Kenmare Resources plc (KMR) Earnings Call Transcript & Summary

Welcome to the Kenmare Resources Half Year Results Presentation. We are joined by Michael Carvill, MD of Kenmare Resources; Tony McCluskey, FD; Ben Baxter, COO; and Cillian Murphy, Marketing Manager, who will present the results for the 6 months ended 30th of June 2021. Also in attendance is Jeremy Dibb, Director of Corporate Development and Investor Relations. [Operator Instructions] I will now hand over to Michael Carvill, MD of Kenmare Resources.

Thanks, Alex, and welcome, everyone, to Kenmare Resources H1 2021 Results Presentation. Just to make a few introductory remarks, the bulk of its presentation on our financial will be conducted by Tony McCluskey. Cillian Murphy, Marketing Manager, will give a short updates on the market, and then we'll give -- review -- Ben Baxter, Chief Operations Officer, will give a review on operations. And I'll provide a few comments on the outlook at the end. Jeremy Dibb is also available for questions, and we hope we'll be able to answer your questions towards the end of the thing. So if we could just turn to the next slide, Jeremy please. So H1 2021 was a half of record production and profitability for Kenmare. So we're really delighted by the performance, I'd say, of the operation during this period. As we have mentioned before in various presentations, our strategy is based on 3 main pillars, gross margin expansion and shareholder returns. So the completion of our growth projects over the last couple of years has seen a 49% production increase, which is, in turn, allowed our margin to increase from 33% to 49% and -- just to note that the second quarter of 2021 was much better than the first quarter. So we're on an improving trend. So we're hopeful that, that margin can improve further. And all of this has allowed us target 25% profit after-tax dividend payout, with our interim dividend declared at $0.0729 per share, which is more than triple the 2020 interim dividend. So we're really pleased by that, very pleased. If I could look at the next slide, Jeremy please. Just a few snapshots of what's been happening. You can see in the graph on the left-hand side of this slide, that shipments are up quite a bit from H2 2020. Sales prices are up a little bit, net sales prices after shipping costs FOB prices. But the combination of both of those and good control on costs has allowed EBITDA and profit after tax to increase very substantially. And so those are the results that we've been hoping for and have now been delivered. We're very excited that our first carbon emission reduction project, the RUPS project, is now well underway and expected completion is early 2022. And RUPS will -- firstly, it's a strongly positive NPV project. So it's a good project by any circumstances, but it also provides a material reduction in carbon emissions from an already low position. And our pre-feasibility study for the move to and the mining of an Nataka ore zone is well underway also with the preferability study expected to be finished in 2022, well ahead of a requirement to move contrary to Plan B -- sorry, contrary to Plan A in 2025. So if I can look at the next slide, please Jeremy. So Kenmare has always been committed to the safety of its employees and the community and to operating its -- to operating the project in a sustainable fashion. And in terms of sustainability, I'd like to cast our minds back to the early investment Kenmare made in an overhead transmission line 170 kilometers long, 110-kilowatt overhead transmission line, which allows us to access sustainability-generated electrical power from the Cahora Bassa hydroelectric power station on the Zambezi River. So the bulk of our power is already sourced from sustainable generating facilities. In H1 2021, we issued our first sustainability report. We're very proud of that report. I hope you've got the opportunity to look at it. Our gender diversity also increased to 11.5%. So that's a continually growing number of women in our workforce, which is adding capacity and strength to our workforce. As I mentioned, the RUPS project is underway, which will materially reduce our carbon dioxide emissions from an already low base relative to our peers. And a long-term carbon emission strategy is under development. In terms of safety, we have a new risk assessment protocol in place. That plus, focus and attention by our senior management, but mainly every single one of our colleagues taking responsibility for their own safety and the safety of their colleagues, has allowed us a 44% reduction in lost time in frequency, which is great, and we're all very pleased with that. And finally, COVID-19 has been a scourge on the planet for the last 18 months and no less so for Kenmare Resources, and especially during H1 2021, when we were hit by the second wave of COVID that spread through Mozambique. And very sadly, 5 of our colleagues have passed away. And so I'd like to offer our sympathies and condolences to the families of those people. But nonetheless, we have been able to manage through that period. And I'm delighted to say that Kenmare has now completed our first round of COVID vaccinations for all of the staff of the company and their families and has issued COVID vaccinations for usage in the local communities, and we're now well underway in the second round of vaccinations. So we're very hopeful that the COVID issue is -- we're starting the last chapter of the COVID issue. And after everyone has been vaccinated, that we will start to feel much more protected against this deadly virus. And so with that, perhaps I could ask Tony to give a review on the financial results. Please, Tony.

