6.3 Securities Trading Iluka's policy in relation to employees holding Iluka securities is set out in the company's Securities Trading Policy, which can be found on the company's website at www.iluka.com. The policy sets out the circumstances in which employees may trade in company securities. 3.6.4 Employee Share Plan The Board believes that strong employee alignment with shareholder outcomes is a vital element of high the company wants all performing companies that create and deliver value for shareholders. Put simply, employees to identify with shareholder returns. Accordingly, the company operates an Employee Share Plan under the rules of the Iluka Resources Limited Employee Share Plan (“Employee Share Plan or Plan”). The Board may, from time to time, at its discretion, make written offers to participate in the Plan. To satisfy the legislative requirements of both Australia and the United States, Australian employees receive the shares under a tax-exempt plan, with a three year sale restriction period (a holding lock is applied during the restriction period). As US employees do not have access to a tax exemption plan, they are offered shares up to A$1,000 through a grant of restricted shares. The shares are held under the Plan with a restriction period of three years. To enable US employees to receive a tax deferral, strict forfeiture conditions apply. The Employee Share Plan was offered in respect to the 2007/2008 and 2008/2009 financial years but was suspended for the 2009/2010 financial year as part of the company’s response to the global economic crisis. 27 Iluka Resources Limited Remuneration Report 31 December 2012 In 2011, the Employee Share Plan was reinstated in respect to the 2010/2011 financial year. Of the 504 Australian employees eligible to participate, 482 (96 per cent) accepted the offer. In the US, 91 of 106 (86 per cent) eligible employees participated. Overall, a total of 573 (94 per cent) of 610 eligible employees accepted the offer. In 2012, of the 497 Australian employees eligible to participate in the Employee Share Plan, 493 (99 per cent) accepted the offer. In the US, all 123 eligible employees participated. Overall, a total of 616 of 620 eligible employees accepted the offer. Shares acquired under the Employee Share Plan are not subject to performance conditions as the primary objective of the Plan is to encourage share ownership by all employees. 3.6.5 2012 Restricted Employee Share Plan In 2012, an additional award of shares was offered to eligible employees in the form of restricted shares in lieu of the cancelled 2009/2010 Employee Share Plan. Each eligible employee was offered 253 restricted shares which was the estimated number of shares a participant would have received had the 2009/2010 employee share plan been offered. The estimated number of shares was based on the volume weighted average share price (VWAP) of shares traded during the month of March 2010, being $3.94. The value of the shares to each participant at the time of the offer would have been approximately $997 (i.e. 253 shares multiplied by a share price of $3.94). The offer was made to 500 eligible employees of which 496 accepted the offer. This resulted in a total of 125,488 restricted shares being awarded. Shares awarded under this offer have a 12 month non-disposal and forfeiture condition. 3.6.6 Iluka Retention Plan During 2007 and 2008, the resources sector experienced very high levels of competition for management and technical talent, with resulting skill shortages and upward pressures on remuneration. These pressures were particularly prevalent at the senior management level and for highly skilled professionals critical to business operation. The Board recognises that continuity of management and retention of key talent is critical to achieving the successful delivery of major projects and other strategies in order to enhance shareholder returns. In that context, the Board regularly reviews the market competitiveness of senior management remuneration and its ability to retain senior management to achieve long term business objectives. Consequently, individuals identified as critical to business outcomes over the medium term. in March 2008 the Board approved the introduction of a Retention Plan limited to certain The Retention Plan offered participants a grant of share rights to ordinary shares in Iluka Resources Limited which vest in full at the conclusion of a three year retention period. The grant of share rights rather than a cash payment provides a strong alignment of the interests of participants with those of shareholders. Where a participant voluntarily ceases employment during the retention period, all share rights awarded under the Retention Plan are forfeited. Retention Plan share rights awarded to executives are included as rights granted in the table on page 32. In August 2009, the Board closed the Retention Plan and no further grants have been made. 28 Iluka Resources Limited Remuneration Report 31 December 2012 SECTION 4: NON-EXECUTIVE DIRECTOR REMUNERATION The remuneration of the non-executive directors is determined by the Board on recommendation from the Remuneration and Nomination Committee within a maximum aggregate amount approved by shareholders at an fees (including superannuation) as Annual General Meeting. The current cap on non-executive directors’ approved by shareholders in May 2011 is $1.5 million. The total amount paid to non-executive directors in 2012 (including superannuation) was $1,004,475. The Board decided not to increase non-executive director fees in 2012. Details of non-executive director fees in 2012 are as follows: Non-Executive Director Fees Board Chairman (inclusive of Committee fees) Board Member Board Member Committee Fees Audit and Risk Committee Chair Remuneration and Nomination Committee Chair Audit and Risk Committee Member Remuneration and Nomination Committee Member 1 Mar 2011 to 31 Dec 2012 $ p.a 312,000 125,000 35,000 25,000 17,500 12,500 The minimum required employer superannuation contribution up to the statutory maximum is paid into each Director’s nominated eligible fund and is in addition to the above fees. Based on the above fee structure, the current total non-executive director remuneration for Iluka’s seven directors, assuming no further changes in 2013, is $1,199,500 per annum, excluding superannuation, or $1,295,845 including superannuation. SECTION 5: MANAGING DIRECTOR REMUNERATION The employment terms and conditions for the Managing Director, David Robb, are set out below. Total Fixed Remuneration $1,750,000 for the year ended 31 December 2012. 2012 Short Term Incentive 90 per cent of TFR at target with up to 120 per cent of TFR for stretch performance awarded 50 per cent as cash and 50 per cent as deferred equity. Measure Profitability (ROC, EBIT, NPAT) Sustainability (total recordable injury frequency rate, severity rate and environmental incidents Growth (individual objectives) Weighting 50 per cent 10 per cent 40 per cent Individual objectives and related deliverables are set each year by the Board at what is assessed to be a stretch level of performance. These objectives typically vary from year to year in line with the company’s objective of creating and delivering value for shareholders. 29 Iluka Resources Limited Remuneration Report 31 December 2012 2012 Long Term Incentive A grant of equity in the form of share rights of up to 30 per cent of TFR measured over a three year performance period. Measure ROE TSR Weighting 50 per cent 50 per cent Long Term Incentive Deferred Plan (2011 to 2013) Retention Offer Performance Period Year 1 Year 2 Year 3 At the 2011 AGM, shareholders approved the following retention arrangements for Mr Robb (referred to as the Long Term Incentive Deferred Plan or LTID Plan). 750,000 share rights offered in three tranches over a 3 year retention period with each tranche being subject to performance criteria referable to Iluka’s TSR. 2011 Financial Year – performance measured from 4 March 2011 to the date 5 business days after announcement of the 2011 annual financial results. 2012 Financial Year – performance measured from the end of the Year 1 Performance Period to the date 5 business days after announcement of the 2012 annual financial results. 2013 Financial Year – performance measured from the end of the Year 2 Performance Period to the date 5 business days after announcement of the 2013 annual financial results. Performance Hurdles For each tranche of share rights there are TSR performance hurdles referable to each performance period as detailed below. - Tranche 1 450,000 Share Rights A base tranche of 150,000 share rights each year that requires an absolute TSR of 12.5 per cent compounding over the three years. - Tranche 2 150,000 Share Rights A base tranche of 50,000 share rights each year that requires an absolute TSR of 15 per cent compounding over the three years. - Tranche 3 150,000 Share Rights A base tranche of 50,000 share rights each year that requires an absolute TSR of 17.5 per cent compounding over the three years. Vesting Conditions Vesting Date Forfeiture A tranche of share rights will vest on the Vesting Date if performance hurdle calculated over the Performance Period for that achieved. the absolute TSR tranche is The share rights applicable to a Performance Period will also vest the TSR performance hurdle is not satisfied at the end of that Performance Period, but the compound TSR performance hurdle for the subsequent Performance Period is satisfied. if Subject to the performance criteria of each tranche being satisfied, share rights will vest 12 months after the last day of the third Performance Period (i.e. February / March 2015). All entitlements under the LTID Plan are forfeited if Mr Robb resigns prior to the end of the three year retention period. Full details of Remuneration section of Iluka’s website (www.iluka.com). the Managing Director’s LTID Plan can be found on the 30 Iluka Resources Limited Remuneration Report 31 December 2012 Termination Arrangements With Notice Without Notice At the 2011 AGM, shareholders approved the following termination payments which may become payable to Mr Robb under the terms of the Executive Employment Agreement entered into between Mr Robb and the company on 11 April 2011. Employment can be terminated by the company during the contract period by giving 12 months notice or pay in lieu of notice plus the total incentive for performance at target under the STIP and LTIP, pro-rata up to the end of the 12 month notice period. All shares to which Mr Robb is entitled under the DEESAP will vest within three months of termination. In the case of misconduct and in certain other circumstances, employment can be terminated without notice and with no entitlement to pro-rata long service leave or any payment under any relevant incentive plan. Voluntary Termination Employment may be terminated by giving six months notice. Any pro-rata award under any relevant incentive plan will be at the discretion of the Board. Termination for other reasons Protection of Interests * By Iluka on the ground of redundancy or by Mr Robb if, at the instigation of the Board he suffers a material diminution in his status as Managing Director, by giving 12 months notice or shall pay an equivalent amount of TFR in lieu of notice. * By Iluka if Mr Robb suffers illness, accident or other cause which renders him unable to perform his duties, by giving Mr Robb 12 months notice or pay an equivalent amount of TFR in lieu of notice. * In the circumstances described above, Mr Robb will receive the total incentive for performance at target under the STIP and LTIP, pro-rata up to the end of the 12 month notice period. All shares to which Mr Robb is entitled under the DEESAP will vest within three months of termination. Mr Robb is restrained from engaging in certain activities during his employment, and for a period following termination of his employment, Iluka’s interests. The Executive Employment Agreement contains provisions relating to the protection of confidential information and intellectual property. in order to protect SECTION 6: EXECUTIVE EMPLOYMENT AGREEMENTS Remuneration and other terms of employment for the Managing Director and executives are formalised in service agreements. The Managing Director and executives are employed on a rolling basis with no specified fixed terms. The Managing Director and executives are remunerated on a total fixed remuneration (TFR) basis, inclusive of superannuation. 6.1 Executive Service Agreements Major provisions of the agreements relating to executives included in this Remuneration Report are set out below. Executive Position Termination Notice Period by Iluka Termination Notice Period by Employee Termination Payments1 C Cobb A Tate General Manager Sales & Marketing Chief Financial Officer S Wickham General Manager Australian Operations 3 months 3 months 3 months 3 months 3 months 3 months 9 months 9 months 9 months 1 Termination payments (other than for gross misconduct) are calculated on current total fixed remuneration at date of termination and are inclusive of the notice period. These termination payments have not changed in the previous two years. 31 Iluka Resources Limited Remuneration Report 31 December 2012 SECTION 7: NON-EXECUTIVE DIRECTOR AND EXECUTIVE SHAREHOLDINGS 7.1 Shareholdings Number Of Shares Name Balance held at 1/1/12 Vesting of share rights Awarded as Restricted Shares Other changes Balance held at 31/12/12 Non-Executive Directors W Osborn G Pizzey G Rezos J Seabrook S Turner Executive Director D Robb Executives C Cobb A Tate S Wickham 1,800 18,351 70,000 19,314 50,000 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a - 3,000 5,000 - - 1,800 21,351 75,000 19,314 50,000 888,528 93,776 52,332 (293,776) 740,860 17,183 63,446 85,069 - 30,883 27,320 24,319 13,317 25,129 - (30,883) (14,000) 41,502 76,763 123,518 No shares were forfeited during the year 7.2 Share Rights Number Of Share Rights Balance held at 1/1/12 Granted during 2012 Vested as shares during 2012 Lapsed during 2012 Balance held at 31/12/121 Fair value of Share Rights granted in ($)2 2012 1,014,977 31,475 (93,776) 51,032 88,494 85,418 11,565 11,691 11,745 - (30,883) (27,320) - - - - 952,676 405,083 62,597 69,302 69,843 148,842 150,463 151,158 Name Executive Director D Robb Executives C Cobb A Tate S Wickham 1 Rights granted in respect to the 2012 LTIP which forms part of share based payments for 2012 to 2014 inclusive. Non-Executive Directors do not have any entitlement to share rights. 32 Iluka Resources Limited Remuneration Report 31 December 2012 SECTION 8: DETAILS OF STATUTORY REMUNERATION DISCLOSURES Details of the remuneration of the directors and other Key Management Personnel (as defined in AASB 124 Related Party Disclosures) of Iluka Resources Limited and the Iluka Resources Limited Group are set out in the following tables. Other key management personnel of the company and the group are the executives who have authority for planning, directing and controlling the activities of the company and the group. KEY MANAGEMENT PERSONNEL – DIRECTORS (i) Non-execuitve Directors W G Osborn G J Pizzey (Chairman) G J Rezos J A Seabrook S J Turner (ii) Managing Director and Chief Executive Officer D A Robb All above persons were directors of Iluka Resources Limited for all of the financial year, as well as for the financial year ended 31 December 2011. G J Martin and R H Ranck were appointed as Directors on 1 January 2013. 2012 KEY MANAGEMENT PERSONNEL - EXECUTIVES C Cobb A Tate S Wickham General Manager Sales and Marketing Chief Financial Officer General Manager Australian Operations H Umlauff and C Wilson were included as key management personnel in the prior year under the requirement of the Corporations Act 2001 to disclose the five most highly remunerated officers, which is no longer required due to a change in the Corporations Act 2011. In the tables on the following page, which set out short term employment benefits, the amounts in the ”STIP cash” column are dependent on the satisfaction of performance conditions as set out in the section headed “Short Term Incentive Plan” above. Amounts in the ”Share Based Payments” column relate to the component of the fair value of awards from prior years made under the various incentive plans attributable to the year measured in accordance with AASB 2 Share Based Payments. All other elements of remuneration are not directly related to performance. 33 2012 Short Term Employee Benefits Iluka Resources Limited Remuneration Report 31 December 2012 *STIP Cash2 $ Non-monetary Benefits $ Other $ Super- annuation $ *Share-based Payments2 $ 2012 Statutory Total $ Name Base, Committee, Cash, Salary Fees1 $ & Non-Executive Directors W Osborn G Pizzey G Rezos 150,000 312,000 155,000 J Seabrook S Turner Total 172,500 142,500 932,000 n/a n/a n/a n/a n/a - - - - - Executive Director D Robb 1,727,189 391,965 53,146 Executives C Cobb A Tate S Wickham Total 620,338 604,012 631,725 78,434 74,904 79,653 1,856,075 232,991 46,298 - 6,600 52,898 n/a n/a n/a n/a n/a - - - - 13,500 16,675 13,950 15,525 12,825 72,475 n/a n/a n/a n/a n/a 163,500 328,675 168,950 188,025 155,325 1,004,475 22,811 3,294,351 5,489,462 46,503 20,208 16,123 82,834 422,191 320,031 444,617 1,213,764 1,019,155 1,178,718 1,186,839 3,411,637 1 STIP Cash includes cash that is sacrificed for the purchase of shares during the year up to the statutory maximum of $5,000. 2 STIP Cash and share-based awards for 2012 were made in March 2013. * n/a denotes that non-executive directors are not eligible for these arrangements. 