Bonham as Trustee for the Aucham Super Fund v Iluka Resources Ltd
[2022] FCA 71
•7 February 2022
FEDERAL COURT OF AUSTRALIA
Bonham as Trustee for the Aucham Super Fund v Iluka Resources Ltd [2022] FCA 71
File number: NSD 576 of 2018 Judgment of: JAGOT J Date of judgment: 7 February 2022 Catchwords: REPRESENTATIVE PROCEEDINGS – shareholder class action – statutory compensation – respondent’s guidance to market about future sales – whether respondent was aware of information meaning that its likely sales would be materially less than sales guidance – whether respondent failed to make disclosures of information – whether respondent made representations that were misleading or deceptive or without reasonable grounds – whether representative applicant suffered loss as result of alleged contraventions Legislation: Australian Securities and Investments Commission Act 2001 (Cth) ss 12BB, 12DA
Competition and Consumer Act 2010 (Cth) Sch 2, ss 4(1), 18
Corporations Act 2001 (Cth) ss 674, 769C(1), 1041E
Evidence Act 1979 (Cth) s 79
Cases cited: Australian Competition and Consumer Commission v GlaxoSmithKline Consumer Healthcare Australia Pty Ltd [2019] FCA 676; (2019) 371 ALR 396
Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; (2013) 250 CLR 640
Bishopsgate Insurance Australia Ltd (in liq) v Deloitte Hoskins & Sells [1999] 3 VR 863
Blatch v Archer (1774) 1 Cowp 63 at 65
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304
Crowley v Worley Limited [2020] FCA 1522
Dasreef Pty Limited v Hawchar [2011] HCA 21; (2011) 243 CLR 588
Forrest v Australian Securities and Investments Commission [2012] HCA 39; (2012) 247 CLR 486
Grant-Taylor v Babcock & Brown Limited (In Liquidation) [2015] FCA 149; (2015) 322 ALR 723
Grant-Taylor v Babcock & Brown Limited (In Liquidation) [2016] FCAFC 60; (2016) 245 FCR 402
Jubilee Mines NL v Riley [2009] WASCA 62; (2009) 40 WAR 299
Tamaya Resources Limited (in Liq) v Deloitte Touche Tohmatsu (a Firm), in the matter of Tamaya Resources Limited (in Liq) [2015] FCA 1098
TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited [2019] FCA 1747; (2019) 140 ACSR 38
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 723 Date of hearing: 8-11, 15-22, 24, 29-31 March 2021, 1, 6-9, 19 April 2021, 11-12 May 2021 Counsel for the Applicants: Mr L W L Armstrong QC and Mr J C Conde Solicitor for the Applicants: Shine Lawyers Counsel for the Respondent: Mr C Withers SC, Mr B Cameron and Mr L Pham Solicitor for the Respondent: Herbert Smith Freehills ORDERS
NSD 576 of 2018 BETWEEN: JAMES BONHAM AS TRUSTEE FOR THE AUCHAM SUPER FUND
First Applicant
AUCHAM PTY LTD (ACN 627 351 446) AS TRUSTEE FOR THE AUCHAM SUPER FUND
Second Applicant
AND: ILUKA RESOURCES LTD ABN 34 008 675 018
Respondent
ORDER MADE BY:
JAGOT J
DATE OF ORDER:
7 FEBRUARY 2022
THE COURT ORDERS THAT:
1.The parties confer and within 14 days file agreed or competing orders as to all outstanding issues in the proceeding and, if disagreed, a written submission explaining their position(s) not exceeding three pages.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
JAGOT J:
1 OVERVIEW
[1]
2 THE CLAIMS
[6]
2.1 Misleading and deceptive conduct
[6]
2.2 Continuous disclosure
[9]
3 PRIMARY FACTS
[10]
3.1 Iluka
[10]
3.2 Mr Bonham
[14]
3.3 Announcements/information Iluka released to market
[17]
3.3.1 23 February 2012 announcement
[17]
3.3.2 12 April 2012 report
[21]
3.3.3 8 May 2012 updates
[22]
3.3.4 9 July 2012 notice
[26]
4 FURTHER FACTS
[27]
4.1 Background - zircon
[27]
4.2 Background – TIO2
[35]
4.3 Background – Iluka’s management structure
[49]
4.4 The sequence of events
[52]
4.5 2009-2012
[59]
4.6 August 2011
[61]
4.7 September 2011
[68]
4.8 November 2011
[93]
4.9 December 2011
[101]
4.10 January 2012
[123]
4.11 February 2012
[135]
4.12 March 2012
[183]
4.13 Up to and including 12 April 2012
[196]
4.13.1 The zircon market
[219]
4.13.2 The TiO2 market
[234]
4.13.3 Overview up to and including 12 April 2012
[246]
4.14 The rest of April 2012
[250]
4.15 May 2012
[279]
4.16 Overview up to and including 8 May 2012
[303]
4.17 The rest of May 2012
[308]
4.18 June 2012
[391]
4.19 July 2012
[428]
5 ILUKA PERSONNEL
[467]
5.1 Mr Robb
[467]
5.2 Mr Cobb
[477]
5.3 Mr Green
[486]
5.4 Mr Tate
[493]
5.5 Mr Pizzey
[497]
5.6 Mr Osborn
[505]
5.7 Mr Rezos
[509]
5.8 Conclusions
[513]
6 EXPERT EVIDENCE - LIABILITY
[519]
6.1 Mr Murray (Mr Murphy and Dr Unni)
[519]
6.2 Mr Rochester (Mr Murphy and Dr Unni)
[569]
6.3 Conclusions
[610]
7 WERE REPRESENTATIONS MADE?
[612]
7.1 23 February 2012 announcement
[615]
7.2 12 April 2012 report
[642]
7.3 8 May 2012 updates
[647]
7.4 Mr Bonham’s evidence
[655]
7.5 Conclusions
[663]
8 REASONABLE GROUNDS FOR REPESENTATIONS?
[668]
8.1 Rejecting some of Iluka’s propositions
[668]
8.2 Iluka otherwise acted on reasonable grounds
[678]
9 CONTINUOUS DISCLOSURE
[700]
10 CAUSATION AND LOSS
[712]
11 LIMITATION PERIOD ISSUES
[721]
12 COMMON QUESTIONS
[722]
13 ORDERS
[723]
1. OVERVIEW
This is a shareholder class action. The representative applicant, James Bonham, seeks statutory compensation from the company, Iluka Resources Limited, for alleged contraventions of s 674 (the continuous disclosure requirements) and s 1041E (false or misleading statements) of the Corporations Act 2001 (Cth) (the Corporations Act), s 12DA (misleading or deceptive conduct) of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), and s 18 of the Australian Consumer Law (ACL) in Sch 2 to the Competition and Consumer Act 2010 (Cth).
The alleged contraventions all arise from the same circumstances. The circumstances concern Iluka’s guidance to the market about future sales of zircon (Z), rutile (R), and synthetic rutile (SR) in 2012. The relevant period for the sales guidance is from 12 April until 9 July 2012. On 9 July 2012 Iluka revised its sales guidance. Its share price fell about 25%. The applicants claim to have suffered loss caused by Iluka’s alleged contraventions.
There are two essential issues:
(1)whether Iluka had reasonable grounds for the sales guidance during the relevant period; and
(2)whether Iluka was “aware”, within the meaning of ASX Listing Rules 3.1 and 19.12, of information meaning that its likely sales of Z/R/SR in 2012 would be materially less than the sales guidance during the relevant period.
The sales guidance involves a representation as to a future matter. Accordingly, Iluka has the onus of proving reasonable grounds for its sales guidance for the purpose of the misleading and deceptive conduct claims. Mr Bonham has the onus of proving Iluka’s awareness of the relevant information for the purpose of the continuous disclosure claims.
For the reasons given below, Mr Bonham’s case, and the class action as a whole, must be rejected.
2. THE CLAIMS
2.1 Misleading and deceptive conduct
According to Mr Bonham, his misleading and deceptive conduct case depends on three types of representations (avoiding, to the extent possible, the definitions building on other definitions which characterise the applicants’ third further amended statement of claim or 3FASOC):
(1)express representations of forecast sales in FY 2012, called the April forecast representation and the May forecast representation:
(a)the April forecast representation is that Iluka expected to achieve in FY 2012 zircon sales of 450kt, rutile sales of 225kt, synthetic rutile sales of 310kt, and saleable ilmenite sales of 350kt;
(b)the May forecast representation is that Iluka expected to achieve in FY 2012 zircon sales of 400kt, rutile sales of 225kt, and synthetic rutile sales of 310kt, and expected that Z/R/SR sales volumes to be approximately one third/two thirds weighted between the first half and second half of 2012;
(2)implied representations that Iluka had reasonable grounds for the April forecast representation and the May forecast representation; and
(3)implied representations that Iluka:
(a)did not know information which created a material risk that the April forecast representation and the May forecast representation were no longer reliable;
(b)was still able to provide reliable forecasts of future revenue when it made the April forecast representation and the May forecast representation; and
(c)had a reasonable basis for providing point estimates of sales for mineral sands products rather than a broad range going forward.
Ultimately, however, Mr Bonham did not rely on the third set of representations, but as I understand it they remain relevant to other members of the class.
For the misleading and deceptive conduct claims, Mr Bonham relied on s 769C(1) of the Corporations Act, s 12BB of the ASIC Act and s 4(1) of the ACL as follows.
s 769C(1) Corporations Act
For the purposes of this Chapter, or of a proceeding under this Chapter, if:
(a)a person makes a representation with respect to any future matter (including the doing of, or refusing to do, any act); and
(b)the person does not have reasonable grounds for making the representation;
the representation is taken to be misleading.
s 12BB ASIC Act
If:
(a)a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act); and
(b)the person does not have reasonable grounds for making the representation;
the representation is taken, for the purposes of Subdivision D (sections 12DA to 12DN), to be misleading .
(2)For the purposes of applying subsection (1) in relation to a proceeding concerning a representation made with respect to a future matter by:
(a) a party to the proceeding; or
(b) any other person;
the party or other person is taken not to have had reasonable grounds for making the representation, unless evidence is adduced to the contrary.
(3)To avoid doubt, subsection (2) does not:
(a)have the effect that, merely because such evidence to the contrary is adduced, the person who made the representation is taken to have had reasonable grounds for making the representation; or
(b)have the effect of placing on any person an onus of proving that the person who made the representation had reasonable grounds for making the representation.
(4)Subsection (1) does not by implication limit the meaning of a reference in this Division to:
(a) a misleading representation; or
(b) a representation that is misleading in a material particular; or
(c) conduct that is misleading or is likely or liable to mislead;
and, in particular, does not imply that a representation that a person makes with respect to any future matter is not misleading merely because the person has reasonable grounds for making the representation.
s 4 ACL
(1)If:
(a)a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act); and
(b)the person does not have reasonable grounds for making the representation;
the representation is taken, for the purposes of this Schedule, to be misleading.
(2)For the purposes of applying subsection (1) in relation to a proceeding concerning a representation made with respect to a future matter by:
(a) a party to the proceeding; or
(b) any other person,
the party or other person is taken not to have had reasonable grounds for making the representation, unless evidence is adduced to the contrary.
(3)To avoid doubt, subsection (2) does not:
(a)have the effect that, merely because such evidence to the contrary is adduced, the person who made the representation is taken to have had reasonable grounds for making the representation; or
(b)have the effect of placing on any person an onus of proving that the person who made the representation had reasonable grounds for making the representation.
(4)Subsection (1) does not limit by implication the meaning of a reference in this Schedule to:
(a) a misleading representation; or
(b) a representation that is misleading in a material particular; or
(c) conduct that is misleading or is likely or liable to mislead;
and, in particular, does not imply that a representation that a person makes with respect to any future matter is not misleading merely because the person has reasonable grounds for making the representation.
