Kenmare Resources plc (KMR) Earnings Call Transcript & Summary

So welcome to the Kenmare Resources Half Year Results Webinar. We are joined this morning by Michael Carvill, MD of Kenmare Resources; Tony McCluskey, Finance Director; and Ben Baxter, COO, who will present the results for the 6 months ended the 30th of June 2020. Also in attendance are Jeremy Dibb; and Katherine Sutton from Investor Relations. [Operator Instructions] I will now hand over to Michael Carvill, MD of Kenmare Resources.

Thanks very much, Alex. And thank you very much, everyone, for attending Kenmare's H1 2020 results presentation. I'm going to just make a short introduction. Tony McCluskey will give a review of the financial results that we just released. Then Baxter will review our operations for the first half and give you an update on how we're proceeding with our major project, which is move of Wet Concentrator Part B. I've got a few slides in marketing and outlook, and we will turn it over to Q&A as soon as we possibly can. So just turning to Slide 5. If you could do that. I'm sorry, I missed a slide show, [ it returns ]. So Kenmare's strategy is on 3 pillars: growth, margin expansion and shareholder returns. As far as growth is concerned, we have had a set of 3 development projects, the last of which is in process momentum, which we believe will be completed before the end of the year. And those projects will provide us with capacity to operate at 1.2 million tonnes of ilmenite product per annum, which represents about a 35% increase on where we presently are. Because we're a very fixed-price business, fixed-cost business, this will automatically create a margin expansion as we will be producing more tonnes for roughly at the same cost. And that margin expansion will allow us to move into the first quartile of the industry revenue to cost curve. And we see that as a major thing and something that is of great benefit to all of our stakeholders. And all of that, the larger volume, larger margin per tonne provides us with an opportunity to have a larger EBITDA, which in turn will allow us to increase our shareholder returns from the present level of 20%. And so we are hopeful that we will be able to significantly enhance our shareholder returns over the coming years. Sorry, and so I'd say, as you can turn to Slide 5 prematurely, there, could you now turn to Slide 5, please. So it's just a quick review on the half. I think that the most notable thing is that we've been able to continue to produce at the mine through this whole COVID-19 pandemic crisis that has overtaken the world. I see this as a tribute to the men and women, who have been working on site and have had to stay at their positions through a very prolonged period when we thought it was unwise to bring in replacements for R&R. And so that effort by everyone and our movement into a new paradigm of operation with social distancing, COVID-related precautions, et cetera, has allowed us continue to reduce. And therefore, allowed us have the EBITDA margin and profitability that we're announcing. And that's unlike many of the other resource industries in Mozambique, who have had to close down. In addition to that, the project team has managed to place the project through to a point where we believe that we will be able to complete this project in the second half of 2020. And that we will be not that far off our schedule and not that far off our budget. And since this project has required inputs from many parts of the world in terms of supply and fabrication of materials and many of those areas have gone through restrictions of shutdowns. It's been a pretty amazing feat that we have managed to juggle all these factors and keep the project on -- basically on budget and on schedule. So we are very pleased with that, and I see this as a very important factor in a review of H1 2020. Also Wet Concentrator Plant C was delivered. It started operating towards the end of, say, first quarter and has been operating happily at 500 tonnes per hour, its weighted capacity since that time, and contributing meaningfully to our production of HMC, and therefore, our production of products. And then looking at the graphs on the page, I think the most notable thing is that prices and the value of our products have continued to increase. And I think this is for the seventh consecutive half yearly -- in this -- for the seventh consecutive half year event, we have had the increasing value per tonne of our weighted average product basket. And I must say, I'm surprised at that. Because I had anticipated that COVID would have an effect of subduing our prices and reducing prices, but in fact even though there has been a global slowdown and even though this is down in each product, for the product that goes into basic industries and is related to our GDP growth, we have had a strong market and increasing prices for our products. All of that has allowed us have an EBITDA margin of 33%. And given the fact that we now can see the insight and the endpoint in insight for our project, and we now have a reasonable degree of confidence that we continue -- can continue to operate the mine despite the COVID. We have been able to declare a dividend of $0.0231 per share, and we finished the half with just under $100 million worth of cash in the balance sheet. So turning to Slide 6. Just an update on COVID. So when COVID became an issue in the February or early March, we made a decision at that stage to effectively lock down the mine. So people who were not present on the site at that stage didn't get to get back and since we operate on a 4-shift basis that meant one shift was not there. And that meant that the people who were on site, had to shoulder both their roles and the roles of the missing people for quite a long time, about 3 months, before we were able to safely organize inward movement of people through a quarantine process and isolation process and beginning to relieve people. And so that was a huge effort on behalf of those people, and it allowed us continue to operate. We obviously heightened our health protocols. Social distancing was quite in play, as a canteen that seated 200 now seats 20 people. And we have implemented increased medical facilities. So we now have effectively an intensive care ward with ventilators and CPAP machines and then a sort of a less-intense facility as well. Now as it happens, we have not had anyone who has been ill with COVID on saying. Recently, we have had a few positive tests, who went immediately into isolation and are either still in quarantine period or have been released from quarantine, without ever showing any symptoms. And we are happy that we can continue to operate a site without exposing people to a risk of infection or a potential outbreak, as they say, of COVID running through the site. We have also supported the local community. We bought 8 ventilators for the local hospital, which is the maximum capacity of ventilators that the hospital could manage; and 50 CPAP machines. CPAPs are a lower technology, low -- less invasive way of providing oxygen to people and probably more useful in many cases. We've provided masks and sanitation units to the local population. We have spent a lot of time trying to -- so we are explaining to people what COVID is, how it can be transmitted, how best to mitigate the risk of infection. And we've been working very closely with the contractors to ensure that there is continuity of business and that everything is organized as best as possible. So with that, perhaps, I could ask Tony to give us a review on the numbers that have come out.

