Kenmare Resources plc (KMR) Earnings Call Transcript & Summary

So good afternoon, and welcome to the latest Yellowstone Advisory Webinar with Michael Carvill, MD of Kenmare Resources; and Jeremy Dibb, Director of Corporate Development and Investor Relations. They will present the half year results to the 30th of June, which were announced on the 19th of August. [Operator Instructions] The format today is a presentation from Michael and Jeremy, which will last approximately 30 minutes, and then we'll have 10 to 15 minutes for Q&A. So without further ado, could I now hand over to Michael Carvill to take us through the results. Thank you, Michael.

Thanks, [ Alex ], and good afternoon, everyone. Good afternoon, ladies and gentlemen, and thanks for tuning into this Kenmare H1 2020 Results Presentation. As [ Alex ] mentioned, we have a slide deck, and we'd like to shoot through this as rapidly as possible so as to provide as much time as possible for questions and answers towards the end. So without further ado, Jeremy, I wonder, could we move to Slide 4. Yes. So Kenmare's strategy is based on 3 pillars: growth, margin expansion and shareholder returns. With regard to growth, we have been implementing a set of growth projects for the last several years. There are 3 projects, the cumulative effect of which will provide us with capacity to produce 1.2 million tonnes of ilmenite product per annum along with associated co-products. The final project in this group of projects is due for completion before the end of 2020. And so we're delighted to be sort of coming towards the end of this long process of expansion and growth. Because the mine is very fixed cost, as we mine more and produce more material, our costs don't change very much. And consequently, expanding production has a very significant effect on our margins. And we expect to increase our margins very significantly as we move from our present level of production. The middle of our guidance this year will be about 750,000 tonnes of ilmenite product. So to move to 1.2 million tonnes is a very significant growth profile. And with that, we will move into the first quartile of the revenue to cost curve of this industry. And with that expanded margin and higher number of units, we will have significantly higher EBITDA to provide more significant shareholder returns than we've presently been doing. And that is an important part of the Board's commitment to stakeholders is that, that shareholder returns will increase as we improve the margin and EBITDA of the business. So could we move to next slide, please, Jeremy. This is just a review of H1 2020. For me, the most notable thing that occurred in H1 is that we've been able to continue production through the whole period of the global COVID-19 pandemic. In my opinion, this is a tribute to men and women who have been working at site and have continued to very selflessly, pursue the continuation of production in very difficult circumstances. And it's something that many, many operations weren't able to do. I also note that we've been able through various twists and turns and facing various challenges, we've been able to keep the development project -- our last development project, which is the move of Wet Concentrator Plant B from its present mining zone out of a place called Namalope to a new mining zone where there is much higher-grade material to be mined. And that has -- that move is quite a complex project and that has proceeded basically on schedule and basically on budget through this whole pandemic. Also, in the first half of this year, we have commissioned Wet Concentrator Plant C. And through the whole of the second quarter, that worked at loaded capacity and delivered a meaningful production and added to our ability to mine process materials. And finally, I suppose looking at this slide, the thing that stands out to me is that despite the slump caused globally by the COVID pandemic and the necessary reactions that governments had to take to it to lock down their economies, the sales price for our weighted average basket of products has continued to increase throughout the period. So we're very pleased with that very robust performance by the product market. So turning to Slide 6. It's just a quick update on the pandemic. When COVID became an issue, we immediately effectively locked down the mine. We were concerned that we would not become a vector which brought COVID into either our mining community or the local community. And consequently, people who are not there were not allowed to return. People who were there were allowed to leave, obviously, but if they did so they wouldn't be able to return. And that meant that there's always 1 shift on R&R of our 4 shifts. So that meant that the 3 shifts that were left had to do the work of 4 shifts and effectively, that was for 3 months. And in fact, some people have had to stay onsite for much longer than that. And during that time, we developed social distancing procedures, hygiene procedures, very strict hygiene procedures, isolation procedures, quarantine. We developed -- we enhanced our clinical facilities very significantly. We now have a full high-intensity ward with the medical staff to operate it and we've stepped on wards. We have specific allocated isolation areas. And all of that has then allowed us gradually reintroduce people and then let new people sort of -- and let the people who have been there, go and take some well-earned R&R. We've also been supporting the local community with the provision of ventilators and CPAP machines and education and masks and all that stuff to try to ensure that the local community is as little hit by COVID as possible. And with that, Jeremy, can I ask you to give the ladies and gentlemen, a quick review of the financial performance during the first half.

