Kenmare Resources plc (KMR) Earnings Call Transcript & Summary

Good afternoon, and welcome to the latest Yellowstone Advisory Webinar with Kenmare Resources, who released their record full year results on the 22nd of March. 2022 was a very strong year for the company, and we're delighted to have with us today Tom Hickey, the Finance Director; Ben Baxter, Chief Operations Officer; and Jeremy Dibb, Director of Corporate Development and Investor Relations. While we're waiting for everyone to arrive, please could you respond to the poll on your screen? And while you're doing that, I'm just going to go through a few admin points. The format today is a presentation of the full year results. This will take approximately half and hour, and then we'll hand over to Q&A. [Operator Instructions] And then following the meeting, you'll be redirected to a short survey, and it would be really appreciated if you just spend a few moments completing that. I'm going to keep that poll up for a few minutes more, but it looks like we've got about 75% of the attendees are shareholders and 25% non-shareholders. And I'm now going to hand over to Jeremy Dibb, Director of Corporate Development, to start today's presentation. Jeremy, would you like to now start sharing your screen?

Thanks, Alex. Yes, I see that now. Can you see that, okay?

Yes, we can.

Great. Thanks again for hosting us for our 2022 financial results. I'll turn quickly to the first slide, on Slide 4. Kenmare, when we operate this business, we have 3 strategic pillars that we consider with any of the actions that we take. The first of which is to operate responsibly; the second of which is to deliver long-life, low-cost production; and the third is to allocate the capital that we generate from operating the business efficiently. Under operating responsibly, we were very pleased that we achieved 12 million man-hours worked without a lost time injury in 2022. That was over an 18-month period spanning '21 to '22. And although we've seen a pickup in the lost time injury frequency rate as a result of a couple of injuries at the end of 2022, that level of 0.09 is still 50% below our long-term 3-year rolling average. And we are focused on making sure that we redouble our efforts on safety in the workforce this year. We're also able to deliver a 6% reduction in our Scope 1 and 2 CO2 emissions for 2022, and that was due to a result of both some efficiencies that we've been able to drive, particularly in the dryers at the MSP, but also as a result of the successful start-up of RUPS, of which we got partial benefit from December in '22. In regards to long-life low-cost production, it's been a target of the company that's been long held to be a first quartile producer. We think that this gives the business the most robust position possible to ensure that as a single asset operation, we continue to generate strong free cash flows through the cycle. And for 2021, so for the prior year, that's the first year, and the external agency, TZMI, has confirmed our position in the first quarter. So we're very pleased about that, and we expect to maintain that first quarter position in 2022, but that won't be confirmed until later this year. We have a very long life of mine. We have over 100 years' worth of mineral resources, and that provides us with many strategic advantages to ensure that the mine will continue to generate for decades to come. A benefit of the mineral suite that we produce, which contains monazite, rutile and zircon, helped to deliver coproducts. And when we take those coproducts into account, our ilmenite cost of production was a new record low for 2022 at $60 a tonne, and that's a great performance for us as a business. So with those cash flows that we generated, the -- that enabled us to maintain our 25% dividend payout ratio. Our dividend policy is actually a minimum of 20% profit after tax. But in both 2021 and 2022, we've maintained a 25% payout ratio. We were also able to reduce our debt position by $71 million and continue to fund the studies for WCP A move, which Ben will talk about later. And so the result of that was that our proposed dividends for 2022 totaled $51.5 million, with just over $40 million of that coming from the dividend or just under $40 million coming in the final dividend, which will be paid in May. So moving to the next slide. It was a year of record revenues, profits and shareholder returns for us. In the top left-hand corner chart, you can see that our sales price -- and these are FOB sales prices. So these are the received prices back to Kenmare. We're a new record high in 2022, and that delivered product revenues that were also a new record at $498 million for the year. Those profits -- or those revenues, sorry, dropped down to new record profits at $298 million of EBITDA. And similarly, net profit showed an even bigger increase to $206 million. So that relates to the $51.5 million dividend that's payable at that 25% payout of net profit. The dividend also benefited from a share buyback that we completed at the end of 2021, which means that on a dividend per share basis, they're actually up 66% versus profits being up 60%. And despite having paid out stronger dividends in 2022, we were also able to move from a net debt position of $83 million to the end of '22, being net cash of $28 million. So showing the robust cash flow generation of the business after dividends and debt repayments. With regards to projects, I mentioned earlier the RUPS project. This is to help the power stability at the mineral separation plant specifically. And that will help to reduce the amount of diesel that we're using, which will both be a cost saving for the business at about $5 million per annum, and also help to reduce the CO2 because we don't have to run the diesel generators as much during the December to March period or, in fact, at all if there are no power interruptions. And with regards to Nataka studies, WCP A has been mining in Namalope since 2007, and it's been on track to move to a new deposit in Nataka where it will transition or mine its way there from around 2025. And the focus in '22 and into '23 has been about optimizing those studies, and Ben will talk more about that shortly. And so with that, I will hand over to Tom Hickey, our CFO.