Great. Thanks, Michael. Good morning, everybody. I'll run through the financial review, which shows a better performance, I think, than some might have expected given the challenges that we are faced, including the COVID pandemic that Michael has just run through. So on Slide 8, starting with the revenue, including carriage, insurance and freight, revenue is $117 million, just below that, down 5% on the same period for last year, which is due to a reduction in the tonnes shipped by 14% and a reduction of freight of $1.7 million. However, on the positive side, it's offset and -- those reductions are offset and increased by sales price increase to $269 per tonne of total -- final product, which is up 13% on the same period last year. And this is driven principally by the stronger ilmenite prices, which are up 28% on the first half of 2019, but with softer primary zircon prices, which are down 16%. The total operating costs of the plant are relatively flat compared to first half of last year, but unit costs are up given the lower production, which we previously announced. Most of our operating costs are relatively fixed, as Michael mentioned. So as a result of that, the cost per tonne has increased to $183 for all products. When we adjust them to the co-product credits, principally the zircon that cost per tonne of ilmenite moved to $119 a tonne. And this is a function both of the lower production, and in this case, the reduced zircon price contribution. Having said that, the EBITDA and the earnings performance has been very resilient during this period. And so we've generated over $37 million compared to the $42.8 million same period last year, and the resulting profit was $12.7 million. The profit is a little bit lower relative to the same period last year, and this is due to a small increase in depreciation, we brought WCP C online, to talk about later; some additional finance costs as we grew the entirety of the $150 million debt facility and higher tax, which I'll come back to as well. As anticipated, we have continued our investment in plant, property and equipment additions of $59 million. So the net debt is $53 million, which is a reduction from a net cash at the end of the year of $13.7 million. So most of that relates to the costs associated with moving WCP B, which is in progress. And we continue to deliver on our dividend policy, which we set out at the Capital Markets Day in October 2018, which is to return a minimum of 20% of profit before tax. So the profit before tax is $16 million. And the dividend is $2.5 million, which equates to $0.0231 per share. I move on then to Slide 9. We look at the sales pricing. The graph on the top right-hand side, if you look at the dark green line, it shows the total average prices which have continued to increase steadily since 2016. And that's net of ilmenite, which, as I touched on earlier, compared to the first half of 2019, is up 28%, and our primary zircon prices were down 17%. The ilmenite contribution is important, in that ilmenite comprises 70% of our revenues. So the strong ilmenite price movement is -- has been supporting the positive earnings performance that I talked on. So this is 5 consecutive quarters where ilmenite prices have continued to move up. And the lower shipment volumes by 14% were partly as a result of adverse weather conditions in the second quarter and also due to some planned maintenance work on the Bronagh J transhipment vessel, one of our 2 transhipment vessels. But we are expecting a pickup in the second half of 2020 and stronger shipments. The revenue bridge that you see on the bottom right-hand side of Slide 9 shows this revenue movement rapidly from $115 million, which is the free on board movement in H1 2019, up to $117 million in the current year. Moving on then to the income statement on Slide 10. The revenue analysis that we show on the right-hand side shows a shift for this period compared to the previous half year, with an increase in the mix weighting towards ilmenite in the first half of 2020. So this will go up and down depending on largely timing of shipments in any particular period. And as a result of the sales, the free on board sales go from $115 million to $111 million after adjusting for the $1.7 million of freight. So that represents a 3.6% reduction in revenue. Costs, as I've said, are relatively flat, and hence, the operating profit, which we've generated is just under $20 million. Finance costs are up from $2.8 million to $4.6 million and the -- this reflects the decision of our prudence to draw the full debt facilities, which we put in place in December last year, and we grew in their entirety in March-April of this year. The average debt interest rate is 6.1%, and we have a small foreign exchange gain, which relates to the Rand Merchant Bank. So after all that, the profit before tax is $16 million, and tax is $3.3 million, which is slightly higher than previously, but we can affect -- we can expect that the effective tax rate will drop in 2021, as we use the [ old ] cost of remove capital costs as the depreciation shield on a tax deduction. So that will come down with an effective rate going forward. The profit after tax is $12.7 million, and the EBITDA of $37 million, we can expect to see increasing in the first half next year following the B move when we're generating higher levels of production. And given the fixed cost base, this will drive down our average cost per tonne and increase our margins. So in 2021, we can expect to see that moving forward. The next slide, Slide 11, reconciles the operating costs and the income statement of the cash cost per tonne. As I said, operating costs are very fixed in nature and it is relatively flat year-on-year. So the adjusted cash operating costs in the center of that table show a reduction of 2% compared to first half of 2019. But when we adjust for the lower production, we see the higher unit costs going from $152 million to $183 million, and then when we adjust for the co-product revenues, particularly given the reduced contribution from the zircon that I touched on ahead of this, we see that going from $78 to $119. Again, I think I'll come back to -- this illustrates for me while we've been so focused on increasing production to 1.2 million tonnes per annum at ilmenite because with this fixed cost base, the more tonnes we get out of the ground, the more we're able to drive down the human costs. And so hence, with the high-grade area in Pilivili, we expect to be able to move this down in 2020 real terms to a range of $125 to $135 per tonne of cash operating costs. Moving on then, on Slide 12, to the balance sheet. As expected and planned, we have significant plant, property and equipment additions of $59 million. And the key elements of this comprise the payment for WCP C of $6.5 million. So we're expecting C to close out at just under $45 million, which is the number that we gave to market last year, and so that's going as planned. An investment of $42 million for WCP B move, which will take place in the second half of the year, and then we'll talk to later. And the balance was sustaining and other capital of just under $11 million. From that, we deduct depreciation of $17.3 million, and we add on an adjustment to the mine closure provision. The mine closure provision isn't something we're planning to do any time in the near-term because we're very long asset light. So this adjustment is a result of a reduced discount rate, and it's mainly a balance sheet movement between plant, property and equipment additions. Inventories were up $5.8 million, mostly that's in consumable spares and parts of the consumable spares related to the additional spares, which we've taken on board because of the new WCP C plant. So about half of that $4 million relates to WCP C, and then the balance relates to the increased value of the mineral products as a result of the higher cost per tonne. The larger working capital movement is included in the trade and other receivables. This is up $19 million. $13.4 million relates to trade receivables, and this is a function of timing of shipments. We had a very busy and active June, even though there was, as I said, some bad weather and transhipment work done in the second quarter, we had quite a busy June. And also the nonutilization of a discount facility, which we have had in place for many years. Given the amount of cash that we have in the bank, it makes more sense for us not to use that facility even though it remains available to us as the source of finance. And then as I move down through the balance sheet, the bank loans reported are $145 million. So this is the gross number of $150 million, which is the full drawdown, plus interest accrued at the end of June of $1.7 million minus the costs of the facility in place, which are amortized over the life of the loan of $6.2 million. And I suppose that, that those facilities were drawn as we say in the strapline to give us increased liquidity given the concerns that we had about COVID at that time in March. Slide #13 reviews the net cash to net debt flows. Looking firstly at 2019. This shows that we were generating over $90 million last year, which was sufficient to service all of the fixed asset additions, working capital and other requirements. So we ended up relatively flat year-on-year. But the first half of 2020 cash bridge shows most of the cash investment, as we planned, goes into the capital growth projects and that will set us up to reduce 1.2 million tonnes of ilmenite next year, in addition to which we've got the working capital change, and some of this will unwind, perhaps, in the second half of the year depending on the timing of shipments. But a large amount of that because we haven't been using the inverse discounting facility. So those facilities, that $25 million facility remains available to the company as a source of finance. And moving on then to my last slide, which is the 2020 interim dividend. And if you'll recall, we committed at the Capital Markets Day in October 2018, to a policy of making a payment of 20% of profit before tax of dividend to our shareholders and increasing that when we follow -- when we completed the execution of the 3 capital projects that Ben will talk to. So for this year, we're doing exactly that. The profit before tax was $16 million. So $2.5 million is simply 20% of that and divided by the number of shares takes it to $0.0231 per share. The dividend timetable is in the bottom right hand corner, and I think the key thing we're focused on is getting B moved, so we can generate more cash in 2021, and then that will enable us to increase our returns to shareholders. So with that, I will hand over to you, Ben.

