Kenmare Resources has been in production at Moma, a huge, low cost mineral sands mine in Mozambique, since late 2007. At mid-2010 capacity year the mine, which benefits from a location by a deep water terminal, will produce 7% of the world’s ilmenite and 4% of the world’s zircon and will have sufficient resources to operate for 150 years. It is presently operating at a gross margin of around 65%.
Initially the mine suffered teething troubles and delays, principally stemming from problems with the plant and equipment supplied by the EPC (Engineering, Procurement, Construction) contractors. But now, following the rectification and completion of the contract scope of works, and a performance improvement programme, Kenmare believes these problems have been largely resolved; proof of the pudding lies in the production figures which demonstrate a successful ramp up during 2009. The ramp-up will be complete by the middle of this year when the addition of an ilmenite scavenging circuit is expected to take ilmenite production to 100% capacity, zircon to 90% and rutile to 75% of design levels. Ilmenite typically contains 45-62% titanium dioxide (TiO2) while rutile contains 94-96%. Zircon is a zirconium mineral used principally in the ceramics industry.
Kenmare believes that medium to long term supply/demand outlook for titanium dioxide pigment and titanium dioxide feedstocks is favourable so the time is now ripe to begin Phase 2 which will expand capacity at the mine by 50%. It is looking to grow in the market at a time when demand for feedstocks for titanium dioxide pigment and titanium metal is likely to be growing rapidly but when the other major producers are either declining or running to stand still.
The company is therefore in the market to raise almost £180m to fund the expansion through the issue of 1.5 billion shares, half in a firm placing and half in an open offer. The shares are priced at 12 pence each, a discount of 42% on the closing price on 4th March, the date of the announcement. The open offer, which has been fully underwritten, closes on 26th March.
Proactiveinvestors met with Managing Director Michael Carvill and Marketing Manager Eamonn Keenan while they were in the City to present their case. Here is a summary of some of the key points they presented about the window of opportunity in the market, the current strengths of the project and the potential of the expansion.
The Window of Opportunity in the Titanium Dioxide Feedstock Market
Titanium metal is used in a wide variety of metallurgical uses such as aerospace, chemical plants, bicycle frames, chemical equipment, heat exchangers, golf clubs and artificial hips, as it is light, hard, chemically inert and it has a low coefficient of thermal expansion with a high strength to weight ratio.
Meanwhile titanium dioxide is the second most refractive naturally occurring material on earth after diamonds. It reflects all colours in the spectrum, has a high opacity and a bright whiteness, and it is non-toxic and inert and so is of great importance in the production of titanium dioxide pigments for many applications including paints and coatings, paper, inks, plastics, foods, cosmetics and fibres. It is also used to mask or enhance other colours.
Demand for pigment (which accounts for around 90% of TiO2 feedstock consumption) has been strongly correlated with world GDP growth, and has averaged a 3.1% compound annual growth rate (CAGR) since 1990. Analysis of trends by market however has shown that the intensity of consumption varies with the maturity of a market. In the most under-developed, but also in the most developed markets, growth tends to be less than GDP, while in the newly industrialising countries pigment demand growth considerably exceeds that of GDP. In China for example pigment growth has averaged 15.6% CAGR since 1990 but the intensity of consumption, at around 0.6kg per capita, is still less than a fifth of the USA's 3.4kg, albeit considerably ahead of India's at around 0.1kg. The potential for catch-up is therefore huge, particularly as there are no substitutes for many of the end uses. The largest global producer of TiO2 pigment, American chemical company DuPont, has predicted that demand for titanium dioxide pigment will grow by 5-10% for the next 5 years to restore the long term trend line growth rate of 3%. This growth will be driven by further industrialisation and urbanisation in Asia and other developing economies, and by catch-up after the recession in the developed economies.
Meanwhile the supply of TiO2 feedstocks is likely to be subject to a number of restrictions caused by capacity constraint, limited expansion potential, resource depletion, significant increases in power prices and unjustifiable further capex requirements. The three major suppliers, (Rio, Iluka and Exxaro who together account for more than half world supply), are all facing challenges in maintaining or growing their current production levels. World production is expected to decline from 2012.
Independent industry analysts, TMZI, are predicting that the combination of demand growth and supply constraints will create a supply deficit from 2012 equivalent to 20% of world supply by 2015 in the absence of new project development. On this basis Kenmare see the period from 2012 as a window of opportunity for higher prices in the market and thus favourable timing for the project expansion to come on stream.
Current Strengths of the Moma Project
Moma's geology, size and location are all significant natural advantages. It is one of the world's largest known mineral sands resources and at the present rate of production Kenmare could be busy for the next 150 years. The Namalope Deposit currently being mined measures roughly 7km by 4km and contains proven and probable reserves of 21M tonnes of ilmenite,1.5M tonnes of zircon and 0.5M tonnes of rutile, which is good for 25 years at the current rate. Other deposits at Moma contain further JORC resources of 160M tonnes of ilmenite, 11M tonnes of zircon and 3.6M tonnes of rutile.