Thanks, Michael. Next slide, Jeremy, and welcome, everyone, this morning. I'll start with the income statement. And we're very pleased to report, I think, a large improvement in earnings performance with a rising EBITDA and net profit after tax. This is due principally to the increase in production, which has helped us reduce unit costs and the increased production has also resulted in increased sales volumes which have been sold at higher prices, more detail on that later. The revenues, FOB, are up 51%. And for this half year period, these are more heavily weighted to ilmenite. You can see in the pie on the right-hand side, that 86% of those sales for H1 2021 relate to ilmenite and comparable period last year that was 72%, which is a more normal ratio of ilmenite to coal products. Our costs will be addressed in a later slide. The increase in finance costs is a result of full debt drawn for most of the half year 2021, and it was only partly drawn in the half year 2020. And the foreign exchange loss relates to a sharp strengthening of the Mozambique metical in April, but has since started to weaken. I suppose the one number that I would call out here that is a little bit counterintuitive is the tax. We see a strong improvement in the profit before tax from $16 million to $50 million. And the reason is because the investment that we made last year in WCP B move and in WCP C are now both fully available as depreciation and hence they provide -- and will provide a tax shield for a while. So that results in a slight reduction in the tax payable for the period. But the result in improvement in earnings with EBITDA is up 121% and profit after tax is up 278%. So strong earnings. Next page, please, Jeremy. Moving on to sales and pricing and shipping. Our total average prices are up by 5%, led by ilmenite being up 18% and primary zircon up 4%. The non-ilmenite products, which is mainly zircon, have a much higher unit price on margin than ilmenite. So there is a mix variance, which I referred to on the previous page, by selling proportionately more ilmenite in the first half of this year compared to last year. And so the average overall price is reduced to about 5% less than you might think in the period. And you can see that mix variance in the chart on the bottom right hand corner. This is partly due to a large zircon and rutile shipments that had been planned for late June, slipping into July, sometimes this happens. So we'll see the benefit as these sales materialize in the second half of the year. Moving on then again to unit costs. This slide shows the usual unit cost per tonne of total product and cost per tonne of ilmenite. Our total production increased by nearly half, 49%. But the adjusted cash operating costs only increased by 16%, and this is due to the relatively high weighting of fixed costs in our business, which is a good thing when we're able to increase our production. So hence, the total unit costs are only up by 22% -- sorry, down by 22%. The ilmenite unit cost at the bottom of the page is down by 5%. But we would expect to see a greater reduction in the second half of the year when we take into account these high-margin sales from the zircon and rutile that slipped into the second half of the year. Of the cost increases, we expect some of them to reduce in time. You'll see them on the top right hand corner there such as the HMC haulage from Pilivili once our pumping system is fully operational. And hopefully, we'll see some abatement in the COVID-related costs over time. We haven't seen much mining inflation in the first half of the year, but we expect to see some signs of this in the second half of the year, and we've continued to work hard to keep our costs under control. The next slide shows -- it's an illustration of how our increased production in the first half of 2021, particularly reduces total unit costs. And again, given the mix variance with the lower zircon rutile in H1, it has a pronounced effect. So the net ilmenite unit cost, which is the orange line, has yet to show the full benefit. But we expect to see this improve in the second half of the year as we get those, and those sales have already got away. Slide 12 shows the net debt bridge from $64 million at the end of December to $76 million at the end of June. And so as you would expect from the strong earnings that I've just spoken about, we've had a strong operational cash flow. And this has been offset by $31 million of CapEx. Some of this relates to the WCP B move creditors paid at the end of the -- at the end of -- early in this year. So B move was largely completed at the end of last year, but some of the creditors were only paid in the first quarter. And in addition to that, we've got a $42 million working capital movement, which is a bit unusual. This is mainly due to the reduced use of invoice discounting, which we have been using up until the end of last year, which means we have an increase in trade receivables and a reduction in the trade creditors from elevated levels at the end of the year, mainly relating to timing of payments. This working capital movement brings us back to what I characterize as a more normalized level of working capital. So we're not expecting to see it in the second half of the year. You'll also see there that we've got dividends and interest paid as normal and we would expect strong cash flow -- strong operating cash flow in the second half of the year to result in a reduction in net debt by the end of the calendar year 2021. So on the balance sheet, you can see these working capital movements that I've just spoken about reflected with increased trade receivables and reduced creditors. So that's as we've already talked about. And also, as expected, the WCP B move are now behind us. So the additions in plant, property and equipment are very much reduced compared to last year. And this is, as we've guided and flagged for some time. Also interestingly, you'll see the debt has reduced with the repayment of $20 million of our revolving credit facility. Our facilities are $150 million, comprising $110 million of a term loan and $40 million of our revolving credit. We've now paid down half that revolving credit. And with the strong cash flow that we expect for the second half of the year, we think we'll be in a position to pay down the other $20 million of that revolving credit, which is available to be redrawn if necessary, to the end of next year. Cash at the end of June was a healthy $56 million. And so we continue to maintain a robustly strong balance sheet, which is one of our commitments. My final slide talks to dividends. Thanks, Jeremy. And so we're delivering on our commitment to return cash to shareholders. We've flagged that we plan to exceed our stated policy of paying a minimum of 20% net profit after tax payout ratio. And we've guided 25% for 2021, of which, because it's an interim, 2/3 of this amount will be payable in October this year. So coupled with this elevated payout ratio, and the increase in net profit after tax in the first half of the year, the resultant dividend is up by more than 3x that which was paid for the first -- relating to the first half of last year. And we look forward to building on this solid progress through the remainder of the year. So with that, ladies and gentlemen, I hand over to Ben, Kenmare's Chief Operating Officer. Thank you.