2.2 Continuous disclosure
Mr Bonham contended that Iluka was aware of two types of information which it had to disclose (again avoiding, to the extent possible, the definitions building on other definitions which characterise the applicants’ pleadings):
(1)that a reasonably-based forecast of Iluka’s expected sales for each of its products in FY 2012 was in the order of and no more than approximately 231kt to 336kt of zircon, 188kt of rutile, and 255kt of synthetic rutile (this depends on the expert evidence of Mr Murray and Mr Rochester); and/or
(2)that Iluka knew when it made the April forecast representation and the May forecast representation:
(a)that it did not have reasonable grounds to make the April forecast representation and May forecast representation;
(b)information which created a material risk that the April forecast representation and the May forecast representation were no longer reliable;
(c)that it was no longer able to provide reliable forecasts of future revenue; and
(d)that it did not have a reasonable basis for providing point estimates of sales for mineral sands products rather than a broad range going forward.
3. PRIMARY FACTS
3.1 Iluka
Iluka is a miner and global supplier of mineral sands products. Its products include zircon, rutile and synthetic rutile.
Rutile and synthetic rutile are titanium dioxide (TiO2) products.
The primary use of zircon is in ceramic tiles.
The primary use of titanium dioxide products are in pigments for paints.
3.2 Mr Bonham
Mr Bonham is retired. He has invested in shares since the early 1990s. Since early 2012 he subscribed to Lincoln Indicator’s “Stock Doctor” information service (Stock Doctor). Around 8 May 2012 he read a series of Stock Doctor reports about Iluka (an 8 May 2012 report, and other reports dated 12, 17 and 23 April 2012). He gained the impression from Stock Doctor that Iluka’s shares had been trading at a discount but “that its recent performance had been below expectations due to short-term market weakness”, and that the “current declining sales trend was probably temporary”. He then read two updates released by Iluka on 8 May 2012 (see below). He understood these as confirming what he had read in Stock Doctor and that there was an expected recovery which had “just been delayed”. Mr Bonham said:
The announcement [of 8 May 2012] also confirmed the impression I had formed from reading Stock Doctor’s reports that [Iluka] had experienced some changes to demand and they had responded to this by changing their production levels while maintaining operational flexibility for when demand recovered. This again suggested to me that [Iluka] was in control of what it was doing and its overall expectations for the year were unaffected by the continued softness in its markets.
On 14 May 2012, Mr Bonham purchased 2,150 shares in Iluka for a total price of $29,503.17 (including brokerage). The price per share at the time was $13.68.
After Iluka’s announcement on 9 July 2012 (see below) and reading another Stock Doctor report of the same date “which dropped the company from ‘Star Stock’ status and which otherwise confirmed my negative views”, Mr Bonham sold all of his Iluka shares on 9 July 2012 for a total price of $19,384.55 (including brokerage). The price per share at that time was $9.03.
3.3 Announcements/information Iluka released to market
3.3.123 February 2012 announcement
On 23 February 2012 Iluka made an announcement to the market “Key Physical & Financial Parameters Iluka 2012”.
The 23 February 2012 announcement said:
This document provides an indicative guide to key physical and financial parameters in the Iluka business for the 2012 financial year. It supplements Iluka’s Key Physical & Financial Parameters, 2012-2014 document, which was disclosed as part of the company’s November 2011 Mineral Sands Briefing Session … That 2012-2014 guidance document was developed before the finalisation of Iluka’s 2012 budget and current difficulties in forecasting global economic conditions means that three year average outcomes may vary significantly depending on, initially, 2012 outcomes and then the path of global economic performance through 2013 and 2014.
The information contained within this document, as well as the 2012-2014 document, is derived from either budget or corporate plan information. It is, as with all such information, and in the context of: uncertain economic conditions globally; potential changes to supply and demand dynamics; and potential modification to the company’s own plans (subject to change and variation) and should be treated as a guide only.
Iluka does not undertake to update this information regularly in part or whole, but can be expected to comment on any material variations. Iluka does not provide pricing forecasts.
The information is provided to assist sophisticated investors with the modelling of the company, but should not be relied upon as a predictor of future performance.
The first page of the announcement continued with a clearly visible section with a blue heading and standard black text in slightly smaller font (but not fine print) as follows:
This briefing paper contains information which is based on projected and/or estimated expectations, assumptions and outcomes.
These forward-looking statements are not guarantees or predictions of future performance and involve known and unknown risks, uncertainties and other factors, many of which are beyond the company’s control, and which may cause actual results to differ from those expressed in the statements contained in this release. Factors that could cause actual results or performance to differ materially from those expressed or implied in the forward- looking statements include, but are not limited to potential changes in:
- exchange rate assumptions
- product pricing assumptions
- mine plans and/or resources
- equipment life or capability
- current or new technical challenges
- market conditions
- management decisions
While Iluka has prepared this information based on its current knowledge and understanding and in good faith, there are risks and uncertainties involved which could cause results to differ from projections. Iluka shall not be liable for the correctness and/or accuracy of the information nor any differences between the information provided and actual outcomes, and furthermore reserves the right to change its projections from time to time. Iluka does not undertake to update the projections provided in this document on a regular basis.
All currency is in nominal Australian dollar terms unless stated differently.
The next page said:
2011 2012
GuidanceCommentary Production (kt) Zircon 601 ~500 Lower 2012 production reflects Iluka’s decision to flex production in light of potentially lower short term demand. A rapid production increase capability exists as market conditions warrant forecast 2012 sales volumes, dependent on global demand levels and phasing, could be ~10% lower than production. 2011 sales volumes for zircon were 514k tonnes. 2010 sales volumes were 478k tonnes. Rutile 281 ~225 Lower 2012 production reflects the announced transition to new deposits in the Murray Basin, which will interrupt mining activities for a period of ~100 days. This is in line with guidance provided previously. Sales are expected to be in line with production in 2012. Rutile sales in 2011 were 265k tonnes. Synthetic rutile 285 ~310 2012 production reflects a 2 kiln operation but with 1 kiln (SR2) undergoing a major maintenance outage (approximately two months) during the first quarter of the year. SR sales in 2012 are expected to be in line with production. SR sales in 2011 were 257k tonnes. While Iluka plans to reactivate a 3rd SR kiln in 2012, this is not expected to make a material contribution to production in the year. Ilmenite – saleable 459 ~350 Level of ilmenite available influenced by internal requirements for synthetic rutile production. …
3.3.212 April 2012 report
On 12 April 2012 Iluka issued an Australian Securities Exchange (ASX) Notice “Quarterly Production Report 31 March 2012”. This report said:
OVERVIEW
Production
Iluka’s first quarter production of zircon, rutile and synthetic rutile was lower than the corresponding quarter in 2011, reflecting a number of factors previously advised by the company…
…
Sales Revenue
Mineral sands sales revenue for the 3 months to 31 March was $196.3 million (2011: $226.3 million).
The lower sales revenue, despite higher product prices (as advised at the time of the 2011 Full Year Results on 24 February 2012), reflects the expected slow start to zircon sales in 2012, as well as phasing of the shipment schedule for high grade titanium dioxide products. This includes 26 thousand tonnes of high grade titanium dioxide products originally scheduled for shipment in March which had been delayed until early April.
…
Market Conditions
Zircon
Iluka has stated on several occasions that it expected a soft quarter or two of zircon demand associated with the following factors: the impact of global economic conditions on customer confidence; the effect of measures by the Chinese Government to control inflation and temper speculative activity in some parts of the Chinese property market; the timing of Chinese New Year and the need for a destocking period, especially for ceramics manufacturers.
As anticipated, first quarter zircon sales figures were low as many customers did not reactivate their plants until February, and in the case of some ceramic manufacturers in China, plants remained closed through part or all of March.
As Iluka has stated previously, it will take some time for a clear view on overall 2012 zircon demand and the phasing of that demand to emerge.
Titanium Products
Iluka continued to experience strong demand for its high grade titanium dioxide. Similarly, demand for high grade titanium products for use in the manufacture of welding consumables strengthened in the latter half of the quarter as the usage of natural rutile as a feedstock for pigment and titanium metal production limited the global availability of this product.
…
3.3.38 May 2012 updates
On 8 May 2012 Iluka issued an ASX notice “Key Physical and Financial Parameters - Update” (the first 8 May 2012 update) which said:
Iluka … today advises a number of changes to its 2012 Key Physical and Financial Parameters document, issued on 23 February 2012.
Iluka has stated on several occasions that it expected a soft quarter or two of zircon demand associated with the impact of global economic conditions on customer confidence and business conditions in various markets, together with the effect of various government policy measures globally and the need for a destocking period, especially for ceramics manufacturers.
Iluka has also stated previously that it expected it would take some time for a clear view on overall 2012 zircon demand and the phasing of that demand to emerge.
After a low first quarter, zircon sales volumes improved in April. While there is some evidence of improved economic traction in major economies such as the US and China, contra-indicators also exist and large eurozone countries are exhibiting increased weakness in the face of prevailing austerity measures. The global economic outlook therefore remains far from clear.
Accordingly, Iluka has decided to reduce its zircon production in 2012, from the previously advised ~500 thousand tonnes to ~430 thousand tonnes, while maintaining its high grade titanium dioxide production. The zircon production adjustment will be achieved mainly via mining lower grade ore at Iluka’s Jacinth-Ambrosia operation in South Australia and processing less zircon-rich concentrate at its Narngulu and Hamilton mineral separation plants. This approach provides the maximum operating flexibility, as well as rapid response capability to return to full production throughputs at the mineral separation plants.
Iluka now forecasts its zircon sales for the full year to be ~400 thousand tonnes compared with the previously forecast ~450 thousand tonnes.
…
There is no change to guidance for titanium dioxide production and sales from that issued at the beginning of the year, with market conditions and sales forecasts in line with expectations.
Overall, Iluka expects its zircon/rutile/synthetic rutile sales volumes to be approximately one third/two thirds weighted between the first half and second half of 2012. Based on the revised zircon sales and assuming current pricing, Iluka’s total revenue mix is expected to be approximately 50-55 per cent titanium dioxide with the remainder zircon and by-products.
…
Also on 8 May 2012 Iluka issued an ASX notice “Key Physical and Financial Parameters – May Update” (the second 8 May 2012 update) which said:
This document provides an indicative guide to key physical and financial parameters in the Iluka business for the 2012 financial year.
The information contained within this document is derived from Iluka’s budgetary forecasts and other estimates. It is, as with all such information, developed in the context of: uncertain economic conditions globally; potential changes to supply and demand dynamics; and potential modifications to the company’s plans and should be treated as a guide only.
Iluka does not undertake to update this information regularly in part or whole, but can be expected to comment on any material variations. Iluka does not provide pricing forecasts.
…
The information is provided to assist sophisticated investors with the modelling of the company, but should not be relied upon as a predictor of future performance.
The first page of the announcement continued with a clearly visible section with a blue heading and standard black text in slightly smaller font (but not fine print) as follows:
This briefing paper contains information which is based on projected and/or estimated expectations, assumptions and outcomes.
These forward-looking statements are not guarantees or predictions of future performance and involve known and unknown risks, uncertainties and other factors, many of which are beyond the company’s control, and which may cause actual results to differ from those expressed in the statements contained in this release. Factors that could cause actual results or performance to differ materially from those expressed or implied in the forward-looking statements include, but are not limited to potential changes in:
- exchange rate assumptions
- product pricing assumptions
- mine plans and/or resources
- equipment life or capability
- current or new technical challenges
- market conditions
- management decisions
While Iluka has prepared this information based on its current knowledge and understanding and in good faith, there are risks and uncertainties involved which could cause results to differ from projections. Iluka shall not be liable for the correctness and/or accuracy of the information nor any differences between the information provided and actual outcomes, and furthermore reserves the right to change its projections from time to time. Iluka does not undertake to update the projections provided in this document on a regular basis.