34 n/a n/a n/a n/a n/a n/a - - - - - - - 2011 Short Term Employee Benefits Iluka Resources Limited Remuneration Report 31 December 2012 Name Base, Committee, Cash, Salary Fees1 $ & Non-executive directors D Morley* W Osborn 60,076 145,833 G Pizzey G Rezos J Seabrook S Turner Total 305,833 150,833 161,373 138,333 962,281 **STIP Cash2 $ Non-monetary Benefits $ Other $ Super- annuation $ **Share-based Payments2,3 $ n/a n/a n/a n/a n/a n/a - 2,783 - 5,551 5,551 2,359 16,244 5,407 13,125 16,306 13,575 14,524 12,450 75,387 n/a n/a n/a n/a n/a n/a 2011 Statutory Total $ 65,483 161,741 322,139 169,959 181,448 153,142 1,053,912 Executive Director D Robb 1,703,271 872,890 46,364 Executives C Cobb A Tate H Umlauff S Wickham C Wilson Total 585,458 588,402 546,942 604,882 454,660 243,318 222,133 210,918 251,428 192,095 2,780,344 1,119,892 36,020 - 4,741 4,741 6,833 52,335 46,202 2,638,048 5,306,775 49,541 19,832 49,225 15,487 24,718 193,745 220,675 235,818 242,911 204,351 1,108,082 1,051,042 1,047,644 1,119,449 882,657 158,803 1,097,500 5,208,874 1 STIP Cash includes cash that is sacrificed for the purchase of shares during the year up to the statutory maximum of $5,000. 2 STIP Cash and share-based awards for 2011 were made in March 2012. 3 Includes negative amounts for the reversal of prior year charges for the ROE component of the 2008 and 2009 LTIP which did not vest * D Morley was a director from the beginning of the 2011 financial year until his resignation on 25 May 2011. ** n/a denotes that non-executive directors are not eligible for these arrangements. 35 Iluka Resources Limited Remuneration Report 31 December 2012 SHARE-BASED COMPENSATION STIP Restricted Shares awarded to the Managing Director and Executives yet to vest Awarded %2 Name D Robb C Cobb A Tate S Wickham 2010 STIP1 2011 STIP1 2012 STIP1 2010 2011 2012 39,230 8,592 9,636 9,683 52,332 24,319 13,317 25,129 38,428 12,985 7,343 13,187 93 97 92 92 83 90 80 90 37 27 26 27 1 STIP restricted share fair value determined independently using the Monte Carlo model that takes into account the share price at grant date, the expected price volatility of the underlying share, the expected dividend yield and the risk free discount rate for the vesting period. STIP restricted shares are awarded in March of the following year (eg 2012 STIP Awards are made in March 2013). 2 The percentage achieved of the STIP maximum available incentive opportunity awarded for the financial year. Maximum value of unvested restricted shares and share rights The maximum value of restricted shares and/or share rights that will be recognised as share based payments in future years is set out below. The maximum value of those restricted shares and/or rights yet to vest has been determined as the amount of the grant date fair value of the share rights and/or shares that is yet to be expensed. No share and/or share rights will vest if the conditions are not satisfied, hence the minimum value of the options yet to vest is nil. Name D Robb C Cobb A Tate S Wickham Fair Value Maximum Value ($) Vesting Year 2014 1,046,624 411,069 295,264 423,581 2013 1,171,840 386,854 323,232 423,679 2015 9,458,566 215,060 187,907 218,407 The fair value of each restricted share or share right and the vesting year for each incentive plan is set out below. Incentive Plan 2010 LTIP 2010 STIP (Tranche 2)* LTID (Tranche 1) LTID (Tranche 2) LTID (Tranche 3) 2011 LTIP 2011 STIP* 2012 LTIP 2012 STIP* Grant Date January 2010 January 2011 March 2011 March 2011 March 2011 January 2011 March 2012 January 2012 March 2013 Fair Value per Share or Right at Grant Date 3.09 9.14 11.81 11.49 11.16 8.41 16.68 12.87 10.20 Vesting Year 2013 2012 & 2013 2015 2015 2015 2014 2013 & 2014 2015 2014 & 2015 * Awards under these plans are restricted shares, all other plans grant share rights. The fair value is calculated in accordance with the measurement criteria of Accounting Standard AASB 2 Share Based Payments as set out in accounting policy 1(w)(v) on page 57 and note 29 on page 90 of the Notes to the Consolidated Financial Statements. 36 Auditor’s Independence Declaration As lead auditor for the audit of Iluka Resources Limited for the year ended 31 December 2012, I declare that to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Iluka Resources Limited and the entities it controlled during the period. Nick Henry Partner PricewaterhouseCoopers Perth 20 March 2013 PricewaterhouseCoopers, ABN 52 780 433 757 Brookfield Place, 125 St Georges Terrace, PERTH WA 6000, GPO BOX D198, PERTH WA 6840 T +61 8 9238 3000, F +61 8 9238 3999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 37 Iluka Resources Limited Corporate Governance Statement 31 December 2012 Corporate Governance Statement APPROACH TO CORPORATE GOVERNANCE Iluka believes that the highest standards of corporate governance are essential in order to create and deliver value for shareholders. ASX CORPORATE GOVERNANCE RECOMMENDATIONS Iluka considers that it meets each of the requirements of the Australian Securities Exchange (ASX) Corporate (Corporate Governance Council’s (Council) Corporate Principles and Recommendations (Second Edition) Principles). The Governance section of the Iluka website www.iluka.com contains Iluka’s key corporate governance policy documents. These include the: Board Charter Audit and Risk Committee Charter • • Directors' Code of Conduct • • Remuneration and Nomination Committee Charter Employee Code of Conduct • • Securities Trading Policy • Continuous Disclosure Policy • Whistleblower Policy DIVERSITY Iluka acknowledges the Council’s amendments to the Corporate Principles released on 30 June 2012 (Diversity Principles). Iluka reports on compliance with the Diversity principles in the Iluka Sustainability Report, which forms part of the Iluka Review, under the heading People. Iluka seeks to attract and retain the best people while building and maintaining a diverse, sustainable and high achieving workforce. Iluka will continue to develop and implement programmes which foster workforce and Board diversity. ROLE AND RESPONSIBILITIES OF THE BOARD OF DIRECTORS The Board operates in accordance with the broad principles set out in the Board Charter. The primary roles of the Board are: appointing and removing the Managing Director; • • monitoring the performance of the Managing Director and the senior management group; • determining the strategic direction and financial objectives of Iluka and ensuring appropriate resources are available to management; • monitoring the implementation and achievement of strategic and financial objectives; and • reporting to shareholders and the investment community on the performance of the company. The Board delegates the implementation of corporate strategy and day to day management management, led by the Managing Director. to senior BOARD MEMBERSHIP Details of the members of the Board, their date of appointment, qualifications and experience are set out in the Directors’ Report under the heading Directors. The Remuneration and Nomination Committee considers and recommends potential directors to the Board based on the skills and experience they are able to bring to the Board. The Board seeks to ensure that its size and the blend of skills of the Directors are conducive to effective discussion and efficient decision-making. 38 Iluka Resources Limited Corporate Governance Statement 31 December 2012 Iluka’s Constitution requires Directors to retire from office no later than the third Annual General Meeting following their election or re-election. The Directors have adopted an internal guideline that the maximum preferred length of service is ten years. DIRECTOR INDEPENDENCE The Board recognises the importance of independent judgement in the decision-making process. The Board’s Charter expressly requires that the majority of the Board be comprised of independent Directors and that the Chairman is an independent Director. The Board Charter sets out the criteria for determining whether a non-executive Director is independent. The Board considers that all non-executive directors are independent. The Board assesses the independence of new Directors upon appointment and reviews the independence of other Directors as appropriate. MANAGING DIRECTOR The Managing Director recommends policy, strategic direction and business plans for the Board’s approval and is responsible for managing Iluka’s day-today activities. The Managing Director is selected and appointed by the Board and is subject to an annual performance review by the non-executive Directors. CONFLICTS OF INTEREST Each Director has an ongoing responsibility to: • • disclose to the Board details of transactions or interests, actual or potential that may create a conflict of interest; and if requested by the Board, within a reasonable period, take such necessary and reasonable steps to remove any conflict of interest. If a Director cannot or will not remove a conflict of interest then the Director must, in accordance with the Corporations Act 2001, absent himself or herself from the room when discussion and/or voting occurs on matters about which the conflict relates. DIRECTOR EDUCATION Directors undergo an induction process upon appointment which includes a detailed briefing on Iluka, meeting key executives and touring operational sites. Thereafter, Directors undertake operational site visits and are provided with regular updates and briefings on current and emerging issues relating to the company and the industry. Directors are encouraged to undertake continuing education relevant to the discharge of their duties. Iluka meets all reasonable costs of continuing Director education. DIRECTORS' ACCESS TO INDEPENDENT ADVICE A Director may, with prior written approval of the Chairman, obtain independent professional advice to assist the Director in fulfilling their responsibilities. Iluka meets reasonable expenses incurred in obtaining that advice. BOARD MEETINGS In 2012, the Board met on 14 occasions to conduct its duties. Ten were scheduled meetings and five were called on an ad hoc basis to deal with specific business matters. One of the scheduled meetings was dedicated primarily to strategic planning. The Chairman chaired all the meetings. The non-executive Directors periodically meet independent of management to discuss relevant issues. Directors’ attendance at Board and Committee meetings are detailed on page 14 of this report. 39 Iluka Resources Limited Corporate Governance Statement 31 December 2012 COMPANY SECRETARY Mr Wilson is Iluka’s Company Secretary. The Company Secretary is responsible for: advising the Board on corporate governance matters; • • management of the company secretarial function; • • attending all Board and Board committee meetings and taking minutes; and communication with the ASX. COMMITTEES OF THE BOARD The Board has established two committees: the Remuneration and Nomination Committee and the Audit and Risk Committee. Each committee functions under a specific charter and is comprised wholly of independent, non-executive Directors. The structure and membership of these committees are reviewed periodically. Each committee reviews its charter on an annual basis. Unless expressly delegated by the Board to a committee, a committee submits all decisions of that committee to the full Board as recommendations to the Board. REMUNERATION AND NOMINATION COMMITTEE The Remuneration and Nomination Committee is responsible for providing assistance and recommendations to the Board in relation to: • • • • • development, review and implementation of the remuneration strategy of Iluka; remuneration of executives and non-executive Directors; performance of the Managing Director and senior executives; succession planning for key roles to ensure a diverse range of candidates; and assessment, composition and succession of the Board. The Remuneration and Nomination Committee’s consists of the following independent, non-executive Directors: Mr Osborn (Chairman), Ms Seabrook, Mr Rezos, Mr Ranck and Mr Pizzey. Details of Directors attendance at Remuneration and Nomination Committee meetings in 2012 are set out on page 14 of the Annual Report. Comprehensive details of the processes and principles underlying the work of the Remuneration and Nomination Committee are discussed in the Remuneration Report appearing on pages 16 to 36 of this Report. For further information on the scope and responsibilities of the Remuneration and Nomination Committee, please refer to the copy of the Remuneration and Nomination Committee Charter available in the Governance section of the Iluka website. AUDIT AND RISK COMMITTEE The Audit and Risk Committee’s role is to assist the Board to fulfil its responsibilities in relation to Iluka’s accounts, external reporting and risk. This is achieved by ensuring that appropriate processes are in place in relation to: • • • • • the integrity of financial reporting; the adequacy of the control environment; the process for the management of risk; the scope and performance of the internal audit function; and the independence and performance of the external audit function. The Audit and Risk Committee consists of the following independent, non-executive Directors: Ms Seabrook (Chair), Mr Rezos, Mr Turner and Mr Martin. Details of Directors attendance at Audit and Risk Committee meetings in 2012 are set out on page 14 of the Annual Report. 40 Iluka Resources Limited Corporate Governance Statement 31 December 2012 For further information on the scope and responsibilities of the Audit and Risk Committee, please refer to the copy of the Audit and Risk Committee Charter available in the Governance section of the Iluka website. BOARD AND COMMITTEE PERFORMANCE EVALUATION The Board carries out an annual review of its performance in meeting key responsibilities. This review process, which is periodically facilitated by external consultants, serves to identify any issues and initiatives for improving the functioning and performance of the Board. This annual review was last undertaken in December 2012. Each of the Board’s committees also conducts an annual self-assessment of their performance in meeting their key responsibilities. These reviews serve to identify strengths, weaknesses and areas for improvement. The Remuneration and Nomination Committee and the Audit and Risk Committee completed their respective self-assessments in December 2012. CORPORATE REPORTING The Managing Director and Chief Financial Officer have made the following certifications to the Board with respect to the 2012 accounts: • • that Iluka’s financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operational results of Iluka and group and are in accordance with relevant accounting standards; and that the above statement is founded on a sound system of risk management and internal compliance and control, which implements the policies adopted by the Board, and that Iluka’s risk management and internal control is operating efficiently and effectively in all material respects. AUDIT FUNCTIONS PricewaterhouseCoopers (PwC) is Iluka’s external audit provider. During 2012, Iluka complied with its internal guidelines, which require the fees paid to external auditors for non-audit-related work to remain below 50 per cent of the audit-related fees without pre-approval by the Audit and Risk Committee. The external auditor will attend the Annual General Meeting and will be available to answer shareholder questions about the conduct of the audit and the preparation and content of the audit report. Iluka has an internal audit function that assists the Board by undertaking an objective evaluation of the Iluka’s internal control framework. The Audit and Risk Committee is responsible for approving the programme and scope of internal audit reviews to be conducted each financial year. An assessment of the quality and focus of the internal audit function is undertaken periodically as part of the review of Audit and Risk Committee effectiveness. ETHICAL STANDARDS AND CONDUCT Iluka has an Employee Code of Conduct, which identifies the standard of ethical conduct expected of Iluka employees. In addition, the Board has specifically adopted a Director’s Code of Conduct, which establishes guidelines for their conduct in carrying out their duties. Iluka has also established a Whistleblower Policy to provide for the confidential reporting of unacceptable or undesirable conduct. The policy provides protection against reprisal to the whistleblower. issues of Copies of the Employee Code of Conduct, Director’s Code of Conduct and the Whistleblower Policy can be found in the corporate governance section of the Iluka website. 