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Base Resources: THE INVESTMENT CASE
INVESTMENT OVERVIEW

Base Resources' Kwale mine 'attractive' and generating significant cash flow, says broker

"The Kwale mine is now built and operating smoothly and is supported by a healthier minerals sands pricing environment," Berenberg said.
Base Resources
INVESTMENT OVERVIEW: BSE The Big Picture
Berenberg has a 'buy' rating on Base Resources

Base Resources Ltd (LON:BSE) has an attractive, medium-life mineral sands mine in the form of Kwale, according to analysts at Berenberg.

Located 10 kilometres inland from the Kenyan coast and 50 kilometres south of the country’s principal port, Mombasa, the company’s wholly-owned mine has been bringing in strong cash flows.

“The Kwale mine is now built and operating smoothly and is supported by a healthier minerals sands pricing environment. Kwale is, therefore, generating significant cash flow,” Berenberg said.

Berenberg, which has a 'buy' rating on Base Resources, expects Kwale will deliver US$420mln in free cash flow over the remaining life of the mine to fiscal year 2024.

Kwale cash flows to support construction of Toliara

The broker expects cash flows will be reinvested into the Toliara mineral sands project in Madagascar, reducing its reliance on debt and avoiding large raises.

Base Resources completed the acquisition of Toliara earlier this year. Construction of the project is slated to begin in the fourth quarter of 2019 and initial production expected a year later.

“Once operating, Toliara offers an attractive +40-year life-of-mine with average steady state free cash flow of US$85m a year, supporting the transition from net debt (US$248mln) into net cash (US$41mln) between fiscal year 2022 and 2026,” Berenberg said.

“With a long life of mine and steady cash flow stream (as well as peers Kenmare and Iluka paying dividends), we expect Base to transition into a dividend payer once Toliara is generating free cash flow (from 2023).”

Base Resources is due to release its pre-feasibility study for Toliara in the first quarter of 2019. Mineral Technologies and Lycopodium have been engaged to complete the pre-feasibility study.

Berenberg expects Base to deliver “more-attractive project economics” when it releases the study.

Extending Kwale life of mine

If the life of mine for Kwale is extended through exploration, Berenberg believes this will offer “attractive, low risk upside” to its valuation.

The broker sees four life-of-mine extension opportunities: South Dune; Kwale East; North Dune and the Vanga exploration lease.

Berenberg said it conservatively models a life-of-mine extension to 2024 but thinks this could well be increased.

The company’s non-executive chairman, Keith Spence, has said he is optimistic of achieving a mine life extension for Kwale. 

“With the Kwale operation running smoothly and with greater flexibility post-Kwale Phase 2, the focus has been squarely on extending the mine life," he said at the group's annual general meeting in November. 

READ: Base Resources' chairman believes the company is “very well positioned to create further shareholder value”

Spence said drilling activity has now shifted to the northeast sector of the Kwale operations, on the North Dune and Kwale East zones with encouraging indications to date.

He believes the profitable mineral sands company “is now very well positioned to create further shareholder value.”

“We have an outstanding operating asset in our Kwale Operation with strong cash generation and extensional potential, an exciting development opportunity with the World-Class Toliara Project and an outstanding team with a track record of successful mineral sands development," he said. 

In a positive step towards the pursuit of a mine life extension at Kwale, the group announced in December that it had been granted a prospecting license (PL) for the Vanga area in Kenya.

READ: Base Resources granted prospecting license for Vanga area in Kenya, extending from existing Kwale operation

The Vanga license is valid for three years and covers an area of 136 square kilometres, extending south-west from the company’s existing Kwale operation towards the Tanzanian border.

Base Resources said preparatory activities, ahead of a planned drilling program in 2019, were underway.

On track to meet production guidance

In its last operations update, the group said mined ore tonnes increased by 35% in the third quarter following the successful implementation of the Kwale Phase 2 mine optimisation project.

The company produced a record amount of rutile – 25,125 tonnes – and a record 9,683 tonnes of zircon in the quarter.

Production guidance for the full year at the Kwale mineral sands project in Kenya was left unchanged.

For the 2019 fiscal year, Berenberg predicts revenue of US$212mln and earnings (EBITDA) of US$114mln.

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