All currency is in nominal Australian dollar terms unless stated differently.
The next page continued:
2011 2012
GuidanceCommentary Production (kt) Zircon 601 ~430 Lower 2012 production reflects Iluka’s decision to flex production in light of lower short term demand. A rapid production increase capability exists as market conditions warrant. 2012 sales are estimated at ~400k tonnes. Zircon sales in 2011 were 514k tonnes. Rutile 281 ~225 Lower 2012 production reflects the announced transition to new deposits in the Murray Basin, which will interrupt mining activities for a period of ~100 days. This is in line with guidance provided previously. Sales are expected to be in line with production in 2012. Rutile sales in 2011 were 265k tonnes. Synthetic rutile 285 ~310 2012 production reflects a 2 kiln operation but with 1 kiln (SR2) undergoing a major maintenance outage (approximately two months) during the first quarter of the year. SR sales in 2012 are expected to be in line with production. SR sales in 2011 were 257k tonnes. While Iluka plans to reactivate a 3rd SR kiln in 2012, this is not expected to make a material contribution to production in the year. Ilmenite – saleable 459 ~350 Level of ilmenite available influenced by internal requirements for synthetic rutile production. 3.3.49 July 2012 notice
On 9 July 2012 Iluka issued an ASX notice “Forecast Sales Volumes – Update” which said:
Iluka … in accordance with its continuous disclosure obligations, provides the following update on general market conditions and sales volume expectations for the full year.
Lower sales volumes now forecast reflect second quarter sales below expectations, but also and more significantly, deteriorating economic outlooks, discussions (which in many cases are ongoing) with customers in relation to second half volume requirements, and completion of the initial stages of the company’s usual mid year reforecast process.
Market Conditions and Revised Guidance
A marked deterioration in major regional economies, more pessimistic official forward outlooks and commentary and the absence of anticipated or effective policy responses since the company’s previous disclosure in early May [ASX Release, 8 May, Key Physical and Financial Parameters - Update], have had a flow on impact on mineral sands customer confidence levels and future business performance expectations, which is likely to influence sales volumes materially over the remainder of 2012.
…
The volatility in factors which materially influence demand and which are beyond the company’s direct control, as well as the company’s move in recent years to shorter period sales contracts, have increased the difficulty in providing specific company performance guidance, particularly over extended periods.
As a result, and given the incomplete nature of discussions with both zircon and pigment customers for second half volume requirements, this revised guidance incorporates forecast sales volume ranges rather than single point forecasts. In addition, due to the continuing uncertainty associated with economic and business conditions, Iluka’s Key Physical and Financial Parameters, 2012-2014 guidance (issued in November 2011) in now redundant. A reinstatement of such guidance will be dependent on market, commercial and other considerations, including reaching a period in terms of global economic performance when multiple year forecasts can be made with an appropriate degree of confidence.
The company’s revised 2012 full year sales volume expectations for zircon and high grade titanium dioxide products (rutile and synthetic rutile) are detailed below. Saleable ilmenite expectations are at this stage unchanged at 350 thousand tonnes for the full year, with 219 thousand tonnes sold in the first half.
Sales Volumes – 1st Half Actuals and Revised Full Year Guidance Ranges
kt 2012
Ist Half Actuals2012
Full Year Sales Guidance RangesZircon 87 200-300 Rutile 85 140-200 Synthetic rutile 101 170-220 Total Z/R/SR 273 510-720 …
Appendix – Market Commentary
Iluka provides the following market commentary which would normally be provided with its Quarterly Production Report, scheduled for release on 12 July. The Quarterly Production Report will replicate this commentary.
Zircon
Iluka sold 87 thousand tonnes of zircon in the first half of 2012. A large scheduled shipment was deferred in June associated with port delays and current forecasts assume this volume will not be recovered. Zircon sold in the first half has achieved weighted average prices in line with previous commentary.
Market conditions in specific markets and end applications affecting second half demand can be summarised as follows:
•in China, the absence of direct policy adjustments to boost the property sector, with attendant implications for property construction, completions and sales, has been compounded by high finished ceramics inventory level in-country. These factors have led to a continuation of subdued customer confidence levels beyond that expected earlier in the year, albeit China’s zircon demand has shown the strongest regional recovery in the second quarter. Iluka has seen the continuation of “just in time” ordering patterns which, from recent discussions with customers, (despite some encouraging factors in relation to increased demand, higher spot pricing and monetary policy easing, as well as zircon sand inventories at historically low levels) are not assumed to change materially in the second half;
•continuing and more pronounced economic weakness and policy uncertainty into the second quarter in the eurozone;
•continuing weakness in the main ceramics export markets for Spain and Italy, such as the fourth largest tile manufacturer, Iran, which has been impacted by sanctions; and Turkey and Egypt, both within the top 10 tile manufacturers, which have been impacted by the aborted “Arab Spring”, have flowed through to continued fragile business confidence levels. From recent discussions with customers this is forestalling expected bulk re-ordering patterns, including inventory replenishment, into the second half despite low zircon sand inventories;
•while demand for zircon in North America has remained relatively constant, there is new evidence of softening manufacturing output and export growth, particularly in June. This has influenced customer sentiment (a major part of Iluka’s zircon sales in North America are into the manufacturing sector) and it is considered prudent to factor this into expected sales volumes estimates over the coming half;
•in other developing markets, such as South East Asia and India, demand has also been negatively impacted by the macro economic settings. This has been especially significant in India (the world’s third largest tile producer), where the Rupee has weakened by 15 per cent since March, making zircon sand imports (and other tile making raw materials) significantly more expensive; and
•some level of thrifting, substitution and application of technology to ceramics manufacturing (difficult to forecast with confidence until ceramics inventories are worked down) which has compounded the effect of the weak economic and business conditions on customer demand.
Zircon demand in non ceramic markets, namely zirconium chemicals, has been relatively stable while in foundry applications, as expected, use of alternative materials where feasible has subdued demand. A lower demand pattern in the second half appears likely in these applications, depending on economic and market conditions.
Global and regional zircon demand recovery remains problematical to predict given current global economic conditions.
High Grade Titanium Dioxide – Rutile and Synthetic Rutile
Global economic settings referred to previously have had an impact on this sector, as the half has evolved. Iluka sold 186 thousand tonnes of high grade titanium dioxide products (rutile and synthetic rutile) in the first half of 2012. Approximately 8 thousand tonnes has been contracted but was not shipped due to shipment scheduling delays. This volume is scheduled to ship during July. Volumes sold or committed in the first half are roughly in line with previous commentary on first half expected sales trends. Weighted average rutile and synthetic rutile prices have been in line with previous disclosed information.
As the second quarter progressed, softer demand for pigment and pigment inventory build began to be reported, reflecting lower European demand and weaker global export flows of pigment. In recent second half volume discussions with pigment customers it is clear that such factors are affecting some pigment producers’ planned production levels, and therefore, in some cases, their high grade ore requirements. Given customer adjustments to their production base are under consideration in some cases, and in the context of existing inventories of pigment by some producers, determination of second half high grade titanium dioxide volumes is expected to take longer than in more normal market conditions. Demand in the smaller niche markets (titanium sponge and welding electrodes) has remained relatively stable but, particularly in the welding market, some weakening in second half demand has been factored into expectations.
4. FURTHER FACTS
4.1 Background - zircon
Zircon is a mineral sand product that is mainly used in the production of opacifier. Opacifier is produced by grinding (or “milling”) raw zircon sand. Opacifier is used as a whitening agent in the manufacture of (amongst other things) ceramics, sanitary ware (ceramic bathroom fittings) and tableware. Opacifier gives these products their bright white finish or glaze due to zircon’s high refractive index. Zircon sand sold by Iluka was also used in the production of zirconia and zirconium chemicals, by refractories in the manufacture of glass and other products, and by foundries for use in the production of metal casings.
Opacifier is used in: (a) high quality porcelain tiles that contain opacifier in the body of the tile itself. The zircon density of porcelain tiles varies depending on the required quality of the end product, and (b) glazed ceramic tiles, where zircon opacifier is incorporated in the glaze and applied as a thin coating to the surface of the tile, as opposed to being incorporated in the body of the tile itself.
Iluka was primarily a producer of premium-grade zircon sand (that is, zircon sand comprised of greater than 66% zircon), which represented approximately 80% of the zircon sand produced and sold by Iluka.
Iluka sold zircon to intermediaries who then on-sold the product (either as opacifier or otherwise processed sand) to the manufacturers of ceramics and chemicals, refractories and foundries. As a result, Iluka considered that it was difficult for it to precisely quantify how much of the zircon sand sold by Iluka was ultimately used in each end-use application. This quantification was further complicated by the facts that end-use applications differed between regions and customers to whom Iluka sold directly, particularly in China, at times on-sold the raw zircon sand to other opacifier and zircon flour producers, creating a secondary market for zircon sand. Iluka was not alone in holding this view. It was shared by other participants in the industry.
Iluka’s sales of zircon in 2009, 2010 and 2011 were about 221kt, 479kt and 492kt respectively. Its sales of rutile in those years were about 153kt, 240kt and 266kt. Its sales of synthetic rutile in those years were about 397kt, 362kt and 257kt. As Iluka put it, following the global financial crisis in 2009:
… between December 2009 and October 2011, Iluka experienced a major upsurge in demand for its zircon products around the world. This was primarily driven by the Chinese government's efforts to inject financial stimulus into the Chinese economy, and, in particular, infrastructure and residential housing development. China’s demand for zircon resulted in a global shortage in the supply of zircon sand … in 2011, Iluka was unable to supply the full quantity requested by its customers.
(Footnotes omitted).
As a result of the strong demand, Iluka increased the price of zircon from US $725 per tonne in 2009 to US $2,500 per tonne by the end of 2011. Iluka also increased its zircon customer base from 45 in 2007 to 135 in 2011.
By 2011 China accounted for approximately 40% – 45% of Iluka’s zircon sales, Europe accounted for approximately 25% of Iluka’s zircon sales, the Americas accounted for approximately 15% of Iluka’s zircon sales, and Japan, India, South-East Asia and other smaller markets, which together accounted for approximately 15% – 20% of Iluka’s zircon sales.
While Iluka contracted zircon sales and set zircon prices on a quarterly basis, it sought information from zircon customers about their yearly zircon demand on a quarterly basis at the start of each year. Pricing was set on a quarterly basis in a negotiation between the sales managers and the individual customers. Pricing varied from customer to customer, from end use to end use. As Iluka had a large number of small and very small zircon customers, Iluka considered that collecting this information was significantly more difficult than the same exercise Iluka undertook for titanium dioxide customers. Iluka also supplied only about one third of the world’s zircon demand and it considered that it was difficult for it to estimate demand from outside of its existing customer base.
4.2 Background – TIO2
Rutile is naturally occurring high-grade TiO2 sand. The rutile mined by Iluka had a TiO2 content of between 92 – 95%.
Synthetic rutile is an artificial equivalent to rutile which is produced by “upgrading” chloride ilmenite, a lower-grade feedstock with an average TiO2 content of between 58% – 62%. Synthetic rutile mined by Iluka had an average TiO2 content of between 90% – 92%.
While both rutile and synthetic rutile are high grade titanium dioxide feedstock (or high grade ore, HGO), Iluka marketed and sold them separately due to their different value to customers. Both were generally sold to the same customers, who blended them at their sites for use as feedstock. The main use is for titanium pigment in paints.
Pigment was produced from TiO2 feedstocks in one of two ways: (a) through a chlorination process, producing what was referred to within Iluka as “chloride pigment”, or (b) through a sulphate-based process, producing what was referred to within Iluka as “sulphate pigment”.