Absolutely, Michael, thanks for that. In the interest of time, I will keep the salient points. But if you have any questions, please don't hesitate to answer -- or ask in the Q&A. Revenues were lower in H1 2020 due to lower production volumes as a result of forecast lower grades in 2020 ahead of the move of WCP B to Pilivili in the second half of this year, leading to higher production in 2021. This was partially offset by a 13% increase in the average prices received, as Michael talked about. Unit costs also rose due to the lower production as broadly flat operating costs were spread over fewer tonnes, a factor we expect to reverse following the WCP B move. EBITDA came in at $37.2 million, while profit after tax was $12.7 million, both reflecting those lower revenues. Net debt increased to $52.7 million as we continue to fund our capital development programs to lift production to 1.2 million tonnes per annum of ilmenite plus associated byproducts. We've declared a dividend of USD 0.0231 a share. This is the third dividend that we've now declared, and it's in line with our promise to return a minimum of 20% of profit after tax to shareholders. Importantly, we remain financially well resourced to fund the completion of the WCP B move while continuing to pay dividends. So stepping into Slide 9. I'd like to draw your attention to the chart in the top right-hand corner. Our average sales price has now risen for the eighth consecutive half, representing strong market fundamentals for the quantities that we produce. Shipment volumes decreased 14% in the half due to the lower production levels, so we had 150,000 tonnes of finished product inventories at the end of the half and expect sales to exceed production in H2 as some of that inventory is drawn down. On the bottom right-hand chart, you can see how the volume offset by $16.7 million, whilst pricing uplifted by $11.5 million, and we also benefited $1 million by way of a better product mix. On Slide 10, you can see the full income statement. Freight costs were down year-on-year, reducing revenues but this also reduces costs as effectively a pass-through from our customers, depending on the way in which we arrange shipping with them. Costs were broadly flat. While operating costs -- profit, sorry, reflected the lower sales. As a reminder, depending on the shipping makeup and pricing, the ilmenite represents about 2/3 of our revenues with zircon and other products representing the remaining thirds. Slide 11 reconciles our cost of sales to our cash operating costs. You can see the midway down the page, the total cash operating costs actually fell 2% year-on-year. However, the lower production volume is down 19%, principally due to the expected reduction in grade at this point in the mine path resulted in a reciprocal 20% increase in unit costs. These cash cost per tonnes for ilmenite increased further due to lower co-product volume of zircon concentrates and retail and lower pricing principally of zircon. Importantly, this $183 a tonne that we achieved in H1 2020 is expected to fall to within a range of $125 to $135 in 2021 following the move of WCP B and benefiting from the higher production volumes. On Slide 12, you can see the balance sheet. There are really 3 main elements here. The increased property, plant and equipment that was up due to the capital spend in the first half of the year, offset by some depreciation. Secondly, you can see that there was an increase in bank loans. This is as we drew down our debt facilities earlier in the year to ensure that we had liquidity during a period of uncertainty brought on by COVID. And finally, there were some working capital increases, but these are really captured best on the next slide. So on Slide 13, you can see the 2019 cash bridge, where essentially, our operating cash flow covered the property, plant and equipment and other cash outflows. Whereas in H1 2020, due to the lower production, our operating cash flow has been a bit lower, although this obviously only represents 1/2 rather than a full year of production. There was also a $29.8 million working capital outflow. This is principally related to an invoice discounting facility that we would usually use but haven't done because we've drawn down our debt. It doesn't make sense to factor invoices from customers, which effectively means that we can get paid immediately for invoices that are due to be paid depending on their payment terms in the future. But because we've drawn down those debt facilities, it doesn't make sense to do those. And so we haven't drawn on those facilities. And therefore, there's been a working capital build. Whilst we don't give forecasts on what that might be, we are not expecting that to increase to the same level in the second half and should stay around the same for the full year. Beyond that, the timing of shipments also has a big impact because we ship in relatively large bulk quantities. And so if a shipment falls in one half or the other, that can have a significant impact, and we shipped a lot of products in June of this year at the end of the half. And then with regards to our interim dividend, we declared it at 20% of our profit after tax, which is in line with our promise to pay out a minimum of 20%. That relates to a $2.5 million dividend distribution, which on a per share basis is equivalent to $0.0231 per share. The record date for that is on the 25th of September and the payment date is made on the 23rd of October. We have told previously about higher capital returns from 2021 when free cash flow is expected to increase due to those reduced operating costs and also benefiting from not having the level of capital development that we've had in the past few years. However, we haven't spelled out how that will be made to shareholders yet. It may be in the case of an increased payout, a special dividend or potentially share buybacks. So passing back to Michael.