Good morning, everybody. Jeremy, if you could move to Slide 16, please. So I'd like to start off by sharing our enhanced commitment to sustainability with you. Our sustainability strategy is under development right now. And this includes a significant focus on climate resilience and decarbonization. One of the things that we've already got started with though is emissions reduction projects. And as Michael briefly outlined our RUPS project is already underway. And this is aimed at reducing diesel consumption across the mine by 15%. And so there is obviously a significant carbon dioxide reduction in emissions going with that. Our rehabilitation plans have been updated to include studies which will improve soil fertility and biodiversity in our rehabilitated areas. And we are making continuing improvements on gender diversity. This has risen to more than 11% females in our workforce at the end of the half year. We've improved our transparency of reporting. And this year, we were pleased to publish our first sustainability report. And over and above that, some of our customers have been asking us to report to the EcoVadis Agency -- ratings agency. And we were pleased to do so and received a Silver Award for that. What I'd really like to then move on to is our significantly improving safety performance. We had one lost time injury during the period and have worked more than 3 million hours without a lost time injury. This brought down the lost time injury frequency rate to 0.14, which is an excellent performance from the team. It's come about because of a significant improvement in risk management across the business and as well as that, improving safety leadership in the workplace. So I'm really very pleased to share that improved result. If we can move on to the next slide. On to production, and we delivered record excavated ore volumes in the first half of this year, approaching 20 million tonnes of mining. This came about because of both improved throughputs and improved utilizations in the mining areas and over and above -- and we expect that to continue into the second half of this year. The heavy mineral grades have also been strong, particularly the Pilivili contribution. And that continues into Q3 as well. While although it does moderate in Q4 of this year, and then for next year, we see grades of around 4.1% through the year. Next slide, please. Our H1 production review, therefore, is significantly impacted by the additional mining and that led to a 43% improvement in heavy mineral concentrate production. And this was influenced by the Pilivili mining coming through and also a full period of operations from WCP C in this period. I'm delighted with the ilmenite production. It's up 52%. It's our best ever performance. And our operations in the second quarter particularly have significantly improved. We ran at a 1.2 million tonne run rate for more than 3 months now. And it's -- as I say, it's our best performance that we've had. The co-products and the concentrates followed suit. Although they were tempered a little bit by the impacts of COVID-19 in Q1, we have people shortages in our mineral separation plant, particularly, and that impacted on plant maintenance and process efficiencies during the half. However, we've recovered from that now. And particularly, our mineral recoveries in the mineral separation plant improved in the second quarter and we delivered a rutile recovery improvement project as well. So I think we're looking much stronger for the second half of the year on process efficiencies. On shipping, we saw a 44% increase in shipping. So we were able to keep up with the additional production that was being made. And that came about as a result of improved utilizations on our transhipment fleet following the improvement works that took place in 2020 and some in the first half of this year. And also, that's resulted in significant improvements in load-out cycle times, our rate of shipping has really improved. We saw that there was a rollover, as Tony mentioned, in shipments into H2. And so what we expect to see is a strong H2 on shipping. And all of that brings us to say that we're on target, and we reiterate our guidances for all of our products. And moving on to development projects on Slide 19. Of 1.2 million tonne ilmenite project delivery, WCP B is substantially complete. We have seen that the ramp-up of the positive displacement pumps, however, which is the remaining component of this project, have been a bit slower than expected. The system has been designed -- has reached its design throughput books, but the utilization of the system has been impacted by the reliability of some of our componentry. We're also learning how to use that system. It's a new system for us at the moment. The impact of that is that whilst it does not impact the HMC production and it does not impact the product output of the company, there is an impact on costs as we see -- as we will see some continuing road haulage this year. At WCP C, I'm pleased to say that, that project is now complete. The constant -- the remedial actions were completed in the first half of the year and the plant is running at its design and expected output. It's running at 400, 500 tonnes an hour, more than 80% utilization, and its products and product grades and recoveries are both above the expectation. So we're very pleased with how that project is delivering. And we're now in the process of formally closing out that project and its final costs are coming below budget at $43.5 million. The rotary UPS is a project that is now underway. This project will deliver improved utilizations at the mineral separation plant, mitigating the impact of power outages and the need to use diesel generators to sustain the MSP. That diesel reduction that comes from that is the -- around 15% reduction in diesel consumption and therefore, there is a knock-on reduction in carbon footprint. The RUPS units have been completed -- fabrication has been completed. They are now ready for transportation to site, and there's a photograph of one of them during the factory acceptance test there on the right. However, the project has come across some higher costs. And when we went out to tender, we got costing back, which was quite significantly greater than our expectation. We had to revise our contracting strategy, and we went out to a retender. And this brought down the costs quite significantly from our first round, but still, we see a little bit of cost creep to $18 million. And because of that process of retendering, we lost a little bit of time. And so now we expect completion to be during Q1 2022. Moving on to my last slide, I'd like to just talk about a bit about longer term. The Nataka prefeasibility study is underway and it's scheduled for delivery in 2022, which is well in time for an expected mining to commence in the Tucker in 2025. We're developing ore body knowledge right now, and that's so that we can get confidence in the resource, but also that we can really develop a mine plan that is resilient. And for that reason, we've had placed particular focus on geotechnical testing and also on the hydrogeological modeling so that we can understand the water impacts on this mine. Over and above that, of course, resource modeling is underway, and we are also looking at the product qualities that will be in the Nataka ore body that will come from the Nataka ore body. We've successfully completed a hydro mining trial in Namalope. And this proves out a low-cost mining method that can supplement our dredges and operate well in the higher signs that are expected. We've progressing well with the process flow sheet. Test work is underway to manage slides and also to look at the strategies of tails deposition in a highest lines environment, and that will be a major part of that study. So the PFS is due in 2022. It will facilitate both the CPA and WCP C to move to Nataka in time. And the relocation is now thought that it will not follow the same methodologies as WCP B, i.e., by the self-propelled modular transporter route. But this time, WCP A will dredge its way into Nataka and then mine high-grade path through the Nataka ore body. This means that there is a -- it has been flagged before, there's a slight shortfall in 2025 ilmenite production. And we've committed studies on addressing that shortfall. So overall, we can continue to be a 1.2 million tonne ilmenite producer on a sustainable basis. And that concludes my slides. I'd like to pass over now to Cillian, please, to deliver the marketing report.

