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 London Stock Exchange and has a market capitalisation of £440 million.
Half year results to 30 June 2023 were released on 15 August and we were delighted to have Michael Carvill, MD and Tom Hickey, FD present at a webinar for private investors. A recording of the webinar is available here.
Kenmare is the worlds largest supplier of ilmenite and has a mine in Mozambique with resources which will last for over 100 years. Capital of $1.4bn has been spent on the mine to date and this has delivered a mine capable of producing 1.2m tonnes per annum, approximately 7% of world supply. Dredge mining has a low environmental impact and the mine uses 90% renewable electricity and rehabilitates the land after mining.
There are three main areas of management focus: operating responsibly; delivering low cost production and allocating capital efficiently. In each of these areas they are performing well, although production volumes were impacted by a couple of issues in the first half of the year. Kenmare works well with local communities and are considered a trusted partner. Kenmare now sits in the lowest cost quartile for production costs. During the first quarter the mine was hit by a very severe lightening strike which caused widespread damage to electrical infrastructure and this took much longer to remedy than originally hoped for and impacted production volumes. The mine is now back to operating normally and the second half of the year has started very well. The order book is good for Q3 and they expect the tight supply/demand outlook to continue.
Despite the production issues the company was able to sell down some of its inventory which enabled them to generate a record $110m EBITDA in the first half of the year. The average sales price reduced slightly to $413/tonne principally due to shipping more ilmenite and lower levels of zircon. The company is very cash generative and finished the half year with net cash of $42m. The interim dividend was raised 59% and the company announced a share buy back of $30m, approximately 5.9% of the outstanding equity. The big capital expenditure project coming up over the coming years is the move and upgrade of WCPA which will begin in 2025 and progress on this is all on track.
Looking more closely at the financial performance of the company, revenues grew 26% to $242.9m after higher sales volumes were offset by lower average pricing. EBITDA rose 6% to $110.4m and profit after tax rose 8% to $67.8m. End market prices remain strong and there is good customer demand for products.
As a large proportion of costs are fixed the decline in production caused by the lightening strike negatively impacted unit costs. Fuel costs also rose due to diesel rising 40% partially offset by savings in repairs and maintenance. All of these factors meant that cash operating costs per tonne were up 24% to $230/tonne and net cash costs per tonne of ilmenite were up 28% to $137/tonne. The company hopes to improve on these figures as they go into H2 with an improvement in production volumes. There is an outstanding insurance claim of $7-8m which if successful will come through in the second half numbers.
The company reported strong cash generation in 2022 and this has continued into 2023.The company started the period with $26m of net cash, generated operating cash flow of $93m, spent $20m on capital expenditure, incurred a small WC outflow and paid dividends of $41m. After a $3m finance charge the company finished the period with net cash of $42m.
The balance sheet has assets of $1,246.5m, principally in property, plant and equipment which reminds investors that, at the current price, the company trades on less than half book value.
Kenmare returned to the dividend list in 2019 and has grown dividends strongly since then. The interim dividend was raised 59% and the overall dividend for the year is expected to be around $50m in 2023 and a similar amount in 2024 as long as this remains in the 20-40% of profit after tax range. Surplus cash can be returned via a buy back and the company is also proposing a tender offer of $30m at a price of 422p per share which was the closing price the day before the announcement. Combined with the previous tender offer, the company will have bought back 18.6% of the shares over the last couple of years. If the tender offer is not fully taken up then the company has the option to buy back stock in the market.
The operational review started with the health and safety report which remains a priority for the company. Lost time injury frequency rose in 2022 and again in the first half of 2023 and the company is working hard to bring this down. Extra work has been put into training and ensuring the right procedures and processes are taking place. Management stated they are not satisfied with the current performance on this metric.
Looking in more detail at the production shortfall in the first half the deficit can be put down to a severe lightening strike and difficult mining conditions. There was a severe lightning strike in Q1 which damaged electrical equipment across the whole mine. This was brought back into operations after a couple of weeks but there were issues with spares and this led to delays bringing production back up to full capacity. This meant that production in Q2 didn’t meet expectations. There were also lower grades in a mined wetland area due to the presence of root fibres which lowered recoveries and increased cleaning times. Finally WCP C was planned to transition in H1 to another area and this transition took longer than anticipated. Consequently there was insufficient HMC to treat in the Mineral Separation plant which resulted in lower overall production. Shipments were up 31% to 556,800 tonnes due to drawdown of inventories and the return of one of the transshipment vessels.
Going into H2 the mining operations are working at higher levels than in the first half and much stronger production levels are expected. Changes to the approach to tackling higher slimes levels at WCPA have improved the operational performance there. WCP B has moved out of the lower grade wetlands and finally WCP C has been operating at normal throughputs since July and is well set for the rest of the year. The dredge path has been revised slightly to pick up some higher grades in the second half of the year too. Whilst the lightning strike was considered a one off event there have been some changes to the design to ensure if this happens again they will be better prepared to deal with it. The company reiterated it was on track to achieve the revised production guidance.
The development and growth projects are also progressing well. In order to move WCP A from its current ore body in Namalope to the new one in Nakaata in 2025 a range of capital expenditure and upgrades need to be made, including; two new higher capacity dredgers; a desliming plant upgraded and the construction of a new tailings facility. The aim is to ensure Kenmare is able to maintain production at the 1.2m tonnes level and maintain their status as a low cost producer during this transition. The specification for the dredgers is nearly finalised and the order will be placed soon with the dredgers available in Q2 2025. The DFS for the desliming plant is progressing well and commissioning is expected in 2025. The plans for the WCP B upgrade from 2,400 tonnes an hour to 3,400 tonnes an hour is also progressing well with the DFS expected to be completed around the turn of the year with commissioning in the first half of 2025. There is also a pre feasibility study ongoing to the Congolone project, an ore body about 80kms north of Namalope which will provide the company with a growth option in the future.
There has been good progress on the sustainability goals in 2023 which remain a significant focus for the company. Gender diversity is improving and there has been increased attention to coaching and development of staff. Elsewhere there have been improvements to water stewardship and agricultural yields.
Kenmare still believe the ilmenite market is very tight and this has supported prices through 2022 and into 2023. Demand from Chinese chloride pigment has been particularly strong which has helped overall demand in the market. There has been some slight pricing weakness recently but the overall market dynamics remain supportive to pricing.
In concluding, management are confident about future prospects. The production issues experienced in the first half are now behind them. Recoveries and grades have both improved and second half production is expected to be significantly better than the first half. The plans for the WCP A move provide for a very strong mining operation at Nakata and enable the company to remain as a low cost operator. In additional the higher capacity at WCP B will remove any mining bottlenecks to operations. The overall market is supportive to strong prices and Kenmare is well positioned towards the growth areas (Chloride production in China). The company has a strong balance sheet and is targeting $50m of annual dividends alongside the return of surplus capital from time to time.
A recording of the webinar is available here.