Bullish comments by chemicals giant DuPont mean that shares in specialist minerals sands miner Kenmare Resources now look worth buying. The US-headquartered paints and plastics specialist surprised industry analysts last week when it said it expects stronger demand in the second half of 2012 for titanium dioxide (TiO2) - a key input in paints and plastics - than most projections. These comments provide a positive beat for Kenmare because its mineral sands output is used primarily as feedstock for TiO2. True, its shares have been marked down this year partly as a result of operational delays, and just two weeks ago - following first-half results for 2012 - we believed that they were only a 'hold'. Following DuPont's bullish signal, we now reckon they are a buy.
- Tight market fundamentals
- DuPont comments
- High TiO2 prices
- Expansion back on track
- Moma delays
- Higher unit costs
As the world's biggest producer of TiO2, DuPont is uniquely qualified to make an assessment about demand trends, although sceptics might note that it subsequently sold its performance-coatings business to US private equity group Carlyle for $4.9bn (£3.1bn). Nevertheless, the fact that Carlyle paid the upper-end of analysts’ estimates for the business unit - a producer of paints for cars and industrial equipment - suggests that it isn't overly worried about the outlook for an operation whose footprint is deep in emerging markets such as China and Brazil.
We're in the midst of a global downturn, so it would be fanciful to suggest Kenmare will avoid a reduction in demand altogether. However, tight market fundamentals governing supply, together with falling inventory levels, are keeping prices of TiO2 feedstock - ilmenite, rutile and zircon - at historically high levels. What Kenmare may lose in sales volumes is likely to be offset by high prices. This was certainly the recent experience of Australian mineral sands producer Iluka Resources, which nearly doubled its first-half profits despite a one-third fall in sales volumes.
| KENMARE RESOURCES (KMR) | ||||
|---|---|---|---|---|
| ORD PRICE: | 39.8p | MARKET VALUE: | £1.0bn | |
| TOUCH: | 39.6-39.8p | 12-MONTH HIGH: | 63p | LOW: 30p |
| DIVIDEND YIELD: | nil | PE RATIO: | 8 | |
| NET ASSET VALUE: | 13.3p | NET DEBT: | 60% | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2009 | 27 | -30 | -3.59 | nil |
| 2010 | 92 | -16 | -0.80 | nil |
| 2011 | 167 | 18 | 0.99 | nil |
| 2012* | 262 | 123 | 4.00 | nil |
| 2013* | 402 | 214 | 8.00 | nil |
| % change | +53 | +74 | +100 | - |
Normal market size: 50,000 Matched bargain trading Beta: 1.7 *RBC Capital Markets forecasts £1=$1.58 | ||||
Apart from anxieties over faltering demand, Kenmare's share price has also been weighed down by continued delays and subsequent cost over-runs affecting the phase II production ramp-up at the group's Moma mining complex in Mozambique. The last major stage of Moma's expansion - the commissioning of a specialist 'wet concentrator' plant - has been delayed until December. This has been a major cause of consternation for investors. It has fed through to higher unit costs for the full-year because Kenmare has been trying to offset any shortfall in output by supplementing its dredging activities with dry mining, which is considerably more expensive.
On balance, however, the details of Kenmare's first-half report for 2012 were reassuring for investors grown weary of Moma's delays. The group produced 276,600 tonnes of ilmenite and 23,600 tonnes of zircon during the period, and confirmed that it expects to produce 630,000 tonnes and 50,000 tonnes respectively for the year. In addition, Kenmare has already agreed to sell most of its 2013 production, although prices have yet to be fixed. Investors can take heart from the fact that price negotiations for ilmenite contracts have generally resulted in higher prices during the second half of this year. However, demand for zircon is less clear as China's ceramics industry is in a state of flux.