Thanks, Ben, and good morning, everybody. I'm going to give an update on what we saw in our product markets in the first half and then give a bit of an outlook as well as to what we're seeing now and for the rest of the year. Starting with the first half of this year, we saw robust markets for all our products, and that was really driven by demand in the first half as global economies came out of lockdowns around the world and economic stimulus was pumped into them. driving demand for our downstream products. We don't believe there were a lot of inventories in the chain, and that flowed through straight through to both ilmenite, and zircon. As a result, we saw prices increasing for all our products, and ilmenite more so shown on the graph here, and that's also impacted by the shipment that slipped into July, as Tony touched on earlier. Supply constraints were evident in the market really late in the half and has started to have an impact late in the first half of this year and also moving into quarter 3. So we expect that trend to continue. Now if we move on to the next slide, I want to touch on ilmenite, our primary product. And what we've seen is very strong pigment demand from a small blip in the second quarter of last year, and that's continued that momentum into the first half of this year, and importantly, quarter 2 being stronger than quarter 1. In terms of pigment demand, we actually understand that quarter 2 was a record for pigment demand. What's encouraging to us is it's quite global in terms of the demand we're seeing for our ilmenite sales. So all the major ilmenite-consuming regions are acquiring about more material at the moment. So it's not just one region that's driving demand at the moment. However, as we always point to China is a key growth market in this industry and will be for ilmenite demand going forward, and the graph on the right-hand side shows well developing trend that we're seeing. So it shows that since the start of 2019, we have seen the production of chloride pigment in China and titanium sponge in China, both double. Why that's important for Kenmare is that the primary feed for both these processes is sulfide ilmenite imported into the country and then upgraded to chloride slag and synthetic rutile. And that is a market where we believe that Kenmare's ilmenite is preferred feed source. That's a trend we expect to continue to grow as well in the coming years. As I said, the first half was mostly demand story, but towards the end of the half, we did see some major supply constraints in the industry, and that is having an impact on tightening the market overall, but also directly resulting in increased inquiries for Kenmare ilmenite. And on that, I'll move to the outlook on the next page, and the solid demand that we're seeing -- have seen in the first half has continued into the third quarter, and we have a good visibility on our order book now for the rest of the year, and it's looking quite positive. Ilmenite inventories remain at very low levels with the supply issues adding to that and adding to Kenmare demand. And as a result of all this, the market is comfortably absorbing. Kenmare's increased production of ilmenite this year and its doing so at higher prices. Really all the same, we said for rutile, demand has increased strongly, and we expect to be able to play our rutile product at higher prices in the second half of this year. Zircon was a bit different. We've seen several quarters of weakness before the end of last year, but demand started to improve towards the end of last year, and that continued into the first half of 2021. And -- that was driven mostly by China and Europe, the major zircon consuming regions, and as a result, prices increased in the second quarter. Supply constraints have now added to the tightness in the market that was resulting from the demand. And we are seeing strong price increases in next quarter 3. And importantly, spot prices now moved significantly above where the contracted prices are, leading to the opportunity for further price increases in the remainder of this year. So all in all, we've seen positive conditions for all our products at the moment and strong demand environment for the rest of this year. With that, I will pass back to Michael for his concluding remarks.