Jeremy, Tom Hickey has just dropped off. We were aware that he had a broadband issue earlier, and he's not back on the webinar at the moment. So I might hand back to you to take us through this financial review until Tom comes back if he's able to access this again.

Okay. Absolutely. So looking at revenues, we talked about $498 million for '22 earlier. And you can see here that we have a freight cost and revenues. So some of our customers that we ship to, we include the freight costs within that. And some of the customers deal with the freight themselves. So from the commercial perspective of the business, what we're really focused on is the minimal product revenues because as much as the freight costs are adds on to additional revenue, they're also adds on to our costs. And so it's a net wash when we're talking about EBITDA or profits. The main change in 2021 was really the mix of our products. So in '21, you can see 79% of our revenues came from ilmenite. And in 2022, it was 68%. And the reason that this moves around is partly to do with the various price moves of zircon relative to ilmenite, but also due to shipment. So for example, there was any one shipment of rutile in 2021, but in '22, we had multiple rutile shipments. And so there is a mix thing that happens here, and that will happen to some degree. But I think 2022, in general, is more reflective of the levels of split that we expect between the different products. If you move down to cost of sales and other operating costs, operating -- cost sales and other operating costs actually fell slightly year-on-year, but that was due to the fact that the Bronagh J, our transshipment vessel was in dry dock, and so shipments were down year-on-year. So that was reflected in a build in inventories, and we would expect that to unwind through 2023. Net finance costs at $11.8 million were flat year-on-year. That was really due to lower gross levels of debt, offset by higher interest rates globally. And as a result, the higher revenues and the -- relatively flat costs. We can see the benefits in the profit before tax and then the tax expense, reflecting an increase in the profitability going from $8.8 million up to $16.1 million and then falling to the profit after tax of $206 million, which I think when you look at it from an EBITDA perspective, the margin of 60% is obviously incredibly strong and benefiting from that increase in pricing that we've seen. Moving to the next slide, on Slide 8. This really breaks down our -- if you look at the top right-hand corner, our average pricing as well as the zircon and ilmenite pricing. And we can see steady increases in the ilmenite pricing that we've experienced steady increases in the average pricing for all of our materials. But from a zircon perspective, we've seen a real pickup in the last couple of halves, and that's been supportive of the business. The demand for ilmenite has remained robust through 2022. Although prices are slightly off the highs that we achieved in probably Q3. From a shipping perspective, I already talked about the dry dock of the Bronagh J, which meant that the actual volumes were down 16%. And in the bottom right-hand side, you can see the benefits we had from the increase in price, offset somewhat by the lower volume shift, which we expect to catch up in 2023, and then benefiting from that mix. So the rutile and zircon are high-value products. And so as we made more shipments to days in 2022, that positively benefited the mix. All the transshipment vessels are now back and operating normally. And following the dry dock of the Bronagh J, it's actually achieving very strong volumes and is well positioned. That's a maintenance that happens once every 5 years. Turning to Slide 9. We saw a 37% reduction in that ilmenite cost of production, as I mentioned on the first slide, with the cash costs falling from $95 a tonne to $60. This slide really breaks down that movement. And so as we're talking about cash costs here, we don't have the impacts of inventory. So we can see the total cash operating costs were up 13% year-on-year, up from [indiscernible], whilst finished product production was broadly flat, up 2% year-on-year. And so that increase in the total cash costs and the slight reduction in the finished products led to the increase in the total cash operating cost from $156 to $180 a tonne, but benefiting more strongly from the coproducts that were generated and, therefore, reducing the cost of ilmenite production to just $60. When we look at it from a cash flow perspective, we started 2022 with $83 million of net cash and then benefiting from the operating cash flow of $290 million, which is broadly in line with the EBITDA that we talked about earlier at $298 million. We then had some CapEx through the year, that was both the completion of the RUPS project, some studies for [ Nataka ] and also the normal sustaining cost of the business, which are broadly around $30 million per annum. So $30 million of studies and CapEx and $30 million of sustaining. We also had some working capital changes of $73 million. That was driven partly by the increase in inventory, and that's not inventory of spares, but inventory of products due to the fact that we couldn't ship everything because of the Bronagh J upgrade. And so that element is likely to unwind through 2023, but we also saw an increase in our receivables. And the increase in receivables is really down to 2 factors. One is that we've had such a strong increase in prices. So with pricing being up 40%, everything else being equal, our debtors or our receivables would have risen by 40%. But it's also due to the timing of shipments and because