Description

Kenmare (KMR.LN – GBP 245) is a largely unloved & unnoticed post re-org mining equity enjoying a major increase in margins and cash flows due to strong pricing of Titanium Dioxide (TiO2).   It has lowered its unit cash costs through volume growth and more stable production, and enjoys a bonus in Zircon, a rather overlooked high value mining by-product.

The current EV in USD is $395m, including $350 of equity value plus $45m of net debt.  

Mine History & Reorg

The company owns and operates the MOMA Titanium Minerals Mine, which produces approximately 11% of the world’s inputs for Titanium related products. TiO2, an industrial pigment used as a bright whitener with high opacity has many applications from paints, to laundry, to paper & plastics.  The component minerals of Ilmenite and rutile are used in the manufacture of Titanium metals which have aerospace applications among others, and the by-product Zircon is used in ceramics.   This mine is a major resource with a 100+ year mine life, and $1.3B has been spent on its construction.

There was a nice start in 2007 to mine construction with first revenues in 2009 and EBITDA ramped to ~$100m run-rate by 2011.  Then a debt financed expansion was approved at exactly the wrong time, and they suffered a double whammy of both production volume problems and weakening prices.  After a tough couple years that led to an out of bankruptcy re-org in summer 2016, which reduced debt and exploded the share count to 109.6m, EBITDA which has gone from negative in 2015, is now estimated at ~$75m for 2017, $100m+ for 2018, and $125m+ for 2019 given tight market supply conditions.  Every $10 increase in ilmenite price means over $10m of additional cash flow.

Locale

The mine is on the coast of Mozambique with direct access to Indian Ocean dry bulk loading.  Though a poor country, it is politically stable, business friendly, and they have recently completed a major upgrade to their electrical power generation facilities and grid supplying low cost power per KWH with uptime improved to first world levels.  Not only does this mean lower costs and smoother operations for Kenmare, but it helped attract to the country the largest infrastructure project in Africa… ENI’s 3.4 million ton per annum FLNG project to which BP has a 20 year offtake agreement.  This multi-billion dollar construction project is attracting major infrastructure service companies to set up local operations, which benefits Kenmare with much faster response to drag-line production problems which had been an operational plague in the past when trying to get serviced from Europe.   The ENI project will also bring $1B/year into government coffers which had $3.6B of 2016 total expenditures, so this is very impactful & I’d expect continued infrastructure improvements and a rising living standard.

Tight supply = good pricing

A number of factors have driven TiO2 pricing much higher from a low point in early 2016.  Though the many grades of pigment with local CIF pricing creates a market where accurate pricing can be opaque, the upward trend is clear from lots of sources.  Increased regulation in both India and China has been designed to crowd out some marginal and lower quality production, and in some cases have put curbs on production volumes.  In China, Ilmenite is also a by-product of Iron Ore production which has volumes slipping because Iron Ore prices are down sharply with steel volumes tapering.  In Australia, the major mines are nearing end of mine life and are now mining the lowest quality dregs at high cost. Iluka has also announced logistics disruptions and is seeking alternate transport.  In Europe, Huntsman had a fire in a TiO2 production facility this past February and is contemplating a rebuild that would begin construction in August with a back online date late in 2018 or possibly 2019.  I doubt they’ll hurry since, in May, Huntsman announced a $250/tonne price increase for its pigments.  The Lomon & Billions brands of pigment with over 700,000 tons of TiO2 capacity from China’s largest producer, says pricing for ilmenite is RMB 1650-1700 per tonne, which equates to $240s range in USD.  Kenmare noted a range from $190-$260 per tonne in China depending on the concentration and quality. Base Resources, a producer in Kenya, said it got a $50 per ton increase for its ilmenite based concentrate, and the Zircon market is in the $870 range with Iluka having announced a $130/t Zircon increase for Q3 on top of a $50/t increase in February.  TiZir, who produces in Senegal, Tronox, who recently acquired Cristal, and others have had similarly upbeat news on pricing direction.

These are good times and Kenmare will produce approximately 1.1 million tonnes of concentrate this year and has guided to a mining cash cost per tonne of $120-132 with many indications to the lower part of that range so I’m using $125/t cash cost.  If they get a sell price of 170/t, which assumes low grades and takes out plenty for CIF China vs selling local, that’s $50m of EBITDA… plus included in the production is ~70-80k tonnes of Zircon as a by-product at $550-$650 per tonne.  That’s another $38-52m so the by-product could double the EBITDA.  The low end of this range gets spot-EBITDA into the high $80s m.  That’s well over this year’s consensus target of $71m, but shows the earning power.  Current year estimates are restrained because of contracted lags in pricing updates and 28% of 2017 volumes sold forward in late 2016 at lower prices.  Plus in Q3 one of two trans-shipment barges will go in for its scheduled special service maintenance, so shipment volumes could be light for a month or so.  As we move beyond the past contracts and into the 2018 spot market, it should be sunny sailing.  

It’s not hard to get to a $1B EV down the line using 8x on 2019 EBITDA, which would still be only 76% of mine replacement cost, and half of the peak EV from 2012.  That would put the stock north of GBP 650 (currently GBP 250s).  And, there’s always buyout potential from strategics given the importance to the industry of 100+ years of mine life, and the ability to expand production at this mine rather quickly and at lower cost than many competitors. 

Catalyst

- 1H report

- Contracts & presold production rolling off in favor of spot market