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Kenmare: 2020 a year of transition, 2021 a year of stronger cash flow

Kenmare Resources plc is an established mining company, which operates the Moma Titanium Minerals Mine, located on the north east coast of Mozambique. The Mine has been in commercial production since 2009 and is recognised as a major supplier of mineral sand products to a global customer base operating in over 15 countries. The company is listed on the premium segment of the London Stock Exchange and has a market capitalisation of £430million.

Full year results to 31st December 2020 were published on 24th March and we were delighted to have the management team present on what was a very successful year. Present were Michael Carvill MD, Tony McCluskey FD, Ben Baxter COO, Cillian Murphy Marketing manager and Jeremy Dibb Head of Corporate Development and IR. A recording of the webinar is available here.

The top level summary is that 2020 was a year of transition which has positioned the company to deliver robust and sustainable cash flows for many years to come. Covid-19 added cost and operational complexity and resulted in delays to some projects but at the end of the year their targeted investments were delivered. Operating in a safe environment has been central to their approach and regular testing of the workforce is still being carried out. There has been a recent rise in cases, but they are past the peak and production levels have not been impacted in the current year.

With the commissioning of a new wet concentrator plant and the successful move of wet concentrator plant B, overall production is set to grow by 45-60% in 2021 after a decline in 2020. With a largely fixed cost base, higher volumes drop through to lower unit costs and EBITDA margins are expected to rise significantly from the current 33%. High profitability and confidence in the future have enabled the board to raise the dividend by 22% in 2020 and raise the pay-out ratio from 20% to 25% of PAT in 2021. With the increased profitability consensus forecasts see the dividend more than doubling in 2021.

The year also saw the focus on safety and sustainability improve. The company already had a good track record in this area, but they have added to their reputation by launching their first sustainability report, approved future capital investment to reduce CO2 emissions by 15% and reduce Lost Time Injury Frequency.

Looking at the key financial and operating metrics revenues fell 10% to $244m and EBITDA fell 17% to $77m. Production fell 15% to 756k tonnes and this was partially offset as overall prices achieved on sales rose 10% to $272/tonne. Net debt rose to $64m from a net cash position after the capital development projects and the dividend was increased 22% to 10 cents. It was emphasised that this is largely fixed cost operation and the investment in additional capacity will lead to significantly stronger EBITDA in 2021 and beyond. One of their targets was to be a top quartile margin producer (lowest cost producer) and going into 2021 they have achieved this.

The company paid a maiden dividend in respect of FY19 and increased it by 22% in 2020. Their policy was to return at least 20% of PAT to shareholders and despite a drop in profitability management confidence in the future enabled them to increase the dividend. Their confidence in future prospects was further underlined by their commitment to increase the minimum pay-out ratio to 25%.

At the operational level, in addition to dealing with Covid, 2020 was all about delivering two large development projects. A smaller wet concentrator plant was commissioned in February and this is designed to target higher ore grades in harder to access locations. But by far the biggest project delivered was the successful move of WCP B to its new location at Pilivilli, the highest ore grade location at Moma. Words are hard to do justice to the task of moving an giant object measuring 88m by 60m by 24m a full 23kms to a new site. There is a brilliant video here, which shows the move, and the whole Kenmare team involved along with their contractors deserve a huge congratulations. The first product was mined in October 2020 and they have got up to full production rates very quickly. There are still a few issues to resolve transporting the HMC back to the mineral separation plant, but pumps and a pipeline are expected to be commissioned shortly.

In terms of big projects for 2021, the company announced a $16m investment in a Rotary Uninterruptable Power Supply which will be deployed at the Mineral Separation Plant. Kenmare has a great source in renewable electricity from a hydro plant but the transmission in the stormy months of the year (roughly 4 months) can be unreliable on occasions meaning the company deploys various diesel generators. The new RUPS investment will lower CO2 emissions by 15%, will be more reliable thereby improving utilisation and recoveries and there will be lower costs through lower diesel consumption. The investment is expected to be completed in 2021.

Looking at the market for their products Kenmare experienced a 20% increase in ilmenite prices in 2020 whilst zircon prices continued to fall resulting in overall prices down 9%. In the first two months of 2021 ilmenite prices have continued to rise and zircon prices have also now started to rise. The company projects demand exceeding supply in the forthcoming years which in their view provides a positive backdrop to pricing. Spot prices are almost 20% higher than prices used in current earnings forecasts.

The meeting concluded with a reminder of the key components of the company strategy. Production of ilmenite is rising by 45-60% to 1.1-1.2Mtpa in 2021. Higher production is expected to deliver higher EBITDA margins (currently 33%) due to the fixed cost nature of the operations. Higher profitability will flow through into higher returns to shareholders and the pay-out ratio has been raised to a minimum of 25% of profit after tax.

Post the meeting I did some back of the envelope calculations. If Kenmare achieves the top end of production guidance at 1.2m tonnes, achieves an ASP of $300/tonne and meets the bottom of the range cost of $132/tonne then the co would achieve over $200m of operating cash flow. Pretty impressive and a long way north of any current forecasts.

This was an upbeat meeting where management demonstrated that they had delivered on their strategic goals for 2020 and stakeholders can look forward to stronger cash generation and returns in 2021 and beyond.

A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact

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