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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 £300 million.
We were delighted to have the new Managing Director, Tom Hickey, Ben Baxter, Chief Operations Officer and Jeremy Dibb, Director of Corporate Development and Investor Relations, report on performance in the first 6 months of 2024 and talk about prospects for the remainder of the year. A recording of the webinar is available here.
Tom Hickey, the new MD, was appointed to his role this week and has been at the company since September 2022 when he was appointed Finance Director. The company will look to find a new CFO and will update the market in due course.
Kenmare has been in Mozambique for 35 yrs and producing for 20 years. Throughout that time the strategy has had some consistent elements. They operate responsibly with a focus on providing a safe working environment, which is now 97% Mozambiquan. The mine has a 100 year life and the company delivers low cost production, in the first quartile of the industry cost curve. Being one of the most efficient producers enables the company to ride the peaks and troughs of the inevitable commodity cycles. The company is investing heavily to bring all the production facilities to Nakata; the largest ore body in their operational area. The company generates significant EBITDA margins and cash flow and since 2019 has returned $280m to shareholders, equivalent to over £2.40/share. The company ended the period with $58.9m of net cash.
The first half of the year was impacted by adverse weather and an issue with the product conveyor (now remedied? which affected the number of shipments from the mine. Already in Q3 there has been some catch up with a number of extra shipments already dispatched. This leaves them confident of the full year outcome but at the half year point revenues fell by 33%, which was 14% due to a decrease in shipments and 22% to a decrease in average price (impacted by a lower value product mix). If the delayed shipments had occurred in the first half, the EBITDA margin would have been closer to the 50% level achieved in the past as opposed to the c40% reported. Financial performance in the second half is expected to be significantly stronger. In terms of prices, ilmenite was down 14% YoY but only 8% on the second half of 2023. It is anticipated there may be further pricing weakness in the second half of the year but going into 2025 with the tight supply/demand dynamics the green shoots of pricing improvement are on the horizon.
Overall, cash operating costs per tonne fell by 5% due to some cost savings in several areas, an insurance payment and a slight improvement in the amount of tonnes mined. The operating cost per tonne of ilmenite was up but this was down to a sales mix effect and is expected to return to a normal number for the full year.
Strong cash generation and the strength of the balance sheet position stands the company well for the capital spend over the coming years – indeed it’s the strongest balance sheet in its history. At the beginning of the period the company started with $21m of net cash and ended the half with $59m of net cash. Operating cash flows added $54m of cash and $49m was spent on capex, there was a working capital benefit of $72m as receivables declined and a dividend of $35m was paid. The planned capex over the next 3 years can all be covered from net current assets and the revolving credit facility, before taking into account any operational cash flow over the next 3 years, which is an excellent position for the company.
Over the past 6 years almost $280m has been returned to shareholders through dividends and buybacks. An interim dividend of $0.15 per share was declared, a small decrease on the previous year, and the company reiterated the dividend policy of paying out 20-40% of profit after tax and indicated it was likely to be at the top end of this range.
The operational review started with the health and safety performance which saw an improvement in Lost Time Injury Frequency rate. In the past 6 months there has only been 1 lost time injury. This has been achieved through a focus on standards and better task planning. Tragically a fatality occurred during the period but a police investigation found this was a non-work related incident resulting in the arrest of 5 people.
Looking at the broader sustainability goals progress has been made in reducing the incidents of local Malaria in the area around the mine with a big increase in child vaccinations in the clinics supported by the company. Also the slimes removed as part of the mining process are being reconstituted as part of the soils and this is expected to improve soil conditions and agricultural yields.
In terms of production, Q1 was tough but there was a significant improvement in Q2 leading to a 4% increase in HMC production to 659,000 tonnes. Ilmenite production increased by 4% to 444,100 tonnes, lower recoveries on Zircon resulted in a 7% decline in production to 21,300 tonnes and there was a 4% increase in Rutile production to 4,000 tonnes. Grades were 5% lower in H1 but this is set to improve in the second half and this is already starting to be seen. Shipments were a challenge in the first half of the year due to adverse weather conditions and work on the conveyor system, now fixed.
Overall the company is on track to achieve the mid-point of full year production guidance at 1m tonnes of ilmenite. The two zircon shipments delayed in H1 have already been despatched and there has been a good start to Q3. Higher grades are already coming through and so management are comfortable that production will hit the target levels. In terms of 2025, production is expected to be in the same range as 2023/2024 and post this any expansion in production will depend on the timing of the WCPB upgrade which would take overall production to 1.2m tonnes of ilmenite.
Securing future production at Moma underpins the capital expenditure programme over the coming years. Nataka is by far the largest ore deposit, accounting for 72% of reserves, and WCPA is moving here and being upgraded. The existing dredges are being replaced with higher capacity dredges, new equipment is being installed and a new tailings storage facility is being built. The benefits of this upgrade should be seen during 2025. Management is pleased with the progress of the project, which is on track, on budget and being progressively derisked. As a reminder the total cost of the WCPA upgrade and move is $341m with the majority of the spend in 2024 and 2025 and can be comfortably funded by the company.
The WCPB upgrade would increase its capacity by 40% and a final investment decision is expected on this in early 2025. It is still viewed as a good project but further progress on WCPA is wanted first before any final decision is made. Initial studies are also ongoing on the Congolone Ore Zone, which could produce an additional 300,000 tonnes of ilmenite over 20 years but this is very much a discretionary longer term project after the WCPA and B upgrades.
Looking at the market the underlying evidence is that long term demand for titanium dioxide (TIO2) is very closely correlated with GDP growth. About 90% is used in pigment, 5% in metal and 5% in welding. The majority of pigment goes into paints, paper, plastics and inks and there is no substitute for TIO2 due to its refractive index. The company sees good demand in their core markets continuing, especially China, which now accounts for c30% of the titanium market. The company has a very strong order book for the second half of the year at good prices for ilmenite and there is a similar picture for zircon. The market is relatively tight at the moment, existing supply is falling off and demand is growing, which points towards an improving pricing environment.
In conclusion, Kenmare is confident about how they will perform this year, the quality of the ore body they operate, the progress of the capital projects and the markets they operate in. Kenmare has a high quality long life asset, an efficient cost of production, placing the company in the first quartile of the industry cost curve, operates in a market with good demand and one where in the medium term they are expecting pricing to improve. This augurs well for continued strong distributions to shareholders.
A recording of the webinar is available here.
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