41 Iluka Resources Limited Corporate Governance Statement 31 December 2012 SECURITIES TRADING POLICY Iluka has a policy on the trading of Iluka’s securities (shares, options, warrants, etc.) by Directors and employees. The Board believes it is in the best interests of shareholders for Directors and employees to own shares in Iluka, subject to strict controls and guidelines on share trading. The Securities Trading Policy prohibits Directors and employees from trading in Iluka’s securities if they are in possession of price-sensitive information, which is not generally available to the market. In addition to this general prohibition, senior management and those employees involved in preparing Iluka’s statutory financial information (Restricted Employees) and Directors are prohibited from trading in securities in the company during the period from the end of the half or full financial year and the release of the results for the relevant period. Prior to trading in Iluka’s securities, Directors must seek approval from the Chairman and Restricted Employees must seek approval from the Company Secretary. A copy of Iluka’s Securities Trading Policy is located in the Governance section of the Iluka website. CONTINUOUS DISCLOSURE Iluka has developed a comprehensive Continuous Disclosure Policy to ensure compliance with the disclosure obligations under the Corporations Act and the ASX Listing Rules and to providing accurate information to all shareholders and market participants. Iluka has established a Disclosure Committee comprising the Company Secretary, Chief Financial Officer and the General Manager, Investor Relations. The Committee reports to the Managing Director. The Committee’s responsibilities include determining if disclosure is required, ensuring the Managing Director is advised of and approves all information disclosed to the market and ensuring the Board is kept fully informed of the Disclosure Committee’s determinations and all information subsequently disclosed to the market. The Company Secretary is convenor of the Disclosure Committee and has primary responsibility for administration of the Continuous Disclosure Policy. The Company Secretary’s responsibilities include ensuring compliance with Iluka’s continuous disclosure obligations and overseeing and co-ordinating information disclosure to the ASX. A copy of Iluka’s Continuous Disclosure Policy is available in the Governance section of the Iluka website. SHAREHOLDER COMMUNICATION Iluka is committed to providing accurate information to all shareholders and the market. Iluka communicates with shareholders through releases to the ASX, Iluka’s website, information distributed direct to shareholders and the general meetings of Iluka. At the Annual General Meeting, shareholders elect the Directors and have the opportunity to express their views, ask questions about company business and vote on items of business for resolution by shareholders. More information on shareholder communication is contained in Iluka’s Continuous Disclosure Policy available in the Governance section of the Iluka website. 42 Iluka Resources Limited ABN 34 008 675 018 Financial Report - 31 December 2012 Contents Financial statements Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors' declaration Independent auditor's report to the members Page 44 45 46 47 48 49 93 94 These financial statements are the consolidated financial statements of the group consisting of Iluka Resources Limited and its subsidiaries. The financial statements are presented in the Australian currency. Iluka Resources Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Iluka Resources Limited Level 23 140 St George's Terrace Perth WA 6000 A description of the nature of the group's operations and its principal activities is included in the review of operations and activities in the Directors' Report, both of which are not part of these financial statements. The financial statements were authorised for issue by the Directors on 20 March 2013. The Directors have the power to amend and reissue the financial statements. Through the use of the internet, we have ensured that our corporate reporting is timely and complete. All press releases, financial reports and other information are available at www.iluka.com 43 Revenue Other income Expenses Interest and finance charges paid/payable Rehabilitation and restoration unwind Total finance costs Profit before income tax Income tax expense Profit for the year attributable to owners Iluka Resources Limited Consolidated income statement For the year ended 31 December 2012 Notes 2012 $m 2011 $m 5 6 7 7 8 1,150.2 1,631.4 10.3 (607.1) (16.6) (24.6) (41.2) 7.9 (842.8) (15.2) (20.6) (35.8) 512.2 760.7 (149.0) 363.2 (218.9) 541.8 Cents Cents Earnings per share attributable to ordinary equity holders Basic earnings per share Diluted earnings per share 28 28 87.1 86.7 130.1 129.4 The above consolidated income statement should be read in conjunction with the accompanying notes. 44 Iluka Resources Limited Consolidated statement of comprehensive income For the year ended 31 December 2012 Notes 2012 $m 2011 $m Profit for the year 363.2 541.8 Other comprehensive income Currency translation of US operation Hedge of net investment in US operation, net of tax Actuarial losses on defined benefit plans, net of tax Other comprehensive loss for the year 19(a) 19(a) 19(c) (0.4) 0.5 (1.7) (1.6) (0.2) 0.4 (4.4) (4.2) Total comprehensive income for the year attributable to owners 361.6 537.6 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 45 ASSETS Current assets Cash and cash equivalents Receivables Inventories Current tax receivable Total current assets Non-current assets Inventories Property, plant and equipment Intangible assets Deferred tax assets Total non-current assets Total assets LIABILITIES Current liabilities Payables Interest-bearing liabilities Provisions Current tax payable Total current liabilities Non-current liabilities Interest-bearing liabilities Provisions Deferred tax liabilities Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained profits Total equity Iluka Resources Limited Consolidated balance sheet As at 31 December 2012 Notes 2012 $m 2011 $m 9 10 11 11 12 13 14 15 16 17 16 17 14 18 19 19 54.3 139.5 522.6 - 716.4 257.9 1,430.3 6.3 15.7 1,710.2 320.7 256.1 376.2 0.5 953.5 49.9 1,430.4 6.7 13.3 1,500.3 2,426.6 2,453.8 87.3 56.9 64.1 128.4 336.7 93.3 407.3 22.2 522.8 859.5 136.7 - 82.0 145.7 364.4 164.0 377.7 13.0 554.7 919.1 1,567.1 1,534.7 1,104.8 18.1 444.2 1,567.1 1,102.0 16.4 416.3 1,534.7 The above consolidated balance sheet should be read in conjunction with the accompanying notes. 46 Iluka Resources Limited Consolidated statement of changes in equity For the year ended 31 December 2012 Attributable to owners of Iluka Resources Limited Contributed equity $m Reserves $m Retained earnings $m Total equity $m 1,108.3 20.4 (4.1) 1,124.6 - - - - - - - 541.8 541.8 (0.2) 0.4 - 0.2 - - (4.4) (4.4) (0.2) 0.4 (4.4) (4.2) 0.2 537.4 537.6 8.5 (14.8) - - (6.3) (8.5) - 4.3 - (4.2) - - - (117.0) (117.0) - (14.8) 4.3 (117.0) (127.5) Notes 19(a) 19(a) 19(c) 18(c) 18(c) 19(a) 19(c) Balance at 1 January 2011 Profit for the year Currency translation of US operation Hedge of net investment in US operation, net of tax Actuarial gains on retirement benefit obligations, net of tax Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Transfer of shares to employees, net of tax Purchase of treasury shares, net of tax Share-based payments, net of tax Dividends paid Balance at 31 December 2011 1,102.0 16.4 416.3 1,534.7 Profit for the year Currency translation of US operation Hedge of net investment in US operation, net of tax Actuarial losses on retirement benefit obligations, net of tax Transfer of asset revaluation reserve Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Transfer of shares to employees, net of tax Purchase of treasury shares, net of tax Share-based payments, net of tax Dividends paid 19(a) 19(a) 19(c) 19(a) 18(c) 18(c) 19(a) 19(c) - - - - - - - - 363.2 363.2 (0.4) 0.5 - (0.1) - - - (1.7) 0.1 (1.6) (0.4) 0.5 (1.7) - (1.6) - 361.6 361.6 5.3 (2.5) - - 2.8 (5.3) - 7.0 - 1.7 - - - (333.7) (333.7) - (2.5) 7.0 (333.7) (329.2) Balance at 31 December 2012 1,104.8 18.1 444.2 1,567.1 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 47 Iluka Resources Limited Consolidated statement of cash flows For the year ended 31 December 2012 Notes 2012 $m 2011 $m 1,170.6 (801.9) 368.7 1,455.2 (749.0) 706.2 27 7.8 (8.5) (159.1) (34.4) 76.1 250.6 (167.3) 1.4 (165.9) (86.7) 81.7 (3.5) (333.7) (8.8) (351.0) (266.3) 320.7 (0.1) 54.3 5.1 (16.0) (12.5) (23.6) 90.3 749.5 (142.5) 3.9 (138.6) (312.7) 130.7 (21.3) (117.0) - (320.3) 290.6 30.1 - 320.7 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest paid Income taxes paid Exploration expenditure Mining Area C royalty receipts Net cash inflow from operating activities Cash flows from investing activities Payments for property, plant and equipment Sale of property, plant and equipment Net cash outflow from investing activities Cash flows from financing activities Repayment of borrowings Proceeds from borrowings Purchase of treasury shares Dividends paid Debt refinance costs Net cash outflow from financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at 1 January Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at 31 December 9 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 48 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 Contents of the notes to the financial statements 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Summary of significant accounting policies Critical accounting estimates and judgements Financial risk management Segment information Revenue Other income Expenses Income tax Cash and cash equivalents Receivables Inventories Property, plant and equipment Intangible assets Deferred tax Payables Interest-bearing liabilities Provisions Contributed equity Reserves Dividends Key Management Personnel Remuneration of auditors Retirement benefit obligations Contingent liabilities Commitments Controlled entities and deed of cross guarantee Reconciliation of profit after income tax to net cash inflow from operating activities Earnings per share Share-based payments Parent entity financial information Related party transactions Events occurring after the reporting period Page 50 60 61 64 66 66 67 68 69 69 69 70 71 71 72 73 75 76 77 78 79 81 82 85 86 87 89 89 90 91 92 92 49 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 1 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the group consisting of Iluka Resources Limited and its subsidiaries. (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board (AASB), Urgent Issues Group Interpretations and the Corporations Act 2001. Iluka Resources Limited is a for-profit entity for the purpose of preparing the financial statements. The consolidated financial statements of Iluka Resources Limited also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). These financial statements have been prepared under the historical cost convention except for financial assets and liabilities which are required to be measured at fair value. (b) Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Iluka Resources Limited (company or parent entity) as at 31 December 2012 and the results of all subsidiaries for the year then ended. Iluka Resources Limited and its subsidiaries together are referred to in this financial report as the group. Subsidiaries are all entities over which the group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. Subsidiaries are fully consolidated from the date on which control de-consolidated from the date that control ceases. is transferred to the group. They are Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the group. The group's Employee Share Schemes are administered through a trust. This trust is consolidated, as the substance of the relationship is that the trust is controlled by the group. Shares in the company held by the trust are disclosed as treasury shares in the consolidated financial statements and deducted from contributed equity. (c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the Managing Director. (d) Revenue recognition Mineral sands Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances, duties and taxes paid. Product sales are recognised as revenue when there has been a passing of risk to a customer, and; • • • the product is in a form suitable for delivery and no further processing is required by, or on behalf of, the group; the quantity, quality and selling price of the product can be determined with reasonable accuracy; and the product has been dispatched to the customer and is no longer under the physical control of the group, or the customer has formally acknowledged legal ownership of the product including all inherent risks, albeit that the product may be stored in facilities the group controls. These products are clearly identifiable and ready for delivery to the buyer at the time the sale is recognised. 50 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 1 Summary of significant accounting policies (continued) Gains and losses, including premiums paid or received, in respect of forward sales, options and other deferred delivery arrangements which hedge anticipated revenues from future production, are deferred and included in sales revenue in accordance with note 1(l). Mining Area C royalty income and amortisation of royalty asset Royalty income is recognised on an accrual basis. Royalty income is received on a quarterly basis and any under or over accrual applicable to previously recognised royalty income is adjusted for based on the receipt of the royalty income entitlement. The royalty entitlement asset is an intangible asset and is amortised on a straight-line basis over its estimated useful life of 25 years, of which 16 years is remaining. Interest income Interest income is recognised in the income statement as it accrues, using the effective interest method. (e) Income tax Current income tax Current tax assets and liabilities for the current and prior year are measured at the amount expected to be recovered from or paid to the taxation authorities based on the current year’s taxable income. The tax rates and tax laws used are those that are enacted or substantively enacted by the reporting date in the countries where the group operates and generates taxable income. Deferred income tax Deferred income tax is provided on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them: • • arise from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither accounting nor taxable profit or loss; the are associated with investments and loans in controlled entities and the timing of temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. the reversal of Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability settled, based on tax rates (and laws) that have been enacted or substantively enacted at the reporting date. Current and deferred taxes attributable to amounts recognised directly in equity are also recognised directly in equity and not in the income statement. Deferred tax assets and liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxation authority. (f) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the consolidated balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. 51 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 1 Summary of significant accounting policies (continued) (g) Business combinations The purchase method of accounting is used to account for all business combinations regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange. Acquisition related costs are expensed as incurred. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity's incremental borrowing rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Costs relating to the acquisition of new areas of interest are capitalised as either exploration and evaluation expenditure, development properties or mine properties depending on the stage of development reached at the date of acquisition. Refer to note 1(n) for more information. (h) Cash and cash equivalents For cash flow statement presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within interest-bearing liabilities in current liabilities on the balance sheet. (i) Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for doubtful debts. Trade receivables are generally due for settlement no more than 90 days from the date of recognition. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for doubtful receivables is established when there is objective evidence that the group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of the provision is recognised in the income statement. (j) Inventories Inventories are valued at the lower of weighted average cost and estimated net realisable value. Weighted average cost expenditure, including depreciation and amortisation. includes direct costs and an appropriate portion of fixed and variable overhead Net realisable value is the amount estimated to be obtained from sale in the normal course of business, less any anticipated costs of completion and the estimated costs necessary to make the sale. Consumable stores include ilmenite acquired from third parties, coal and other inputs to the synthetic rutile process. A regular and ongoing review is undertaken to establish the extent of surplus obsolete or damaged stores, which are then valued at estimated net realisable value. Inventories expected to be sold within twelve months after the balance sheet date are classified as current assets, all other inventories are classified as non-current assets. (k) Foreign currency translation (i) Functional and presentation currency The consolidated financial statements are presented in Australian dollars, which is the company's functional and presentation currency. 52 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 1 Summary of significant accounting policies (continued) (ii) Transactions and balances Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses, including those from the translation at balance date of foreign currency denominated monetary assets and liabilities, are recognised in profit or loss, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. The fair value of any forward exchange contracts entered into is determined using forward exchange market rates at the balance sheet date. (iii) Group companies The results and financial position of the United States (US) entities that have a US dollar functional currency are translated into AUD as follows: • • • assets and liabilities are translated at the exchange rate at balance date; income and expenses for each month are translated at average exchange rates; and all resulting exchange differences are recognised in the foreign currency translation reserve within other comprehensive income. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, the associated exchange differences are reclassified to profit or loss, as part of the gain or loss on sale. (l) Derivatives and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at balance date. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The group designates certain derivatives as either: (1) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); (2) hedges of highly probable forecast transactions (cash flow hedges); or (3) hedges of a net investment in a foreign operation (investment hedges). At the inception of the transaction, the group documents the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The group also documents its assessment, both at transaction inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. For fair value hedges, changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gain or loss relating to the effective portion of interest rate swaps hedging fixed rate borrowings is recognised in profit or loss within finance costs, together with changes in fair value of the hedged fixed rate borrowings attributable to interest rate risk. The gain or loss relating to the ineffective portion is recognised in profit or loss within other income or other expenses. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to profit or loss over the period to maturity using a recalculated effective interest rate. No derivatives were designated as cash flow hedges in the current or prior years. For net investment hedges, any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss as other income. Gains and losses accumulated in equity are reclassified to profit or loss on disposal of the foreign operation. For derivatives that do not qualify for hedge accounting, changes in the fair value are recognised immediately in profit or loss. 53 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 1 Summary of significant accounting policies (continued) (m) Loans and receivables Loans and receivables are included in current assets, except for those with maturities greater than 12 months after the balance sheet date, which are classified as non-current assets. (n) Exploration, evaluation and development expenditure Exploration and evaluation expenditure is accumulated separately for each area of interest. Such expenditure comprises net direct costs and an appropriate portion of related overhead expenditure. Expenditure is carried forward when incurred in areas for which the group has rights of tenure and where economic mineralisation is indicated, but activities have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable ore reserves and active and significant operations in relation to the area are continuing. Each such project is regularly reviewed. If the project is abandoned or if it is considered unlikely the project will proceed to development, accumulated costs to that point are written off immediately. Each area of interest is limited to a size related to a known mineral resource capable of supporting a mining operation. Identifiable exploration assets acquired from another mining company are recognised as assets at their cost of acquisition. Projects are advanced to development status when it is expected that accumulated and future expenditure on development can be recouped through project development or sale. Capitalised exploration is transferred to Mine Reserves once the related ore body achieved JORC reserve status (reported in accordance with JORC, 2004) and has been included in the life of mine plan. All of the above expenditure is carried forward up to commencement of operations at which time it is amortised in accordance with the policy stated in note 1(o). (o) Property, plant and equipment Land and buildings are shown at historical cost, less subsequent depreciation for buildings. Land is not depreciated. All other property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. The cost also includes the present value of the estimated costs of dismantling and removing the asset and restoring the site on which it is located. Direct costs associated with the commissioning of plant and equipment are capitalised and included in property, plant and equipment. Pre-commissioning costs in testing the processing plant are also capitalised. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. As set out in note 1(v), in the case of provisions for assets which remain in use, adjustments to the carrying value of the provision are offset by a change in the carrying value of the related asset. Depreciation and amortisation of mine buildings and mine specific machinery and equipment is provided for over the life of the relevant mine or asset, whichever is the shorter. Mine specific machinery and equipment refers to machinery and equipment for which the economic useful life cannot extend beyond the life of its host mine. Depreciation and amortisation of mine buildings and other non-mine specific plant and equipment and reserves and development is determined on a straight-line basis as the consumption of economic benefits is not expected to vary over the operational life of the asset. Depreciation of mine specific plant and reserves and development is determined on a unit of production basis to more appropriately match depreciation charges with expected pattern of consumption of economic benefit of the asset. 54 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 1 Summary of significant accounting policies (continued) The basis of depreciation of each asset is reviewed annually and changes to the basis of depreciation are made if the straight line or units of production basis is no longer considered to represent the expected pattern of consumption of economic benefits. The expected useful lives are as follows: - Mine buildings - Mine specific machinery and equipment - Mine specific plant - - Reserves and development Other non-mine specific plant and equipment the shorter of applicable mine life and 25 years the applicable mine life units of production units of production 3-25 years The reserves and life of each mine and the remaining useful life of each class of asset are reassessed at regular intervals and the depreciation rates adjusted accordingly. (p) Maintenance and repairs Certain items of plant used in the primary extraction, separation and secondary processing of extracted minerals are subject to a major overhaul on a cyclical basis. Costs incurred during such overhauls are characterised as either in the nature of capital or in the nature of repairs and maintenance. Work performed may involve: (i) (ii) the replacement of a discrete sub-component asset, in which case an asset addition is recognised and the book value of the replaced item is written off; and demonstrably extending the useful life or functionality of an existing asset, in which case the relevant cost is added to the capitalised cost of the asset in question. Costs incurred during a major cyclical overhaul which do not constitute (i) or (ii) above, are written off as repairs and maintenance as incurred. Costs qualifying for capitalisation under (i) or (ii) above are subsequently depreciated in accordance with note 1(o). General repairs and maintenance which are not characterised as part of a major cyclical overhaul are expensed as incurred. (q) Non-current assets constructed by the group The cost of non-current assets constructed by the group includes the cost of all materials used in construction, direct labour on the project, project management costs, borrowing costs incurred during construction of assets with a construction period greater than twelve months and an appropriate proportion of variable and fixed overheads. Borrowing costs included in the cost of non-current assets are those costs that would have been avoided if the expenditure on the construction of the assets had not been made and are capitalised in accordance with the policy stated in note 1(u). (r) Recoverable amount of non-current assets Depreciable assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell (FVLCS) and value-in-use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (Cash Generating Units (refer note 2)). Non-financial assets that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. (s) Trade and other payables These amounts represent liabilities for goods and services provided to the group prior to the end of the financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the group for similar financial instruments. 55 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 1 Summary of significant accounting policies (continued) (t) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred and are subsequently measured at amortised cost. Any difference between the net proceeds and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. (u) Borrowing costs Borrowing costs include interest on borrowings, including amounts paid or received on interest rate swaps, amortisation of deferred borrowing costs, and finance lease charges. Borrowing costs are recognised as expenses in the period in which they are incurred, except where they are included in the costs of qualifying assets which take more than 12 months to prepare for their intended use. The capitalisation rate used to determine the amount of borrowing costs to be capitalised is the weighted average interest rate applicable to the entity's outstanding borrowings during the year. No borrowing costs were capitalised in 2012 or 2011. (v) Rehabilitation and mine closure costs The group has obligations to dismantle, remove, restore and rehabilitate certain items of property, plant and equipment. The cost of an asset includes the present value of the estimated costs of dismantling and removing the asset and restoring the site on which it is located. A provision is raised for the present value of the estimated cost of settling the rehabilitation and restoration obligations existing at balance date. Those costs that relate to rehabilitation and restoration obligations arising from the production process are recognised in production costs. As the value of the provision represents the discounted value of the present obligation to restore, dismantle and rehabilitate, the increase in the provision due to passage of time is recognised as a finance cost. The provisions are reassessed at least annually. A change in any of the assumptions used to determine the provisions could have a material impact on the carrying value of the provision. In the case of provisions for assets which remain in use, adjustments to the carrying value of the provision are offset by a change in the carrying value of the related asset. Where the provisions are for assets no longer in use, any adjustment is reflected directly in profit or loss. (w) Employee benefits (i) Wages and salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised as current payables. Non-accumulating sick leave, parental leave and other ex-gratia leave is recognised as an expense when taken. (ii) Long service leave The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. The obligations are presented as current the entity does not have an unconditional right to defer settlement for at least twelve months after the reporting date, regardless of when the actual settlement is expected to occur. liabilities in the balance sheet if 56 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 1 Summary of significant accounting policies (continued) (iii) Termination benefits Liabilities for employee termination benefits associated with restructurings are brought to account when the group is demonstrably committed to terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal. (iv) Retirement benefit obligations The group has a defined benefit section and an accumulation type benefits section of the ING Master Trust in Australia, as well as separate defined benefit plans for US employees. The defined benefit plans provide defined lump sum benefits based on years of service and final average salary. The accumulation type benefits section receives fixed contributions from group companies and the group's legal or constructive obligation is limited to these contributions. A liability or asset in respect of defined benefit superannuation plans is recognised in the balance sheet and is measured as the present value of the defined benefit obligation at the reporting date, plus actuarial gains (less actuarial losses), less the fair value of the superannuation fund’s assets at that date and any unrecognised past service cost. The present value of the defined benefit obligation is based on expected future payments which arise from membership of the fund to the reporting date, calculated annually by independent actuaries using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to other comprehensive income in the period in which they occur. Past service costs are recognised immediately in profit or loss, unless the changes to the superannuation fund are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over the vesting period. Future taxes that are funded by the group and are part of the provision of the existing benefit obligation (e.g. taxes on investment income and employer contributions) are taken into account in measuring the net liability or asset. Contributions to the accumulation fund are recognised as an expense as they become payable. (v) Share-based payments Share-based compensation benefits are provided to employees via incentive plans, the Directors', Executives and Employees Share Acquisition Plan and the Employee Share Ownership scheme. Information relating to these schemes is set out in note 29 with additional information in the Remuneration Report. The fair value of entitlements offered has been determined in accordance with the measurement criteria of AASB 2 Share-based Payment. The fair value of shares is determined based on market prices at grant date, taking into account the terms and conditions upon which those equity instruments were granted. The fair value is recognised as an expense through profit or loss on a straight-line basis between the grant date and the vesting date for each respective plan. The fair value of share rights is independently determined using a Monte Carlo simulation that takes into account the exercise price, the term of the share right, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate of the term of the share right. The fair value of the Long Term Incentive Plan (LTIP - TSR tranche) also takes into account the company's predicted share prices against the comparator group performance at vesting date. A credit to the share-based payments expense arises where unvested entitlements lapse on resignation or the non-fulfillment of market vesting conditions. Payroll tax payable on the grant of restricted shares or share rights is recognised as a component of the share-based payments expense when paid. 57 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 1 Summary of significant accounting policies (continued) Shares provided to employees under the Employee Share Ownership scheme are purchased on-market, with the purchase cost being recognised as an employee benefits expense. (x) Operating leases Leases in which a significant portion of the risks and rewards of ownership are not transferred to the group as lessee are classified as operating leases (refer to note 25). Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. (y) Contributed equity Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the company in proportion to the number of and amounts paid on the shares held. On a show of hands, every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options for the acquisition of a business are not included in the cost of the acquisition as part of the purchase consideration. (z) Dividends Provision is made for the amount of any dividend declared on or before the end of the financial year but not distributed at the balance sheet date. (aa) Carbon emissions Carbon emission units granted by the Australian Government are recognised at nil value. Carbon emission units purchased for compliance purposes under the Australian Carbon Pricing Mechanism are recognised at cost. An emissions liability is recognised as a liability when actual emissions exceed the emission units granted by the Australian Government. Any liability recognised is measured at the value of the purchased units held, with any excess liability measured at the current market value of carbon units at the reporting date. The movement in the liability is recognised in the income statement. (ab)Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year and excluding treasury shares. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares including share rights, and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. (ac) Rounding of amounts The company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the "rounding off" of amounts in the financial statements. Amounts in the financial statements have been rounded off in accordance with that Class Order to the nearest hundred thousand dollars, or in certain cases, the nearest thousand dollars and the nearest dollar. (ad)Parent entity financial information The financial information for the parent entity, Iluka Resources Limited, disclosed in note 30 has been prepared on the same basis as the consolidated financial statements, except as set out below. 