Pigment producing customers who purchased HGO from Iluka were using the feedstock to produce chloride pigment. Approximately 82% of the HGO produced by Iluka was sold to chloride pigment producing customers, with the balance of rutile products being sold to producers of welding electrodes and fluxes, and producers of titanium metal. In contrast to the large number of Iluka’s zircon customers, more than 90% of Iluka’s high grade titanium dioxide feedstock was supplied to five major chloride pigment producers, DuPont, Tronox, Kronos, Huntsman and ISK. Europe accounted for approximately 25% – 35% of TiO2 sales by revenue, the Americas about 20% – 30% of TiO2 sales by revenue, and Japan, South East Asia, the Middle East and other smaller markets, together accounting for approximately 32% – 52% of TiO2 sales by revenue. China only accounted for approximately 3% of Iluka’s TiO2 sales by revenue, which was predominantly sales of bagged rutile and ilmenite.
Iluka supplied approximately 23% of the global supply of TiO2 feedstocks that were supplied to producers of chloride pigment.
Chloride pigment producers typically ran their plants at constant rates throughout the course of a year and at (or near) full capacity due to high production costs. As a result, chloride pigment producers needed guaranteed supply of feedstock. Continuity of supply, consistency, and quality of the feedstock are seen as critical components in chloride pigment production. Iluka had a track record of being a reliable source of HGO and therefore was a supplier to almost all chloride pigment plants around the globe. In or around October or November of each year, usually prior to the annual TZMI conference, Iluka’s major pigment producing customers informed Iluka how much and what type of TiO2 feedstock they planned to source from Iluka in the coming year. Iluka used the TZMI conference in November of each year to conduct face-to-face pricing negotiations with its major TiO2 customers.
TZMI is a mineral sands consultancy which, amongst other things, published data and held an annual industry conference attended by Iluka and its customers. TZMI describes itself as:
… a global, independent consulting and publishing company which specialises in all aspects of the mineral sands, titanium dioxide and coatings industries.
…
TZMI has proven expertise gained from our consultants having many years of direct operating experience in the industry in chief executive, senior operational, analytical and marketing roles.
…
To ensure TZMI provides accurate and up to date advice, TZMI maintains the most comprehensive and current databases of industry production, market information and best practices in the world, including supply and demand models, technical data and operating cost data for all major producers.
Mr Robb considered TZMI the pre-eminent mineral sands consultants.
Between 2009 and 2011 there was a significant increase in demand for the high grade titanium dioxide feedstocks which Iluka produced. Pigment producers moved away from lower-grade “slag” (a TiO2 feedstock comprising approximately 85% TiO2) towards higher grade TiO2 feedstock in order to produce more pigment from their existing manufacturing capacity. Further: (a) there was a significant increase in the demand for paint driven by the financial stimulus following the global financial crisis, and (b) unlike its major competitors, Iluka did not have long-term off-take agreements in place at that time which allowed it to increase the price of its TiO2 feedstocks on a more regular basis.
Between 2009 and 2011 Iluka’s price for its high grade titanium dioxide feedstock increased from a range of US $425 to US $850 per tonne to a range of US $2,300 to US $2,800 per tonne.
It was submitted for Mr Bonham that the evidence is that sulphate and chloride pigments are interchangeable for 80% – 90% of paint applications, so paint manufacturers could readily shift between pigments if the economics warranted it or change their feedstock to a lower quality chloride slag. I do not accept this submission. In particular, while the evidence contains statements that the products are 80% – 90% interchangeable, the evidence is also that: (a) chloride pigment paints are of much higher quality than sulphate pigment paints and sulphate pigment paints are not suitable for all applications, (b) for paint producers, consistency of colour and quality was essential and that could not be achieved by sulphate pigment paints, (c) the main cost of painting is labour not paint. An apparently cheaper sulphate pigment paint (mainly sourced from China) would need repainting before a higher quality chloride pigment paint and that would adversely affect a paint producer’s reputation in the market, and (d) a chloride pigment plant producer would not immediately or readily change its feedstock blend given the need for consistent quality output and technical challenges in doing so.
Mr Robb also made the point (supported by other evidence) that changing to lower quality chloride slag feedstock would result in reduced yields and waste disposal issues. DuPont could use ilmenite in its processes not only because of its technical skill but because it had special waste arrangements not available to other producers. Mr Robb explained:
DuPont’s ability to take chloride ilmenite was not just a function of its technical skill, it was a function of the arrangements it had for the disposal of the much higher volumes of waste that came with processing chloride ilmenite rather than a higher grade feedstock and they were able to controversially deep well inject that in North America, get rid of it that way, and they were able to dispose of it into the Gulf of Mexico also. So other customers, even if they could approach the technical capability of DuPont, had the commercial problem of how could they cost-effectively dispose of the waste.
The consequence is that Mr Bonham’s submission that paint manufacturers could shift between pigment types if the economics warranted it or change their feedstock to a lower quality chloride slag obscures what would be a far more complex and nuanced decision-making process which might have long-term reputational impacts for a paint producer.
4.3 Background – Iluka’s management structure
At the relevant time David Robb was Iluka’s Managing Director and Chief Executive Officer.
A number of people reported directly to Mr Robb – Alan Tate, Chief Financial Officer and Head of Business Development Team, Cameron Wilson, Company Secretary and General Counsel, Rob Porter, General Manager, Investor Relations, Steve Wickham, Chief Operating Officer and General Manager of Australian Operations, Doug Warden, General Manager, Business Development and Exploration, Victor Hugo, General Manager, Product and Technical Development, Chris Cobb, General Manager, Sales and Marketing, Hans Umlauff, General Manager, SA Development and Project Management, and Matthew Blackwell, General Manager, US Region. These people comprised Iluka’s “leadership team”.
Iluka adduced evidenced from Mr Robb, Mr Tate, Mr Cobb, Simon Green (Iluka’s General Manager, Finance and Risk at the time), George Pizzey (the chairman of Iluka’s board and a non-executive director at the time), and Wayne Osborn and Gavin Rezos (non-executive directors on Iluka’s board at the time).
4.4 The sequence of events
The events leading up to and between 23 February 2012 and 9 July 2012 are relevant to both the misleading and deceptive conduct case and the non-disclosure case.
I propose to deal primarily with the events identified on behalf of Mr Bonham as supporting his case, based on the submissions ultimately made for him, supplemented by reference to Iluka’s submissions. I have also included uncontentious parts of the evidence where appropriate. I will deal with the expert evidence relevant to these issues after considering the contemporaneous material.
The documents and other evidence use abbreviations including B for budget, B1 and B2 (for versions of the budget), H for half (H1 and H2 comprising a full year) and Q for quarter (Q1, Q2, Q3 and Q4 comprising a full year).
The following discussion exposes that Mr Bonham’s case involves propositions about the dire and bleak state of the zircon and TiO2 markets in 2012 which Iluka was allegedly determined to ignore for as long as possible.
I have concluded that these propositions are largely based on a combination of hindsight, a determination to focus only on information which might support these propositions, and a general theme of Iluka being allegedly concerned to ensure that the market was not informed of its real sales prospects in 2012. To that end, Mr Bonham’s submissions include: (a) an extensive day-by-day account of Iluka’s activities throughout the relevant period, including irrelevant and marginally relevant material and allegations outside of the pleaded case, (b) a marked tendency to focus on selected parts of documents which might be thought to support Mr Bonham’s case and to ignore other parts which do not appear to do so, and (d) a determined effort to force every event or statement into a pre-conceived framework consistent with the general theme of Iluka being allegedly focused on ensuring that the market was not informed about its real sales prospects in 2012.
As a result, a document by document, witness by witness and expert by expert analysis is required in order to deal with Mr Bonham’s submissions.
I start with the documents. These have the benefit of being contemporaneous records.
4.5 2009-2012
Mr Bonham submitted, as is the fact, that Iluka’s NPAT (net profit after tax) position had also dramatically improved between 2009 and 2011 from an NPAT of $(-82.4) billion in 2009, to $36.1 billion in 2010 and to $541.8 billion in 2011. Mr Bonham’s submission continued:
Analysts’ estimates, by the start of the Relevant Period, were for a FY12 NPAT of around $1-1.3 billion in 2012 – a stark increase even from the excellent FY11 result. Thus it is not to the point that Iluka’s eventual FY12 results were its second-best ever. What matters is that the market was led to expect FY results in a given range, and what happened led to a disappointment of those expectations. The essential question is unchanged – at what point ought Iluka to have corrected those expectations?
(Footnotes omitted).
This is not a relevant question. There is no pleaded representation about Iluka’s NPAT for FY 2012. The pleaded representations relate to sales not NPAT. Iluka did not issue NPAT guidance. The pleaded representations are also by Iluka not analysts.
4.6 August 2011
Mr Robb’s report to the board of August 2011 said zircon demand remained strong in China. It also said that customers had reported that opacifier and refractory sales had slowed in China. It noted that substitution was continuing to grow and that Iluka was investigating the potential for substitution in this market. It also noted that the shortage of high grade TiO2 feedstock was continuing and a number of pigment producers had reported a softening of demand for pigment as of late.
Mr Cobb and Mr Robb accepted that as a result of the scarcity of zircon in 2011, Iluka considered that it needed more information about the extent of possible substitution and thrifting. Mr Robb said that substitution and thrifting were an inevitable response of buyers to scarcity and price rises as “that’s what sensible buyers do”, but the “extent to which they would be successful with it, how fast the transition would occur, what other impacts they would suffer in terms of product quality, that was an unknown, as was how much of it had already occurred”. For these reasons Iluka decided to conduct a review of the issue which culminated in a zircon substitution study which was presented to the leadership team on 2 August 2011.
The zircon substitution study had four objectives:
•Identify existing and emerging substitutes to zircon in key segments
•Assess the level of threat from these substitutes
•Determine if growth in production outweighs substitution threats
•Formulate tactics and strategies to address substitution risks
Key conclusions included that:
(1)tile manufacturers are pursuing substitution and some successful initiatives have already been achieved and adoption of some new practices is likely;
(2)the other sectors remained strong or firm albeit with some risk in the foundry sector;
(3)ongoing monitoring of substitution threats is required; and
(4)once sufficient information was gathered, forecasting of the impact on demand would be done.
Other information in the zircon substitution study included that:
(1)porcelain tiles has the highest zircon density among the ceramic products, so any successful substitution in this segment can have the biggest potential impact to zircon demand;
(2)there was a strong indication that most tile manufacturers are actively pursuing a number of substitutes to reduce their zircon dependence, their aim being to reduce zircon content without adverse quality penalties;
(3)substitution techniques included shifting from full-body to glazed porcelain tiles, body whitening (quality impact uncertain) and reduction of the zircon bearing layer in tiles including a double press method used in China;
(4)a number of successful substitution initiatives had already been realised, with drastic reductions of tile zircon content and it was likely other tile manufacturers will adopt successful substitution practices; and
(5)Iluka needed to monitor substitution threats, investigate further the technical, availability and commercial aspects of the substitutes, forecast the impact on demand once sufficient data was gathered, and plan its response.
The key actions in the zircon substitution study included setting up regular meetings with key industry players to keep track of trend and actions, gain more direct contacts and inputs from tile manufacturers, investigate the Chinese double-press equipment manufacturer, gather body-whitening tile samples and arrange lab testing to understand better these competing products, and conduct an evaluation of potential demand impact based on the date gathered by different segments.
The fact that substitution and thrifting of zircon in China had been recognised as a material issue in 2011 needs to be kept in mind. Amongst other things, it means that it cannot be assumed that the effects of substitution and thrifting of zircon in China had not, in part at least (perhaps even in large part) been absorbed into the demand for Iluka’s zircon in China in 2011.