the Bronagh J returned in late Q3, it meant there was a lot of shipping in Q4 and so there was probably an abnormal amount of debtors at the end. So some of that will unwind through this year. And then we've got the shareholder returns. The dividends here at $35 million of the cash dividend. So that's the H2 2021 and the H1 2022 dividends, that's why it's 35% rather than 51% and a very small amount regarding the odd-lot offer, which we completed last year, to help give some liquidity to very small shareholders and to provide an opportunity to clean up the shareholder register from those people that couldn't have traded in the stock. And then on the financing and FX, we talked about this, but the $11 million was broadly the same as 2022 -- sorry, 2021, offset by higher interest rates, but low amounts of gross debt. And that leaves us with a net cash position of $28 million, which is a great place to be in, just before we head into the capital expenditure that we required for the move for WCP A. So moving to the balance sheet. There's not too much to talk about here, the PPE additions, so the money we spent that $60 million was broadly the same as the amount of depreciation for the year. The inventory, as I talked about, was up $22 million with regards to the mineral stocks due to the lower amount of ilmenite shipped during the year, and the spares stocks rose by just $2 million. We talked about the movement and the receivables. And the debt reduction was a factor of the 6 monthly payments we make on the term loan and the full repayment of the revolving credit facility that we were paid in 2022. That remains available to us to draw should we need it. There's also some changes in the growth and provisions, and that was mainly relied in relation to changes in discount rates. As interest rates have risen, discount rates have risen, which has actually reduced the closure provision for the mine because the mine has a very long life. And therefore, when you discount that back at a higher interest rate, it effectively drops the amount that you need for a provision, but it's really an accounting treatment as obviously we know that the mine will continue to operate for decades to come. And so turning to dividends. We've seen steady growth in our dividend. We try to target a 1/3 payout for the interim dividend and 2/3 payout for the final dividend, but it's been more exaggerated than that because it tends to be that our first half shipments are lower than the second half shipments, which is why you get this difference. The dividends were up 66%, a new record high for us. We haven't included here the additional shareholder buyback we completed in 2021. But if you were to add up all the dividends since we first started paying them in 2019, along with the share buyback in 2021, we've now returned a cumulative $185 million over that period. In the bottom right, you've got the timetable for the 2023 dividend, and that will be paid on the 19th of May. As I said, our policy is a minimum of 20% of profit after tax. And for '21 and '22, we targeted a 25% payout ratio, which is effectively saying the dividend is 4x covered by our profits. And finally, coming to the capital returns. When we think about the business and the money that we generate, there are certain elements, which are nondiscretionary. We have sustaining capital. We have the move of WCP A, the transition to the Nataka zone. And then we have debt commitments and servicing of that debt that we have to maintain. And we made a commitment to shareholders of the dividend policy of 20% of profit after tax. We have been thinking about our dividend policy in the context of the capital that we've got to come in the following years and the commodity price. And we'll be hosting a Capital Markets Day on the 26th of April, and we're providing an update on the dividend policy at that point in time. And beyond this capital uses, we really then think about how we can either grow and improve our existing asset. So there are projects that we believe in strongly like the RUPS project, which delivered both a positive NPV, gave us operational resilience and also helped to reduce the amount of CO2 that we produce as a business. But we're also looking at options around the production gap in 2025. So if you were to look back at our Capital Markets Day from 2018, we highlighted that as WCP A transitions to Nataka, it goes to a lower grade portion of the ore body, which would mean there's a production gap. And so we're looking at options to reduce that, and Ben will come on to talk about the plans we've got for our projects. But we also have 100 years of resources. And so that gives us lots of optionality to increase production if we think there's a strong economic case for doing so, and we can see growth in the market. We've also consider additional capital returns. And given the free cash flow and the EBITDA multiples that we've been trading on, in 2021, we felt it was the right thing to do to invest that money in buying back our shares, and that was the best investment we could make, but -- and that's something, which might be attractive in the future. But we also look at additional capital returns through higher dividend payout, for example. And then we also always consider all the opportunities in the market with regards to M&A, but as I mentioned, given the fact of the most of we're currently trading on, historically, we've seen the strongest returns we can see is to buy back our own shares with any excess capital we've got, but those things are constantly in competition with each other, and we evolve our thoughts as we get. And so with that, I think I'll hand over to Ben.