Thanks, Jeremy. We believe this mine is a very sustainable mine. We operated using hydro-generated electric power, which is 0 carbon -- has a 0 carbon footprint, and we rehabilitate as we go. So we don't leave slag heap or a big tailings dam or anything like that, the land is rebuilt, revegetated and given back to farmers. And we do it also with a very good safety record. We are rated as 5-star safety -- as far as our safety systems are concerned by the rating agency that's applicable. And we have a low safety -- and we have a low number of injuries. However, those injuries increased a little bit in H1 2020, and we have now refocused our attention and have a whole bunch of programs going to bring people's attention back to the safety issue. Could we move on to the next slide please, Jeremy? During Q1 2020, we mined more ore than we have ever mined before. So it's quite -- we're quite pleased with that. That's in part a consequence of commissioning Wet Concentrator Plant C, which is a smaller Wet Concentrator Plant focusing on area with slightly -- with somewhat higher grades that was -- that's sort of difficult to get with the 2 larger wet concentrator plants. But -- so the contribution of Wet Concentrator Plant C allowed us to have -- they -- a record production for the quarter. However, if you look at the grade profile on the graph on the right-hand side, you can see that we have been experiencing falling grades over the last mile and those falling grades increased. Those grades -- there was further reduction in grade in H1 2020, which was anticipated. This is coming as Wet Concentrator Plant B comes to the end of the period of mining in the present ore zone at Namalope. And as always happens, you tend to mine the good stuff first. And as you finish up and tidy up at the end, you have to end up taking lower mine -- lower-grade material. As we move to the new mining area, at Pilivili, we encounter much higher grade and also easier mining conditions. And so at that point, we -- the grade profile jumps forward again and provides us with the opportunity to produce additional HMC to give us capacity to operate at 1.2 million tonnes per annum. Can we move on, please, Jeremy to next slide? So because of that reduction in grade, we produced less HMC than we have previously produced. The grade was 28% lower, but our decrease in HMC production was only 12% less, and that's a consequence of good mining operations. And really everything else on that slide really flows from that point. So I think I'll just move on to the next slide, Jeremy. So our pathway to 1.2 million tonnes of ilmenite production per annum. So that's -- it's a very significant forward step, and it's the culmination of a lot of investment, a lot of work and a lot of focus on increasing this production. So our first project was that we upgraded Wet Concentrator Plant B from 2,000 tonnes per hour to 2,400 tonnes per hour. That was completed in 2018. In 2019, we built a brand-new Wet Concentrator Plant and a new dredge and opened a new mining area with the new mining plant, that's Wet Concentrator Plant C. It actually completed or got commissioned in the first quarter of 2020, so we didn't get contribution from it in the first quarter 2020, contribution really started in the second quarter 2020. In 2020, most of our focus has been on the move of Wet Concentrator Plant B, which is the new enlarged Wet Concentrator Plant of 2,400 tonnes per hour. From its present mining zone, where it's encountering those reducing grades that you saw in the previous slide, to Pilivili where we've seen much more enhanced grades. That project is a significant project, and it required the building -- it requires the building of a 23-kilometer road, which has a capacity to take the pressure associated with moving this plant along it and involves very specialist contractors to do the move. So if we could move to the next slide. So Pilivili has very favorable mining characteristics. We're very much looking forward to getting there. However, the project did encounter some challenges provided by the world on -- worldwide restrictions associated with COVID-19. And those -- while we have managed to get around most of those restrictions, and we believe that we will start mining in Pilivili and roughly the same time and roughly on budget. We expect that there are some parts of the project that won't be complete in time. And that is one that there is a positive displacement pumping system to pump the heavy mineral concentrate back to their mineral separation plant for a separation into final products. That was being manufactured in Germany and was slowed down by COVID restrictions in Germany. So we will start without that, and we will simply truck the material back to the Wet Concentrator Plant for the first couple of months. And likewise, with our overhead transmission line, the pylons for that were being manufactured in South Africa and were impacted by the shutdown in South Africa. So again, when we start in Pilivili, we will be starting with our own diesel electric generating system, which we have as a standby system, but which we use for the first couple of months to get started. So thanks, Jeremy, maybe we can turn on to next page. And these are just a few photographs of preparations for the move of Wet Concentrator Plant B. It will be moved, it will be carried by self-propelled mobile transport units, and that is one of what you can see in the top left photograph. That unit has -- concrete units have been put on top of it to mimic the point pressure that the road will have to bear when the main Concentrator Plant is moved and -- as a test and the road stood up beautifully to the test, so we're very pleased. The photograph on the top right-hand side is a relocation pond. So the Wet Concentrator Plant B will be floated into that pond. Pond will be sealed, water will be pumped out and it will settle down onto those concrete plinths you can see in the photograph. The self-propel mobile transport units will come in underneath it and then it will proceed along the road that you can see there extending from the pond. And those are