The sands are found at surface with no overburden and little vegetation. They are mined using two dredges to pump the ore from a large artificial, freshwater mining pond, some 800 by 300 metres and up to 15 metres deep. The ore is pumped to a wet concentrator plant which floats behind the dredges and separates out the valuable heavy minerals, (5% by weight), from the tailings which are deposited at the rear of the dredge pond for ongoing rehabilitation; the pond and concentrator plant thus effectively takes a slow walk across the reserve over the life of mine. Meanwhile the heavy minerals concentrate is pumped to the mineral separation plant where it is separated and processed into the finished products; ilmenite, zircon and rutile. These are transported 2.4km along a covered overland conveyor belt to a jetty where they are loaded onto Kenmare's trans-shipment vessel, the Bronagh J, which transports the products to a sheltered deep-water trans-shipment point 10km offshore where it self-discharges into the customer's vessels.
Costs at the mine can thus be kept low. The deposit is at surface, dredge mining is the cheapest, most efficient and safest mining method for this type of project, there is ample freshwater, the infrastructure is fully integrated, the ore does not require any overland wheeled transportation, and the hydro-electric power supply arrangement, for the next 20 years is at a very competitive tariff. Since the products are high volume but relatively low value the coastal location on a favourable shipping route next to a deep water terminal is of crucial importance to the economics of the project.
Meanwhile revenues are boosted by the high quality of the ilmenite produced, (which, at 52-59% has a high TiO2 content and can be sold without upgrading), and by the valuable rutile and zircon co-products. Rutile is a preferred TiO2 feedstock for titanium metal, pigment and welding electrode applications and is in strong demand given its limited supply. The zircon is used primarily in the ceramics industry and for refractory and foundry applications.
Kenmare also benefits from strong relations with local communities and with the NGOs. It employs 600+ people at the mine comprising 80% local employees, 16% Zimbabweans and 4% other ex-pats, and it supports local enterprise and projects in health, education and sports. The company won some prestigious awards in 2009 including the Nedbank Green Mining Socio-Economic Award and the Irish Chamber of Commerce President's Award for Corporate Social Responsibility. The company has also established a strong working relationship with the Mozambican authorities and it benefits from favourable taxation treatment, with the mineral separation plant and export facilities being a designated Industrial Free Zone.
The Proposed Expansion
The proposed expansion will increase the capacity of the mine by around 50% from its current capacity of 800,000 tonnes per annum of ilmenite to 1.2 Million tonnes, while zircon production should increase from 50,000 to 80,000tpa and rutile from 14,000 to 22,000 tpa. At this level production would represent respectively 10% and 7% of the world's ilmenite and zircon supplies. The expansion will increase throughput by the addition of an extra dredge, wet concentrator plant and a Wet High Intensity Magnetic Separation circuit ahead of the mineral separation plant and through various upgrades of the existing equipment and infrastructure. It will be modular in design to avoid disruption to existing operations. The 18 month design and construction programme could begin in the second half of 2010, with production ramping up during 2012 to full production by 2013. At this point the company should be generating very significantly more revenue, particularly if prices are higher, which should help to pay down the current debt of $353M more rapidly.
So will Kenmare be successful in the proposed expansion? There is no doubt that the company faced considerable difficulties in Phase 1 (see the Proactive Investors article from August 2009) which led to a higher debt burden, slower returns, significant extra dilution for shareholders and a loss of market confidence, which was compounded by the recession and falling ilmenite prices. It resulted in the share price plummeting from a peak of 67p in mid-2007 to 7p by end-2008. But the silver lining, according to Kenmare, is that valuable experience was gained, the company now has an intimate knowledge of the systems and equipment and construction contract management, and key new personnel were appointed in 2009, including a new Chief Operations Director, the highly experienced Jacob Deysel who previously worked for Richards Bay Minerals, the world's largest single producer of titanium dioxide, where he was responsible for the mine's five plants, geology, mine planning and maintenance. The fact that production figures are now on track following the performance improvement programme is certainly a positive indicator.
Nonetheless there are considerable risks to a project of this scope and size; the prospectus for the offer lists 37 different categories of risk. Key among these must be the commodity price risk, particularly if there were to be a double dip recession, Kenmare's debt position, and the risks of capital cost escalation and/or delays, (although the cost estimate allows for a accuracy tolerance of +/-25% and +/-10% contingency). Dilution for existing shareholders is clearly another issue. Since the announcement about the offer the share price has headed south.
However the upside is considerable given the strengths of the project and proposed expansion. The deposit is known to be large, long-life, high-quality and with valuable co-products. Its coastal location with deep-sea loading facilities is of fundamental importance. Unit mining costs, already relatively low should fall further as the expansion will optimise the use of existing infrastructure. Revenues will increase in line with production and any increase in prices.
If Kenmare's interpretation of the market is correct the expansion will be well timed to enable the company to capture first mover advantage in the projected deficit in the TiO2 feedstock market. The expansion could propel Kenmare to the position of third largest global producer TiO2 feedstocks at a time when consumption in China, India and other industrialising countries will be growing rapidly.