Good afternoon, everybody. Yes, I'm going to take you through an operational review, if you can go to the next slide. Thanks, Jeremy. So as Jeremy mentioned upfront, sustainability is a core strategic priority for us. And we've divided that into 4 strategic pillars. And here listed are some of the achievements that we've made over the past year or so. We had a significant improvement in our health and safety with a lost time injury frequency rate reducing by 50%. The diversity of our workforce is really improving now, and we now have more than 14.5% of the workforce being female, and that's up, not only up a percentage on the previous year, but there's a 10% increase over the past 5 years or so. On the environment, Jeremy mentioned our 6% reduction in Scope 1 emissions, and I'll come to that in a bit more detail on a further slide. But we also rehabilitated 191 hectares of land during the year. And our water reuse rate is now 90%, which we're very happy about. In the communities, we invested $3 million with our not-for-profit development agency KMAD. And we've been focusing very much on not only delivering infrastructure, but also delivering improvements in quality of education, and we saw a 17% improvement in numerously compared to 2021. We spent $116 million on local procurement, which was a 12% increase, and that we continue to strive to improve on even further. And then around governance and trust of our business, we've audited all 62 on-site suppliers around sustainability policies. And we're now going through gap analysis and action plans with all of those suppliers to ensure compliance. And we delivered voluntary principles on human rights training for not only our own security forces, but also the public security forces that support the business. On the next slide, please, Jeremy. Just to go into a little bit more detail on health and safety. This is a really significant achievement for -- a milestone for the business. We went 11.8 million hours without a lost time injury on the business. That amounts to 19 months of work without a lost time injury. And we think that's industry-leading. As we mentioned earlier, we did have 3 injuries, though, in the latter part of the year, and that broke that record and delivered an LTIFR of 0.09 by the end of the year. And so we are redoubling our efforts, focusing on safety standards and on safety leadership to make sure that hazards are identified and risks mitigated prior to any job taking place. Next slide, please. We're working on decarbonization of the business, and that is to deliver our ambition of being net 0 carbon dioxide emissions producer by 2040. And really, our achievements in 2022 were around twofold. The first was the delivery of the rotable uninterruptible power supply for the mineral separation plant. So this is called RUPS to us and is a project, which provides seamless electrical energy into the mineral separation plant even when there's power instability coming in from the transmission grid. It's been a net positive project -- net positive NPV project and has -- but has also saved us significant costs and carbon dioxide, saving -- on an annualized basis, it will save us 4 million liters of diesel a year, which is about $5 million, and that equates through to 12,000 tonnes of CO2. There have also been productivity improvements of the mineral separation plant because when your plant runs steadily and smoothly, you see not only more operating time, therefore, you can make more production, but also your recoveries improve because of that steady operating environment. And we saw that particularly in the zircon production during 2022. We also focused on the dryers, in the MSP. So in order to get separation of minerals, you need to heat the material and make sure it's dry. And diesel is the way that we currently do that. And it's -- this is the largest area of diesel consumption in our business. By improving the process, doing continuous improvements to -- and refurbishing equipment, we saw a 7% reduction in diesel consumption on the dryers through the year. And that's -- the 2 of those projects combined gave us that 6% reduction. On the next slide, please, Jeremy. Moving on to the production. We saw a consistent delivery in 2022, and this was despite receiving higher levels of slime in the ore body through the year. Now slime is the clay-sized fraction of the soil that we're mining. And as it gets higher and has consistently been getting higher year-on-year over the past few years, we're seeing it becoming more and more problematic to delivery of tonnage. Nevertheless, we saw record excavated ore volumes in 2022, up 2%, and delivering a 2% increase in the heavy mineral concentrate, which is the product of our mining area. Nevertheless, it was a slightly lower quality, and this had a knock-on effect into the final products delivery. The slime was particularly high in the -- in Q1. And we implemented some good projects to help mitigate that such as the implementation of a population process and also clean water additioning to further dilute slimes. Nevertheless, slimes remains a challenge for us in the business, and it's something that's very much the focus of the pre-feasibility study work that we've been doing for Nataka, and I'll talk a bit more about that on the later slide. In terms of final products, therefore, ilmenite was down 3% at 1.088 million tonnes. And zircon was a record level of 58,000 tonnes driven by the improved recoveries that we saw from both RUPS and also further flocculation work that we've been trialing in the mineral separation plant. Rutile was flat and concentrates were up 3% on the basis of having higher monocyte in the feed that we were