Thanks, Tony. Good morning, everybody. I'll present the operational review for H1. Firstly, I'll start with health and safety, and it's important, as Michael has said, to recognize the workforce during this first half. We asked a huge amount of them through the COVID-19 restrictions, some of them have not been home for over 6 months now. And the levels of commitment to keep the operations running safely and productively, has been exceptional on that part. In H1, we've spent a lot of time looking at strengthening our focus on safety and on sustainability. And this follows an increase in the number of lost time injuries. And what we've done is initiated a full review to reinforce the Kenmare safety culture, focusing particularly on leaders and the way they manage safety in their operations, but also on -- specifically on hazard identification and risk assessment practices to ensure that all work can be done safely. We've also built on the establishment of the sustainability committee in 2019, and we hosted the site visits of that committee in January 2020 prior to the COVID-19 restrictions. And over and above that, have published 9 -- 11 sustainability-focused corporate policies around all of our sustainability work streams. And in addition, updated our land and rehabilitation strategy moving forward to increase, both the focus on community land availability as well as biodiversity. Moving to Slide 17. We achieved a record excavated ore volume in Q2 '20. And this was a benefit of the WCP C operation, having a fast ramp-up into production. And that gave us an overall improved H1 performance on ore mined. Excavated ores will decrease, however, in H2 due to the downtime that we are expecting from the WCP B move, but thereafter, will strengthen significantly as we move into 2021. We anticipated the low grades in H1 2020 at 3.3% THM. And this was because WCP B approached the end of its mine path in Namalope, but also WCP A mined a lower grade area. We do expect this to change in H2 2020, however, as first of all, WCP B moves into Pilivili with its high grades in Q4, but also WCP A is scheduled to move into higher-grade areas, and we will receive the full half years of production from WCP C, which mines a relatively high grade part of our ore body. Moving to Slide 18. Here, I'll present an overall production review. We saw a 12% increase -- decrease in HMC production, and this was driven by the 28% lower ore grades. And this followed through -- right through our mineral separation plants and led us to reduce production of all finished products due to the lower HMC supply, but also because we were producing a lower heavy mineral grade resulting in, but -- and this resulted in us maximizing the mine recoveries that were available to us. Ilmenite production was further reduced, impacted at 19% below the prior period by reduced retreatment of spillage during this half, but also because of a write-off of ilmenite final product as a result of reprocessing of outside stockpiles from 2015. Zircon fared better, and this was because we processed stockpiled nonmagnetic concentrates, and that reduced -- that partially offset the lower HMC supply. As Tony mentioned, we saw a 14% decrease in shipping during the half, and this was largely due to adverse weather conditions. However, we're also continuing to do improvement works on our transshipment vessels and particularly the installation in H1 of a new thruster control system that become unreliable during 2019. Shipping volumes are expected to improve in the second half, and we move -- as we move into seasonally better weather conditions and further improvements are scheduled for the transshipment vessels in order to increase capacity, and therefore, mitigate weather conditions in the future. On Slide 19 now. As you know, our pathway to 1.2 million tonnes of ilmenite production per annum is based on the delivery of 3 projects. In 2018, we completed the 20% capacity upgrade of WCP B. In 2019, we focused on the building of a new mining plant called WCP C, and that is now delivering consistently on its 500 tonnes per hour nameplate capacity, and that was delivered on budget. And in 2020, we're focusing on the move of WCP B to the high-grade Pilivili ore body. And the project is currently around 70% complete. But the timeline has been impacted by COVID restrictions. And this has meant that whilst our scoped budget of $106 million is essentially on budget, we are experiencing additional costs associated with those delays and having had to manage the COVID restrictions. On Slide 20 now, I'll walk through this move in some more detail. The first thing to say is, we expect the move to be completed in the second half of this year. That's despite the COVID-related challenges we're experiencing, and we expect production to commence in Pilivili in Q4. Many of you will recall that Pilivili is our highest grade orebody, and therefore, it brings us -- it's a significant step towards producing 1.2 million -- it's a significant contributor towards us producing 1.2 million tonnes of ilmenite per annum. It has not only good grades, but it has favorable mining conditions. And the move itself is quite well explained in the video that's in the top right-hand side of this presentation for those who've not yet seen it. In terms of an update on the current progress, we're currently 70% complete. Our main focus has been on making sure we manage risk and move the plant safely and take