Thanks, Cillian. It's very encouraging to hear those messages, very positive messages coming through from the market. But just turning to our strategy. It has long been an objective of our strategy, a key objective of our strategy to become a first quartile producer in the revenue to cost curve for this industry. Being a first quartile producer will increase our cash flow stability. It will allow us to remain cash flow positive through the commodity cycle and that will increase our returns. And we believe that the implementation of the projects that have occurred over the last few years, the increase in the quality of the team. The good business organization that the site and the projects are implementing are all contributing to put us on a trajectory to achieve the first quartile position in the industry. Thanks, Jeremy, if we can just turn to the last slide. which is really a summary. Our strategy -- the growth component of our strategy has been based on low-capital intensity projects which are designed to utilize underutilized portions of the existing facilities, and that has delivered the 49% increase and record production for the first half of 2021, and we believe that will continue to do so in the second half. That has allowed us to expand our margins and which has allowed us to increase our interim dividend by 3x. So all in all, I'd like to thank the dedication of the teams that have been working, the leadership of the workforce throughout the site and throughout the project. And with that, we're ready to turn the webinar over to questions. So Alex, I think we're ready to take questions. Go ahead.

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

Congratulations on a very solid dividend. A couple of questions, largely around the working capital. Tony, I was wondering would you sort of characterize where working capital is now something that's sort of about normal for present pricing levels? Or is there still more to come in terms of reducing trade payables as the final payment for B is worked through? And perhaps there's still some invoice discounting to work off as well? Or is that fully out? I'm just trying to get a sense of whether we might expect a little more working capital to be absorbed in the second half of this year or not? And then secondly, perhaps for Cillian. I get the impression from the way you were talking about sales for 2021 as a whole that for the year, we should expect a more normal ratio of ilmenite to zircon, rutile and so forth. Is that what we should be looking at? Or should we be sort of still thinking that the second half should be normal, and therefore, the full year is a bit weighted to ilmenite?