treating last year. On to shipping, as Jeremy said, we were down 16% on shipping during the year as a result of the 5 yearly planned dry docking that we have of our transshipment vessels. One of them was away for 4 months during the year. Nevertheless, when the Bronagh J transshipment vessel came back, we had both vessels in use on high utilization times. And in fact, those vessels are now operating at their best ever levels. And we were not able to catch up the shipping in the second half of the year. But -- and then that's why we ended up with some higher inventories at the year-end, which we are now drawing down this year. On the next slide, we're reiterating our guidance for 2023. This was the guidance that was issued in January. The production for this year will be broadly in line with 2022. We do see some slightly lower grades this year, but that's offset by further increasing excavated ore volumes and the slimes mitigation measures that I was speaking about. But of notice to mention that as we reported earlier, we had a significant lightning strike in January -- sorry, in February. And that has moved our expectation of ilmenite and rutile production to the lower part of the guidance range. That lightning strike was particularly intense and right outside the gate of the mine and resulted in significant damage to electrical equipment through the business. The -- we are now -- we have been -- since that announcement was made, we have been back into full operations, but we do have some risk ahead of us on provision of spares and getting our stocks back to normal levels on spares because we suffered significant damages there. If we turn on to operating costs. We expect a slight increase in costs for the year. It's likely that if we're in the lower part of the production range, our $1 per tonne will be in the upper part of the cost range in [ '20 ] but still within the [ 1 70 to 1 88 ] guidance. And then on capital, our capital is focused on completing studies for the development projects, particularly the move from Namalope to Nataka for WCP A. And we expect that -- and then we expect sustaining capital to be in and around the normal range of -- which has been traditionally around $30 million. And this year, we're expecting it to be $33 million. Just to remind you, our WCP A transition costs are expected to, at the moment, to be no less than $225 million. However, we will be reviewing and updating that number at the Capital Markets Day now that the pre-feasibility study is complete, and we will be giving further information on the 26th of April on that. On to Slide 20. It's really -- bring some delight to me that we've now got ourselves into a position that we have a strategy for Nataka that is not only conceptual, it is actually now developed and has been tested in the field. And we will be giving a large part of our Capital Markets Day over to the development of this long-term new way of operating in Nataka. WCP A has to move. It has completed or is near completing, its available ore in the Namalope zone. And so this is a business continuity project. And the pre-feasibility study has delivered some really quite useful conclusions for us and has given us a clear path forward. We've moved into the definitive feasibility study stage, and we expect to complete that by the end of this year. Just as a reminder, you'll recall that Nataka is the largest ore zone at the moment. It represents more than 6 billion tonnes of ore, and that is about 75% and, therefore, more than 75 years of mineral resources for the business. The big change, I guess, with Nataka compared to Namalope is that slimes continues to rise, and it rises to the extent where we're having to -- we are reviewing and applying a new set of thinking to both the mining, the processing and the tails management so that we can be -- so that we can have a more resilient and deliver at a higher level in that Nataka ore zone. When it comes to the mining side, we now know that we can successfully dredge mine the Nataka area. And that means that we have access to continuing with the long -- the low-cost mining method that we've successfully used over the current years. We also, though, have realized and done work through with a hydro mining trial and understood now that we can both marry high-pressure water monitoring with dredging, and that will be a very successful way forward for us in the future. On the processing side, we will need to add an upfront de-sliming circuit to the process. This is new equipment that will need to be installed on WCP A, but it's not new technology, and it's something that actually we currently employ at our WCP B operation. Just doesn't exist on our older plant. And then on the tails side of things, one of the constraints that we've had with production in Namalope has been managing the settling process of the slimes and getting water back -- clean water back to the process. And we will be moving from the current paddock-style methods of tailings deposition to a tailings storage facility. And that obviously brings some costs around civil engineering and so on to implement that project. More details on that to come on the Capital Markets Day at the end of April. And really, I guess the place where this project has gone is not just to look at capitally feasible and operating feasible projects. But really, we are a first quartile producer. And so what we really want to do is make sure that our studies deal with the optimization aspects of the business so that we can remain a first quartile industry position. And that's really the focus that we'll be giving on the Capital Markets Day. And with that, Jeremy, I'll pass back to you for the market.