58 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 1 Summary of significant accounting policies (continued) Investments in subsidiaries Investments in subsidiaries are accounted for at cost. Tax consolidation legislation Iluka Resources Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation as of 1 January 2004. On adoption of the tax consolidation legislation, the entities in the tax consolidation group entered into a tax sharing agreement which limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity, Iluka Resources Limited. (ae) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2012 reporting periods. The group's assessment of those new standards and interpretations considered relevant to the group is set out below. The group does not intend to early adopt any of the new standards or interpretations. the impact of (i) AASB Interpretation 20 Stripping Costs in the Production Phase of Surface Mine and AASB 2011-12 Amendments to Australian Standards arising from Interpretation 20 (effective 1 January 2013) Interpretation 20 sets out the accounting for overburden waste removal (stripping) costs in the production phase of a mine. It states that these costs can only be recognised as an asset if they can be attributed to an identifiable component of the ore body, can be measured reliably and it is probable that future economic benefits will flow to the entity. The costs will be amortised over the life of the identified ore body. Application of the interpretation is not expected to have a material impact on group's financial statements. (ii) AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, revised AASB 127 Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures and AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards (effective 1 January 2013) This suite of five new and amended standards addresses the accounting for joint arrangements, consolidated financial statements and associated disclosures. Application of AASB 10, AASB 11, AASB 127 and AASB 128 are not expected to have a material impact on the entity’s financial statements. Application of AASB 12 will not affect any of the amounts recognised in the financial statements but may impact the type of information disclosed. (iii) AASB 9 Financial Instruments, AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective from 1 January 2015) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The group has not yet determined the extent of the impact, if any. (iv) AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 (effective 1 January 2013) AASB 13 establishes a single source of guidance for determining the fair value of assets and liabilities. It includes guidance on how to determine fair value and expands the disclosure requirements for all assets and liabilities carried at fair value. The new standard it not expected to have a material affect on the entity’s financial statements. (v) AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements (effective 1 July 2013) These amendments remove the individual key management personnel disclosure requirements from AASB 124 Related Party Disclosures. While this will reduce the disclosures that are currently required in the notes to the financial statements, it will not affect any of the amounts recognised in the financial statements. 59 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 1 Summary of significant accounting policies (continued) (vi) AASB 2011-9 Amendments to Australian Accounting Standards - Presentation of Items in Other Comprehensive Income (effective 1 July 2012) In September 2011, the AASB made an amendment to AASB 101 Presentation of Financial Statements which requires entities to separate items presented in other comprehensive income into two groups, based on whether they may be recycled to profit or loss in the future. This will not affect the measurement of any amounts recognised in the financial statements but will impact the type of information disclosed. 2 Critical accounting estimates and judgements The group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. Impairment of assets (i) The recoverable amount of each Cash Generating Unit (CGU) is determined as the higher of value-in-use and fair value less costs to sell. Where there is no binding sale agreement, fair value less costs to sell is based on the best information available to reflect the amount the group could receive for the CGU in an arms length transaction and has been estimated on the basis of discounted present value of the future cash flows. The estimates of future cash flows for each CGU are based on significant assumptions including: • • • • • • estimates of the quantities of mineral reserves and ore resources for which there is a high degree of confidence of economic extraction and the timing of access to these reserves and ore resources; future production levels and the ability to sell that production; future product prices based on the group's assessment of short and long term prices for each of the key products; future exchange rates for the Australian dollar compared to the US dollar using external forecasts by recognised economic forecasters; future cash costs of production, sustaining capital expenditure, rehabilitation and mine closure; and the asset specific discount rate applicable to the CGU. Given the nature of the group's mining activities, future changes in assumptions upon which these estimates are based may give rise to material adjustments to the current or prior years. This could lead to a reversal of part, or all, of impairment charges recorded in the current or prior years, or the recognition of new impairment charges in the future. Due to the nature of the assumptions and their significance to the assessment of the recoverable amount of each CGU, relatively modest changes in one or more assumptions could require a material adjustment (negative or positive) to the carrying value of the related non-current assets within the next reporting period. The inter-relationships of the significant assumptions upon which estimated future cash flows are based, however, are such that it is impracticable to disclose the extent of the possible effects of a change in a key assumption in isolation. A total of $136.7 million (2011: $136.7 million) of impairments from prior periods remain, all of which are attributable to the Mine Reserves and Development component of Property Plant and Equipment. The prior impairments may be subject to reversal in the event of the ore bodies to which they relate being re-instated in the group's mine plans. 60 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 2 Critical accounting estimates and judgements (continued) (ii) Rehabilitation and mine closure provisions These provisions represent the discounted value of the present obligation to restore, dismantle and rehabilitate certain items of property, plant and equipment. The discounted value reflects a combination of management's assessment of the nature and extent of the work required, the future cost of performing the work required, the timing of the cash flows and the discount rate. The total rehabilitation and mine closure provision of $444.5 million (2011: $426.9 million) includes $312.6 million (2011: $243.1 million) for assets no longer in use or for obligations arising from production process outputs. Changes to the provisions for assets no longer in use are charged to profit or loss and amounted to $8.3 million (2011: $34.8 million). The charges are reported within rehabilitation and holding costs for closed sites in note 7. 3 Financial risk management The group's activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The group's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the group. Financial risk management is managed by a central treasury department under policies approved by the Board of Directors. (a) Market risk (i) Foreign exchange risk Foreign exchange risk arises from future commercial denominated in a currency that is not the entity's functional currency. transactions and recognised assets and liabilities The group operates internationally and is exposed to foreign exchange risk arising predominantly from currency exposures to the US dollar. Balance sheet translation risk is managed by borrowing in US dollars to provide a hedge for the net US dollar investment in the US operation and the US dollar receivables from Australian sales. The group's exposure to USD foreign currency risk at the end of the reporting period, expressed in Australian dollars, was as follows: Cash and cash equivalents Receivables Payables Interest-bearing liabilities, net of swap 31 December 2012 $m 31 December 2011 $m 16.7 93.2 (5.3) (81.8) 22.8 1.2 198.0 (6.6) (88.7) 103.9 61 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 3 Financial risk management (continued) Group Sensitivity The average US dollar exchange rate applied during the year was 1.0358 (2011: 1.0323). The US dollar spot rate at 31 December 2012 was 1.0403 (31 December 2011: 1.0152). At 31 December 2012, if the foreign currency exchange rates strengthened/(weakened) against the functional currency by 10 per cent (2011: 10 per cent), with all other variables held constant, the group's post-tax profit for the year and equity would have moved as per the table below. 31 December 2012 31 December 2011 -10% Strengthen +10% Weaken Profit $m 1.8 8.3 Equity $m (1.5) (1.5) Profit $m (1.5) (6.7) Equity $m 1.2 1.3 Interest rate risk (ii) Interest rate risk arises from the group’s borrowings and cash deposits. When managing interest rate risk the group seeks to mitigate the interest rate exposure attributable to borrowings by utilising a blend of floating and fixed rate debt. During 2012 and 2011, the group's borrowings at variable rates were denominated in Australian dollars and US dollars. As at 31 December 2012 there were no outstanding term deposits. Borrowings at variable rates expose the group to cash flow interest rate risk, while borrowings at fixed rates expose the group to fair value interest rate risk. At 31 December 2012, if interest rates for the full year were -/+ 1 per cent from the year-end rate with all other variables held constant, post-tax profit for the year would have been $1.7 million lower/ $1.5 million higher (2011: $1.1 million higher/lower). The sensitivity is based on net debt at 31 December 2012 assuming that the net debt balance was constant throughout the year. The interest charges in note 7 of $11.5 million (2011: $12.1 million) reflect interest-bearing liabilities in 2012 and 2011 that range between $67.5 million and $356.1 million. (b) Credit risk Credit risk arises from cash and cash equivalents, as well as credit exposure to customers. The group has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history. The group also maintains an insurance policy to assist in managing the credit risk of its customers and therefore has no significant concentrations of credit risk. Of the total trade receivables balance of $111.9 million, $58.0 million is covered by an insurance policy and $12.0 million by letters of credit. These receivables are considered low risk. Derivative counterparties and cash transactions are limited to high credit quality financial institutions and policies limit the amount of credit exposure to any one financial institution. The group has policies in place to ensure that cash deposits are held with counterparties with an appropriate credit rating. Credit exposure limits are approved by the Board based on credit and sovereign ratings. (c) Liquidity risk Liquidity risk management involves maintaining sufficient cash or undrawn credit facilities to meet the operating requirements of the business. This is managed through committed undrawn facilities as shown in note 16 and prudent cash flow management. 62 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 3 Financial risk management (continued) Maturities of financial liabilities The tables below analyses the group financial instruments into maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. liabilities and net settled derivative financial Weighted average rate Less than 1 year $m Between 1 and 2 years $m Between 2 and 5 years $m Total contractual cash flows $m Carrying amount liabilities $m % 2.3 4.3 - 58.9 58.9 - 1.0 1.0 82.2 19.7 101.9 82.2 79.6 161.8 81.8 76.1 157.9 At 31 December 2012 Non-derivatives Interest-bearing variable rate Interest-bearing fixed rate Total non-derivatives Derivatives Interest rate swaps (net receivable) 0.1 - - 0.1 - At 31 December 2011 Non-derivatives Interest-bearing variable rate Interest-bearing fixed rate Total non-derivatives 1.3 5.0 1.1 3.1 4.2 88.9 58.9 147.8 - 21.3 21.3 90.0 83.3 173.3 88.7 76.6 165.3 Derivatives Interest rate swaps (net receivable) 0.7 0.3 - 1.0 - 63 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 4 Segment information (a) Description of segments Operating segments are reported in a manner that is consistent with the internal reporting provided to the Managing Director, who is considered the chief operating decision maker, for the purpose of making decisions regarding the allocation of resources and the monitoring of performance. Cash, debt and tax balances are managed at a group level together with exploration and other corporate activities and are not allocated to segments. The segments have changed from those reported at 31 December 2011. The mineral sands operations in Australia have become increasingly integrated over the past two years and are now managed as a single operation. Accordingly, operational performance of the Eucla/Perth Basin and Murray Basin operations are reported as a combined Australia (AUS) segment whereas in the 2011 financial statements they were reported separately. Comparative information has been presented in accordance with the 2012 classifications. Australia (AUS) comprises the integrated mineral sands mining and processing operations in Victoria, Western Australia and South Australia. Material is mined from various deposits in the South West and Mid West of Western Australia (Perth Basin), together with the Jacinth-Ambrosia deposit in South Australia (Eucla Basin) and several deposits in Victoria (Murray Basin). The mined material is processed predominantly at facilities in the South West and Mid West of Western Australia and the Murray Basin to produce saleable products. United States (US) comprises the integrated mineral sands mining and processing operations in Virginia and rehabilitation obligations in Florida. Mining Area C (MAC) comprises a deferred consideration iron ore royalty interest over certain mining tenements in Australia operated by BHP Billiton Iron Ore. Where finished product capable of sale to a third party is transferred between operating segments, the transfers are made at arms length prices. Any transfers of intermediate products between operating segments are made at cost. During 2012, $3.0 million of saleable material was transferred from the US to Australia at arms length prices. This transfer is included within the results below. No such transfers were made during 2011. (b) Segment information 2012 Total segment sales Total segment result Segment assets Segment liabilities AUS $m US $m MAC $m Total $m 958.2 111.6 - 1,069.8 492.0 60.1 72.3 624.4 2,217.6 98.1 21.8 2,337.5 462.9 67.5 - 530.4 Depreciation and amortisation expense 192.6 7.0 0.4 200.0 Additions to non-current segment assets 388.3 20.2 - 408.5 64 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 4 Segment information (continued) 2011 AUS $m US $m MAC $m Total $m Total segment sales to external customers 1,400.8 135.9 - 1,536.7 Total segment result Segment assets Segment liabilities 712.7 40.3 88.1 841.1 2,015.6 64.9 25.6 2,106.1 504.1 71.4 - 575.5 Depreciation and amortisation expense 211.4 10.4 0.4 222.2 Additions to non-current segment assets 187.7 1.4 - 189.1 Segment revenue is derived from sales to external customers domiciled in various geographical regions. Details of segment revenue by location of customers are as follows: Asia Europe North America Australia Other countries Sale of goods 2012 $m 2011 $m 555.2 247.9 251.5 0.6 14.6 1,069.8 745.5 442.6 327.1 2.0 19.5 1,536.7 Revenue of $181.3 million and $135.9 million was derived from two external customers from mineral sands segments, which individually accounts for greater than 10 per cent of segment revenue (2011: revenues of $195.7 million was derived from one external customer from mineral sands segments). Segment result is reconciled to the profit before income tax as follows: Segment result Interest income Other income Restructure charges Marketing and selling Corporate and other costs Depreciation Technical support, product development and major projects Exploration expenditure Net foreign exchange losses Interest and finance charges Profit before income tax 65 2012 $m 624.4 7.7 7.3 (2.0) (12.5) (45.7) (3.1) (13.6) (29.5) (4.2) (16.6) 512.2 2011 $m 841.1 6.2 3.9 - (6.9) (35.5) (2.4) (11.9) (19.0) 0.4 (15.2) 760.7 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 4 Segment information (continued) Total segment assets and total segment liabilities are reconciled to the balance sheet as follows: Segment assets Corporate assets Cash and cash equivalents Deferred tax assets Current tax receivable Total assets as per the balance sheet Segment liabilities Corporate liabilities Deferred tax liabilities Current tax payable Interest-bearing liabilities Total liabilities as per the balance sheet 5 Revenue Sales revenue Sale of goods Other revenue Mining Area C royalty income Interest 6 Other income Net gain on disposal of property, plant and equipment Sundry income Foreign exchange gains 66 2,337.5 19.1 54.3 15.7 - 2,426.6 530.4 28.3 22.2 128.4 150.2 859.5 2,106.1 13.2 320.7 13.3 0.5 2,453.8 575.5 20.9 13.0 145.7 164.0 919.1 2012 $m 2011 $m 1,069.8 1,536.7 72.7 7.7 80.4 88.5 6.2 94.7 1,150.2 1,631.4 2012 $m 1.3 9.0 - 10.3 2011 $m 2.9 4.6 0.4 7.9 7 Expenses Expenses Cash costs of production Depreciation/amortisation Inventory movement Cost of goods sold Restructure and idle capacity charges Rehabilitation and holding costs for closed sites Impairment reversal Government royalties Marketing and selling costs Corporate and other costs Technical support, product development and major projects Exploration expenditure Foreign exchange losses Expenses include: Defined contribution superannuation Defined benefits superannuation Employee benefits (excluding share-based payments) Consumable stores written off Share-based payments Operating leases Finance Costs Interest and finance charges paid/payable Bank fees and similar charges Amortisation of deferred borrowing costs Rehabilitation and mine closure unwind Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 2012 $m 2011 $m 583.5 203.1 (346.9) 439.7 14.8 9.8 - 19.6 30.2 45.7 13.6 29.5 4.2 607.1 11.9 1.1 135.6 0.8 9.7 10.1 11.5 2.8 2.3 24.6 41.2 628.9 224.6 (147.7) 705.8 8.5 36.2 (35.6) 25.2 34.5 35.5 13.7 19.0 - 842.8 8.9 0.3 115.8 3.5 7.7 9.1 12.1 2.1 1.0 20.6 35.8 67 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 8 Income tax (a) Income tax expense Current tax Deferred tax Under/(over) provided in prior years Notes 14 (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit before income tax expense Tax at the Australian tax rate of 30% (2011: 30%) Tax effect of amounts not deductible (taxable) in calculating taxable income: Research and development credit US tax concessions Tax losses recognised for overseas operations Other items Difference in overseas tax rates Under/(over) provision in prior years Income tax expense (c) Tax expense relating to items of other comprehensive income Currency translation of US operation Actuarial (losses)/gains on retirement benefit obligation 2012 $m 131.9 16.2 0.9 149.0 512.2 153.7 (1.6) (0.6) (3.3) 2.0 150.2 (2.1) 0.9 149.0 2011 $m 156.6 66.3 (4.0) 218.9 760.7 228.2 (1.3) (1.6) - 0.9 226.2 (3.3) (4.0) 218.9 (661.2) (979.6) - 0.6 0.6 0.1 1.1 1.2 (d) Tax losses losses for which no deferred tax asset has been recognised are approximately $87.7 million Unused capital (2011: $87.7 million) (tax at the Australian rate of 30%: $26.3 million (2011: $26.3 million)). The benefit of these unused capital losses will only be obtained if sufficient future capital gains are made and the losses remain available under tax legislation. (e) Franking Credits 2012 $m 2011 $m Franking credits available for future years Franking credits for future years are based on a tax rate of 30 per cent (2011: 30 per cent). These amounts include franking credits of $126.7 million (2011: $145.7 million) that will arise from the payment of current income tax in Australia as provided for in these financial statements. The balance of the franking account at 31 December was $6.8 million (2011: nil). 