I'll take the first question. And with respect to working capital here, we have not completely but pretty much paid all of the WCP B liabilities, except for some retentions, which linger for about a year, but they're sort of relatively modest amounts in the order of maybe just over $1 million. I suppose, yes, I would characterize this level of working capital as reasonably normal. At the end of the year, it was high because of B and because we had some trade payables that slipped into 2021. And as I touched on, we were using one of our discounting facilities, we have 2, and we have suspended the use of that. The other one relates to China sales, which we will probably continue to use a little bit of. But frankly, I would expect the level that you see at the end of June to be more normal now than at the end of the year. What I would also say is as prices move up and down, that will also impact on the revenue line. So if we see our sales going up, there is a natural tracking in any business for the debtors or trade receivables to follow. But for the full year compared to the end of June, I don't think there'll be big changes. I hope that answers your question. Over to Cillian.

Yes. So the simple answer is we expect it to normalize. There were 2 impacts really in the first half. And first thing we touched on is that a shipment got delayed at a port near Moma, and therefore we could not get it away in time. The second one is we did end the half with some zircon concentrates which we will sell-down in the second half as well, which will obviously push towards bringing that more to a normal overall '21 sales.

Okay, understood. [Technical Difficulty]

Can you hear me?

Yes, Richard, we can hear you.

Cool, okay. Sorry. I cut out there [indiscernible], yes. Congrats on good set of numbers. First question is a couple of questions on operations. Slide 17, just the forecast excavated ore volumes profile. And Ben, can you just help me out on this H2 2023 where the volumes really pick up to kind of 23-odd million tonnes for the half? What is driving that? Can you just kind of clarify exactly what the driver is there?

Yes. So it's an increasing profile because we are building in our expected increases in utilization and throughputs across the period. Now throughputs are regulated by a model which predicts based on hardness of ore. And we go through a patch where we have a very good ore feed in that. So it's not a constant -- it's not always going to be a constant increase going forward, but it is -- there is a trend of some improvements -- incremental improvements as we go along.

Okay. So if I was to kind of look at the long-term kind of tonnage profile of the mine. Is it kind of fair to assume that it kind of hovers around 40 million tonnes excavated with some years where it picks up due to softer ore, in some years where it is below due to harder?

I think 40 million is a reasonable number, and we would expect to be going on there every year. Yes.

Okay. And utilization rates, is that kind of more like 80% like to what you've targeted in the past? Or are you trying to push a piece of that?

So it's a bit of a mix. And WCP C would certainly, we'd expect that to run above 80% but other plants below. WCP A is an older plant. So it's harder -- it's a more complex plant and it's harder to get up to the 79% level we've been targeting, but WCP B should be sitting around about 79%, 80% period.

Okay. And then on Nataka, the move to Nataka in 2025. What sort of PFS CapEx should we be thinking about putting in our models for next year? And you've talked about how it's going to be kind of more [ minage weightage ] to the ore body rather than the move that we saw. So how should we think about the kind of CapEx profile sort of over the next 5 years in terms of kind of growth CapEx or however you want to put it into a -- or project CapEx?

So the studies work over, I think, budget that is around $6 million and there is a little bit extra that we -- because we've realized that getting knowledge early is actually going to help us. So we have -- we are expecting a bit more spend in 2022 above that $6 million. It's too early to give you a capital number of the profile -- or a profile of that capital over the longer term, Richard, at this point in time. That's the purpose of the PFS. So it would be premature for me to give you a number at this point in time. It is going to -- it's not going to be dissimilar to thoughts of levels of capital that were in place for WCP B move to Pilivili. It's a substantial amount of money in those sorts of orders.

Okay. And then just on the -- I mean, you talked a bit about recovery rates, like ilmenite recovery rates dipped in the second quarter. What is the target for the ilmenite recovery rate? And how should we kind of think about getting back to recovery, for Q2 is 83%. Is -- we've sort of oscillated anywhere between 70% lows and 95% high. So what's a good number to think about long term?

