A major investment programme at the Moma mineral sands project in Mozambique is set to come to an end later this year. The owner, Kenmare Resources plc (LON:KMR) reckons that when the expansion programme is complete it will have invested a total of US$150mln to take production up to 1.2mln tonnes a year. The output increase amounts to around 35% of the previous production level, and looks set to boost margins and profits too.
Analysts reckon that EBITDA, which rang in at US$93mln in 2018, will almost double to US$170mln. And shareholders are likely to get a piece of the action too – the policy is to pay out a minimum of 20% of the company’s profit after tax, and a precedent has already been set. An interim dividend was paid out in October 2019 that puts the company on a full year yield of about 3% or 4%.
All told, Kenmare looks to be in pretty good shape.
But how has this all come about? After all, isn’t the titanium feedstock market supposed to be in trouble, and hasn’t Kenmare had troubles of its own?
To take the last point first, Kenmare did recapitalise back in 2016 after a mooted offer from the world’s number one producer of zircon failed to materialise. At that time the company brought in Oman’s sovereign wealth fund, alongside existing investors like M&G, to set its balance sheet on an even keel, and started to look towards the future as an independent and significant player in mineral sands.
As it happened, that was about the time that a market that had been in the doldrums since 2012 began to turn. The supply-demand dynamic in mineral sands is an interesting one, and not always easy to get to grips with for the outside observer. Pricing is opaque, and is usually done via specific and often private off-take agreements.
Nevertheless, it is relatively easy to get a feel for what’s going on by talking to participants in the market. Overall, the general feeling is that recent upward pressure on pricing is likely to continue in the absence of new supply.
“Overall demand has continued to increase, but mines have fallen out of production,” says Michael Carvill, the long-standing chief executive of Kenmare.
“The market is already in undersupply, and looks like moving into significant undersupply soon, because it still doesn’t pay to do greenfield mines.”
“But,” he adds – and this is the crucial point – “it does pay for companies like us to do brownfields expansion.”
Whether by accident or design, Kenmare has found a sweet spot in the market. The ilmenite price isn’t strong enough to support hundreds of millions and even billions of dollars of capital expenditure that would be required to get major new projects off the ground, but it is strong enough to support the investment in extra supply from existing operations like Moma, which can leverage off existing processing and export infrastructure.
So far that analysis has been borne out by the fundamentals, and the investment in new capacity is nearing completion.
The expectation is that Kenmare will be producing ilmenite at a net cost of between US$50 and US$60 per tonne from 2021, compared to US$78 per tonne in the first half of 2019. Set against the current ilmenite sales price of above US$200 per tonne, the company looks to be in a nice position.
The expansion is being funded from cash generation and current cash resources, with additional downside protection provided by approximately US$80mln of undrawn debt facilities, so there’s little likelihood of any recourse to shareholders even in the most bearish of scenarios.
The company finished 2019 with net cash of US$13.7mln, and of course the cash keeps coming in from the existing operations.
Kenmare is currently trading on an earnings multiple of around five or six, depending on the given day, but of course as the earnings increase exponentially one of two things will happen. Either the shares will be unmoved, in which case Carvill’s promise to pay out a minimum of 20% of profit after tax will end up generating a monster yield. Or else the shares will keep pace with earnings, and investors will be awarded with a nice bit of capital appreciation.
It takes a steady hand on the tiller of course, to steer a company like this in as complex as an environment as Mozambique. But Carvill’s been on the job since the late 1980s. If anyone can do it, he can.