133.5 145.7 68 9 Cash and cash equivalents Cash at bank and in hand Deposits at call Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 2012 $m 54.3 - 54.3 2011 $m 15.9 304.8 320.7 Cash and deposits are at floating interest rates between 0.0 per cent and 3.45 per cent (2011: 0.0 per cent and 5.93 per cent) on US dollar and Australian dollar denominated deposits, at a weighted average interest rate of 2.03 per cent (2011: 5.66 per cent). 10 Receivables Trade receivables Mining Area C royalty receivable Other receivables Prepayments 2012 $m 111.9 15.5 7.8 4.3 139.5 2011 $m 215.5 18.8 13.5 8.3 256.1 No trade receivables are impaired. There is $0.9 million overdue (2011: $13.1 million), all of which is less than 28 days overdue (2011: $7.6 million). Due to the short term nature of these receivables, their carrying amount approximates fair value. 11 Inventories Current Consumable stores Work in progress Finished goods Total current inventories Non-current Work in progress Finished goods Total non-current inventories All inventories are held at cost. 2012 $m 2011 $m 38.0 44.0 440.6 522.6 213.9 44.0 257.9 43.0 172.3 160.9 376.2 49.9 - 49.9 69 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 12 Property, plant and equipment Land & Buildings $m Plant, Machinery & Equipment $m Mine Reserves & Development $m Exploration & Evaluation $m Total $m 1 January 2011 At Cost Accumulated depreciation* Opening written down value Additions Disposals Impairment reversal Depreciation/amortisation Foreign exchange Transfers/reclassifications Closing written down value At 31 December 2011 Cost Accumulated depreciation* Closing written down value Year ended 31 December 2012 Opening written down value Additions Disposals Depreciation/amortisation Foreign exchange Transfers/reclassifications Closing written down value At 31 December 2012 Cost Accumulated depreciation* Closing written down value 103.1 (12.0) 91.1 1,729.9 (757.1) 972.8 2.4 (1.0) 2.6 (2.8) - - 92.3 84.8 (1.6) 21.8 (105.4) (0.1) 10.0 982.3 107.0 (14.7) 92.3 1,836.5 (854.2) 982.3 92.3 5.3 (0.1) (3.3) - - 94.2 982.3 61.7 - (107.8) (0.8) - 935.4 642.0 (305.6) 336.4 103.7 - 11.2 (115.8) - (4.2) 331.3 741.0 (409.7) 331.3 331.3 131.7 - (91.6) (0.1) 0.4 371.7 121.1 (26.9) 94.2 1,914.1 (978.7) 935.4 836.6 (464.9) 371.7 24.7 - 24.7 5.8 - - (0.2) - (5.8) 24.5 24.7 (0.2) 24.5 24.5 4.9 - - - (0.4) 29.0 30.2 (1.2) 29.0 2,499.7 (1,074.7) 1,425.0 196.7 (2.6) 35.6 (224.2) (0.1) - 1,430.4 2,709.2 (1,278.8) 1,430.4 1,430.4 203.6 (0.1) (202.7) (0.9) - 1,430.3 2,902.0 (1,471.7) 1,430.3 * Accumulated depreciation for Mine Reserves and Development includes cumulative impairment charges Assets in the course of construction Included in property, machinery and equipment and mine reserves and development are amounts totalling $26.3 million and $0.6 million respectively (2011: $75.5 million and $22.7 million respectively) relating to assets under construction which are currently not being depreciated as the assets are not ready for use. Assets not being depreciated Included in mine reserves and development are amounts totalling $58.9 million (2011: $98.4 million) which have not been depreciated as mining of the related area of interest has not yet commenced. Rehabilitation Additions in plant, machinery and equipment and mine reserves and development include changes in the provision for rehabilitation and mine closure totalling $34.9 million (2011: $51.1 million) (refer to note 17). 70 13 Intangible assets MAC royalty asset Cost Accumulated amortisation Net written down value 14 Deferred tax Deferred tax asset: Deferred tax asset amounts recognised in profit or loss Employee benefits Rehabilitation provisions Tax revenue losses Other Gross deferred tax assets Deferred tax asset amounts recognised directly in equity Share issue costs Actuarial losses on retirement benefit obligations Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 2012 $m 10.0 (3.7) 6.3 2011 $m 10.0 (3.3) 6.7 2012 $m 2011 $m 8.2 129.5 3.3 4.6 145.6 0.2 1.8 2.0 6.9 126.8 - 3.9 137.6 1.0 1.1 2.1 Amount offset to deferred tax liabilities pursuant to set-off provision Net deferred tax assets (131.9) 15.7 (126.4) 13.3 Deferred tax liability: Deferred tax liability amounts in profit or loss Depreciation/amortisation Foreign currency exchange Receivables Inventory Other Gross deferred tax liabilities Amount offset to deferred tax assets pursuant to set-off provision Net deferred tax liabilities (123.0) (5.1) (5.0) (19.6) (1.4) (154.1) 131.9 (22.2) (103.5) (6.1) (6.2) (21.6) (2.0) (139.4) 126.4 (13.0) 71 14 Deferred tax (continued) Movements in net deferred tax balance: Balance at 1 January Credited to the income statement Over provision in prior years Charged directly to equity Balance at 31 December Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 2012 $m 0.3 (16.2) 7.6 1.8 (6.5) 2011 $m 55.3 (66.3) 3.7 7.6 0.3 Deferred tax assets of $20.8 million (2011: $17.7 million) and deferred tax liabilities of $26.6 million (2011: $25.3 million) are expected to be recovered in less than 12 months. 15 Payables Trade payables Accrued expenses Annual leave payable Government royalties payable 2012 $m 25.4 46.0 11.2 4.7 87.3 2011 $m 47.1 63.6 10.3 15.7 136.7 72 16 Interest-bearing liabilities Unsecured Current Senior Notes 2003 (ii) Non-current Multi Optional Facility Agreement (i) Senior Notes 2003 (ii) Syndicated Term Loan Facility (i) Deferred borrowing costs (a) Financing arrangements Total Facilities Multi Optional Facility Agreement Senior Notes 2003 Syndicated Term Loan Facility Working Capital Facility Used at balance date Multi Optional Facility Agreement Senior Notes 2003 Syndicated Term Loan Facility Working Capital Facility Unused at balance date Multi Optional Facility Agreement Syndicated Term Loan Facility Working Capital Facility Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 2012 $m 2011 $m 56.9 - 81.8 19.2 - (7.7) 93.3 - 76.6 88.7 (1.3) 164.0 800.0 76.1 - - 876.1 81.8 76.1 - - 157.9 718.2 - - 718.2 - 76.6 445.0 49.3 570.9 - 76.6 88.7 - 165.3 - 356.3 49.3 405.6 73 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 16 Interest-bearing liabilities (continued) (i) Multi Optional Facility Agreement In April 2012, the group entered into a Multi Optional Facility Agreement (MOFA) comprising a series of unsecured five year bilateral revolving credit facilities with several domestic and foreign institutions, totalling $800 million. The MOFA replaced the Syndicated Term Loan Facility of $445 million, of which $100 million matured in March 2012 and $345 million was due to mature in March 2013, along with a US$50 million Working Capital Facility which matured in March 2012. As at 31 December 2012, the MOFA bears a weighted average variable interest rate of 2.3 per cent. (ii) Senior Notes - 2003 Series The notes have an average fixed interest rate of 5.3 per cent and mature in two tranches; being June 2013 US$40.0 million and June 2015 US$20.0 million. The translation exposure on the June 2013 US$40 million notes has been eliminated through a cross currency swap at AUD/USD 0.7025. The cross currency swap also converts the fixed USD interest payments of 5.25 per cent to an AUD variable interest rate exposure. As at 31 December 2012, the cross currency swap bears a variable interest rate of 3.9 per cent (2011: 4.9 per cent). The swap requires settlement of interest receivable and payable on a semi-annual basis on dates which coincide with the interest payable dates on the underlying notes. (b) Interest rate exposure and maturities of interest-bearing liabilities 2012 Interest-bearing liabilities Interest rate swaps (notional principal) 2011 Interest-bearing liabilities Interest rate swaps (notional principal) Fixed interest rate Effective floating average interest rate % Floating interest rate 1 year or less $m $m 1 to 5 years $m 2.3 3.9 1.3 4.9 81.8 56.9 138.7 88.7 56.9 145.6 56.9 (56.9) - - - - 19.2 - 19.2 76.6 (56.9) 19.7 Total $m 157.9 - 157.9 165.3 - 165.3 The contractual repricing date of the floating rate interest-bearing liabilities at the balance dates will be reset within one year. 74 17 Provisions Current Employee benefits (a) Rehabilitation and mine closure Other provisions (b) Non-current Employee benefits Rehabilitation and mine closure Retirement benefit obligations Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 Notes 23 2012 $m 10.2 50.0 3.9 64.1 4.2 394.5 8.6 407.3 2011 $m 9.0 60.7 12.3 82.0 3.9 366.2 7.6 377.7 (a) The current provision for employee benefits represents amounts for which the group does not have an unconditional right to defer settlement. The group does not expect a significant amount of the provision will be paid in the next 12 months. (b) Other provisions include restructure and redundancy. Movements in provisions Balance at 1 January Change in provisions - expense for closed sites Change in provisions - other Change in provisions - additions to property, plant & equipment Foreign exchange rate movements Unwind expense Amounts spent during the year Unused amounts reversed Balance at 31 December Rehabilitation and mine closure $m Notes Other provisions $m 7 12 7 426.9 8.3 - 34.9 (0.8) 24.6 (49.4) - 444.5 12.3 - 2.7 - - - (10.0) (1.1) 3.9 75 18 Contributed equity (a) Share capital Ordinary shares - fully paid Treasury shares Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 2012 Shares 2011 Shares 418,701,360 (1,630,066) 417,071,294 418,701,360 (2,269,590) 416,431,770 2012 $m 1,120.0 (15.2) 1,104.8 2011 $m 1,120.0 (18.0) 1,102.0 (b) Movements in ordinary share capital There have been no movements in share capital since 7 May 2009. (c) Treasury shares Treasury shares are shares in Iluka Resources Limited acquired on market and held for the purpose of issuing shares under the Directors, Executives and Employees Share Acquisition Plan. Opening balance at 1 January 2011 Acquisition of shares, net of tax Employee share issues, net of tax Balance at 31 December 2011 Acquisition of shares, net of tax Employee share issues, net of tax Balance at 31 December 2012 (d) Dividend reinvestment plan Number of shares 3,220,149 1,498,791 (2,449,350) 2,269,590 341,621 (981,145) 1,630,066 $m 11.7 14.8 (8.5) 18.0 2.5 (5.3) 15.2 The company has a dividend reinvestment plan (DRP) which was suspended in 2010 until further notice. (e) Capital risk management The group's objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can continue to provide returns to shareholders and benefits for other stakeholders and to maintain an efficient capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The group monitors capital on the basis of the level of return on capital and also the level of net cash/debt and compliance with bank covenants, including the gearing ratio. The group manages funds on a group basis with all funds being drawn by the parent entity. 76 19 Reserves (a) Reserves Asset revaluation reserve Share-based payments reserve Foreign currency translation reserve Movements: Asset revaluation reserve Balance at 1 January Transfer to retained earnings on disposal Balance at 31 December Share-based payments reserve Balance at 1 January Transfer of shares to employees, net of tax Share-based payments, net of tax Balance at 31 December Foreign currency translation Balance at 1 January Currency translation of US operation Hedge of net investment in US operation, net of tax Deferred tax Balance at 31 December (b) Nature and purpose of reserves Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 2012 $m 15.9 4.4 (2.2) 18.1 16.0 (0.1) 15.9 2.7 (5.3) 7.0 4.4 (2.3) (0.5) 0.5 0.1 (2.2) 2011 $m 16.0 2.7 (2.3) 16.4 16.0 - 16.0 6.9 (8.5) 4.3 2.7 (2.5) (0.3) 0.4 0.1 (2.3) (i) Asset revaluation reserve The asset revaluation reserve records revaluations of non-current assets prior to the adoption of AIFRS. Transfers are made to retained earnings on disposal of previously revalued assets. (ii) Share-based payments reserve The employee share-based payments reserve is used to recognise the fair value of equity instruments granted but not yet issued to employees under the group's various equity-based incentive schemes. (iii) Foreign currency translation reserve Exchange differences arising on translation of the net investment in foreign operations, including US dollar denominated debt used as a hedge of the net investment, are taken into the foreign currency translation reserve net of applicable income tax, as described in Note 1(k). US$20.0 million of debt (2011: US$20.0 million) is designated as a hedge of the net investment in the US operations at balance date. The reserve is recognised in profit or loss when the net investment is disposed of. 77 19 Reserves (continued) (c) Retained earnings Balance at 1 January Net profit for the year Dividends paid Transfer from asset revaluation reserve, net of tax Actuarial losses on retirement benefit obligation, net of tax Balance at 31 December 20 Dividends Final dividend for 2011 of 55 cents per share, franked for 2010 of 8 cents per share, unfranked Interim dividend for 2012 of 25 cents per share, franked for 2011 of 20 cents per share, unfranked Total dividends paid for or provided Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 2012 $m 416.3 363.2 (333.7) 0.1 (1.7) 444.2 2012 $m 229.4 - 229.4 104.3 - 104.3 333.7 2011 $m (4.1) 541.8 (117.0) - (4.4) 416.3 2011 $m - 33.5 33.5 - 83.7 83.7 117.2 (a) Dividends not recognised at the end of the reporting period In addition to the above dividends, since year end the Directors have determined a final dividend for 2012 of 10 cents per share, fully franked (2011: 55 cents, fully franked). The dividend is payable on 4 April 2013 for shareholders on the register as at 7 March 2013. The aggregate amount of the proposed dividend is $41.9 million. (b) Franked dividends The impact on the franking account of the final dividend for 2012 will be a reduction in the franking account balance of $17.9 million (2011: reduction of $98.7 million) from $133.5 million (refer note 8(e)) to $115.6 million. 78 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 21 Key Management Personnel (a) Key Management Personnel Key Management Personnel of the group comprise Directors of Iluka Resources Limited as well as other specific employees of the group who met the following criteria: "personnel who have authority and responsibility for planning, directing and controlling the activities of the group, either directly or indirectly." Key Management Personnel - Directors The following persons were Directors of Iluka Resources Limited during the financial year: (i) Managing Director and Chief Executive Officer D A Robb (ii) Non-execuitve Directors W G Osborn G J Pizzey (Chairman) G J Rezos J A Seabrook S J Turner All above persons were Directors of Iluka Resources Limited for all of the financial year, as well as for the financial year ended 31 December 2011, except for Mr D M Morley who retired on 25 May 2011. On 20 December 2012, Mr J H Ranck and Mr G J W Martin were appointed as Directors, with effect from 1 January 2013. (b) Key Management Personnel - Employees other than Directors (The Executives) C Cobb A Tate S Wickham General Manager Sales and Marketing Chief Financial Officer General Manager Australian Operations 2012 Key Management Personnel Compensation The company has taken advantage of the relief provided by the Corporations Regulation 2M.6.04 and has transferred the detailed remuneration disclosures to the Remuneration Report. The relevant information can be found in the Remuneration Report of pages on pages 16 to 36. 