Kenmare Resources crosses the line in the sand
by Wendy Durham
proactiveinvestors.co.uk
For many shareholders in Kenmare Resources (LSE:KMR ISE:Kenmare Resources), it's been a long, long haul. But after a number of false starts, it is beginning to look as if the company's 100% owned flagship project Moma is at last heading for full production, having crossed the operational breakeven line in May.
The Moma Titanium Minerals Mine in northern Mozambique is exploiting one of the largest mineral sands projects in the world. At a capital cost of over $500 million, Moma has not been cheap – although it has come in at around than half the cost of Rio Tinto’s similar QMM project in Madagascar. Nor has it been trouble free. Whilst mining commenced in April 2007, and first shipments from Moma commenced in December 2007, on-going plant problems at all levels - originally described by Chairman Charles Carvill as "teething problems" - have bedevilled the project.
Turnkey contractors, working under a fixed price contract, delivered a mine that simply wasn't capable of handling the required throughput in a number of key areas, a matter which was confirmed - after recurrent problems during the preceding year - by a series of performance tests carried out in November last year under independent supervision. Since then, it has taken Kenmare many months, working with the contractors, to ensure that all plant operations and installations are capable of meeting their production targets. Encapsulated in the Performance Improvement Project (PIP), the work - now virtually complete - has involved 326 discrete improvements, replacements or upgrades, with most of the hardware deficiencies dealt with under contractors' warranty. Many new on-site appointments have also been made, with the new team being headed up by a highly experienced ex-Richards Bay man, Jacob Deysel, as Chief Operations Director.
The results have been evident in steadily increasing output - by mid-July, 20 million tonnes had been dredged and a total of 29 ships loaded by barge from Moma's on-site export terminal. Ilmenite production was up from 94,000 tonnes in Q1 to 105,000 tonnes in Q2 and zircon production nearly doubled from 3,300 tonnes to 6,500 tonnes, enabling more than 135 tonnes of minerals to be shipped to seven customers during Q2. The cash cost breakeven point for Moma was reached in May and as a result, operational costs - previously capitalised - will be reflected in the profit and loss account from 1st July onwards.
Once in top gear, anticipated in Q4, Moma should deliver 800,000 tonnes per annum (tpa) of ilmenite, 47,000 tpa of zircon and 18,000 tpa of rutile - equivalent to approximately 7% of world supply.
So what are these minerals? Ilmenite and rutile are the naturally occurring form of titanium, 94% of which is used by chemical companies such as Dupont and ICI as feedstock for the manufacture of titanium dioxide pigment. The pigment is used in paints and other coatings, plastics, paper etc, and is much favoured for its bright whiteness and light reflecting characteristics. The remaining 6% is used to produce titanium metal, used in demanding applications such as aerospace and in chemical and power plants, where its high melting point and resistance to corrosion are valued. Zircon is a valuable co-product used in the ceramic and the refractory /foundry industries, and at Moma, revenue derived from it almost covers the costs of the mining operation.
And those costs are surprisingly low, sitting in the lowest quartile internationally for a number of reasons: dredge mining is the cheapest method of extraction, there is no overburden, mineral separation takes place on site, minerals are directly exported to sea-going vessels from site and Moma has access to inexpensive power from the Cahora Bassa hydroelectric scheme. The Moma project also has Industrial Free Zone (IFZ) status, which means that the project processing plant will be exempt from Mozambique corporation tax, import duties, export duties and Value Added Tax, but will pay 1% turnover tax after year six of production.
As for revenue, Kenmare has marketing agreements in place covering around 60% of the first five years production from the mine, with the majority of 2009 production covered by existing contracts. Demand for the titanium minerals slowed in the early part of the year, due to destocking initiatives and recessionary influences, but Q2 showed an improvement in demand, with ships queuing up at Moma’s anchorage, and Kenmare are confident that the market will readjust as world economies recover through 2010 and 2011. All existing contracts are fixed volume, based on either agreed or market prices, and according to the company, a year's output at full production should attract revenue of around US$120 million at current contract prices. A recent research note suggests contract prices of $93, $825 and $560 for ilmenite, zircon and rutile respectively and operational costs at full production of US$48 million, leading to potential gross profits in the region of US$72 million.
Expansion will enhance these tentative numbers significantly. The overall Moma project is massive, comprising a total of 6,534 million tonnes of mineral bearing sands, with an average grade of 3.1% of total heavy minerals, which contain high grade reserves at Namalope, the current mining site, of 26 million tonnes of ilmenite, 0.52 million tonnes of rutile and 1.54 million tonnes of zircon. Measured and inferred resources contribute a further 160 million tonnes of ilmenite, 3.6 million tonnes of rutile and 11 million tonnes of zircon, most of them contained in the huge Nataka deposit some 5km south of Namalope. Taken together, Kenmare's Namalope and Nataka deposits will support mining at the current rate for over 125 years - although with such a large orebody, Kenmare have every intention of extracting as much of that minelife as possible as quickly as possible! Within the next three years the company could be mining 1.2 million tpa of ilmenite, with potential for further growth to 1.8 million tpa thereafter. Expansion will be straightforward, as the existing minerals separation plant sits between Namalope and Nataka, and additional output can be achieved on the Richards Bay model of incremental steps without too many capex implications.
But capex has not been the only cost involved for the company and its shareholders in the construction and commissioning of Moma. As well as racking up the sums capitalised and thus increasing future amortisation writedowns, low revenue during the extended ramp-up has obliged Kenmare to seek a capital repayment "holiday" from their senior lenders during 2009, and although this has been agreed, there are penalties. The deferred payments must still be paid within the life of the senior loans, which will increase future repayments, and following financial completion - now delayed until December 2012 - mandatory prepayments of 25% of available cashflow after debt service will apply. Interest margins on the subordinated loans will increase by 3% and 1% until technical and financial completion respectively, and Kenmare has also provided a consideration for the deferral of US$1.9 million in cash and 28.2 million ordinary shares in the Company, which were issued in April. And in spite of having also gained access to the US$15 million contingency fund, Kenmare came back to the market in June, issuing 54 million new shares to secure US$16.7 million in additional working capital.
It has been a costly business, leading to a higher debt burden, slower returns and significant extra dilution for shareholders, and perhaps most seriously, the loss of market confidence in both the company and the Moma project. Whilst the share price, currently at 22p, has recovered almost four-fold from its earlier lows, it is still well down on the pre-production highs of 2007, when it exceeded 65p. Demonstrable and significant production increases for the first two quarters of this year have shown that PIP and tightened management controls are having the desired effect. Kenmare will need to maintain and increase this performance momentum to arrive at their goal before the end of the year and instil confidence into the market that their troubles are really over at last. |