Thanks, Ben. So you can see here, this is an all-in price that we received for all of our products. And we can see again here the consistent uptick that we've had in the average price received for all of our products over the last 5 years or so. There has been a tightness in the market, and that supports these price rises as demand has gradually continue to increase broadly in line with global GDP, whilst production for our minerals hasn't increased at the same rate, which has led to a drawdown of surplus inventories and a rising price. This was across the full product suite, so both ilmenite, rutile, zircon and monazite, have all been rising over this time. And for those of you who might not know what monazite, monazite is a rare earth containing mineral that is then further processed into -- and separate into separate areas. And we really talked about the impact of shipment in particularly H1 2022 as a result of the Bronagh J return from the 5-year dry dock. We are a market-leading ilmenite supplier. So we're not the largest ilmenite producer in the world, but we believe we are the largest seller or supplier of ilmenite. And our share of non-Chinese ilmenite supply has been growing significantly year-on-year. And that's been as a result of some of the production increases we've had, but also the constraints of other producers and the fact that our ilmenite is very suitable for both the 2 routes of producing chloride pigment. So when we think about our business for TiO2, about 5% goes into welding applications, so that it goes into sort of shipbuilding and welding large pieces of steel. About 5% of it goes into titanium metal, and a lot of that's for aerospace as well as medical and sporting golf clubs, spikes, et cetera, but 90% of it goes into pigment. And within pigment, there are 2 different types of processing route. There's the sulfate route and the chloride route. And the Chinese domestic ore is more ilmenite ore. It's more suitable for the sulfate route. But as China has continued to grow in the chloride pigment, which is a new and more modern technology, they've had to look to import feedstocks in order to be able to process and produce chloride pigment. And that's why we've seen this growth, which you can see on the right-hand side in the bottom. The ilmenite required for both metal within China, but also for chloride pigment within China has been steadily growing. And as that's something which our feedstock is very suitable for and, in fact, deferred by many customers, that's why we've continued to benefit in terms of the pricing that we can achieve for our ilmenite. Moving to Slide 24. I mentioned briefly earlier that the pigment market was slightly weaker in the second half of 2022, and that's as a result of consumer pressure that has been felt as a result of rising inflation. And that meant that some of the pigment producers destocked a little at the end of the year. But as we've entered 2023, the Western pigment demand has certainly started to increase, but it does remain subdued and is coming from low levels, but it remains at reasonable levels, whilst Chinese pigment demand has been benefiting from the recovery in that market as they move away from the COVID restrictions. And we've seen some very small spot market increases in the ilmenite and domestic prices for pigment. We've seen strong robust demand for our products. We've been drawing down our inventories in the first half of 2023. And we would expect that inventories would normalize for our feedstock products by the end of this year. In terms of zircon, there was similarly weaker demand in the second half of 2022, but that stabilized earlier this year. Pricing and volumes have been robust in Q1. And without -- throughout the inventory value chain, we believe that zircon inventories remain at low levels, which is a positive we take away. And again, we believe the Chinese market will benefit from the new COVID-19 policies and government stimulus that's occurring in China right now. And so with that, I'll turn to the outlook. I mentioned at the beginning of the presentation that the real strategic priority for us has been moving into a first quartile position in the industry cost curve. We can see from 2013 through to 2018 and through to 2021, we've moved from the fourth quartile into the first quartile. And so in periods where commodity markets are oversupplied, that's not where we are right now. But at some point in the future, we're sure that more supply will be built. And at those periods of time, you want to ensure that as an organization, you're as far along the left-hand side of this chart as possible. This is a margin curve. It's not a cost curve. So in many policies, you might look at the cost curve. But we look at the margin curve because of the relative different mineral assemblages between different operations that might produce more zircon or more ilmenite or more retail. And so what we do is we look at all of those different mines, and this is actually a study that was done by TZMI, the leading mineral sands consultant, and they put us just on the edge of that first quarter. Just to mention the really high margin producers in the first half of the first quartile, they're really Chinese producers that mainly produce iron ore and produce the ilmenite as a byproduct. And so because the iron ore price was very high in 2021, that meant their cost of production, their coproduct cost -- byproduct cost of production of ilmenite was much lower, and therefore, their margins were very high. So that explains the shift in that through 2013 to '18 to '21 as a result of the higher iron ore price. But maintaining that first quartile position is a key strategic focus for us to give us the stability of cash flows through the cycle, which enables us to pay out more sustainable dividends to shareholders. And so coming back to wrap things up. In 2022, we were really pleased by the RUPS commissioning that went well and meeting our -- meeting -- or sorry, creating a new record of 12 million man -- 12 million hours worked without an LTI. We'll be focusing on those safety targets in 2023, as Ben talked about, and looking to reduce CO2 emissions further as RUPS went up and focusing also on biodiversity in the rehabilitation that we do after mining. We're also sort of forecasting relatively steady production in 2023, as Ben talked about with the guidance that we've given, whilst also looking to optimize how we mine in relation to the slimes and what we can do to help increase that operating envelope that we're currently within. We had a strong return in terms of dividends and debt reduction. And in '23, we'll be looking to optimize that balance sheet structure as well as finishing off the Nataka DFS to provide that certainty of the move ahead of the transition in 2025. And we look forward to updating you with more information on those areas, specifically in the Capital Markets Day on the 26th of April. And so with that, I'll hand back to Alex for any questions.

