Kenmare on the road to riches

For those keen for that experience Kenmare has put together a 20-minute film on the mega-move. The narrator makes the stakes clear: “If the plant tipped or sank into the road, half a billion dollars could be lost”. Indeed. 

To spoil the ending of move number one, the miner did manage to get WCP B down the road and as a result last year the company hit a production record of 1.1mn tonnes of ilmenite and 56,300 tonnes of zircon.

Hitting high numbers isn’t everything of course. Every company that has just undergone a massive capital project will have a fair chunk of debt attached. Kenmare is on the way to clearing this, however, and broker Peel Hunt forecasts a shift to near net cash by the end of 2022. The company will have to do it again in a few years, although likely won’t build a new road next time. 

Ti-dye 

The mechanics of the Kenmare operation are fairly simple. The company’s Mozambique mine, called Moma, gives it the right to extract heavy mineral concentrate (HMC) from sand in a large coastal area, which contains ilmenite (itself a mix of titanium dioxide, or TiO2, and iron, although magnesium is also sometimes in the mineral). TiO2 is used in everything from paint pigment to paper and plastics. 

Huge dredging machines collect the sand, and then the HMC is separated from the sand itself and clay. The HMC is then pumped to another plant to split out the ilmenite, zircon and rutile. Zircon is also used in industrial applications and rutile is another titanium precursor.

London has a handful of miners exposed to the ilmenite market: aside from Kenmare, there is Base Resources (BSE), although this is a secondary listing, and Bluejay Mining (JAY), which is building an ilmenite project in Greenland. Bluejay has made plenty of progress with its Dundas project in recent years – getting all-important mining permits – and if financing is soon secured it will be in production in 2024. 

Compared with metals like copper and aluminium, the market itself is small: according to the US Geological Survey (USGS), total global production of TiO2 was 8mn tonnes in 2020, just under 1mn tonnes of which came from Mozambique. Other major producers include Canada, Australia and Ukraine. But given there are only a handful of sizeable mines – plus lots of smaller operators in China – events like the closure of Rio Tinto’s (RIO) Richards Bay mine last year can have a big impact on prices. 

In China, they went from around $250 a tonne of concentrate 12 months ago to almost $400 a tonne, according to SP Angel research, while last month Peel Hunt put the spot price at $440 a tonne. Each miner produces a slightly different product and grade so figures may differ slightly for Kenmare, but the company did say at the end of 2021 that average received prices increased 13 per cent quarter on quarter, indicating a steady uptick. Costs are also rising. The cash cost per tonne is set to rise from $155 in 2019 to between $190 and $210 this year, according to guidance issued last month.

Kenmare’s increased production has coincided with and contributed to a rise in global supply, although the company believes this is still “insufficient to meet increased demand”. “This pricing momentum has continued into 2022, driven by demand for Kenmare products and low ilmenite inventories in the supply chain,” it noted in January. 

Managing director Michael Carvill said years of low prices had kept new large-scale entrants out of the market. 

“It's really only at this stage now that [the price is] at a point where it would allow a [publicly listed] mining company to develop a greenfield mining operation and pay for the capital expenditure on a reasonable expected return,” he said.

Cap-expensive

Alongside price swings, capital expenditure is the second key to the Kenmare story. To keep mining such large volumes of material, the company must spend big, which explains the $127m outlay to shift WCP B. The company excavated 39mn tonnes of ore in 2021 and must continually replace those kinds of tonnages to stay in business.

The next looming capital commitment is WCP A, which is currently the subject of a prefeasibility study. This will likely be done by “dredging a corridor” rather than building a new road, and is vital to maintaining production at around 1.2mn tonnes a year: without the shift, this would drop off in the middle of the decade. Carvill said he didn’t yet have a cost estimate but expects not be any cheaper than the WCP B move.

A smaller-scale project to stabilise energy supplies is already under way and will cost $18mn. This will have the added benefit of reducing Kenmare’s use of back-up diesel generators when Mozambique’s hydroelectric powered grid proves unreliable, as it occasionally does. Another $43.5mn went to “remedial actions” on WCP C last year. In 2022, capital expenditure (capex) is set to hit $62mn, almost double broker Peel Hunt’s previous forecast. Of that figure, just over half is sustaining capex, and includes repairs to a company ship. 

Investors will need to get used to these constant spending needs, but this doesn’t mean there isn’t lots of cash left over for capital returns. Kenmare’s dividend policy is to return 25 per cent of profit after tax, and the board sweetened this in 2021 by buying back 13.5 per cent of its outstanding shares, worth around £61.7mn. Despite being forced to upgrade their capital spending estimates, Peel Hunt analysts Peter Mallin-Jones and Tim Huff believe the “strong balance sheet” means the company can afford the $100mn-plus WCP A move as well as “healthy dividends”. 

Despite keeping ilmenite forecasts low, the broker also expects the free cash-flow yield to continue to climb, from 19.4 per cent for 2021 to over 25 per cent in 2023.

Still a miner

This is still a mining company, despite the impressive record in recent years (safety too, has been a strong point for Kenmare). The Covid-19 pandemic recovery has revved up global economic activity and therefore industrial activity. 

But there is no certainty this will continue: rising costs across sectors means manufacturers will start looking for margin and down the value chain consumers will also cut back on spending. The USGS directly links TiO2 demand to global gross domestic product, which the International Monetary Fund expects to decline from 5.9 per cent in 2021 to 4.4 per cent this year.

Operational risks are always there. Kenmare saw six weeks of power issues in the December quarter, although these should be reduced when a new rotary uninterruptible power supply is up and running by the end of March. While this should lower carbon emissions, Kenmare has a significant impact on its environment. It holds onto the topsoil stripped away before mining starts and as per its operating plan this is “recovered for use in re-vegetation”. 

As we’ve seen with Centamin (CEY) and plenty of others, single-asset miners can be riskier because when something goes wrong, there goes the cash flow. That risk is more diffuse for Kenmare, given its multiple WCPs and the fact it does not have an underground or open-pit operation. It can boast zero lost-time injuries in the past year, impressive for any company, so there are also upsides for the workers with this model. 

We’ve long been bullish about Kenmare, recommending readers buy before the strong uptick in ilmenite prices. Now with the WCP B move out of the way and some breathing room before the next big shift, we still think this is a winner in a strong field of London miners.

Last IC View: Buy, 430p, 18 Aug 2021