Kenmare profits on favourable product mix

Despite rising production, the global market in titanium feedstocks tightened in the early part of 2022 as inventories in the global supply chain were drawn down. Consequently, Kenmare Resources (KMR) was able to increase prices over the first and second quarters, achieving a record average received price of $429 (£352) per tonne which bolstered revenues even as production and processing declined.

The miner benefitted from rising demand for ilmenite, the main source of titanium dioxide, and “pricing momentum has continued” into the second half of 2022. However, management warned that demand for the feedstock is correlated to global economic growth due to the use of titanium dioxide in so many industrial sectors.

Revenues were also supported by an increased proportion of higher value products, not least of which zircon. Amongst other applications, the mineral is used widely in the ceramics industry and Kenmare saw strengthening demand in all major regions except China, due to the government's restrictive zero-Covid policy. Nevertheless, primary zircon revenue increased by 69 per cent to $32.5mn.

Production and processing picked up during Q2 and has continued into the second half, so management still expects to achieve the lower end of production full-year guidance. However, it’s certainly possible that cost increases and increased supply chain risks, including increased geopolitical concerns and a potential shortage of critical spare parts, could potentially delay planned capital projects.

It’s worth noting that freight costs increased by 46 per cent to $15.2mn. Total shipments were down by 29 per cent due to unfavourable weather and the planned five-yearly dry dock maintenance work on the Bronagh J transhipment vessel. Volumes should increase through to the year-end, but Kenmare is now holding more finished inventory. But these risks are more than adequately reflected in the lowly forward rating of four times consensus earnings. Buy.

Last IC view: Buy, 429p, 17 Feb 2022