2012 Non-executive Directors Executive Director Executives Total Short term benefits $ 932,000 2,172,300 2,141,964 5,246,264 Post employment benefits $ Share-based Payments $ Termination benefits $ Total $ 72,475 22,811 82,834 178,120 - 3,294,351 1,186,839 4,481,190 - - - - 1,004,475 5,489,462 3,411,637 9,905,574 79 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 21 Key Management Personnel (continued) 2011 Non-executive Directors Executive Director Executives Total Short term benefits $ 978,525 2,622,525 3,952,571 7,553,621 Post employment benefits $ Share-based Payments $ Termination benefits $ Total $ 75,387 46,202 158,803 280,392 - 2,638,048 1,097,500 3,735,548 - - - - 1,053,912 5,306,775 5,208,874 11,569,561 The numbers of shares in the company and share rights for ordinary shares in the company are set out below for including their personally related entities. No shares were granted as each Key Management Personnel, compensation during the reporting period. Share rights and shareholdings of Key Management Personnel Number Of Shares Name Balance held at 1/1/12 Vesting of share rights Awarded as Restricted Shares Other changes Balance held at 31/12/12 Non-executive directors W Osborn G Pizzey G Rezos J Seabrook S Turner Executive Director D Robb Executives C Cobb A Tate S Wickham 1,800 18,351 70,000 19,314 50,000 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a - 3,000 5,000 - - 1,800 21,351 75,000 19,314 50,000 888,528 93,776 52,332 (293,776) 740,860 17,183 63,446 85,069 - 30,883 27,320 24,319 13,317 25,129 - (30,883) (14,000) 41,502 76,763 123,518 No shares were forfeited during the year Number Of Share Rights Balance held at 1/1/12 Granted during 2012 Vested as shares during 2012 Lapsed during 2012 Balance held at 31/12/121 Fair value of Share Rights granted in ($)2 2012 1,014,977 31,475 (93,776) 51,032 88,494 85,418 11,565 11,691 11,745 - (30,883) (27,320) - - - - 952,676 405,083 62,597 69,302 69,843 148,842 150,463 151,158 Name Executive Director D Robb Executives C Cobb A Tate S Wickham 1 Balances for the Executive Director and the Executives include restricted shares which will vest in future periods subject to legislative requirements. 2 Rights granted in respect to the 2012 LTIP which forms part of share based payments for 2012 to 2014 inclusive. Non-Executive Directors do not have any entitlement to share rights. 80 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 21 Key Management Personnel (continued) (c) Transactions with Key Management Personnel There were no transactions that were required to be disclosed which occurred between the group and Key Management Personnel that were outside of the nature described below: (a) (b) (c) occurrence was within a normal employee, customer or supplier relationship on terms and conditions no more favourable than those it is reasonable to expect the group would have adopted if dealing at arms length with an unrelated individual; information about these transactions does not have the potential to adversely affect the decisions about the allocation of scarce resources made by users of the discharge of accountability by the Key Management personnel; and the transactions are trivial or domestic in nature. the financial report, or Therefore, specific details of other transactions with Key Management Personnel are not disclosed. 22 Remuneration of auditors During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms: (a) PricewaterhouseCoopers Australia Audit and other assurance services Audit and review of financial statements Other assurance services Tax and other services Tax compliance and advisory services Other compliance and advisory services Total remuneration 2012 $000 2011 $000 551 46 597 - - - 597 548 30 578 68 3 71 649 (b) Network firms of PricewaterhouseCoopers Australia Audit and review of financial statements 10 10 81 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 23 Retirement benefit obligations (a) Superannuation plan (i) Australia All employees of the group who do not elect an alternate fund under the Superannuation Fund Choice Legislation are entitled to benefits on leaving service, retirement, disability or death from the Iluka Section of the ING Master Trust, a sub-plan of the ING Masterfund. Within the Iluka Plan (the plan) the vast majority of members are entitled to accumulation (that is, defined contribution) benefits only. The plan also provides defined lump sum and pension benefits based on years of service and final average salary for a small number of members. The accumulation contribution section receives fixed contributions from group companies. The group's legal or constructive obligation is limited to these contributions. (ii) USA All employees of the United States (US) operations are entitled to benefits from the US operations' pension plans on retirement, disability or death. During the year, the US operations closed one of its defined benefit plans. This plan provided a monthly benefit based on a set amount per month per year of service. The US operations have one remaining defined benefit plan and one defined contribution plan. The defined benefit plan provides a monthly benefit based on average salary and years of service. The defined contribution plan receives an employee's elected contribution and an employer's match-up to a fixed percentage. The entity's legal or construction obligation is limited to these contributions. The following sets out details in respect of the defined benefit sections only of the Australian and US plans. The expense recognised in relation to the defined contribution plans is disclosed in note 7 and is a related party transaction. (b) Balance sheet amounts Defined benefit plan obligation - present value Defined benefit fund plan assets - fair value Net liability in the balance sheet Present value of the defined benefit obligation, which is partly funded: Balance at 1 January Current service cost Interest cost Contributions by plan participants Actuarial losses/gains Exchange rate changes Benefits paid Closure of plan Balance at 31 December 82 2012 $m 22.8 (14.2) 8.6 2012 $m 22.6 0.6 0.9 0.1 3.6 - (1.2) (3.8) 22.8 2011 $m 22.6 (15.0) 7.6 2011 $m 17.5 0.4 0.9 0.1 3.5 1.4 (1.2) - 22.6 23 Retirement benefit obligations (continued) Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 Fair value of plan assets: Balance at 1 January Expected return on plan assets Actuarial losses/(gains) Exchange rate changes Contributions by group companies Contributions by plan participants Benefits paid Closure of plan Balance at 31 December The major categories of plan assets are as follows: Cash Equity instruments Debt instruments Property Other assets 2012 $m 15.0 0.9 0.6 (0.4) 3.0 0.1 (1.2) (3.8) 14.2 0.2 9.0 3.7 0.2 1.1 14.2 2011 $m 14.1 1.0 (1.1) 0.9 1.2 0.1 (1.2) - 15.0 0.3 8.3 5.2 0.1 1.1 15.0 The assets are invested with professional investment managers. The number of shares, if any, of the company held by the managers is decided solely by the investment managers. (c) Amounts recognised in profit or loss Current service cost Interest cost Expected return on plan assets Closure of plan Total included in employee benefits expense Actual return on plan assets (d) Amounts recognised in other comprehensive income 2012 $m 0.6 0.9 (0.9) 0.5 1.1 1.6 2011 $m 0.4 0.9 (1.0) - 0.3 (0.1) Actuarial loss recognised in the year Cumulative actuarial losses recognised in other comprehensive income (1.7) (7.6) (4.4) (5.9) 83 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 23 Retirement benefit obligations (continued) (e) Principal actuarial assumptions The principal actuarial assumptions used by the fund actuaries (expressed as weighted averages) were as follows: Australia Discount rate Expected return on plan assets Future salary increases USA Discount rate Expected return on plan assets Future salary increases 2012 % 2011 % 3.1 3.3 3.5 4.0 7.5 3.0 3.1 5.0 3.5 4.5 6.9 3.5 The expected rate of return on plan assets has been based on historical and future expectations of returns for each of the major categories of asset classes as well as the expected and actual allocation of plan assets to these major categories. (f) Employer contributions (i) Australia Employer contributions to the defined benefit section of the Plan are based on recommendations by the Plan's actuary. The objective of funding is to ensure that the benefit entitlements of members and other beneficiaries are fully funded by the time they become payable. To achieve this objective, the actuary has adopted a method of funding benefits known as the aggregate funding method. This funding method seeks to have benefits funded by means of a total contribution which is expected to be a constant percentage of members' salaries over their working lifetimes. Using the funding method described above and particular actuarial assumptions as to the defined benefits plan's future experience, the actuary recommended payment of employer contributions ranging between 12.5 per cent and 12.9 per cent (2011: 12.5 per cent to 12.9 per cent) of salaries, dependent of the defined benefit category of membership. An actuarial valuation of the Plan for financial statement disclosure purposes has been performed as at 31 December 2012. The funding valuation for regulatory purposes is performed annually on 30 June, coinciding with the Fund's annual review date. The Plan has 12 months to finalise the valuation and as such the 30 June 2012 valuation is currently under way. As at 31 December 2012 only 5 active members remain in the plan. 84 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 23 Retirement benefit obligations (continued) (ii) USA Employer contributions to the defined benefit section of the plan are based on recommendations by the plan's actuary. The objective of funding is to ensure that the benefit entitlements of members and other beneficiaries are fully funded by the time they become payable. To achieve this objective, the actuary has adopted a method of funding benefits known as the Projected Unit Credit (PUC) method. Under the PUC method, unfunded past service is amortised over 10 years and future benefit accruals are funded during participants' working lifetime with cost varying based on the age of participants. Actuarial gains/losses are amortised over 5 years. Total employer contributions for both the Australian and US plans that are expected to be paid by the group for the year ending 31 December 2013 are $0.9 million. (g) Net financial position of plans The net financial position of the plans based on information supplied from the plans' actuarial advisors are Australia deficit $0.4million (2011: deficit $0.4 million) and US deficit $8.2 million (2011: deficit $7.2m). A net deficit of $8.6 million (2011: deficit $7.6 million) is included in non-current provisions (refer note 17). (h) Historic summary Defined benefit plan obligation Plan assets Deficit 24 Contingent liabilities 2012 $m 22.8 (14.2) 8.6 2011 $m 22.6 (15.0) 7.6 2010 $m 17.5 (14.1) 3.4 2009 $m 19.7 (15.0) 4.7 2008 $m 27.6 (16.2) 11.4 Bank guarantees The group has a number of bank guarantees in favour of various government authorities and service providers to meet the total value of performance commitments and guarantees was $115.0 million (2011: $106.0 million). its obligations under exploration and mining tenements. At 31 December 2012, Native title There is some risk that native title, as established by the High Court of Australia's decision in the Mabo case, exists over some of the land over which the group holds tenements or over land required for access purposes. It is impossible at this stage to quantify the impact, if any, which these developments may have on the operations of the group. Other claims In the course of its normal business, the group occasionally receives claims arising from its operating activities. In the opinion of the Directors, all such matters are covered by insurance or, if not covered, are without merit or are of such a kind or involve such amounts that would not have a material adverse effect on the operating results or financial position of the group if settled unfavourably. 85 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 25 Commitments (a) Capital commitments Capital expenditure contracted for at the reporting date but not recognised as liabilities is as follows: Amounts contracted for and payable within 1 year All of the commitments relate to the purchase of property, plant and equipment. (b) Exploration and mining lease commitments Commitments in relation to leases contracted for at reporting date but not recognised as liabilities payable: Within one year Later than one year but not later than five years Later than five years 2012 $m 2011 $m 8.2 11.5 21.3 39.4 50.1 110.8 22.0 42.3 54.8 119.1 These costs are discretionary. If the expenditure commitments are not met then the associated exploration and mining leases may be relinquished. (c) Lease commitments Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Within one year Later than one year but not later than five years Later than five years (d) Other commitments Commitments for payments in relation to non-cancellable contracts 2012 $m 12.5 16.1 0.4 29.0 2012 $m 92.4 2011 $m 13.6 16.4 0.6 30.6 2011 $m 106.5 The commitments include $61.2 million (2011: $95.9 million) in respect of the group for term contracts for coal, gas, electricity and water used in the production process. 86 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 26 Controlled entities and deed of cross guarantee The following companies are all incorporated in Australia and are parties to a Deed of Cross Guarantee (the Deed) under which each company guarantees the debts of the others: Iluka Resources Limited, Westlime (WA) Limited, Ilmenite Pty Limited, Southwest Properties Pty Limited, Western Mineral Sands Pty Limited, Yoganup Pty Limited, Iluka Corporation Limited, Associated Minerals Consolidated Limited, Iluka Administration Limited, Iluka Consolidated Pty Limited, Iluka Exploration Pty Limited, Gold Fields Asia Limited, Iluka International Limited, NGG Holdings Limited, Iluka Midwest Limited, Western Titanium Limited, The Mount Lyell Mining and Railway Company Limited, Renison Limited, Iluka Finance Limited, The Nardell Colliey Pty Limited, Glendell Coal Limited, Lion Properties Pty Limited, Basin Minerals Limited, Basin Minerals Holdings Pty Limited, Basin Properties Pty Limited, Swansands Pty Limited and Iluka (Eucla Basin) Pty Limited. By entering into the Deed, the wholly-owned entities represent a closed group and have been relieved from the requirements to prepare a Financial Report and Directors' Report under Class Order 98/1418 (as amended by Class Order 98/2017) issued by the Australian Securities and Investments Commission. The closed group is also the extended closed group. In addition to the members of the extended closed group, the Iluka group also includes the following Australian companies: Ashton Coal Interests Pty Ltd (Iluka interest 95.8 per cent), Iluka International (Brazil) Pty Ltd (Iluka interest 100.0 per cent), Iluka International UAE Pty Ltd (Iluka interest 100.0 per cent), Iluka International Lanka Pty Ltd (Iluka interest 100.0 per cent), Iluka International China Pty Ltd (Iluka interest 100.0 per cent) and Iluka Share Plan Holdings Pty Ltd. The group's activities in the US are undertaken by Iluka Resources Inc, which is 100 per cent owned. Condensed income statement of Extended Closed Group Revenue from ordinary activities Expenses from ordinary activities Finance costs Income tax (expense)/benefit Profit for the year Condensed statement of comprehensive income Profit for the year Other comprehensive income Actuarial gains/(losses) on defined benefit plans, net of tax Total other comprehensive income Total comprehensive income for the year Summary of movements in consolidated retained earnings 2012 $m 1,041.1 (542.8) (38.2) (139.3) 320.8 2011 $m 1,530.7 (741.2) (34.6) (211.7) 543.2 320.8 543.2 - - (0.8) (0.8) 320.8 542.4 Retained earnings at the beginning of the financial year 440.9 14.7 Profit for the year Dividends paid Retained earnings at the end of the financial year 320.8 (333.7) 428.0 543.2 (117.0) 440.9 87 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 2012 $m 2011 $m 35.4 122.1 490.0 647.5 2.3 257.9 41.6 1,389.6 6.3 1,697.7 303.9 241.9 361.9 907.7 0.5 49.9 41.5 1,401.0 6.7 1,499.6 2,345.2 2,407.3 77.7 56.9 54.1 126.7 315.4 93.3 359.1 22.2 474.6 790.0 118.0 - 73.1 145.7 336.8 164.0 331.6 13.3 508.9 845.7 1,555.2 1,561.6 1,104.8 22.4 428.0 1,555.2 1,102.0 18.7 440.9 1,561.6 26 Controlled entities and deed of cross guarantee (continued) Condensed balance sheet of Extended Closed Group Current assets Cash and cash equivalents Receivables Inventories Total current assets Non-current assets Receivables Inventories Other financial assets Property, plant and equipment Intangible assets Total non-current assets Total assets Current liabilities Payables Interest-bearing liabilities Provisions Current tax payable Total current liabilities Non-current liabilities Interest-bearing liabilities Provisions Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained profits Total equity 88 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 27 Reconciliation of profit after income tax to net cash inflow from operating activities Profit for the year Depreciation and amortisation Exploration capitalised Net gain on disposal of property, plant and equipment Net exchange differences and other Rehabilitation and restoration unwind Non-cash share-based payments expense Amortisation of deferred borrowing costs Impairment reversal Non-cash rehabilitation expense for closed sites Change in