4.7 September 2011
Iluka prepared a five year corporate plan each year. Its 2011 corporate plan for 2012-2016 was presented to and discussed by the board in September 2011. The focus of the corporate plan was medium to long-term planning. The 2011 corporate plan said that after many years of relatively stable prices both zircon and TiO2 feedstock prices have increased substantially over the last twelve months. Further, and notwithstanding the significant increases in feedstock prices, Iluka’s major customers (i.e. major pigment producers and the zircon opacifiers) have been able to pass on significant price increases, enabling them to expand their dollar margins. This was said to be because of inelastic demand for the key end use applications of ceramics and chemicals (zircon) and pigment and sponge metal (TiO2), the chloride pigment industry being at or near full capacity resulting in a deficit situation, and the lack of viable substitutes for zircon and titanium in their key end use applications.
The 2011 corporate plan said:
Whilst there has been some thrifting in zircon use over the last ten years as prices have risen from around US$300 per tonne in 2000 to US$950 per tonne in 2010, there has been little evidence of widespread substitution occurring over this period. However, with the price increasing significantly in 2011, the 2011 Corporate Plan has addressed the risk of substitution of zircon in key end use applications. The findings of the substitution work to date are summarised in section 4.4 [(extracted below)]. This work will continue as a priority with two full time resources allocated to substitution research.
Thrifting involves reducing the amount of zircon used in producing a product. Substitution involves using a substitute for zircon in a product.
The 2011 corporate plan identified that: (a) Iluka is the market leader for zircon with a 38% world market share, (b) demand for zircon is influenced by its unique properties that include opacity, wear resistance, chemical and thermal stability and useful electrical properties, and (c) Iluka has forecast zircon demand on a ‘bottom up’ (i.e. end use segment and demand by region basis) and a ‘top down’ basis (i.e. forecasting global growth and then considering the split between China and the rest of the world using a high, a base and a low demand scenario.
The 2011 corporate plan identified that: (a) the TiO2 feedstock market is split into two streams, being chloride and sulphate, and (b) Iluka only produces chloride feedstocks, which are used in chloride pigment process.
Section 4.4 of the 2011 corporate plan said:
The potential for substitution or thrifting of zircon as a result of higher prices and or scarcity of product has been identified as part of the 2011 Corporate Plan. A substitution study was commenced in May to understand the potential magnitude of this threat on future zircon demand. The initial phase of the study examined all sectors of the zircon market and was conducted through interviews with Iluka customers and, where possible, companies further down the value chain (e.g. tile producers). Trade data and relevant literature was also included in the study. Initial findings were presented to Iluka’s Leadership Team in August. These findings outlined the following:
•the risk of substitution is highest in the ceramics and foundries markets;
•tile manufacturers are actively pursuing substitution for porcelain tiles, either through alternative whitening materials, such as clays, feldspars and alumina or they are considering alternative production techniques, which only require zircon in the top layer of the tiles;
•the foundry sector remains strong, although there is risk of alumina based sands replacing zircon in small castings and chromite doing the same in large castings; and
•zircon consumption remains strong in the refractory and zirconia/zirconium chemicals sectors, with little risk of substitution.
The next phase of the study, to be conducted over the next six months, is designed to estimate the likely impact of zircon demand growth in terms of tonnes per annum, for the foundry and ceramics sectors. The study will also estimate which geographical markets may be most impacted by possible substitution.
In section 5.1 of the 2011 corporate plan a strengths, weaknesses, opportunities and threats analysis identified opportunities including unmet zircon demand and a favourable market outlook providing volume and price opportunities, a favourable market outlook for rutile providing volume and price opportunities, and a threat as the zircon deficit and future potential growth gets filled through other means i.e. substitution, thrifting and new supply.
Section 5.2 of the 2011 corporate plan identified “strategic elephants” including that the scarcity of zircon, which was an opportunity for Iluka to increase production and price, could “lead to demand erosion via substitution and further thrifting” and that “previously uneconomic or technologically challenged projects become viable”. Also the looming TiO2 feedstock global supply deficit which was an opportunity for Iluka to increase production and price also had implications as there was strong demand for sulphate pigment and China had indicated a move to chloride pigment process. Under Iluka’s management system (the Argenti system) a “strategic elephant” is “any feature of truly massive significance”, having an effect of at least 25 – 30% of current profits. A “strategic elephant” can be “good news or bad”. Strategic elephants should not amount to more than three or four issues within any organisation.
Section 5.3 of the 2011 corporate plan included a key risk matrix. In the matrix substitution and thrifting (C4) is shown as a catastrophic but unlikely (at least once in 25 years) risk. It is the only risk in the “red zone” of the matrix.
The 2012 forecast sales in the 2011 corporate plan were 571kt of zircon, 307kt of rutile, and 341kt of synthetic rutile.
The overall strategy for zircon in the 2011 corporate plan was to “increase zircon prices to the optimum sustainable level whilst monitoring, and where possible, minimising substitution and market contraction”, market conditions being described as involving “a supply deficit of zircon over the next three years due to global demand, assuming no major substitution, and the inability of existing producers to expand zircon production in the short term”.
The overall strategy for TiO2 in the 2011 corporate plan was to “continue the strategy of six monthly pricing for the majority of the TiO2 products, whilst recognising and supplying a higher volume of feedstock to new and developing higher ‘value in use’ markets at elevated margins”, market analysis having indicated “a supply deficit for high grade feedstocks … over the Plan years (2011 – 2016) and restricting existing chloride pigment producers from adding additional brown or greenfield capacity”.
The risk of substitution and thrifting of zircon was not new. Mr Cobb explained that:
… we had been aware that substitution and thrifting had been occurring throughout the history of zircon. It’s part of, you know, the fact that our customers are always looking for alternatives, cheaper alternatives to zircon. It’s nothing new. Zircon had been substituted broadly in the casting markets, especially in Japan years earlier. We knew there was substituting and thrifting, there always had been, but we weren’t aware of the extent that that was occurring.
Mr Cobb and Mr Robb both said that they recalled that a “strategic elephant” could be a risk or an opportunity. It was submitted for Mr Bonham that this evidence should be rejected as the “strategic elephant” of substitution and thrifting was plainly a risk. I disagree. The “strategic elephant” identified in the 2011 corporate plan was not “substitution and thrifting”. It was the market opportunities for zircon and TiO2. The market opportunities were lack of supply of zircon and TiO2 which were said to present both an opportunity (to increase production and supply by Iluka) and a risk (that customers would increase substitution and thrifting). I accept Mr Robb’s evidence as follows:
So would it be fair to say when Iluka in September 2011 was finalising its corporate plan, at least the final strategy paper, the very first of the strategic elephants that it had identified, the first of the potentially massive threats to its business, was thrifting and substitution in the zircon markets?---No, that’s not correct, I’m sorry. The strategic elephant was zircon market opportunity. And that reflected a gap opening up, as we saw it, between demand and supply, with supply falling behind demand. Iluka was uniquely positioned because of our strength in zircon to fill that gap and the implication that you’re referencing was only if we failed to fill that gap. So that if there was sufficient scarcity, that would lead to demand erosion, by definition, if there’s not enough supply, demand has to adjust down to meet supply. So, no, I don’t agree with you. The strategic elephant was an opportunity of a market that was growing faster than supply and we were relatively favourable – we were favourably placed to fill that gap. That was the strategic elephant.
And the risk that comes there for Iluka is that there will be substitution and thrifting. That’s what is said in that box?---Only if we failed to meet the gap and scarcity was a factor.
Mr Bonham accepted that the 2012 forecast sales in the 2011 corporate plan were for Iluka’s internal planning purposes only. He submitted that the forecast sales of zircon of 571kt could be contrasted with the apparent expectations of the sales and marketing team. I deal with each of the documents referred to for Mr Bonham and his submissions below.
It should not be inferred that the sales and marketing team were discussing a possible “alternate case” for the FY12 budget, and using as a base for that work a FY12 zircon sales figure of 450kt. This submission is based on a two page draft document, “scenario for management discussion purposes”, which contains suggested parameters for “indicative ‘alternate case’”. The entry for zircon says “450,000 tonnes CC [Chris Cobb] to comment on suggested reduction”. Relevantly: (a) the author of this document is unknown, (b) the document remains a draft, (c) the final version was intended to be discussed with Mr Cobb, and (d) the use to be made of the “indicative ‘alternate case’” is unclear. It would not be uncommon for companies to develop alternative scenarios from time to time to stimulate discussion or stress test assumptions. The existence of such documents do not found any assumption or inference that they represent the view of the company or, indeed, even the author of the document.
Mr Cobb received an email on 16 September 2011 attaching some information and proposing some ranges for the effect of substitution on demand. The information had been requested by production managers who wanted to be able to deal with the worst case market scenario, as well as the best cases and something in between. The worst case was said to be “something like” a 6% drop in global demand for zircon in 2012 (80kt), 11% in 2013 (140kt), and 6% in 2014 (75kt). The email said these tonnages were “very rough” but “we are looking at something in the order of 300ktpa of lost market demand by 2014 (partially off-set by growth in the other segments)”. This equated to a loss of market share for Iluka of 2%, 4% and 2% of the entire market drop in 2012, 2013 and 2014 respectively or 100ktpa by 2014.
On 23 September 2011 Jorge Masbate of Iluka (Product Manager Zircon – Product and Technical Development, not a member of the leadership team and reporting to Mr Hugo) met representatives of Bitossi, a major tile manufacturer. According to Mr Cobb, Iluka was starting to make direct contact with tile manufacturers to better understand the issues around substitution and thrifting of zircon. However, Bitossi, like another tile manufacturer whom Iluka subsequently spoke to, Matrix, only operated in Guangdong Province when there were around 3,000 tile manufacturers in China and Iluka was very careful about its dealings in China given the risks involved to personnel. Opacifier producers also wanted to keep Iluka away from their customers (ceramic producers) as they did not want Iluka to know the margin the opacifier producers were making. This all meant information about the market in China was difficult to obtain and to draw conclusions from, but any information was a “step forward”.
Mr Masbate’s file note, which he sent to Mr Hugo, said: (a) “Bitossi still seriously concerned with the level of substitution that they observe in their markets”, and (b) “Bitossi completed an internal lab test to compare tile quality produced by using different levels of calcined alumina and zircon. Visually, it was difficult to detect the variance in level of whiteness among the samples produced”. Further actions were recommended focusing on Iluka obtaining further technical information about the product outcomes resulting from the substitution methods Bitossi identified.
Mr Bonham submitted that:
The Sales & Marketing Leadership Team Report … for the previous month [September 2011] was released and noted continuing softness in the Chinese and SE [South East] Asian zircon markets and forecast a halving of sales volumes from Q3 to Q4. In some contrast, the B1 process seems to have yielded a FY12 zircon sales forecast of 571kt – better than FY11 – albeit with the ‘alternate’ case still acknowledged at 450kt. By late October the zircon forecast had reduced to 520kt (and was reduced further later).
In fact, this report (of Mr Cobb) said that “September was an exceptional month for sales volume and revenues with the entire shortfall from July and August recovered in the month”. For zircon Iluka’s sales volume and price was ahead of its forecasts and prices were to increase by another 10% in 2011 Q4. The report said that:
•Full increase achieved though volumes impacted in China and SE Asia due to softening of the market, especially in ceramics. China volume in Q4 will be less than 50% of Q3.
•European market holding up well and a number of customers are taking additional volume in Q4.
…
•Zircon now enters unknown territory with prices around US$2500/t delivered and substitution and thrifting becoming more widespread, Kalimantan production rising and China likely to remain soft for at least 2 quarters unless the government lifts it tight fiscal policy and allows banks to lend, and construction projects to commence.
For TiO2 the report said that rutile and “HyTi volumes and prices for the month and YTD [year to date] are ahead of budget and F6+6”. Further:
•Customers have informed us they have observed for the first time in 18 months a softening in the forward pigment demand indicators, and DuPont is already considering reducing production possibly in 2012.