into account the COVID restrictions that have been put in place in Mozambique and by ourselves. Well -- and this has been done, whilst minimizing the impact on costs and also on the schedule. Getting people into the country has been one of the big challenges for -- in order for execution works to take place. And I'm happy to say that the first group of expatriate relocation contractors began work on August 10. A second tranche of contractors is -- an application is currently in for business phases, and this is allowing us to be confident to target the move taking place during this quarter and production starting up in Q4. Unfortunately, a couple of areas of the project will not be ready for that startup. The overhead power line and the positive displacement pump systems have been delayed because of COVID-19-related issues, fabrication delays relating to lockdown in various countries and then logistics delays in getting materials from those countries to site. However, mitigations are in place for both of those with our expectation, and what we are doing is to move diesel generators to the Pilivili ore body to power the startup of mining in the area. And also to truck the HMC back to the mineral separation plant over the short term, and that's pending the delivery of both those parts of our scope by the end of the year. As I mentioned, the overall scope remains on budget. However, the COVID-19 delays have brought additional costs, and that's changing locations of where fabrications would take place, additional time, and therefore, costs relating to contractors and the EPCM on site. And also, just to mention that some of that additional 10% is being expected to go through to operating costs, as we commence work with the diesel generators and trucking of the HMC. Moving to Slide 21, a couple of visuals to show you the progress so far. On the top left-hand side, you'll see one of our self-propelled modular transporters on site. The majority of the SPMTs are now on site, the rest are in country and on routes to the site as we speak. What you see in that photograph is a load test taking place. So we've been testing the completed sections of the road, making sure that the bearing pressure of the axles is correct and simulating the move itself. Those design checks are being completed as we speak and are, so far, all going well. In the top right-hand side, you'll see a photograph of the relocation pond. This is now complete and waiting for the dredge and WCP to arrive. The plan is to float that pond prior to the dredge and the WCP coming in from the right-hand side of this photograph. The pond will then be maneuvered through 90 degrees over the plinths, which are the sort of vertical white areas on -- in the center of the photograph. We then drain the pond. The pond sits down on those plinths. We clean the base of the pond, position SPMTs underneath the pond, lift and then drive the pond out on the relocation roadway, which you see at the top of the photograph. One other important consideration has been providing water for startup and also for the ongoing makeup water requirements for mining in Pilivili, and the water pipeline is complete. Moving to Slide 22. We've embarked on a number of other work streams to prepare ourselves for producing 1.2 million tonnes of ilmenite on a sustainable basis. And the first area has been building -- about building robustness into our mineral separation plant. We've put in place additional separation capacity. That's currently being installed and will be installed prior to the end of this year, so that it's ready for the additional HMC coming from Pilivili. And we've put additional circuits in both the ilmenite -- additional equipment into both the ilmenite and zircon circuits. And we're also built -- going to build an additional storage shed to provide us with some more additional flexibility and capacity for storing products prior to shipment. On the transshipment vessels, a significant set of improvement works is underway. The idea here is to increase loading capacity, so that we can get that greater flexibility to manage poor sea conditions when they happen. I already mentioned the new thruster control system installed on the Bronagh J, but we've also completed 3 of 4 engine replacements on that vessel so far this year. And on the Peg transhipment vessel, we built -- we will, in the second half of this year, be installing new thrusters and a new loading excavator. And in the case of the excavator, we're putting a -- instead of a normal excavated bucket, we'll be moving to an increased capacity clamshell-type loading device, so that we can further increase capacity. The Jetty has also been reviewed, and we're adapting it to be able to load from both sides from 2021 onwards. And that will further improve the cycle times between further loading of customer vessels. Finally, we're focusing on increasing the resilience of our power supply to site. We are exploring various options to increase the stability of power to the MSP, and this will allow us to further maximize recoveries and operating time. Currently, we're looking at various cost/benefit analyses. And as we find out more about that project, we'll talk more about it. But at this point in time, any additional capital expenditure that we come up with would be subject to Board approval. And so that was the last slide from me. I'm going to now pass back to Michael to deliver the market update. Thank you.

