Kenmare Resources plc (KMR) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Kenmare Resources plc Q2 2026 Production Update. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to Managing Director, Tom Hickey. Good afternoon.

Thank you. Thank you very much. Thank you all for taking the time to join us after we announced our Q2 and H1 production update this morning. I'm accompanied here by James McCullough, CFO; Cillian Murphy, Head of Marketing; and Ben Baxter, COO, and I'll hand over to them for different segments of the presentation. But if we move ahead, please. So just a quick reminder. Kenmare Resources is the owner and operator of the Moma Titanium Minerals Mine in Mozambique. We've been there for nearly 40 years. We've been producing for nearly 20 years. And we've got a very, very long mine life, a very long-term resource base. We've invested for the long term over recent years. And I suppose if you're going to be somewhere for a long time, you want to behave yourself, you want to be a good citizen, you want to integrate well with the community. Kenmare and Moma are important to Nampula, the problems in which we're set we're important to Mozambique. We make a meaningful contribution to each. And that's not just from the taxes and royalties that derive from our production, but also from the social investments that we make to increase capability and capacity in and around the mine. And look, we're pleased that's been recognized by having us included in the FTSE4Good Index for the second year in a row. So, in country, you also need a good framework of agreements, and we have been negotiating the renewal of our implementation agreement with the Mozambican government for quite some time, and I'll run through that a little later. But just to recap, we produce titanium minerals, ilmenite, rutile, they're key raw materials in the manufacture of paints, pigments, paper, plastic, titanium metal. We're a good chunk of global supply, about 6% and pretty much the same with Mozambican exports. So while we're a comparatively small company, we're important within the industry in which we sit and the country within which we sit. And of course, titanium, like many other in recent years, has been put on critical minerals list for Europe, the U.K. and the U.S. So there's lots of attention on the mineral and the metal, and we believe that will stay that way for a number of -- for the foreseeable future. I touched a little bit on the investments that we have made in -- throughout Moma's life. Our net book value at the end of 2025 was just under $900 million. And we've invested not far off $300 million in the last two, three years on an upgrade of our biggest plant, WCP A, to move to our biggest ore body in Nataka, and Ben will talk a little bit about that later on. We're substantially through that CapEx at this stage. If we can move on, Katharine. So from the general intro to Kenmare to the quarter and indeed the half year, those of you who've heard our calls before will remember that while in many other years, our priority would be production and tonnes produced. for 2026, our key -- our highest priority is shipments. We entered the year with a substantial level of finished goods inventory. We want to sell that inventory down along with our existing production. We want to obviously use that to generate cash flow to maintain our financial flexibility at a time when market pricing has progressively weakened over the last number of years. Hopefully, we're at or near the bottom of that. But certainly, we have been paying close attention to our liquidity, close attention to our production in 2026, and we expect that to continue. Certainly, in the first half, we've performed well in that regard. Our first half shipments of 556,000 tonnes, just ahead of the run rate of our annual shipments guidance. And there were some notable pieces of information in there. I mean, our concentrates production for the full year was materially exceeded in H1. And that's arose principally from a new product called ZrTi, which was previously a waste stream. So something where we didn't fully recover all the valuable minerals to our main products. And effectively, this would have historically been discarded. But it's certainly become clear to us that there's market interest in this material, and it will be part of our sales for many years to come, albeit not at the levels of 2026 because in '26, we're exploiting a historic ore body -- excuse me, historic stockpile that we had and meeting demand via that. ZrTi aside, I think our ilmenite production, which is our main product, was impacted by the WCP A investment and in particular, the elongated commissioning process of that. And we expect our 2026 production to be just at the level of our guidance of 800,000 tonnes. And I think Ben will run through the work we've been doing ourselves to improve performance, and it has improved over recent months and what we expect to do over the remainder of the year to complete that project. The other point I'd make is we do expect to see a stronger H2, both in terms of heavy mineral concentrate and the grade. So there's certainly some tailwinds or some positive influences on the second half of the year. Looking at our market, I touched already on the markets in which we operate and the fact that over the last number of years, they've weakened progressively. Quite a few movements in the first half of this year. The ilmenite market, we expect it to be a little weaker in Q2, and we've seen that. But the market, as Cillian will perhaps run through, is actually getting quite distinct in different geographies with the Chinese market differing materially from Western markets. And even within China, markets for chloride pigment and the ilmenite inputs to it versus sulfate pigment very different. Some things driven by what's happening in the U.S.