just a couple of photographs of the road. And we go on. So with B mining in Pilivili, we'll be producing much more heavy mineral concentrate. And so we have to make sure that the rest of the project is capable of processing and exporting this enhanced level of output. And consequently, we have been looking at where bottlenecks might arise in the mineral separation plant, and we have been altering the mineral separation plant by adding extra units of separation equipment or increasing capacity of bucket elevators or conveyor belts to ensure that it is capable of operating comfortably at 1.2 million tonnes per annum. And likewise, with our load out facility, we have a jetty of our own port facility. We load our own transport -- transshipment vessels there, which go offshore and we -- they then transfer that material -- the product material into customer vessels in the lee of islands that just lie offshore. And we have been working to increase the capacity of this transshipment system so that it's fit-for-purpose and ready to load 1.2 million tonnes per annum. So all aspects of the projects are being dealt with. So thanks, Jeremy, maybe turn on to the next page. Okay. Just a quick review of the market. Just to reemphasize what Jeremy is saying, the graph he showed previously was of the weighted average of all our products. This is ilmenite. You can see the ilmenite price has been increasing steadily. This is a consequence of a lack of investment in feedstock, in the mining of titanium feedstocks for the last 5, 7 years and increased demand for those feedstocks, which has allowed world inventory, which was somewhat of a large world inventory to be gradually used up and with consequent gradual tightening of the market. If I could turn to the next page please, Jeremy. And part of the reason for that are these 2 graphs. If you can see on the left-hand graph, that's pretty clearly steadily -- if not steadily, but consistently increasing production of pigment in China. And then if you look from the middle of 2019 on through to 2020, you can see that the production of feedstocks to support that pigment production in China has, in fact, been reducing. And the consequence of that is that Chinese manufacturers of titanium pigment have been seeking feedstocks in the world market and therefore, competing in the world market with western -- with western pigment producers, the consequence being tighter markets and gradually increasing feedstock prices. Now it is possible that as a consequence of the COVID pandemic slowdown that we will see significant softening of prices towards the end of the year. We're not quite sure. We haven't seen it yet, but it's in fact, quite probable. But nonetheless, we still feel that the medium and long-term fundamentals are extremely strong in this market. So thanks Jeremy, can we turn to the next page. So we have seen very solid demand in the H1 2020 and that has flowed into H2. So far, we haven't seen any significant reduction in demand. And in fact, we are very fully sold. We have a couple of [ spudding ] still to make, but otherwise we're pretty nearly fully committed. We do expect to see some softening at the end of the year but again, I just have to comment that I don't think that is a long-term softening. It will be transitory period as we get out of the COVID situation. Zircon, which is an important coproduct, has been softer, and that softness has been exacerbated by COVID. However, there are a small number of producers that make up a significant majority of the supply in this market, and they have operated in a quite a disciplined fashion. And as a consequence, while the price for zircon has softened somewhat, it hasn't softened tremendously. And again, the long-term fundamentals for zircon are extremely strong. So thanks, Jeremy, may we turn to the next page. Yes. So when COVID struck, we weren't sure that we would be able to keep the Wet Concentrator Plant B project on schedule. And therefore, this will have -- this has a significant consequence on production for the year. And in fact, we weren't even absolutely positive that we would be able to continue mining and consequently, we withdrew our guidance. Now with the knowledge that we can continue to mine, and we have clear sight towards the end of the COVID -- sorry, of the Wet Concentrator plant B project, we have reinstated our guidance. And the guidance is as laid out here. I don't think it's necessary to read through every aspect of it, but we have restated our guidance and basically, it's 70,000 at 100,000 tonnes of ilmenite per annum for this year and associated coproducts. So maybe if we move on Jeremy, thanks. And so the question is, why have we been doing this? Why have we been spending so much money focusing so hard, working so much to implement all these projects, what is the goal? And the goal is, as you can see here, is to take a company which was operating in the worst quartile of the revenue to cost curve and move that position to the best quartile of the revenue-to-cost curve and that's where we believe we will be in 2021 with the enhanced production. And that improved position of the cost curve is higher margins providing better returns. But also, it provides great stability in the future in the event of a commodity downturn in the future. This company will be able to ride it out as it's extremely rare that a commodity downturn bites down into the premier quartile to the best quartile. So thanks, Jeremy. If we could turn on. So finally, just a quick summary. We have a very large-scale asset. It's a world-scale asset. We have a market-leading position in the industry with a strong balance sheet. We mine that ore body responsibly. We have a good safety record. We feel that we have done it in a sustainable fashion. We focus on operational excellence, all of which has provided sustained profitability, and we have very significant growth in the pipeline due to emerge from that shortly, which we believe will deliver significant shareholder returns. And so I think that's the last of our slides, [ Alex ]. I'm happy to take some questions, if anyone has any questions.