Thanks, Ben. And I see that we're running on a little bit, so I'll sort of move quickly through these slides. Turning to Slide 24. The graph that you looked at previously showed a weighted average for all products, and you could see that all products have an increased value per tonne. But this graph is for ilmenite alone, and you can see that it's even more pronounced with a 28% increase on H1 '19 and a 10% increase from H2 '19. And I suppose the question is why is that? Well, what we've seen is that during 2019, constrained supply allowed legacy ilmenite inventories to be depleted around the world. And when COVID occurred, there's obviously a reduction in demand, but supply constraints were also exacerbated by shutdowns in mining operations in China, India and South Africa. And so there was a balance between these 2 forces. Additionally, demand for ilmenite is supported by the development of further upgrading capacity for ilmenite to produce synthetic rutile or titanium slag in operations, which are not related directly to -- or not to link directly to ore bodies and who, therefore, have to buy their ilmenite in the market. So the consequence of that was that we continued to experience solid demand during H1 of 2020 and experienced increase in prices. And in fact, for H2 2020, we are -- we have -- we are substantially sold for most of our production. And we have still a small amount of material that has to be sold in the spot market, but not that much. So why has it balanced out like that? And if you look at the graphs on page 25, we think this is something of the explanation. You can see the production of pigment in China has continued to grow and through 2020 [ Q2 ], we see continued growth in Chinese pigment production. And then if you look on the graph on the right-hand side, you can see a reduction in supply from China. And this has, obviously, increased the demand for imported ilmenite and imported ilmenites such as the ones that we make. So this increasing supply gap has been, in some part, met was also by the supply of low-quality ilmenites and concentrates, which contain ilmenite. So if I then move on to Slide 26, what is the outlook for our products? Well, as I mentioned, we've seen solid demand through H2 and continuing into H2 2020, and we have offtake agreements in [ clears ] for most of our products. While we can see some of our customers operating at lower utilization levels than they were previously operating and operating at utilization levels, which are well below their optimum, we also noticed that there has been no buildup of inventories that we can see and inventories of high-quality sulphate ilmenite remain at low levels as we enter H2. Nonetheless, any of these stock markets cannot be totally immune to the effect of the worldwide pandemic. And we still expect to see some reduction in pricing, as we move towards the end of the year. And we expect these submarkets are going to be subdued towards the end of the year, as those lower utilization rates and lower demand flow through to the feedstock producers. Zircon is different. Zircon was softer before COVID occurred because -- there was already softness in the zircon market before the event of COVID pandemic and global lockdowns and -- had an effect of further dampening demand. However, this has relatively concentrated [ oligopoly ] of suppliers and those main suppliers have been disciplined in terms of the amount of material that they've been releasing into the market. And consequently, prices have, while being subdued, have not had any catastrophic reduction. The long-term fundamentals of zircon remain very strong, with a potential closure of the largest zircon-producing mine in the world in the Jacinth-Ambrosia, operation in Australia, which is due to cease operation in 2022. Turning now to outlook. In early March in the face of the massive uncertainty, that was provided by the event of COVID-19, guidance was withdrawn. At that time, we weren't confident that we would be able to continue to operate the mine. We were far from confident that we will progress the development of, say, Wet Concentrator Plant B move project. But now things are different. We believe that we have a reasonable expectations -- expectation that we could continue to mine. And our view is that Wet Concentrator Plant B will move in the second half of 2020. And consequently, it's appropriate that we would reinstate our guidance. And we are doing so now, with ilmenite guidance between 700,000 and 800,000 thousand tonnes of products; primary rutile (sic) [ zircon ] at 38,400 to 43,900; rutile, 5,600 to 6,400; and concentrates between 31,400 and 35,900. And that will all be done with a total expenditure of between $152 million and $160 million, giving a cash cost per tonne finished product at $180 to $196 per tonne. So these unit costs are expected to be higher than previously guided due to the lower production volumes and the largest fixed cost base. So this is -- we have -- there is a leveraged effect associated with the fact that the operation is a fixed cost operation. As our production reduces, unit costs increase significantly and as production increases, unit costs drop significantly. And so why we are doing all this? We turn to Page 29. It's because our view is that this will move us into the first quartile in the revenue to cash cost curve, and this provides benefits to all our stakeholders, with the benefit of higher margin or higher returns, but also the benefit of security in a downturn and -- as inevitably one will happen in the future. So turning then finally to Slide 30. Quick summary of our situation. We believe our -- we have a market-leading position with a very large-scale long-life assets. We have had a long-standing commitment to sustainability, and we have not a much higher commitment to documenting that sustainability, which we believe will flow through into better scores from the rating agencies. Strong balance sheet. Our approach has been focused on operational excellence, manage responsibly, target continued improvement. And that has resulted, we believe, in sustained profitability. We have a strong relationship with the host communities. The pipeline of projects is coming towards the end, it has been fully funded. And we believe this will provide shareholder returns. So I'm terribly sorry that ran on a little longer than we had anticipated. But it's not over. And so guys, we're happy to take questions. Alex?