operating assets and liabilities Decrease (increase) in receivables Increase in inventories (Increase) decrease in net deferred tax (Decrease) increase in payables (Decrease) increase in provisions (Decrease) increase in net current tax liability Net cash inflow from operating activities 28 Earnings per share (a) Basic and diluted earnings per share Basic earnings per share (cents) Diluted earnings per share (cents) (b) Weighted average number of shares used as denominator 2012 $m 363.2 203.1 (4.9) (1.3) (2.7) 24.6 9.7 2.3 - 8.3 116.3 (354.9) 4.9 (95.9) (5.1) (17.0) 250.6 2012 Cents 87.1 86.7 2011 $m 541.8 224.6 (5.2) (2.9) 2.7 20.6 7.7 1.0 (35.6) 34.6 (92.4) (168.6) 59.5 8.2 6.7 146.8 749.5 2011 Cents 130.1 129.4 2012 Number 2011 Number Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Weighted average share rights outstanding Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 417,041,967 2,025,870 416,421,427 2,352,602 419,067,837 418,774,029 89 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 29 Share-based payments The share-based payment expense recognised in profit or loss of $9.7 million (2011: $7.7 million) results from several schemes summarised below. Further information on each scheme is contained in the Remuneration Report. Shares / Rights at 31 Dec 12 Expense 2012 $m Shares / Rights at 31 Dec 11 Expense 2011 $m Schemes 2011 STIP (i) 2010 STIP (i) 2009 STIP (i) 2012 LTIP - TSR (ii) 2012 LTIP - ROE (ii) 2011 LTIP - TSR (ii) 2011 LTIP - ROE (ii) 2010 LTIP - TSR (ii) 2010 LTIP - ROE (ii) 2009 LTIP - TSR (ii) 2009 LTIP - ROE (ii) Iluka Retention Plan (iii) MD LTID (iv) Employee Share Plan (v) Restricted Employee Share Plan (vi) Total share-based payments Grant date Vesting date Mar-12 Jan-11 Jan-10 Jan-12 Jan-12 Jan-11 Jan-11 Jan-10 Jan-10 Jan-09 Jan-09 2008 Mar-11 Mar-13/14 Jan-12/13 Jan-11/12 Jan-15 Jan-15 Jan-14 Jan-14 Jan-13 Jan-13 Jan-12 Jan-12 2011 Feb-15 Fair value $ 16.68 9.14 3.58 11.07 14.66 7.37 9.44 2.59 3.58 3.49 4.64 2.80 11.62 276,056 175,001 - 113,970 113,970 146,665 146,665 335,846 335,846 - - - 750,000 - - 3.1 0.8 - 0.5 0.6 0.4 0.4 0.3 0.3 - - - 2.2 0.6 0.5 9.7 - 368,654 152,361 - - 151,076 151,076 350,019 350,019 272,598 272,598 29,000 750,000 - - 2.6 0.3 - - 0.4 0.5 0.3 0.4 0.3 0.1 0.4 1.8 0.6 - 7.7 (i) (ii) The Short Term Incentive Plan (STIP) equity component comprises two equal tranches of restricted shares which vest one and two years respectively after grant date. The fair value of the 2011 STIP is determined as the volume weighted average price of ordinary shares over the five trading days following the release of the company’s annual results. The Long Term Incentive Plan (LTIP) comprises two equal tranches of share rights which vest three years after grant date subject to performance criteria. The Total Shareholder Return (TSR) tranche is based on market performance and no adjustments are made for share rights that do not vest due to the non-fulfilment of vesting conditions. The fair value at grant date for the 2012 LTIP Plan takes into account the exercise price of $nil, the share price at grant date of $15.50, the expected price volatility of the share price (based on historical volatility), the expected dividend yield of 1.81% and the risk free rate of return of 3.14%. The Return on Equity (ROE) tranche is based on internal performance measures and prior year expenses for rights that do not vest for this tranche are credited to the share-based payments expense. The 2011 expense for the 2009 LTIP - ROE includes a reversal for the portion of the share rights outstanding at 31 December 2011 that did not vest. (iii) The Iluka Retention Plan share rights were offered on various dates with the majority offered in March 2008 at $4.09 per share, with a vesting date of March 2011. The fair value relates to the final shares that vested in 2012. (iv) Full details of the Managing Director's Retention Share Rights that vested in March 2011 and the Managing Director's Long Term Incentive Deferred (LTID) share rights granted in March 2011 and approved by shareholders at the 2011 AGM are set out in the Remuneration Report. The fair value of $11.62 per right is the weighted average for all share rights in the LTID. (v) A total of 46,200 (2011: 42,975) shares were issued to eligible employees who participated in the plan. Each participant was issued with shares worth $1,000 based on a volume weighted average market price of $13.33 (2011: $13.23) for the five days prior to the start of the offer period. (vi) In 2012, a total of 125,488 restricted shares were awarded to eligible employees who would have been entitled to participate in the Employee Share Plan for 2009/10 that was cancelled. 90 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 30 Parent entity financial information (a) Summary financial information Balance sheet Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Shareholders' equity Contributed equity Reserves Retained earnings Profit or loss for the year Total comprehensive income (b) Profit for the year 2012 $m 2011 $m 129.7 1,933.8 2,063.5 90.6 567.2 657.8 383.6 1,996.7 2,380.3 491.4 642.3 1,133.7 1,405.7 1,246.6 1,120.0 17.8 267.9 1,405.7 492.6 492.6 1,120.0 17.6 109.0 1,246.6 199.7 199.7 Profit for the year includes dividends received from controlled entities of $475.0 million (2011: $200.0). (c) Contingent liabilities of the parent entity The parent had contingent liabilities for performance commitments and guarantees of $28.9 million as at 31 December 2012 (2011: $28.6 million). (d) Contractual commitments for the acquisition of property, plant or equipment As at 31 December 2012, the parent entity had contractual commitments for the acquisition of property, plant or equipment totalling $7.0 million (2011: $0.9 million). 91 Iluka Resources Limited Notes to the consolidated financial statements 31 December 2012 31 Related party transactions Disclosures relating to related party transactions are set out in the notes to which they relate. For disclosures relating to Directors and Key Management Personnel refer to Note 21. Details of material controlled entities are set out in Note 26. The ultimate Australian controlling entity and the ultimate parent entity in the wholly-owned group is Iluka Resources Limited. 32 Events occurring after the reporting period On 17 January 2013, Iluka announced its intention to idle the Eneabba mining operation (Mid West, Western Australia) in March 2013. On 21 February 2013, Iluka announced a continued idling of synthetic rutile kiln 3 at Narngulu, Western Australia and other production changes and cost reduction initiatives to reduce production include a total of approximately 200 positions being made redundant. Total costs of and fixed costs that will including implementing the announced production cuts and cost reductions of approximately $50 million, redundancy costs, are expected to be incurred and expensed during 2013. 92 In the Directors' opinion: Iluka Resources Limited Directors' declaration 31 December 2012 (a) (b) (c) the financial statements and notes set out on pages 43 to 92 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards and other mandatory professional reporting requirements as detailed above, and the Corporations Regulations 2001; and giving a true and fair view of the group's financial position as at 31 December 2012 and of its performance for the financial year ended on that date, and (ii) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable, and at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group identified in note 26 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in note 26. Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the chief executive officer and chief financial officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. G J Pizzey Chairman D A Robb Managing Director Perth 20 March 2013 93 Independent auditor’s report to the members of Iluka Resources Limited Report on the financial report We have audited the accompanying financial report of Iluka Resources Limited (the company), which comprises the balance sheet as at 31 December 2012, and the income statement, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for the Iluka Resources Limited Group (the consolidated entity). The consolidated entity comprises the company and the entities it controlled at the year's end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. Our procedures include reading the other information in the Annual Report to determine whether it contains any material inconsistencies with the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. PricewaterhouseCoopers, ABN 52 780 433 757 Brookfield Place, 125 St Georges Terrace, PERTH WA 6000, GPO BOX D198, PERTH WA 6840 T +61 8 9238 3000, F +61 8 9238 3999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 94 Independent auditor’s report to the members of Iluka Resources Limited (cont’d) Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: (a) the financial report of Iluka Resources Limited is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2012 and of its performance for the year ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) the financial report and notes also comply with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the remuneration report included in pages 16 to 36 of the directors’ report for the year ended 31 December 2012. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s opinion In our opinion, the remuneration report of Iluka Resources Limited for the year ended 31 December 2012, complies with section 300A of the Corporations Act 2001. PricewaterhouseCoopers Nick Henry Partner 20 March 2013 95 Iluka Resources Limited Five Year Physical and Financial Information 31 December 2012 Five Year Physical and Financial Information Production volumes (kt) - Zircon - Rutile - Synthetic rutile - Ilmenite saleable - Ilmenite upgradable Sales volumes (kt) - Zircon - Rutile - Synthetic rutile - Ilmenite saleable Weighted average annual prices (US$/t) - Zircon - Rutile - Synthetic rutile AUD:USD range (cents) Average AUD:USD spot exchange rate (cents) Summary financials ($m) Revenue from operations1 Group EBITDA - Mineral Sands EBITDA - Mining Area C EBITDA - Other EBITDA Depreciation and amortisation Net interest and finance charges Income tax (expense) benefit NPAT Operating cash flow Capital expenditure Free cash flow2 Net (debt) cash Capital and dividends Ordinary shares on issue (millions) Dividends per share in respect of year (cents) Franking level (per cent) Opening year share price ($) Closing year share price ($) Financial ratios Basic earnings per share (cents) Free cash flow per share (cents) Return on shareholders' equity (per cent)3 Return on capital (per cent)4 Gearing (net debt/net debt + equity) (per cent) Financial position as at 31 December ($m) Total assets Total liabilities Net assets Shareholders' equity Net tangible asset backing per share ($) 2012 2011 2010 2009 2008 343.2 220.3 248.3 385.6 288.5 213.8 105.5 169.6 443.2 2,080 2,464 1,771 601.5 281.3 285.7 459.7 201.9 514.5 265.9 257.7 570.9 1,886 1,174 878 412.9 250.1 347.5 469.0 215.9 478.7 240.0 362.5 373.7 913 560 481 263.1 141.4 405.0 342.1 496.7 222.6 138.7 396.7 376.4 815 511 461 385.1 140.1 467.3 586.2 641.0 481.0 156.4 507.0 643.1 760 502 452 96.8 / 108.1 95.3 / 110.3 81.2 / 101.8 92.0 103.6 103.2 62.9 / 93.7 79.3 60.4 / 98.1 85.4 1,069.8 748.8 726.0 72.7 (49.9) (203.1) (33.5) (149.0) 363.2 368.7 (167.3) 81.2 (95.9) 418.7 35.0 100.0 15.50 9.02 87.1 19.4 23.2 32.8 5.8 1,536.7 979.3 925.9 88.5 (35.1) (224.6) (29.6) (218.9) 541.8 706.2 (142.5) 589.6 156.7 418.7 75.0 73.3 9.14 15.50 130.1 140.6 42.5 54.9 n/a 874.4 305.1 250.2 76.3 (21.4) (219.0) (46.2) (3.8) 36.1 163.6 (117.2) 60.7 (312.6) 418.7 8.0 0.0 3.58 9.14 8.6 14.5 3.2 5.0 21.8 576.0 99.6 75.6 50.2 (9.5) (176.6) (22.7) 61.5 (82.4) 83.9 (521.6) (209.8) (382.1) 418.7 n/a n/a 4.64 3.58 (8.7) (50.1) (7.5) (9.6) 25.9 894.8 274.6 186.3 56.8 (47.0) (161.7) (35.6) 7.7 77.5 226.4 (198.4) 420.7 (215.7) 380.7 n/a n/a 4.11 4.64 17.8 110.5 7.9 7.9 17.4 2,426.6 859.5 1,567.1 1,567.1 3.74 2,453.8 (919.1) 1,534.7 1,534.7 3.65 1,939.9 (815.3) 1,124.6 1,124.6 2.54 2,098.4 (1,003.1) 1,095.3 1,095.3 2.46 2,058.1 (1,020.1) 1,038.0 979.8 2.61 12010 to 2008 excludes hedging gains/(losses). 2Free cash flow is determined as cash flow before any debt refinance costs and dividends paid in the year. 3Calculated as Net Profit After Tax (NPAT) for the year as a percentage of the average monthly shareholders equity over the year. 4Calculated as Earnings Before Interest and Tax (EBIT) for the year as a percentage of average monthly capital employed for the year. 96 Iluka Resources Limited Shareholder Information 31 December 2012 Shareholder Information as at 18 March 2013 Stock exchange listing Iluka’s shares are listed exclusively on the Australian Securities Exchange (ASX). The company is listed as “Iluka” with an ASX code of ILU. The company does not operate a sponsored American Depositary Receipts (ADR) programme. Number of shares on issue The company had 418,701,360 shares on issue. Number of shareholdings There were 29,689 shareholders. Voting rights, on a show of hands, are one vote for every registered holder and on a poll, are one vote for each share held by registered holders. Distribution of Shareholdings Size of shareholding 1 - 1,000 1,001 - 10,000 10,001 - 100,000 100,001 - 1,000,000 1,000,001 and over Unmarketable parcel (less than $500) Number of holders 16,705 12,056 861 52 15 1,351 Substantial Shareholders (as provided in disclosed Substantial Shareholder Notices to the company) Shareholder M&G Investment Management Limited, London BlackRock Investment Management (Australia) Limited Schroder Investment Management Australia MFS Investment Management RS Investment Management Co. LLC Top 20 Shareholders (Nominee Company Holdings) Shareholder HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Limited BNP Paribas Nominees Pty Ltd Citicorp Nominees Pty Limited J P Morgan Nominees Australia Limited Australian Foundation Investment Company Limited AMP Life Limited HSBC Custody Nominees (Australia) Limited BNP Paribas Nominees Pty Ltd Argo Investments Limited HSBC Custody Nominees (Australia) Limited Merrill Lynch (Australia) Nominees Pty Limited R O Henderson (Beehive) Pty Limited UBS Wealth Management Australia Nominees Pty Ltd Iluka Share Plan Holdings Pty Ltd CS Fourth Nominees Pty Ltd RBC Investor Services Australia Nominees Pty Limited UBS Nominees Pty Ltd 97 Size of shareholding 42,755,825 40,111,686 27,386,364 25,446,567 21,799,163 % of issued capital 10.21 9.58 6.54 6.08 5.03 Number of shares 134,987,967 106,867,531 57,164,559 12,510,747 8,219,911 4,839,856 3,745,146 2,367,000 2,301,013 2,168,323 1,718,777 1,500,000 1,320,633 1,209,115 1,125,000 887,278 773,834 769,754 618,167 584,322 % of issued capital 32.24 25.52 13.65 2.99 1.96 1.16 0.89 0.57 0.55 0.52 0.41 0.36 0.32 0.29 0.27 0.21 0.18 0.18 0.15 0.14 Iluka Resources Limited Shareholder Information 31 December 2012 Share Registry Inquiries Shareholders who require information about their shareholdings, dividend payments or related administrative matters should contact the company’s share registry: Computershare Investor Services Pty Limited Level 2, 45 St Georges Terrace Perth WA 6000 Australia Telephone: +61 3 9415 5000 (Head Office) or 1300 850 505 Facsimile: +61 3 9473 2500 (Head Office) Postal Address: GPO Box 2975 Melbourne VIC 3000 Website: www.computershare.com Each inquiry should refer to the shareholder number which is shown on issuer-sponsored holding statements and dividend statements. Annual General Meeting The 2013 Annual General Meeting (AGM) of Iluka Resources Limited will be held at 9:30am (AWST) on 22 May 2013, at the Perth Convention and Exhibition Centre, Perth Western Australia. Details of the business to be conducted at the AGM are provided in the Notice of Annual General Meeting. Dividends Iluka recommenced dividend payments with the 2010 full year results. The company has suspended its dividend reinvestment plan. Dividend Payment History Dividend type Final Interim Final Interim Final 2013 Calendar Record date 07/03/13 10/09/12 09/03/12 09/09/11 09/03/11 Payment date Cents per share DRP pricing $ 10 25 55 20 8 04/04/13 05/10/12 05/04/12 05/10/11 06/04/11 n/a n/a n/a n/a n/a Franking % 100 100 100 0 0 21 February 17 April 20 May 9:30am WST 22 May 9:30am WST 17 July 23 August 16 October 31 December All dates are indicative and subject to change. Shareholders are advised to check with the company to confirm timings. Announcement of Full Year Financial Results March Quarter Production Report Closure of acceptances of proxies for AGM Annual General Meeting – Perth June Quarter Production Report Announcement of Half Year Financial Results September Quarter Production Report Financial Year End Investor Relations Inquiries Dr Robert Porter General Manager, Investor Relations and Corporate Affairs Email: robert.porter@iluka.com Telephone: +61 3 9225 5008 Mobile: +61 (0) 407 391 829 98 Corporate Information Company Details Iluka Resources Limited ABN: 34 008 675 018 Registered Office Level 23, 140 St George’s Terrace Perth WA 6000 Australia Postal Address: GPO Box U1988 Perth WA 6845 Australia Telephone: +61 8 9360 4700 Facsimile: +61 8 9360 4777 Website: www.iluka.com This site contains information on Iluka’s products, marketing, operations, ASX releases, financial and quarterly reports. It also contains links to other sites, including the share registry. 99 I l u k a R e s o u r c e s L m i i t e d 2 0 1 2 A n n u a l R e p o r t A B N 3 4 0 0 8 6 7 5 0 1 8 www.iluka.com Iluka Resources Limited 2012 Annual Report CREATE AND DELIVER VALUE FOR SHAREHOLDERS 

Continue reading text version or see original annual report in PDF format above