Well, thank you very much, Jeremy and Ben. And Jeremy, especially thank you for jumping in at the last minute covering the financials. Apologies that Tom had some WiFi issues. We are now going to go to Q&A.

[Operator Instructions] Let me start with a couple of questions here. Great results. And the question is, how do we stop the boom bust in the share price, the business needs, institutional shareholders to ease illiquidity as existing [indiscernible] shareholders had to sell down when the price rises. What are you doing to find them?

Okay. Thanks, Alex. Look, unfortunately, as a company, we don't set the share price, and that's obviously driven by buyers and sellers in the market. What we've really tried to do is focus on the elements that we can control. So becoming a first quartile producer should help to reduce the volatility in the cash flows that we have, and therefore, reduce the volatility in the dividends that we pay, and we hope that will be valued by shareholders and should lead to improve valuation. But in terms of institutional shareholdings, we've just completed the road show through last week of back-to-back meetings, meeting as many investors as we can do. And we'll be responding to feedback from this call, but also those meetings with investors to inform our Capital Markets Day to make sure that we address as many as those concerns or challenges or opportunities as flagged to us. So speaking to our shareholders regularly, meeting with as many people as possible and trying to get the story out there and the things that we're focusing on at the moment.

Thank you. I think this is probably a question for you, Ben. Can you please update us on the parts replacement due to the lightning strike and expected timetable for any remaining works. Also, has the RUPS been working versus expectations?

Yes. Okay. I'll take that one. So first of all, on the RUPS, it's been exceeding our expectations. It's really been a very successful project. It does exactly what it says on the tin when you have power instability is coming from the external transmission grid. This product seamlessly converts energy stored in the flywheel in to bridge the gap before diesel engines can be turned on and then seamlessly converts to diesel generation. The big improvement that we've seen is that in the past, we used to run diesel generators for 4 months of the year because we couldn't predict the outages and the dips. So now we have a way of coping with those dips in a seamless manner, and we can save that 4 months of diesel per year. So really very happy with that project. On the -- back to -- on the spares holdings, so the severity of that strike was such that really there was large amounts of drives, inverters, rectifiers, all of the sort of electronics equipment that was damaged. We've been able to repair some of it. We've used our stock holdings and we've been engaging with OEMs to get emergency spares. And that's been a successful process. Those spares are on route or in manufacturers. Sometimes they have long lead times, but we expect to sort of be through the bulk of that during end of Q2. I think we'll -- that will be something that's behind us. In the meantime, we're employing some personnel who can affect repairs should we have further breakdowns. But thankfully, this sort of equipment is not sort of equipment that is failing on -- very frequently. So I think we're in an okay position there.

Okay. I've got a question here about global inventories. Could you give us some -- your views on the outlook for global inventories?

Sure. So I mean on a feedstock, look, I think -- if we look back to 2012, when the market last peaked, they were very large global inventories, and they took a long time to work down. We haven't seen inventories at those levels through the cycle. And I think that both mining companies and pigment companies have been much more careful not to build big inventories. I said there was some destocking, particularly at the pigment side of things, in 2022 and sort of in Q4 and probably into the beginning of this year. We don't think that inventories are high from either a feedstock or a pigment perspective at the moment globally.

Okay. Question -- congratulations on these results. Is dredge mining of Nataka supposed to contain the expected reduction in production in 2025? And to what extent?

So I'll take that one. So the reason for the reduction in production in 2025 into 2026 is really due to the transition period that we move from out of the Namalope deposit to a 20-year high-grade or higher-grade path, which we've designed from -- which starts from late 2026 onwards. In that interim period, there's a transition through low grades. And so the dredging will be worked through those low grades, but it does leave us with a shortfall on ilmenite production for those years. So we've been looking at what opportunities we have, both at WCP A, but also at the other operations that we have to try and fill that gap. And we've done some studies there, and we'll be talking through those studies at the Capital Markets Day with a view to closing or near closing the shortfall so that we can remain in or around 1.2 million tonnes of ilmenite production in '25 and '26.

Another question here on cost. Is there anything you can do to reduce the freight costs?

In short, the answer is no. We try and minimize freight costs by ensuring that there's a balance between making lots of shipments per year and making sure that we're not building significant inventories, but we try and maximize the size of the shipments that we make. So we'll ship up to 60,000 tonnes at a time and potentially to multiple customers. But ultimately, the global seaborne dry bulk market is that we're a very small part of it. And so there's nothing we can really do to control it. But equally, it's not a cost that's borne by us directly. It's borne by our customers. Freight rates have come down substantially. They're probably 1/3 to 40% of what they were at the peak through last year when there was a lot of challenges in terms of getting hold of ships. So it's not something we do much about, but it's not something which we're actively exposed to in the market as part of the overall pricing discussion we have with customers, and they really pay the cost of the frame.

Okay. I've got a couple of questions here on capital allocation and the debate between share buybacks and dividends, and I'm going to try and sort of put the 2 questions together. And the gist of the question is, look, return on equity is extremely high, above 20%. Return on assets is also very strong in around about 12%. And the business is capitalized at about 0.5x book. How do you look at the trade-off between share buybacks and dividends? Because from a number of different angles from the 2 questionnaires, would suggest that actually, there are fewer better investments than buying back your own shares? And so yes, could you comment on your thoughts on -- I said the trade-offs between share buybacks and dividends?