[Operator Instructions] The first question is from the line of Peter Mallin-Jones from Peel Hunt.

Congratulations on the performance. I just had three questions, two relating to the operations among the market. So just on the operations, you alluded to the fact that ilmenite output fell a chunk more than the output of HMC in the first half. Obviously, there's a bit of inventory write-off that happened within that. But I was wondering if within that you had changed the plant settings within the Wet Concentrator Plants, and therefore, were using the ability to push a bit more HMC out because you weren't limited by the capacity at the mineral separation plant? And related to that, then in the last couple of years, you've talked about project or tender as part and parcel of the target to hit the 1.2 million tonnes. I was just wondering whether that has been sort of put on hold a little bit, just at the moment, given, a, the pressures from COVID and dealing with that; and b, ensuring that your move of the Wet Concentrator Plant goes without a hitch later this half? And then finally, I was just wondering if you could perhaps give us an idea of what you're seeing in terms of market prices since period end and since the strong realizations in the first half as to whether we can expect something similar, broadly speaking, for the volumes you've sold so far in the second half?

Ben, could you perhaps [ start with ] Peter's first question?

Yes. Okay. Thanks, Pete. So you're quite right. There was a reduction in the grade of the heavy mineral concentrate in the first half of the year. And the reason for that was to be able to take the maximum that we could from mine production. So this is a situation where the MSP was not feed constrained during that period and having maximized -- a maximized mine recovery means more absolute mineral being presented to the mineral separation plant. The intention is that when WCP B moves to Pilivili that we will become the plant constrained in the MSP in producing 1.2 million tonnes. So that plant setting will be reverted back to our normal [ 95% ] THM grade in HMC, and that will enable us to produce HMC of sufficient quality to transfer to making the 1.2 million tonnes of ilmenite. And maybe I'll take the second question as well on project or tender. The project is not on hold, Pete, as you would say it. However, there has been steady progress through the half. But there is no doubt that the project was also impacted by COVID-19, as we did experience some fabrication delays, we had lockdown, meaning we couldn't get spares and fabricated items in South Africa to the site. And so whilst there was some -- there was good progress, there were also some delays in some of our progress as well. We have made some key improvements, however, and we've installed flow-control wells on the dredge to improve the delivery of feed to the concentrators and incurring less downtime there. And our -- what we call hot tails at the seamless changeover process from one tailings line to another is being rolled out currently across both WCP A and WCP B, and we've seen some significant improvements in dry mining mobile fleet improvements during the half. An external audit of our shutdown processes has also been completed in H1 and has identified some additional further improvement opportunities for us. So the project continues, and we'll keep moving forwards on that.

In terms of the value per tonne in the second half, Peter, I think we've said that we would expect to see some reduction in value per tonne in terms of ilmenite and zircon as well. So we anticipate some reduction.

The next question is from Job Langbroek from Davy. Job, please could you ask your question?

Hello? Can you hear me now?

Yes, yes. That's it.

