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Kenmare Resources: FY23 a challenging year but cash flow remained strong

Kenmare Resources plc is an established mining company, which operates the Moma Titanium Minerals Mine, located on the northeast 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 London Stock Exchange  and has a market capitalisation of £270 million.

2023 Full Year Results were published on 20 March and we were delighted to have Michael Carvill, Managing Director, and Jeremy Dibb, Director of Corporate Development and Investor Relations, report on performance over the last year and talk about prospects for the year ahead. A recording of the webinar is available here.

The presentation started with the news that Michael Carvill will be stepping down in August this year after 38years as MD. His focus during his remaining time at the company will be on the renegotiation of the investment agreement with the Mozambique Government and the XCPA move to Nakata. There are some excellent internal candidates and a search firm is running the succession process for both internal and external candidates.

Kenmare’s success is built on three strategic priorities: operating responsibly; delivering long life, low cost production and allocating capital efficiently.  Kenmare has a safe and engaged workforce and has a low incidence of lost time injuries at only 0.15 per 200k hrs worked. The company is in the first quartile on the cost curve and produced 986kt of ilmenite in 2023. The mine’s reserves will last for over 100 years and capital spend is focussed on those projects that enable the company to remain in the first quartile of the cost curve.  The company has a balanced approach to share buy backs and dividends and last year paid out $50m in dividends as well as $30m in buy-backs leaving the company with a net cash position of $21m at the year end.

2023 was the second best year for Kenmare ever and the company delivered a 50% EBITDA margin. The company generated revenues of $437m, EBITDA of $220m and net profits of $131m.  The financial results were impacted by lower prices for Kenmare products, lower production due to a lightning strike earlier in the year and a lower mix of zircon. The impact of revenues being 12% lower than the previous year was felt all the way down the P&L.  Worth noting though is that whilst pricing was weaker than in 2022, pricing remained strong compared to prior years.

There was a significant increase in cash operating costs per tonne, partly caused by lower production of zircon, along with higher fuel costs, inflationary pressures and the additional costs associated with the lightning strike. So, whilst overall costs only rose 4% against a 9% decline in production the cash costs per tonne rose 15% to $209/tonne.  The cost increase per tonne for ilmenite rose 74% to $109/tonne due to the lower co-products revenue. Despite these higher costs, ilmenite was still being sold for $337/tonne which gives a $229/tonne margin which is still incredibly healthy.

Kenmare remains very cash generated and produced $196m of operating cash flow over the year. The company spent $67m on capex, returned $86m to shareholders and ended the year with cash of $21m. The balance sheet remains very healthy with total assets of $1,261m, including inventory of $99m. The term loan has now been refinanced through a $200m revolving credit facility which expands the size of the facility and extends the maturity profile to 2029.

The strong cash generating capabilities were highlighted again with the long term record of shareholder returns with over $250m returned since 2019. Guidance for the dividend going forward was reiterated at 20-40% of profit after tax and the policy will be used to smooth dividend payments when pricing is under pressure. On a per share basis the dividend rose due to the reduction in the overall share count.

The capital allocation policy divides the allocation of capital between core requirements and discretionary requirements. On the core side is the capital spend required to maintain Kenmare as a cost efficient operator alongside additional capital spend required to sustain the capital in the plant. Key to capital allocation is retaining financial flexibility and this was behind expanding the RCF to $200m. The third core element is the dividend policy which paid out 38% of PAT in 2023. With any other cash available there are discretionary components. This includes spending on growth like the increase in capacity at WCPA and the option to increase production at WCPB. Additional capital returns beyond the dividend policy are also considered discretionary as are M&A opportunities.

Operating sustainably has always been important for Kenmare and a few examples of progress made in 2023 were highlighted. There is a safe and engaged workforce with women now representing 16% of all staff and 40% of senior management. The Lost Time Injury rate rose during 2023 to 0.15 per 200k hours worked. Steps taken in Q4 to improve this performance resulted in 0 LTIFR in the final quarter of 2023. The company charity, KMAD, refurbished a hospital, built 3 water supply systems and continues to sponsor more microbusinesses that positively impact the community. Whilst the majority of energy supply comes from Hydroelectricity, the company also reduced their own Scope 1 emissions by 14%. Finally, over 200k trees were planted in 2023.

2023 was a challenging year for production and incidents included a lightning strike as well as experiencing lower grades than expected as the dredges worked through the wetland areas for the first time. Revised test drilling has now built a better understanding of what can be achieved in the wetlands going forward. In total 986k tonnes of ilmenite, 51k tonnes of Zircon, 8,400 tonnes of Rutile and 45,700 of concentrates were produced, in-line with the revised guidance.

Production guidance for 2024 is 950-1050k tonnes of ilmenite reflecting higher mine rates but lower ore grades.  Grades in H1 are expected to be lower than grades mined in the second half of the year. Production in 2025 is expected to be roughly the same as 2024.

The main capital project is the relocation of WCPA to Nakata and its upgrade to ensure mining continues in the first quartile of the cost curve. Nakata represents  72% of Kenmare’s mineral resources and moving WCPA to Nakata unlocks the majority of Kenmare’s 7.5bn tonnes of mineral resources. Once moved, WCPA will not have to move again. WCPB will continue to mine in Pilivill and mine through to Muladi and eventually Nakata and again will not require a further move. WCPC, is the smallest plant and will remain in Namalope until 2030 when it will be moved to Nakata along the existing road built for the previous WCPB move.

Part of the additional costs for improving the performance of WCPA are due to the management of slimes, the very fine particles that can impact recoveries. The new facility will seperate these slimes and pump them away to a tailings storage facility. This will greatly ease processing and operations. Overall, the capital costs are expected to cost $341m on the upgrade of WCPA and its move including 2 new larger dredges and the new tailings storage facility.

Moving to the end markets and pricing, 2023 was another strong year, with robust demand but global interest rate rises impacted economic activity and inventories. Broadly speaking prices fell in the first half before recovering slightly in the second half of the year as was anticipated. If interest rates stay at the current levels or fall slightly this should be good for demand and market prices. The long term supply demand curve shows a small demand inbalance which again support long term pricing. The company does not believe the economics are right to bring new supply onto the market which is a further factor supporting long term prices. In terms of 2024 the pigment producers are reporting stronger than expected sales and Kenmare is seeing increased demand. This has not yet been reflected in higher prices but does suggest inventory destocking is over and that customers are experiencing increased demand. In their experience volumes recover first and these are then followed by stronger prices.

In summary, Kenmare is positioned well in the market selling to areas that are growing fast. The WCPA project is well planned and well staffed and good contractors have been engaged who they know can deliver and it will help keep Kenmare in the first quartile of the cost curve. Management believe shareholder returns will be strong going forward and that there are also good growth options.

A recording of the webinar is available here.


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