Absolutely. Look, we're a mine that began production back in 2007, and we started paying dividends in 2019. I think a lot of our shareholders are very focused on receiving a dividend. But I think it's also fair to say that the majority can see the strong benefits of a buyback. And the buyback that we did in 2021, which was to return $83 million, I think, it was very successful and, we think, very value accretive to the business. Going forward, it's definitely something we spend a lot of time looking at. We look at the equivalent rates of return of buying back shares on a 1-year out view and compare that to a 5-year long-term view on our pricing. And then we used that to compare both against additional dividends or projects, which are internal, which generate an IRR. So there is a constant competition for that capital, and we review it regularly. And ultimately, the Board makes a decision. But I would say that a steady dividend. Normal dividend per share is certainly something, which some of our shareholders very strongly advocate for, and I couldn't see us moving away from that.

Okay. Certainly, sort of on a related question. After the substantial CapEx plan for the next 3 years, Kenmare may be generating substantial free cash flows. Does development of purchase or purchase of assets in other jurisdictions form part of the company's plans. Can you tell us what your considerations are on deploying these free cash flows?

Sure. So look, we -- absolutely, we look at lots of things. As part of my role on the corporate development side of things and my team look at the other options that are out there for us. But I think when you've got a 100-year life of mine with a first quartile position trading at 0.5x book as someone mentioned, that's a very high hurdle to try and beat with other investments. So it's something we look at. It's something that we consider in the mix when we're looking at how we can best generate return from the capital that we generate.

Got a couple of questions here, which I think of you, Ben. What is your view on the flocculation project? And has it been a success in managing the Nakata signs?

Yes. Okay. So we've been doing -- the flock work that we've been doing has been actually in the Namalope area in our existing WCP A operations. And then secondly, also at the mineral separation plant to -- and the idea being that the faster you can settle fine particles of slimes, the easier it is to have clean water, and that will -- clean water in your process will improve your recoveries. Both -- in both locations, flocculation has brought good results for us this year. And so it does become a clear part of the Nataka long-term because slimes keeps rising. And so it will have its component part to play in our slimes management protocols.

Okay. And as I said, another question for you, Ben, are you about to implement any geometallurgical concepts that better characterize the deposits and to reduce any surprises in ore quality and to avoid any recovery [ exclusions ]?

Yes. So the answer is that we've been employing geomatallurgical processes in our laboratories for a few years, a good few years now. And we undertake fractionation of our ilmenite, and that is a process, which has given us a lot more clarity over and above an XRF model that was previously used to predict the types of ilmenite that we were producing. We now actually have physical fractionation of samples so that we can better predict our ilmenite production and which types of ilmenite we're making. So it's working. There's further efforts to do more in that zone. We have capital projects currently underway to try to move us away from some of the outsourced work that we do in that area and in-sourcing it. But yes, it's a key component. Slimes is -- slimes rheology and characterization is also a key component of the Nataka feasibility studies because, I mean, has been cleared through this presentation, slimes holds many of the keys to value for our future. And the more we understand about slimes itself not just the final products within the ore body, but the slimes is the key to actually liberating that value.

Okay. I think we've got time for a couple more questions. So here's one again for you, Ben. Production suffered a little bit in the first quarter following the lightning strike. Why do you feel that you can, I guess, catch up on production for the rest of the year?

So as I said, the -- we have stated that our ilmenite production will be in the lower part of guidance, and that's really a reflection of the lost production that we had as a part -- due to weather situations in Q1. So we will be attempting to pull back some of that production and -- but the reason why there's -- so you saw that ilmenite and rutile production will be in the lower part of guidance, but we haven't changed our zircon guidance. And the reason for that is that we are receiving better recoveries than expected for so many of the reasons that I've already touched on, such as RUPS and flocculation, but we're getting better recoveries of zircon. And so hence, we still see ourselves as being in the middle or more of -- on that production.

Okay. And the last question here for you, Jeremy. You sort of benefited from very high prices in 2022. They've weakened slightly, I think you indicated towards the end of the year. Where do you see prices for 2023?

Sure. Look, I think we've said prices will be slightly lower than the prices that we achieved in 2022. I don't think I can give a pricing forecast on where they'll go to. But the market is stable at the moment, and we're seeing good levels of demand. So it will depend upon the economic environment. But I think we don't see any big moves in pricing for this year.

Brilliant. Thank you very much. That brings us to the end of today's webinar with Kenmare. Thank you very much, as I said to Jeremy and Ben, for taking us through the presentation, and particularly Jeremy, for stepping in when he needed to then. Thank you to everyone attending. Would like to just flag up as you leave today, you'll be redirected to a short survey. We really appreciate it if you just complete that survey and management really appreciate your views. And also just to flag up a couple of forthcoming webinars. Later on today, we've got a webinar with Lloyds Banking Group. And on the 18th of April, at 12:30 with Capita plc. And on the 22nd of May at 1:30 with Sainsbury's. And details of all of those are on the Yellowstone Advisory website. So again, thank you for attending, and we hope to see you all soon.

Yes. Thank you, everybody.

Thank you. Bye.