Okay. Well done on the results. Look, one of the questions -- I have three questions. One has been answered already. So the other two, I think. I'm just wondering whether Ben could provide a little bit more detail on the start-up at Pilivili. I know you've outlined it's a Q3 event for the move. But just wondering, when you say start-up of production in Q4, whether there will be a quasi commissioning period and when we can expect to see full production? And then one for Tony, which would be, if we can get any kind of sense of the interaction between the second half capital expenditure and the final year net debt expectation. I know you can't guide, but if you could even just guide us to some kind of sense how to think about the working capital position at the end of the year and all done in the context of consensus performance for the year? So just to get some sense of how you see the capital expenditures working out over the rest of the year.

Thanks, Job. So in terms of the timings of the move, we've not -- we're not planning to be more specific on the specific timings at this point in time because the -- but what we are happy to say is that the move itself will take place in Q3. And in Q4, we will be doing a ramping up process. So the reason for that is that we want the site to undertake the move when it's safe to do so. We don't want them to be influenced by date that we've provided externally. And our aim here is to make sure that the process is completed as safely and as risk-managed as possible. But to be specific on your ramping up question component, you're right. There is a ramp-up profile, and that ramp-up profile is expected to continue through Q4 and be ready for full production thereafter.

And Job, with respect to the second half CapEx. So per the updated guidance that Michael touched on, we're looking at development and sustaining CapEx of $142 million. So sustaining CapEx will be a bit lower than we previously guided, about $17 million for the full year. So taking onboard what we've spent in the first half, which in aggregate is $59 million, that leaves $83 million for the second half of the year. In terms of funding of that, on net debt, look, we anticipate that net debt will increase. I think the guidance number -- we don't give guidance on that. I think the consensus number is something like $75 million. And I suppose what I can say is that the debt facilities that we have put in place have served as well. We have $100 million at the middle of the year, and that was after the adjustment of working capital that you just asked about. We do not see the largest part of that, which is the trade receivables, increasing at the end of the year. It does depend on the timing of shipments. But there was a very busy June, so it's possible that there'll be a small unwinding of some of that, if I do think. In addition, compared to the beginning of the year, we have a $25 million invoice discounting facility that we previously had been using. So the increase in net debt to the middle of the year, and therefore, reflecting on the end of the year, it depends on whether or not we use that facility. If we don't use that facility, then the net debt could be a bit higher than consensus. But we have those facilities available to us. And if we decide to use the invoice discounting facility, then obviously that adjusts for the net debt fact the other way. So I suppose my view is that given the plan that Ben has outlined, and given that we're 70% way through WCP B move already, I think that we're in quite good shape in terms of the available cash and facilities for B moved at the end of the year.

The next question is from Richard Hatch from Berenberg.

Yes. Appreciate your time. Just a few questions. First one is just on CapEx. So just in terms of 2021 CapEx and beyond, where are we with the kind of the thought process on CapEx? It feels to me like CapEx for 2021 is looking like sort of $30 million, $35 million, what -- with the $5 million deferral. But what does that look like going out longer term? And are you able to put any numbers at, on or around this kind of power stability sort of project? And then second question is, Tony, forgive me if I sort of -- you covered it off already, but are you able to give, sort of, any kind of, sort of, guidance or clarity around where you think net debt could transition to by year-end? And third question is just on reading through some of the transcripts from some of the pigment producers, they have, sort of, talked about how they were quite hungry for feedstock in the second quarter, but they might dial it back into the third. So perhaps just to push Michael a little bit more on your comment that you think that prices might soften. Are you able to give any kind of, sort of, range as to where you think prices might move to second half? And whether there's any sort of differential between rutile and chloride, ilmenite, sort of, price movement?

So look, I'll take the first 2, Richard. And in terms of CapEx for 2021 and beyond, because we've got a deferral of some of our sustaining CapEx and pieces of the development CapEx, you're absolutely right, some of that will move into 2021. I think at this stage, CapEx is lumpy, Richard. So the numbers that I've given earlier in response to Job, which is a similar question, [ $100 million ] between years. I think the key thing for us is like WCP C, when we give guidance, the idea is to come in within the total envelope. And if it slips to one or another side of a reporting period end, then that's something we'll manage at the time. But to be clear, H2 is $83 million. And 2021, we would expect to see some increase on the numbers that we previously talked about, but I don't think at this stage, we're in a position that we can sort of give a full update. With respect to net debt at the end of the year, again, I think that, that Job's question, sort of, went to the heart of this, and we won't be giving guidance on profitability or exact net debt levels. What I can say is that given the cash that we have in the bank, given the state that we're at with the WCP B project and given the additional invoice discounting facilities that we have available to us, I think that we're in pretty good shape as I look at the next 6 months. And at that stage, B is finished, and the big chunk of our 3 capital projects that we talked about, since our Capital Markets Day of 2018, which was the expansion of B, the building of C and the move of B will all have been completed. And then we'll see a substantial reduction in that CapEx. And that's subject to, as Ben touched on, other projects that we're looking at, such as the power stability. But we haven't made any decisions on that. Ben said that that's subject to Board discussion and approval. So we haven't considered amounts, it's still in early days. [ Mike, why don’t you take produced results? ]

Yes. So in the second half of the year, we've said that we expect to see some reduction in the net value per tonne. That's based on our view that some of our customers are operating on significantly reduced utilization rates. Now that is also balanced by the fact that their inventories are low or between low and very low, which is on an unusual situation. You would expect with low utilization risks that there would be a buildup of raw material inventory, but the fact that there isn't demonstrates the scarcity of supply or constraint of the supply. Also, we have seen some evidence in the market that high-grade titanium feedstocks are -- have been transacted at lower price than we had previously seen. So all of those give us the view that there will be some form of a reduction. We don't quite know how much it's going to be, Richard. That's -- we just don't know. Some of our material is already -- a significant amount of our material is already locked in and priced. So we don't think that it's going to be a major movement in our prices. But Q3 seems to be fine. And really, it will be a Q4 event.

