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Base turns a maiden profit

How long can the Kenyan mineral sands extractor continue to print cash?
September 1, 2017

Four years after first production from Base Resources’ (BSE) mineral sands plant at Kwale in Kenya, the company has generated a maiden profit. Interestingly, it wasn’t higher production that moved the needle in the year to June; a 20 per cent uptick in ore mined was outweighed by a fall in heavy mineral grade, resulting in a 3.5 per cent drop in plant output. Instead, it was higher sales volumes, and a strengthening of ilmenite and zircon prices, which boosted earnings before interest and tax by 449 per cent to A$60.1m (£37m).

IC TIP: Hold at 17p

Operating costs – or as Base reports ‘cost of goods sold’ – remained constant at A$88.6m, which translated to a revenue to cost of sales ratio of 2.4, up from 2.0 a year ago. The metric is managing director Kim Carstens’ preferred method of measuring the company, unsurprising given broker Numis expects post-tax profit to sharply decline in 2019 and 2020 after peaking at A$66.6m (with earnings per share of 9¢), in the current financial year.

Accordingly, investors should look beyond the excellent cash generation reflected in these results and promised in Numis’s 50 per cent free cash-flow yield estimate for 2018. That’s because grades are set to fall further. To compensate, the board has given the green light to Kwale Phase 2, which will maximise the feed of concentrate to the mineral separation plant, thereby boosting production volumes.

BASE RESOURCES (BSE)  
ORD PRICE:17pMARKET VALUE:£128m
TOUCH:16.5-18p12-MONTH HIGH:21pLOW: 7p
DIVIDEND YIELD:nilPE RATIO:10
NET ASSET VALUE:31.6¢NET DEBT:55%
Half-year to 30 JunTurnover (A$m) Pre-tax profit (A$m)Earnings per share (¢)Dividend share (¢)
20130.1-6.7-1.25nil
201429.1-14.0-2.50nil
2015146-16.0-2.85nil
2016169-20.9-3.41nil
201721528.82.85nil
% change+27---
Ex-div:na   
Payment:na   
£1=A$1.62