Kenmare's close local ties have been key in the wake of Moma incident

The recent settling pond breach at Kenmare Resources' (LON:KMR) Moma ilmenite sands mine in northern Mozambique, which flooded part of a nearby village and caused the sad loss of a small child, has brought one often-disregarded aspect of the company's operations into sharp focus. 

A source of pride for the company has always been its excellent record of involvement in and assistance to its local communities. Numerous villages fall into the catchment area of the Moma ilmenite project, and Kenmare have always striven to make sure that their local neighbours derive direct economic benefit from development and operations at the mine.

A secondary aim is to try to ensure that the negative aspects of a large surface mine impact as little as possible on the lives of local people.

The vehicle through which Kenmare achieve this is the Kenmare Moma Development Association – an initiative managed jointly by senior on-the-ground mine staff and representatives of the local community.

A wide range of community improvements have been put into operation over the years, many financed solely by Kenmare, and others with the support of local and national government and NGOs. Schooling and school renovation, health facilities, savings and credit schemes, economic activities such as poultry and egg production, goat farming, vegetable growing, fishing  and sewing – all have been put into operation in recent years.

The mine itself is the largest customer for many of the economic initiatives, but the long term intention is to grow these businesses to ultimately become independent of the mine and develop into an ongoing and self-contained local economy.  KMAD has won several awards for the solid work it has done, the most recent of which came last October when the Association won the Nedbank Capital Green Mining Award for its significant contribution in terms of social and economic enhancement of the communities surrounding the Mine.

This commitment to the wellbeing of their neighbours was fully tested on 8th October, when a settling pond containment wall at the mine gave way and released a flood of non-toxic water, mud and sand which partially overwhelmed the nearby village of Topuito.

The damage was extensive (if largely minor) with nearly 400 houses affected, though in the confusion a four-year-old girl went missing and is now presumed dead. However, Kenmare immediately offered accommodation, catering and medical care to those who could not occupy their homes, and remedial work to clean and repair the affected houses was put in hand. 

Within days, many villagers were able to return home, and now, a month later, only a few families - whose traditional houses need rebuilding - are still being housed by Kenmare.  MD Michael Carvill said “All the staff at the mine have worked night and day and it has been heartening to see the efforts everyone has put in. We are working closely with the Mozambican Government and local leaders in an effort to return village life to normal as quickly as possible and ensure that this incident is never repeated.”
 
Much of the relief work, including the rebuilding, has been carried out by people and companies from the local community, and Kenmare – in conjunction with local and national government and members of the community - have assessed reimbursement for those villagers who lost their possessions, and this is now being paid.

Kenmare will additionally donate compensation to those families whose lives were most affected by the incident. Whilst nothing can compensate for the loss of a child, in all other ways Kenmare have responded well to an unforeseeable accident – and have received praise from local people for their prompt action. Mozambique's Minister of Mineral Resources Esperanca Bias said following the incident that the most important immediate task was to guarantee shelter for all the families affected. "Fortunately, we have learnt that the company has made space available for the victims, which is praiseworthy”.

However it was essential to cease dredge mining immediately and commence a full review of the settling pond complex to discover how and why it failed.

In the event, the cause was a misdirected discharge pipe, the outflow from which eroded the southern retaining wall of the settling pond, causing it to fail. The overflow spilled into a settling paddock which was not designed to contain such a volume, and its own retaining wall failed, allowing the escape of water, sand and clay.  Engineering consultants were summoned immediately to the site, and a new system of retaining walls has been designed. The new, higher berms incorporate textile reinforcement to avoid any further incidence of erosion and a system of regular external pond management auditing will be implemented.

The new system has been completed and dredge mining resumed at Moma on 8 November, with the full approval of the Department of Public Works.

In the meantime, the mineral separation plant (MSP) at Moma has continued to produce products from a previously mined stockpile of heavy mineral concentrate.

To cover the brief period between the recommencement of dredge mining and the accumulation of sufficient fresh, dried material to feed the MSP, further stockpiles from the commissioning phase are also available for processing and Kenmare intends to use this material to bridge the gap, estimated at about 10 days.

Full production from freshly mined material will be impacted by less than two weeks, and the company – which had almost reached its long-deferred production targets in the first half year accounting period – is unlikely to suffer a significant setback from the accident.

Their recent interims showed a maiden profit for the half year, but also – and probably more importantly - showed that the lengthy difficulties with the commissioning of this big ilmenite project may be almost over. By August, ilmenite production was up by 33% to nameplate capacity, zircon production had increased to 90% of capacity, and rutile had reached 60% of capacity and was expected to reach full production by the end of this year. 

At a pure mine operating level, the half-year numbers were better than the final figures shown in the accounts actually signify. Sales revenue rose to US$40.6 million, in spite of a number of legacy contracts set at lower prices, whilst mining and processing costs amounted to US$31.5 million. Add distribution and administration costs into the mix, and the resulting mine EBITDA totalled US$4.4 million for the half year. Sadly, the debt interest at US$14.8 million and the depreciation and amortisation at US$10.5 million - dwarfed the earnings of US$4.4 million, and only a substantial currency conversion windfall of US$22.1 million – resulting in an overall profit of US$1.2 million - saved Kenmare from a further loss.

But if the international market for ilmenite – and its co-products at Moma, zirconium and rutile – continues to improve, and costs per tonne continue to decrease as output ramps up, this might just be the last time Kenmare need to rely on non-operational sources of income in order to post a profit.

And thus far, every indication is that demand for Moma's output is on the increase, and prices are improving month on month. It's on this basis that Kenmare have planned a big expansion of the Moma project, to strike – as it were – whilst the iron is hot and make the most from their recently upgraded reserves and resources which now total 180 million tonnes of ilmenite, 4 million tonnes of rutile, and 12.5 million tonnes of zircon.

To this end they raised US$280 million last Spring via a placing and rights issue, with the proceeds earmarked for a 50% increase in size of the mining/processing operation to 1.2Mtpa ilmenite, 80ktpa zircon and 22ktpa rutile.This will create a competitive, low cost, operation with a mine life in excess of 100 years.

Plans, which involve a third dredge, a second wet concentrator plant and an upgrade – including the addition of a WHIMS circuit to obviate the need for drying concentrate -  to the mineral separation plant, are well advanced, with completion expected by the end of 2012. In addition, delivery of a second transshipment vessel to join the Bronagh J at Moma's export wharf is expected shortly.

The most recent development for the company - following the placing and a higher concentration of share ownership within the UK - was the reclassification of its shares on the Irish Stock Exchange from a main market listing to a secondary listing as an overseas company.

This allowed the granting of a  FTSE UK Nationality classification, enabling Kenmare to be considered for admission to the FTSE 250 index. This milestone was achieved in September, and has put Kenmare firmly on the radar of index-tracker funds, whilst also adding significant prestige to the company's image when dealing with international clients and customers.

The incident at Moma interrupted a steady rise in the share price over the last few months, but Kenmare's swift and comprehensive action has allayed investor fears, and the share price quickly resumed its climb, and is now achieving levels last seen a year ago.

In fact, it has overshot by a substantial margin the house broker's target of 20p by January 2011. The same broker's note, published in July by J P Morgan Cazenove, forecasts total revenues for 2010 of US$98 million rising to US$138 million in 2011, and reaching US$244 million by 2013.

EBITDA rises on a similar scale from US$38 million in 2010 augmenting in steps to US$165 million by 2013. If Kenmare can pursue its development plans through to fruition and indeed achieve numbers of that order, then the current share price would seem to undervalue the company by a significant margin, even at today's market cap of £560 million.