The next question is from the line of Richard Morgan from Mirabaud Securities.

Just a couple of questions on dividend. Perhaps I misheard, but I thought I heard Tony talk about the policy being 20% of pretax profit, whereas my understanding was that it's 20% of post-tax profit. So perhaps you could just clarify that? And second point on dividend. Last year, you did pay out 20% of profit after tax, but it was weighted 1/3 interim, 2/3 final. Whereas, this year, it seems that you've paid out the full 20%. So perhaps you could just comment on that weighting policy and what we might expect in the future?

Okay. Sorry, I misspoke. You're right, it's 20% of profit after tax. That's absolutely right, Richard, good pick-up. In terms of the weighting, look, every year, we look at this. And we did reduce the interim dividend for 2019, which is our main dividend as you outlined, so effectively reduced it by 1/3. Given the relatively modest amount that we're looking at for the first half of the year, we decided to go for the full 20%. So it's consistent with our policy of 20% year-on-year. But the decisions as to how we do that in the future, I think will be up to the Board. I think the bigger picture here, Richard, for me, is that with B moved, I'm expecting that we'd be in a position to generate more cash, and therefore, we'll be in a position to return more funds to shareholders. And that's where we said a minimum of 20%, and it will be a higher number. Whether or not we take off 1/3 or make some adjustment to that, for the interim versus the final weighting, like you just asked, I think that, that's yet to play out. But it would not be unusual to pay a slightly smaller dividend for the interim and higher one for the full year. But I think it needs to be considered.

Okay. And I must say it's good to see that you're paying the dividend and not passing it like a lot of the other companies.

Thanks, Richard.

The next question is from the line of Yuen Low from Shore Capital.

Can you hear me?

Hello? Hello?

Can you hear me now?

We have an incredible echo, Yuen.

[Technical Difficulty]

I would say I think we're just going to have to move on and maybe Yuen could come in on another line.

The next question we have is from the line of Richard Larkins from The Chester Partnership.

A couple of questions, please. Why was the finished ilmenite written off? And second question is relating to the current security issues in Mozambique, how does the company's insurance cover? And -- sorry, how does the company's insurance cover war and terrorist risk? And related to that, what's the company's view regarding on-site and local security provision?

Yes, I'll take that one. Richard, I'll take the first question. So back in 2014, Kenmare produced ilmenite and stored it outside on the tarpaulin cover. And over the last year or so, we've been drawing from that stockpile of finished product and making sales. However, when we got to the base, some of the material was contaminated with the underlying materials and required reprocessing through the ilmenite plant. And as we've been feed constrained, we were able to -- we found the time to reprocess that material. And therefore, it became subject to a second round of losses of the contaminated component [Technical Difficulty] recovery loss. That meant that we had to take a write-down of that recovery loss through that process. There was also -- as we did that process, there were some various small survey adjustments that took place at the same time.

I'll just answer the insurance question, and then I pass back to Mike or Ben on the local security. But just to supplement what Ben has mentioned. So whilst the ilmenite write-off has impacted on production, when we put that material outside, we made a financial provision. And so it affected on its performance. We recognized that at the time, Richard. With respect to your question on terrorist insurance, we have cover for riots and civil disturbance at the moment. But we don't have cover for war or terrorists. So that's the insurance cover that we have in place.

To the security at site, our own security force, which is a normal security force that is not armed, and it's [indiscernible] ensuring that copper wire isn't stolen and people don't siphon off diesel wire from our heavy mobile equipment, et cetera. Just a very normal security force. The government has allocated a detachment of marine police to locate -- to our site, some probably 10 years ago, as -- in response to maritime piracy activities in the Indian ocean, and those marine police is still stationed at our location. And there's also a normal police detachment at the location. So we're very happy with the normal provision of security. However, that's not something that is appropriate if there was a full-scale insurgency in Mozambique, and so further steps would be taken. While we are looking very closely [ and focus on ] events that are occurring at Cabo Delgado, we do not believe at the moment that they would represent a danger to our continued operations. And as such, we are comfortable with the present level of security provision.

We appear to have no further questions. So I will hand you back to Michael Carvill to close the webinar. Michael?

Yes. Thanks, Alex. Look, everyone, sorry, did that run on a little. We were slower than we anticipated in our presentation, but we really appreciate the effort of staying on the line, and hang your mind for so long. So thanks, everyone, and look forward, hopefully, to presenting in-person the next time this all happens. So thank you very much. Bye.