•It will become more apparent as to the impact on 2012 volumes at TZMI in Hong Kong but based on current volume wish list from customers this should not be an issue for Iluka given the high grade Ti02 bias.
The report continued:
… September saw the turn down in demand in China and to some extent also in SE Asia as customers failed to take up additional zircon offered for delivery in the month at spot prices slightly above Q3 contracted material. Elsewhere in the world the situation has not shown the same downturn as yet and despite the global uncertainty, especially in Europe, the market for Zircon remains solid at present.
…
There is also clear signs that tile manufacturers have opted to produce less high quality porcelain tiles in favour of lower quality tiles with less zircon. Construction activity is only down by 10 to 20% … yet some customers have seen a 50% reduction in the off-take of opacifier, as the tile manufacturers have opted to change their production mix to lower or no Zircon products in response to higher opacifier prices. The high Q3 Zircon sand imports also lead to an oversupply of opacifier just as the market was starting to soften which has compounded the issue in Q4.
Reduced Zircon sand supply and hence opacifier production in Q4 should rebalance the market, which together with a demand driven pull for porcelain tiles is hoped will re invigorate the market after Chinese New Year.
…
Currently demand for all Ti02 products remains strong across all sectors, and the price of Rutile in to the welding sector for Q4 is now over US$2000 per tonne, some US$600 per tonne above the Iluka contracted 2011 H2 pricing to the pigment sector. HyTi and Rutile 92 sales in the quarter were extremely strong with a total of 27,000t sold against 13,400 for the previous 6 month period…
During late September, reports of softening in Ti02 in the medium to long term were passed on to Iluka by Kronos and DuPont, and they are looking at their options in terms of feedstock mix in 2012 should this downturn eventuate. At this stage it appears from discussions to be more a slow down from the 3 to 5 % annual growth being forecast up until recently, and not a downturn as such, but with the continued global economic uncertainty this could change, either way.
Initial work is underway to prepare for the customer discussions in regard to 2012 Ti02 volumes and H1 2012 pricing during the TZMI conference in Hong Kong. It is anticipated that the customers will ‘talk down’ the market and feedstock prices in 2012, but the recent presentations on potential feedstock price increases by Tronox in regard to their merger makes this more difficult. At this stage it is anticipated that a sizable increase can still be achieved in High Grade Ti02 Feedstock in H1 2012.
The “halving of sales volumes” forecast was a reference in the report to an expected “reduction in Q4 sales to China by around 50% to approx 25,000t” which would then be followed by a re-invigoration of the Chinese market in 2012 after Chinese New Year.
In other words, the B1 budget forecast of 571kt at this time in the budget process was not “in some contrast” to Mr Cobb’s report.
4.8 November 2011
Mr Bonham referred to a file note about meetings between Iluka and its TiO2 customers at the TZMI conference in November 2011. According to these submissions:
(1)at least four major pigment customers (Hunstman, DuPont, Tronox and Kronos) were recorded as expressing – in varying but uniformly trenchant terms – their concerns over Iluka’s proposed pricing increases for 2012;
(2)by late 2011 Iluka was offering only half-yearly contracts (save for a legacy arrangement with DuPont) so that it had no binding agreements with customers about sales for the second half of 2012 and thus in the event of a downturn in the market in the first half of 2012, Iluka was wholly exposed;
(3)Iluka’s feedstock competitors were offering feedstocks – in particular, slags – under longer-term contracts, including “legacy” contracts that were expected to remain in place at least through part of 2012; and
(4)Iluka’s feedstock sales as negotiated during late 2011 and into 2012, for the 1H/12 period, were its best guide to customers’ production plans and likely purchases during the balance of 2012 and the real danger was that the absence of binding contracts for 2H/12 would mean that sales would slump – that is, not be committed at all – when the contracts for the current half-year ended.
This negative view of Iluka’s position in respect of TiO2 in late 2011 is ahistorical. The reality was that:
(1)it was to be expected that customers would seek to drive Iluka’s prices down;
(2)the shorter contracts had enabled Iluka to increase prices when demand was high during 2011; and
(3)overall 2011 had been a strong year for TiO2 sales with some softening late in the year, but an expected upturn in demand in the second half of 2012.
Mr Bonham also submitted this:
From at least early November 2011 there develops an increasing disconnection between the budget forecasts and the information being received by Iluka regarding the zircon market. On 2 November 2011, Mr Cobb received some detailed analysis of the expected effect of zircon substitution and thrifting from Endeka, which Mr Hind described as “very much work in progress” but “the numbers are built up sector by sector, region by region so [it] is more than just a wild stab in the dark”. The bottom line was a forecast from Endeka that thrifting and substitution would reduce global zircon demand in the ceramics sector by around 32% or 250ktpa.
Endeka’s analysis was subsequently incorporated into Iluka’s own Corporate Planning slide packs, with no suggestion that it reflected some kind of scare-tactic deployed by Endeka for the purposes of that company’s negotiations with Iluka.
Indeed, the plausibility of Endeka’s analysis is supported by Iluka’s own December 2011 work on assessing likely zircon demand in 2012. A spreadsheet of some managers’ assessments (including Mr Cobb) recorded an average forecast of 1285kt – that is, around 200kt less than Iluka’s estimates of FY11 demand – and no return to FY11 levels until FY13.
Endeka was one of Iluka’s opacifier-producing zircon customers. The spreadsheet which showed reduced global zircon demand of 250kt or 32% was part of the information Endeka provided to Iluka on a confidential basis. I do not accept that this evidences a disconnect between Iluka’s consideration and the information available to it. In particular (and as Iluka submitted):
(1)Mr Cobb did not take Endeka’s views at face value. He asked if Endeka would “share their substitution work with us prior to TZMI so we can understand where the 100 to 200kt opacifier demand destruction they are referring to is occurring” and was told it had been provided on a confidential basis and hopefully Endeka would share its final views before the TZMI conference;
(2)accordingly, Endeka’s views were not final at his stage. Further, Endeka had an interest in providing information to Iluka to keep Iluka’s prices down. Mr Cobb said about Endeka:
It was a very unusual situation at the time in that they were struggling economically and they had very little working capital and we were supporting them on an almost month-by-month basis in terms of credit and it was very much in their interest to try and talk the story down and try and make sure the prices didn’t rise any further. And that was discussed among the team. Anything we received from my customers where they are talking it down, we need to balance that with all the other external information we’ve got;
and
(3)the spreadsheet did not give any indication of the time period over which the posited reduction in demand would occur, nor whether it included any proportion of the posited reduction which had already occurred.
To the contrary, Iluka informed the market that: (a) there were material risks that its sales guidance would not be achieved in 2012, (b) there were a number of reasons why it had to qualify its sales guidance for 2012 meaning it could not be relied on as a predictor of future performance, and (c) its sales guidance was the best guidance it could provide at the time but was subject to all of the qualifications in its 23 February 2012 announcement as maintained and repeated thereafter.
It follows that Mr Bonham’s misleading and deceptive conduct case (and the class action as a whole on this basis) must fail.
8. REASONABLE GROUNDS FOR REPESENTATIONS?
8.1 Rejecting some of Iluka’s propositions
I do not accept Iluka’s submission that the statements on which Mr Bonham relied involve statements only as to present circumstances. They are statements as to future expectations. As such, they are representations relating to future matters, and thereby subject to the statutory presumption of lack of reasonable grounds unless Iluka adduces evidence to the contrary.
I also do not accept Iluka’s proposition that the issue whether Iluka had reasonable grounds for the making of the April forecast representation and the May forecast representation (be they characterised as statements of present or future expectation) is to be answered by posing the question “did Iluka apply a reasonable process, taking into account relevant information, to arrive at the conclusions that it did, having regard to its statements to the market about the limitations on its ability to make an accurate estimate?”. This question exposes only part of the relevant issue, which is the existence or not of reasonable grounds for making the assumed representations. The issue is ultimately one of substance, not merely process.
As a matter of substance, a statement made as a result of a reasonable process, may be one made without reasonable grounds. Equally, as a matter of substance, a statement made as a result of an unreasonable process, may be one made with reasonable grounds. However, I accept that the character of the process by which a statement has been formulated as reasonable or not will be relevant to the drawing of inferences about the character of the statement as reasonable or not, but it is not determinative of that issue. In short, if the evidence establishes that a reasonable process has been implemented by well-qualified, informed and experienced people who must be inferred to have been doing their best at the time to provide accurate information, then there needs to be something in the evidence before it would be concluded that those people had all reached conclusions lacking reasonable grounds.
TPT Patrol is not authority to the contrary. Beach J said at [1322], that “[t]he question whether there were reasonable grounds for the making of a profit forecast is to be resolved by looking at whether the relevant director had made a genuine assessment as to the appropriateness of the forecast. If such a genuine assessment had been made, there would be reasonable grounds to support the making of the forecast”. The genuineness of the assessment ultimately involves a question of substance. So much is apparent from the surrounding observations Beach J made as follows:
1320 In determining whether a person held reasonable grounds for a representation of opinion, the relevant inquiry is into whether the facts possessed by him were capable of supporting the opinion that he held.
1321 A person will have had reasonable grounds for making a representation with respect to a future matter if there are facts which are sufficient to induce that state of mind in a reasonable person.
The judgment of Gleeson J in Crowley v Worley Limited [2020] FCA 1522 also does not support Iluka in this regard. While her Honour was satisfied that the budget process on which Worley relied for its NPAT forecast was reasonable, and accepted that this was relevant to the reasonableness of the forecast, Gleeson J was also satisfied at [648] that the evidence did not establish that “particular integers or portions of the FY14 budget were overstated or understated so as to be unreasonable or unjustifiable”. In other words, her Honour considered that, on the evidence, the substance of the FY14 budget was reasonable.
Iluka otherwise submitted that “on its budgeting and reforecasting processes but that those processes were detailed and rigorous and involved a careful consideration of all relevant demand side factors. There was, in short, a genuine assessment of the appropriateness of the sales forecasts. And that is what is relied on to establish reasonable grounds”. That is a submission concerning both substance and process. It reflects a legitimate approach to the issue of the existence or not of reasonable grounds for the making of a statement.
Nor are the observations in Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 at [33] or Forrest v Australian Securities and Investments Commission [2012] HCA 39; (2012) 247 CLR 486 at [102] on point. Those observations, that a statement of opinion may or may not imply that the maker of the statement has reasonable grounds for the opinion, are relevant to statements of presently held opinions and do not take account of the statutory deeming provisions that operate when a person makes a representation about a future matter.
Iluka also submitted that “the Court should not draw any inferences adverse to Iluka where the Applicant contends an interpretation of business records which is inconsistent with evidence from Iluka’s witnesses” because the proceeding was commenced on the last day of the six year limitation period after the release of the 12 April 2012 report and was not prosecuted in haste. As a result, Iluka’s witnesses were recalling events from nine years ago. Iluka cited in support Bishopsgate Insurance Australia Ltd (in liq) v Deloitte Hoskins & Sells [1999] 3 VR 863 and Tamaya Resources Limited (in Liq) v Deloitte Touche Tohmatsu (a Firm), in the matter of Tamaya Resources Limited (in Liq) [2015] FCA 1098.
Bishopgate concerned dismissal for want of prosecution. Tamaya concerned an application to amend pleadings. Iluka did not identify any authority identifying that, at the level of principle, delay in an applicant’s commencement and prosecution of proceedings may justify or support the drawing of inferences in favour of the respondent. Rather, courts accept that the consequences of delay may affect the capacity of one or other party to adduce evidence either at all or of a particular kind and that may be relevant to an assessment of the inferences appropriate to be drawn in the particular circumstances of any case, given that all evidence is to be weighed according to the capacity of a party to prove or contradict the fact in issue: Blatch v Archer (1774) 1 Cowp 63 at 65.