Perfect. Yes, we have a number of questions. So thank you, Michael and Jeremy, for taking us through that presentation. [Operator Instructions] I'm going to start with the first couple of questions, which I'm just going to group together, and they are regarding the move of WCP B. And the questions are, in relation to the move of WCP B, what work still needs to be completed? And what is the biggest risk in moving WCP B.

Well, I mentioned that the positive displacement pumping system still has to be completed. The overhead transmission line still has to be completed. The road is not completed. It's nearly complete, but it's not complete. There is infrastructure work to be done at the location of Pilivili, where we're building a new storage warehouse and workshops, et cetera. And of course, we have to move it. We have to do the move itself. And where is the greatest risk? The greatest risk, I suppose, is risk to schedule because we will not move this based on priority indeed. We will move it when we feel that everything has been done, all the risks are being mitigated to the largest extent that it's possible to mitigate them and when our operating team feels that they are comfortable that the time is right, and we're ready to go. And so therefore, we won't push them to move on a particular date or on a particular schedule. We'll do it when we're happy that risks have been -- has effectively eliminated as possible. And consequently, that means that there is some risk to schedule. And I see that as the most germane and pertinent risk.

Okay. And just another one in connection with the move. I think you mentioned there'd be some trucking of the product once the WCP B is up and running and also that you'll be running generators before the electricity pylons are there. So the question is, how long will the increased costs relating to trucking product and running the generators go on for?

Look, I think somewhere around 3 months for both of them. We still have to manage to get the pipeline for the positive displacement pumping system into the country. It got badly held up by COVID restrictions. It was due to be manufactured in Spain, it got moved to Denmark, and then it has to be moved to Bahrain. So it -- we've had certain challenges there. So we think about 3 months we'll get everything pretty well finished.

[ Alex ], if I could just add there as well. I think the other benefit of the fact that we'll be trucking using temporary diesel gen sets for the power, is that although it brings some additional costs to it, it also reduces the risk profile of the project. So the positive displacement pump line whilst we, as Mike said, expect to ramp that up pretty quickly, it also gives us an alternative while the trucking is in place. So that sort of derisks the project in many ways.

Okay. Moving on to pricing. Question here is, please, would you give us your views on the ilmenite market? What prices are you currently getting? And where do you see the market heading over the next year or so?

