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Kenmare Resources: Moving production capacity towards 1.2MTA/yr – the benefits of operating leverage

Michael Carvill, MD and Jeremy Dibb, Director of Business Development and Investor Relations, presented their HY results at a Yellowstone Advisory webinar on 24th August.

This was a good first half performance in line with expectations. A record amount of ore was mined but grades were slightly lower which meant that finished production fell. Selling prices for ilmenite rose again supported by strong Chinese demand and supply disruptions across other areas of the market. The market dynamics look attractive for the remainder of the year but given prices have risen for 8 consecutive quarters management were sensibly cautious on pricing, which provides scope for a positive surprise. Overall revenues fell 5% to US$116.8m and EBITDA fell 13% to US$37.2m. Total cash costs were flat at US$75.2m but due to lower tonnage of finished production and the broadly fixed nature of costs the cash costs per tonne rose by 20% to US$183/tonne.

This is why the growth projects currently going on and completed over the last couple of years are so important to Kenmare. When Wet Concentrator Plant B (WCP B) is moved in the current quarter total production will rise 35% to 1.2mtpa. The company reiterated that cash operating costs per tonne are then targeted to fall to $125-135/tonne which will place the company as one of the lowest cost producers. Management confirmed in response to a question that production of 1.2mtpa is targeted every year bar one until 2040.

The operational benefits of higher production and a fixed cost base will drive a significant increase in margins if average selling prices stay anywhere near the current achieved prices of US$270/tonne. Peel Hunt, the company’s broker estimate that EBITDA will rise to US$160m in 2021 as a result of this.

Management told us that the move of WCP B is 70% complete. The relocation pond at Namalope has been finished, the self-propelled mobile transport units have arrived on site and the 23km road that WCP B will travel along is almost complete. Covid-19 has had a negative impact on the fabrication of the pumps for moving high mineral content (HMC) production to the mineral separation plant and on the fabrication of the electricity pylons for the power. There are temporary solutions for both which will incur some additional cost until they arrive and are installed, estimated at 3 months, but critically the temporary solutions will enable WCP B to start production in the fourth quarter. A lot of planning has gone into this move and management emphasised that safety was of paramount importance in completing the project. In their view, the biggest outstanding risk was to the schedule.

The company initiated a dividend programme 18 months ago and confirmed again that the intention is to pay a minimum of 20% of profits after tax as a dividend to shareholders. The balance sheet is in good shape and strong cash flows will enable shareholder returns to rise through a combination of increasing the dividend pay-out percentage and buy-backs.

A question was asked about insurgent activity in Northern Mozambique but this was deemed to be a significant distance away so not to be an issue.

A recording of the webinar can be found on the Yellowstone Advisory YouTube channel or by clicking here.

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