There is no basis in the present case for an inference that the capacity of Iluka to call evidence (other than from Mr Hugo) was adversely affected by the passage of time. Iluka called the relevant witnesses, particularly Mr Cobb and Mr Robb. While they had to refresh their memories from documents, I do not doubt the accuracy of their evidence.
8.2 Iluka otherwise acted on reasonable grounds
If the alleged representations were made, I do not accept Mr Bonham’s case that Iluka did not have reasonable grounds for making those representations at the relevant times.
The evidence has not exposed any issue which Iluka failed to consider in formulating its public statements between February and July 2012. It has not exposed any lack of a genuine assessment of the relevance of the issue having regard to the circumstances as they existed at the time. It has not exposed any material from which it should be inferred that Iluka was unreasonably ignoring information that did not suit it. Rather, the evidence has exposed that the relevant Iluka personnel were highly experienced in the markets in which Iluka operated, and were careful, diligent, and continuously exerted themselves to ensure that the information Iluka gave to the market was accurate and timely.
This is not mere evidence of a “process”. As noted, it may be accepted that a robust process is capable of yielding an unreasonable outcome. Iluka’s evidence, however, goes well beyond that of a mere robust process (although the evidence does establish that its processes were robust).
Mr Bonham’s proposition that “what is remarkable about Iluka’s defence is that, despite having had every opportunity to establish, as a positive proposition, that it had reasonable grounds for its extant sales guidance(s), it made a deliberate forensic choice not to do so” is inaccurate. It is apparent that Iluka’s evidence was not confined to its budgetary and re-forecasting processes. The evidence from the Iluka personnel, in particular Mr Cobb and Mr Robb, engaged in detail with the substance of Iluka’s budget and re-forecasting, as well as the terms to its public statements said to underpin Mr Bonham’s case. Iluka did not have to call an expert to opine as to a reasonable forecast for its sales in 2012 of zircon and TiO2 products. The expert evidence it did call undermined the evidence for and case theory of Mr Bonham, whilst also reinforcing the reasonableness of the views expressed by the Iluka witnesses.
Iluka called the key witnesses, in particular, Mr Cobb and Mr Robb. The idea that there were “awkward anomalies” in Iluka’s documents, such as the estimate of global zircon demand of 1,050kt, and that Iluka deliberately avoided calling any witness to explain those documents is untenable. There were numerous people within Iluka involved in many different aspects of the business. Insofar as sales forecasts are concerned, it was Mr Cobb’s responsibility to make the relevant assessments based on all information and to present it to Mr Robb and Mr Robb’s responsibility to review that and present the relevant views to the board. The evidence of Mr Cobb and Mr Robb was clear, cogent and persuasive. It was irreconcilable with Mr Bonham’s case. At all times they considered Iluka’s sales guidance had reasonable grounds and, indeed, was as accurate as possible. When they consider that the sales guidance had to be revised, they ensured that the revisions made were also as accurate as possible. When they reached the view that market conditions were too volatile to permit anything other than sales guidance based on a wide range, they ensured that the sales guidance reflected this view.
It is not to the point that Mr Bonham (or Mr Murray or Mr Rochester) pointed to snippets of documents which might or might not have suggested others within Iluka might have been less optimistic than Mr Cobb or Mr Robb about one or other issue relevant to the formulation of the sales guidance, be it substitution and thrifting, market conditions, or the position of customers. It is apparent that Mr Cobb and Mr Robb were aware of a vast range of information. The evidence is they weighed the information carefully. It is apparent that both reached genuine assessments based on applying expertise and experience in the relevant markets to the available information. It is impossible to conclude that the views that they held were unreasonable. The evidence of both Mr Cobb and Mr Robb was clear – they both considered Iluka’s sales forecasts to be reasonable at all times before the end of June 2012.
The evidence does not support an inference that Mr Cobb or Mr Robb held any view that Iluka most likely would not achieve its sales guidance (assuming it held its prices) before 30 June 2012. Mr Cobb suspected it may be difficult for Iluka to do so in early to mid-June 2012 (again, if it held its prices) but had good reasons at that time not to have reached any concluded view to that effect. Mr Cobb also saw distinct signs of improvements in both markets by the time of the 20 June 2012 meeting of the board.
I do not consider that Iluka’s actions between early June and 9 July 2012 were unreasonable. Signs of improvement in China were appearing. Iluka management genuinely believed that a turnaround in zircon demand was emerging up to 20 June 2012. They also genuinely believed that Iluka would be able to negotiate deals for its TiO2 products enabling it to meet its sales guidance given that the negotiations were ongoing. There is no basis upon which it would be inferred that Mr Cobb and Mr Robb were both being unreasonably optimistic.
The notion that infuses the case theory for Mr Bonham, of Iluka management being virtually wilfully blind to the effects of substitution and thrifting on demand for its products, is untenable. For zircon products, the focus on China involves distortion and inaccurate over-simplification. For TiO2 products, Mr Bonham’s case involves inaccurate over-simplification and exaggeration.
There is ample evidence of Iluka making significant efforts to identify and understand the effects of substitution and thrifting on demand for its zircon products in China. The fact that Iluka management considered the issue to be complex and the effects to be difficult to quantify does not support an inference of unreasonableness, let alone wilful blindness. The evidence indicates Iluka was right – the issue was complex and the effect was difficult to quantify given the nature of the zircon market in China and the fact that the impact had partly been absorbed in 2011. The evidence does not suggest that the views of Mr Cobb or Mr Robb about the overall effects of substitution and thrifting on demand for Iluka’s products were wrong or unreasonable.
Mr Bonham’s case also posits that Iluka’s approach, of documents remaining in draft for discussion purposes and apparently never being finalised, was itself unreasonable. The criticism is misplaced. Iluka’s leadership team had substantial experience and expertise in the markets in which Iluka operated. It was rational and appropriate for information to be presented to and considered by the leadership team. It was also rational and appropriate for Iluka to want to ensure that the information it possessed was accurate and reliable. I do not infer that Iluka was seeking to delay or defer the sharing of bad news about its markets in 2012. That is irreconcilable with the evidence of Iluka’s witnesses which I accept. It also depends on a partial and selective view of the contemporaneous documentary record.
The fact that Iluka’s sales guidance involved a heavy weighting to the second half of 2012 (or, as Mr Bonham emphasised, that Iluka would need to achieve record results in that period to achieve the weighting) does not mean that the overall sales guidance was unreasonable. If, as Iluka anticipated, demand would rebound in the second half of 2012 after a period of destocking in both markets, then a heavy weighting to the second half of 2012 makes sense. Iluka’s markets had been growing strongly from 2009. The view of Mr Robb, in particular, that the drive to urbanisation would see demand continue to grow and, in effect, swamp the impacts of substitution and thrifting, was not a result of blind optimism. It was a carefully considered conclusion based on years of experience in the industry. It is not apparent from the evidence that Mr Robb’s views in this regard turned out to be wrong.
Further, the views of Mr Robb and Mr Cobb that the rebound in demand would be strong in the second half of 2012 also were not a result of blind optimism. They knew the market was seasonal and cyclical. They knew that periods of decreased demand occurred. They were familiar with the intricacies and longer-term patterns of the market. Having heard and seen them give evidence, it is difficult to infer that in 2012 either was unknowingly involved in the publication to the market of sales guidance which lacked reasonable grounds. Characterising their views at the time (that Iluka’s sales guidance was not only reasonable, but the best guidance that could be given in the circumstances) as merely “subjective” fails to confront reality.
The evidence proves that at the relevant times: (a) the Iluka witnesses were all highly experienced in the industry, (b) the key Iluka personnel for sales guidance, Mr Cobb and Mr Robb, were well-informed about all relevant issues, including substitution and thrifting, (c) the views that Mr Cobb and Mr Robb held that it was difficult to quantify the impact of substitution and thrifting were well-founded, (d) Mr Cobb and Mr Robb were careful and considered in their approaches, (e) Mr Cobb and Mr Robb were aware of and had taken into account all issues of relevance, (f) Mr Cobb and Mr Robb had the objective of being as accurate as possible in respect of the sales guidance provided by Iluka to the market, (g) Mr Cobb and Mr Robb considered that the sales guidance provided by Iluka to the market was not only reasonable, but the best guidance that could be given in the circumstances, and (h) Mr Cobb and Mr Robb considered that Iluka’s revised sales guidance was also timely and not only reasonable, but the best guidance that could be given in the circumstances.
In these circumstances, to characterise Mr Robb and Mr Cobb’s views as lacking reasonable grounds (which would be necessary given that it must be inferred that Iluka acted on the basis of their views) is difficult. They did not fail to notice an issue which they reasonably should have noticed. They did not fail to consider information concerning any relevant issue. They had no reason to risk their reputations as long-term participants in the industry for any perceived short-term gain in Iluka’s share price. There is no suggestion they were reluctant to give the board the information it needed to make well-informed decisions. There is no evidence of either Mr Robb or Mr Cobb being historically over-optimistic about sales forecasts. There is no evidence of any kind of systemic flaw or tendency to yield unachievable sales targets in Iluka’s budget and forecasting processes.
It is easy, with hindsight, to say that Mr Robb and Mr Cobb should have realised that: (a) substitution and thrifting would make their views about 2012 sales unreasonable, or (b) global economic conditions would make their views about 2012 sales unreasonable. However, as to the former, it is not apparent on the evidence that substitution and thrifting had any material impact that Iluka had not anticipated. As to the latter, rather than global economic conditions improving through 2012 as anticipated, they deteriorated sharply in June and early July 2012. Iluka was not alone in its anticipation of a strong second half of 2012. It was shared by all key industry participants.
The fact that Mr Bonham can point to documents indicating more pessimistic views (such as Endeka) earlier than Iluka adopted a pessimistic view, does not cause me to infer that Iluka lacked reasonable grounds for its sales guidance during the relevant period. Iluka operated in global markets. Its products involved two distinct global markets. The regions comprising its markets were disparate and complex. It could not reasonably take the view of any customer trying to achieve lower prices as representative of any segment of the market. It had to be sceptical about information given to it by customers given the evidence that the industry was characterised by brinkmanship and misinformation rather than transparency.
Iluka’s approach leading up to and at the meeting of the board on 20 June 2012 was not unreasonable. It appreciated that it was reaching a critical decision point. Given very recent indicators of a turnaround in the zircon market and the ongoing negotiations for sales in the TiO2 market, Iluka’s view that it had not yet reached that point was carefully weighed and made. The steps it took to ensure a decision could be made quickly if required were prudent. But it was not unreasonable as at 20 June 2012 for it to consider that the turnaround in zircon demand was beginning or that it could secure sales for its TiO2 products for the second half of 2012.
I do not accept that the evidence supports an inference that Iluka adopted an approach of “if in doubt, let it stand”. That proposition is not consistent with the contemporaneous evidence or the evidence of the Iluka witnesses. The proposition also confuses the relevant issue. The fact that one or other employee of Iluka might have doubted that it would achieve its sales guidance before 30 June 2012 (noting that even that inference is not available on the evidence) does not mean that, at that time, Iluka did not have reasonable grounds to maintain the guidance. This proposition ignores the terms of the guidance. It also ignores common sense – Iluka had to consider the terms of any revised guidance carefully. It did so over a few days which was not unreasonable in the circumstances given the information it needed to decide on the revised terms of the guidance that should be given.
Nor do I accept that Iluka’s evidence established only that Iluka’s officers subjectively considered that Iluka’s extant guidance was achievable. The evidence did establish this, but it did more. It explained why the officers held the views they did. Their reasoning processes did not depend on unreasonable assumptions or unreasonably ignore relevant information.
In these circumstances I consider that the evidence establishes that Iluka had reasonable grounds for the making of the alleged representations (if made) at all relevant times. Iluka’s actions to revise its guidance as it did through the first half of 2012 were reasonable and timely. The fact that, with hindsight, Iluka was wrong about the timing or the fact of a rebound in demand in the second half of 2012 does not establish that it lacked reasonable grounds for the alleged representations.