Look, we don't like to give precise prices for our ilmenite products. And we just don't do it. It's an opaque market. Those prices are confidential, both to customer and supplier. But we have given our average price for weighted average basket of products for the half, which is in the presentation you just received. Where do we see the prices going? We've mentioned that it's highly possible that there could be softening of prices towards the end of the year. However, what I was pointing out with regard to overall tightness of the market, I think is the prevailing force in the market. And if there is a softness that occurs as a consequence of COVID, we believe that it will be transitory. And the overall trajectory of the market is for higher prices for ilmenite.

Okay. A question here on the security situation. Could you comment on the security situation around your area? There have been some Islamist terrorist attacks in Northeast Mozambique, how near to you are these attacks? And does this have the potential to be a growing problem?

So the attacks all have occurred in the north of Cabo Delgado province and that area is about 500 kilometers north of us. But it's not 500 kilometers in U.K. along the M1 motorway, it's a very different area. And so that travel, that distance is quite significant. So we don't see it as a near-term hazard or risk associated with our business whatsoever. Nonetheless, we're obviously conscious of it and are watching it closely. And as far as security in our area is concerned, we do not -- our security force is an ordinary security force. They're not armed. They're involved in stopping people stealing screw drivers and cans of diesel and things like that. It's a very normal situation for any mine that was operating anywhere in the world, normal security issues. The occasional bit of theft and things like that, we don't have any other issues to deal with.

Okay. You're taking production up to 1.2 million tonnes per annum. How long do you foresee this level of production being sustainable for? And what plans do you have to increase production beyond that?

So our mine plan at the minute sustains that production for every year, except 2025 when there's a dip until 2040. And the dip associated with 2025 is for Wet Concentrator Plant A, which is moving to a new zone, and there's a period when it's not mining at full capacity so that's that dip. Do we have any plans for further enhancing production? I think we will look at it, but our objective is to get to 1.2 million tonnes, achieve and sustain 1.2 million tonnes and use the margins that we create by that production to provide returns to our shareholders. And we have a very supportive shareholders who've invested in the company and supported it for a long time. And it's -- I think it's the company's turn to repay those -- that support that the shareholders have given it. So we are focused on achieving 1.2 million and maintaining that 1.2 million, which is not easy like that will require focus and dedication and then using their proceeds on that to reward shareholders.

Okay. Thanks, Michael. We've got a link question coming in from someone else, which says, you've made good progress towards the strategic goals, which should mean 3 to 4 years of higher returns. Do you have any more visibility on the next tranche of capital expenditure, which has been flagged for the WCP A move in 2024, 2025?

We're working on it, and we're doing base work on the scoping study for that project. And we haven't got to the stage of pre-feasibility or anything like that. So we can't suggest anything other than it's likely to be somewhere around the same cost as wet concentrator plant being moved.

Okay. We've got a couple more questions here. [Operator Instructions] Moving on to the government of Mozambique. What is the government's share in Kenmare profits, corporation tax and royalties? And do they have an equity share?

They don't have an equity share. And maybe, Jeremy, you could give a better more nuance to answer than me on the other aspects?

Yes, absolutely. So broadly speaking, the government receives about a 2% or equivalent to a 2% revenue royalty, which is actually split as 2 different businesses. So you have the mining company and the processing company. The mining company actually pays a 3% royalty, but obviously, it's not in the final product. And the processing company pays a 1% royalty. Those 2 added together equate to broadly 2% royalty on revenues. The company also pays corporation tax on the mining company, and that's at a 35% corporation tax rate. The processing company actually sits in industrial free zone, so it doesn't pay any corporation tax. This is the same tax structure as other big companies or other big projects, I should say, at the time, were receiving. So the Mozal smelter is under a similar type of fiscal structure. And the government doesn't have any take with regards to ownership of the project.

Okay. We've got one final question here, which is will Kenmare increase their dredging fleet in the near future?

We have no plans to do so.

Thank you, Michael. Thank you, Jeremy. As there are no further questions, we will come to the end of this webinar today with Kenmare Resources. Thank you, Michael and Jeremy, for presenting so well. Thank you for everyone who has attended. As you leave the webinar today, you'll be directed to a feedback page. And if I can ask you to complete the feedback, that would be incredibly helpful. Our next webinar is with Checkit PLC on the 16th of September. So thank you very much for attending and see you again soon. Goodbye.

Thanks. Bye.