We target 90% on the plant as an ilmenite recovery number. So sometimes we do better than that. And sometimes, we have had -- the COVID impact was there in the first half of this year because of our levels of maintenance fell away a bit because we lack -- we didn't have people to do maintenance at one period of time and there's a bit of a lag to that. You don't see the impact. until a bit later. But that's -- we've overcome that now. It's -- I'm talking about process recovery there as opposed to yield.

Yes. Okay. Understood. And then my last one is just on 2025. You talked about that kind of that scope for a potential shortfall in production, which is what you've guided to in the past on what the market is, I believe, expecting. But what sort of order of magnitude are we talking about there? Are we sort of saying that production has scopes dropped to 1 million tonnes, so you lose a couple of hundred thousand tonnes for it? Or is it more than that?

So we've been working on this over the last couple of years, and that gap has moved around a bit. At one point, it was significantly greater than it currently is. But we've been able to incorporate some additional mining capacity. We are considering how to use hydro mining early so that we can bring some additional capacity into our existing mining plants. And -- so that's sort of where we are. It's currently sharing at around 1.1 million tonnes in 2025. So we've got another 100 to find.

Okay. And sorry, my last one is just perhaps one I'll throw it in to Michael's strategy. Looking at the numbers, the cash you're throwing off, obviously generating a lot of free cash flow. You're paying a reasonable amount of that back to your shareholders but perhaps becoming a more diversified company away from a single asset would be attractive to some shareholders. What's your thought process on opportunistic M&A at this point?

Well, Richard, we are paying money to our shareholders, and we have significant projects in the front of us. So it's not as if we are so flushed with cash that is burning the hole in our pocket, and we need to go and spend it somewhere. We are always conscious of the fact that it's a single project company and that there could be benefits to our shareholders and stakeholders generally to have diversification. So we continually review projects that are available in the market and continually assess them. At the moment, we have no plans for any M&A.

Okay. The next question is from Colin Grant of Davy.

Yes. A couple of questions for me, if I can. Maybe just start with the first one. Tony, I think you mentioned there earlier on in your sentences about inflation and the possibility of an uptick in some costs in the second half. And I'm wondering if you could just expand a little bit on what they relate to, whether it's wages or energy prices or so on and give some level of quantification, if possible? And the second one is really just a technical thing. It's just to do with the timing of that shipment. On Slide 9 in your revenue bridge, you've given some figures that show there was a $14 million impact to revenue from that shipment slipping into H2. And I just want to get a sense of whether or not all of that have dropped through to EBITDA or whether there are some additional costs that we need to factor in, in terms of considering that?

Okay. I think both of those are for me. So look, I suppose what I would say about planning inflation is that it's really more of a watching brief. We haven't seen a lot of it come through in the first half of the year. Ben touched on the RUPS project and some of the costs that have come in on that, I have nudged up the forecast outcome for that project from $16 million to $18 million. So it's not like it's completely blowing it out of the order. But I think it's an area that we're going to have to continue to kind of monitor and watch. So because it hasn't really manifested itself at this stage, it's not something that I can really quantify, Colin. But I think I won't just be kind of keeping an eye on this, it will be other companies as well. That said, we come into the first half of the year. And the increase in costs relative to the increase in total production is significantly less, as I outlined, given the fixed cost nature of the business. So look, I suppose that's one to watch and monitor and pick up through the course of the year. It may not come through fully. It's what I would sort of consider as a risk and an area of focus. On the timing of the shipping and the quantification of the shipping, probably, yes, the value the -- it's not just the value of the ship which is sort of $7 million or $8 million. It's also the concentrates that Cillian mentioned that we're in stock that will be sold in the third quarter. So it's actually not that unusual for us to see ships slip from one period into another and having a meaningful impact, both favorable and adverse. But over the long term, I expect it to unwind and to even out of the, say, $7 million or $8 million there, more than half would probably have dropped to the bottom line because the value of zircon is so much more than ilmenite. So on per tonne basis, it's got relatively similar unit costs, a little bit more maybe. And so you get a bigger impact on earnings. So again, maybe -- for the first half of the year, we might have been looking at something closer to $90 million, than $82 million. But for the full year, unless we get a similar effect in December, we should see this whole thing washing out.

As there are no further questions, I will hand back to Michael Carvill to close the meeting.

Thank you, Alex, and thanks, everybody, for your attention and your time this morning, and that concludes our 2021 H1 results presentation. So thank you, everyone, and goodbye.

Cheers, everyone. Bye.

Thank you.