In so concluding I have not asked whether no reasonable entity in the position of Iluka could have come to the views it did. I did not understand Iluka to be suggesting that I should adopt any such approach. I accept that the issue in the present case is simply one of the existence or not of reasonable grounds for the alleged representations. I also consider that it is possible that Mr Bonham could have failed to prove that a reasonably-based forecast of Iluka’s expected sales for each of its products in FY 2012 was in the order of and no more than approximately 231kt to 336kt of zircon, 188kt of rutile, and 255kt of synthetic rutile (based on the evidence of Mr Murray and Mr Rochester), yet succeeded in the case that Iluka did not have reasonable grounds for the asserted misrepresentations and/or contravened its disclosure requirements. Contrary to Iluka’s submissions, the latter contentions do not wholly depend on the former.
9. CONTINUOUS DISCLOSURE
Mr Bonham’s claims must be rejected because I do not accept the propositions, based on the evidence of Mr Murray and Mr Rochester, that a reasonably-based forecast of Iluka’s expected sales for each of its products in FY 2012 was in the order of and no more than approximately 231kt to 336kt of zircon, 188kt of rutile, and 255kt of synthetic rutile. Nor do I accept that Iluka did not have reasonable grounds to make the April forecast representation and May forecast representation. It follows that Iluka could not have been aware of the alleged contrary information alleged to have been subject to an obligation of disclosure. That is, I do not accept that at any relevant time Iluka knew that it: (a) did not have reasonable grounds to make the April forecast representation and May forecast representation, (b) had information which created a material risk that the April forecast representation and the May forecast representation were no longer reliable, (c) was no longer able to provide reliable forecasts of future revenue, or (d) did not have a reasonable basis for providing point estimates of sales for mineral sands products rather than a broad range going forward.
This said, I do not accept a number of Iluka’s submissions about the continuous disclosure requirements. In particular, I do not accept that the requirements “only require an opinion to be disclosed if the opinion is actually held by the directors or if the opinion is held by someone else and should have become known to the directors”.
The continuous disclosure obligations in s 674(2) of the Corporations Act (as then in force) applied to “information” that is not generally available and that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of securities of the entity. Further: (a) ASX Listing Rule 3.1 provided that once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information, and (b) in Chapter 19 of the Listing Rules, r 19.12 provided that an entity becomes aware of information if, and as soon as, an officer of the entity has, or ought reasonably to have, come into possession of the information in the course of the performance of their duties as an officer of that entity.
On this basis, unaffected by authority, it is not difficult to conclude that if an officer possesses information from which the officer ought reasonably have drawn a particular conclusion, the entity has become “aware” of the information represented by that conclusion. It was not necessary for the definition of “aware” to make that explicit (as occurred by subsequent amendment to the definition in 2013). Accordingly, if I had concluded that at any relevant time Iluka had become aware of information in the form of a conclusion that, acting reasonably, it ought to have formed which required disclosure, then I would have accepted that Iluka contravened its continuous disclosure requirements. Further, in that regard, I would have considered that Iluka could become so “aware” either by its directors or an officer (as defined in s 9 of the Corporations Act) possessing information for which they reasonably ought to have formed the conclusion requiring disclosure. The issue does not arise in the present case because on the facts, assuming Mr Cobb is an officer of Iluka (which Iluka denied), I do not infer that Iluka ought reasonably to have drawn any conclusions it did not draw.
I do not accept that authority requires a contrary conclusion.
Jubilee Mines NL v Riley [2009] WASCA 62; (2009) 40 WAR 299 is authority only for the proposition that the information an entity has or ought to have had “cannot be construed as extending to information arising from business decisions which Jubilee had not made - such as the decision to undertake exploratory drilling”: at [90]. That concept, of business decisions not made, is not the same as the formation of an opinion or conclusion reasonably required to have been made in the ordinary course of an existing business. In Jubilee Mines the entity was not in the business of nickel mining. As such, the capacity it had to decide to enter the business of nickel mining was not information of which it ought to have been aware. If the entity had been in the business of nickel mining, the reasoning in the case would have been inapplicable.
Grant-Taylor v Babcock & Brown Limited (In Liquidation) [2015] FCA 149; (2015) 322 ALR 723 depended on the fact that no-one within the entity, at the relevant time, believed it to be insolvent despite it later being apparent that it was insolvent. The obiter dicta at [156]-[158] needs to be understood in this context. The board of the entity had considered the relevant issue, insolvency, and concluded that the entity was not insolvent. This was wrong, but it was not a case of a failure to form an opinion at all. The obiter dicta at [156]-[158], to the effect that an opinion not formed but which reasonably should have been formed does not come into the possession of the entity, is conceptually unsatisfactory. This is because it is accepted that an entity does possess an opinion actually held. If that is so, and an entity possesses information from which it reasonably ought to have formed an opinion but did not, it cannot be said that the entity is not in possession of information (the opinion) it ought reasonably to possess.
Grant-Taylor v Babcock & Brown Limited (In Liquidation) [2016] FCAFC 60; (2016) 245 FCR 402, which dismissed the appeal, did not depend on the obiter dicta.
TPT Patrol involved a case of actual not constructive awareness of the lack of reasonable grounds for an NPAT forecast: [1135], [1174]. On this basis the observations at [1174] that officers are not required to form an opinion based upon information they know or ought to know of is also obiter dicta.
I am unable to accept the obiter dicta identified above. An opinion or conclusion is nothing more than a state of mind. Knowledge is also a state of mind. The relevant issue is not the difference between one state of mind and another. The relevant issue is information. Information exists outside of a person’s state of mind. If the information does or ought reasonably to have induced a particular state of mind in the entity (via its directors or officers) then that state of mind itself is information that the entity has or ought reasonably to have had. Either way, the disclosure obligation is engaged if the information is not generally available and that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of securities of the entity.
The contrary approach, in my view, is inconsistent with the language of the legislation and its purpose, to “to enhance the integrity and efficiency of capital markets by requiring timely disclosure of price or market sensitive information”: Grant Taylor at [92].
As I have said, however, the continuous disclosure case fails on its facts.
10. CAUSATION AND LOSS
As discussed above, I do not accept that Mr Bonham relied on the alleged representations, assuming they were made. Accordingly, even if Mr Bonham had proved any statutory contraventions (which he has not), he has not proved loss caused by the contraventions. Mr Bonham’s wife, his co-trustee (who the evidence indicates had a power of effective veto over any share purchase), must be inferred not to have relied on anything said or done by Iluka. In those circumstances, Mr Bonham’s case would have failed on causation of loss even if he had established a statutory contravention.
Otherwise, causation and loss for the purpose of other class members were sought to be established based on the evidence of Mr Houston, an economist, constituting an event study. Mr Houston’s evidence assumed that the opinions of Mr Murray and Mr Rochester should be accepted. I have not accepted those opinions. I have not accepted that Iluka contravened any statutory obligation. Accordingly, questions of causation and loss as analysed by Mr Houston do not arise.
If these questions did arise, it would be necessary to give detailed consideration to the evidence of not only Mr Houston, but also Mr Holzwarth, an economist. The complexity of the issues about causation and loss to which their evidence gives rise is not amenable to generalised overview. The only general observations which can be made are as follows.
Mr Houston’s evidence does not adequately confront the fact that the level of short selling in Iluka shares was among the top five or ten most heavily shorted stocks included in the ASX 100 index. The inference which must be drawn is that J Capital was not alone in considering that Iluka’s shares were over-priced in the first half of 2012. It is reasonable to infer that these market participants took a less optimistic view than others about the macro-economic and other factors affecting Iluka’s sales volumes in 2012. While short-selling also necessarily involves a market participant taking a contrary view, the relevant point here is that Mr Bonham’s case depends on Iluka’s sales guidance having been unreasonable. The fact that Iluka’s shares were subject to a high rate of short-selling at the relevant time, indicates that the market held a range of views about Iluka’s sales forecasts. The fact of such a high level of short-selling indicates that the market participants holding those opposing views were acting rationally because the volatility then in the market made either position reasonable. That one position (short) was proven to be correct in the first half of 2012 does not prove the contrary position (long) was unreasonable. Nor does it prove that Iluka knew or reasonably should have known information which the market did not. To the contrary, the high level of short-selling in the market of Iluka shares tends to undermine the notion that the information Mr Bonham contended ought to have been disclosed to the market but was not, in fact, was not known to the market. It also tends to suggest that the first step in Mr Houston’s analysis, estimating the market’s actual expectations of Iluka’s sales in 2012, is fraught with difficulty.
Mr Houston considered the reports of equity analysts (which focus on share price) as the best available proxy for the market’s actual expectations of Iluka’s sales in 2012. However, it is not apparent that the subset of analysts’ reports used by Mr Houston, nine from the 23 provided by Mr Bonham’s lawyers, is a representative sample. Without evidence supporting an inference that the sample is representative, the exercise Mr Houston has undertaken cannot prove anything. This is so whether or not it is also concluded, based on the academic literature, that reports of equity analysts have an inherent and substantial systemic bias towards long positions.
These confounding factors may explain an apparent anomaly in the results of Mr Houston’s analysis which Iluka described as follows:
Mr Houston identified that on 8 May 2012 the average of the subset of analysts relied upon reduced their expected 2012 zircon sales by 35 kt, to which Mr Houston attributed an abnormal price reaction of $2.20, while on 9 July 2012 the average of the subset of analysts relied upon reduced their expected 2012 zircon sales by 105kt, to which Mr Houston attributed a share price movement of $0.86. These resulted in a “multiplier” of $0.063 per kt for 8 May 2012, but just $0.08 per kt for 9 July 2012.
(Footnotes omitted).
I do not consider this apparent anomaly adequately explained by any proposition advanced by Mr Houston or Mr Bonham.
I also found two fundamental aspects of Mr Holzwarth’s evidence persuasive, in particular that:
(1)the analysts’ reports are not “a good proxy for the market overall. Their expectation as a group are too high, as you can see with the target prices, and particularly given there is such a high level of short selling, which is reflected in the share price but not reflected in their estimates”; and
(2)there is evidence of the awareness in the market of issues of substitution and thrifting including sell-side analysts preparing reports for subscribers who are also part of the market (not confined to J Capital). This evidence was consistent with the opinions of Dr Unni, which I also accept.
On this basis I am not persuaded that Mr Houston’s evidence provides a reliable foundation for assessing the effect of the alleged statutory contraventions (if they existed) on Iluka’s share price (that is, that the alleged contravening conduct caused an inflation of Iluka’s share price).
11. LIMITATION PERIOD ISSUES
Iluka’s limitation period defence is incapable of any generalised assessment. I do not consider this to be an appropriate case in which to provide views about the limitation issues on an assumed basis that my primary conclusions are wrong. Amongst other things, the then docket judge ordered on 8 July 2020 that the date that the amendments effected by the Further Amended Statement of Claim take effect is to be determined at trial. On 22 December 2020 the then docket judge ordered that the date that the amendments effected by the Second Further Amended Statement of Claim take effect is also to be determined at trial. Whether those amendments should be ordered to take effect from the date of commencement of the proceeding or the date of amendment involves an evaluative assessment of the nature of the amendments and of the interests of justice. I do not consider that exercise can be undertaken appropriately on a hypothetical basis.
12. COMMON QUESTIONS
The common questions no longer reflect the case as pressed for Mr Bonham. I consider that the parties should confer having regard to these reasons for judgment and file agreed amended common questions with proposed answers reflecting these reasons for judgment.
13. ORDERS
I consider that the application should be dismissed, but propose to give the parties an opportunity to confer about the further orders that should be made including as to the appropriate common questions and as to costs.
I certify that the preceding seven hundred and twenty-three (723) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jagot. Associate:
Dated: 7 February 2022
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