-Iran conflict, which is increased freight costs and also sulfuric acid costs, but also influenced by just the evolution of the market and different pigment technologies. Our other main product is zircon. And zircon has been a much more positive story in the first half of this year. The market has strengthened materially. We're getting higher prices on all zircon products. We expect that to continue. And look, I think this is very much a function of the measures producers have taken to manage supply, an unfortunate fire at one of our peers, Grande Cote and Senegal, which has taken supply out of the market. It hasn't really been growth in demand. But certainly, we could sell all of the zircon we can produce and perhaps more, and we're seeing that reflected in price. More Kenmare specific. I've touched on liquidity. I've talked about its importance. At a time of elevated net debt, it's always important to have your lender support, and we were pleased to get that in the first half. We increased our revolving credit facility by $30 million to $230 million, although we don't really expect to use that extra capacity, it's always good to have it. And we amended the covenants to give us more flexibility and to reflect the fact that while pricing is weak, our balance sheet, our current assets, current liabilities and our total investment in the asset is positive. And so we were pleased that all our lenders recognize that. We were pleased that they supported us. And I think that these lenders have been with us for a number of years yet, and they realize this is a cyclical industry. Like us, they're hoping for recovery, but it's always important to have financial flexibility as you travel towards it. We had net debt of $176 million at 30th of June, although we got $14 million of receipts in the first week of July, which would have had us pretty much flat since year-end. I think that's quite a creditable performance because we spent $23 million of development CapEx. So predevelopment CapEx, the business was cash flow positive in the first half of the year at pretty much the trough of the market. And that CapEx is rolling off quickly. I mean the WCP A project is substantially complete. We've had $7 million in the second half. So that investment burden or investment obligation is rapidly receding. And finally, I touched on the implementation agreement with the Mozambican Government. This has been going on for quite some time. The agreement itself nominally expired at the end of 2024, but we've been operating under the legacy terms since then. And over the six months, we've had good constructive engagement with the authorities in Mozambique, a lot of back and forth on phasing of some of the investments that we commit to, we committed to a $200 million investment in the asset over the 20-year renewal period. What will it be? When will it be? What will it be with the first five years? Similarly, with our social investments, we would be committing to a $50 million investment over the 20-year renewal period. How will it build on what we've done in the past? What will the focus be? How will it be split between years? And I think really what this is, is the technical term team in Mozambique trying to prepare themselves for whatever questions or challenges or queries they may get from the Council of Ministers or President as they move towards the renewal. I should stress there's no formal timetable for the renewal. But certainly, from our perspective, we've given them all that we've been asked for. They're comfortable with what we've provided. And we'd be very hopeful that there will be some move ahead before too long. But as in any government, they have many other priorities in country. And hopefully, they will get to it before too long. So, look, we're very focused on a negotiated agreement here. It's our definite preference despite the fact this has gone on a long time. We've been flexible. We've made a proposal that's far better than what is -- than the previous terms, reflecting the government's need to have a better return from Moma, and we think the proposal we've made is fair. Though we would prefer not to go to arbitration and that arbitration would be in Washington, if necessary, we would be prepared to if the government were to make further demands that were unacceptable to us or that were unaffordable by us. So I think we're -- we have made progress in the first half. Hopefully, we can maintain it. So look, that's the overview from my perspective of the first half. We'll just do a slightly deeper dive with my colleagues on some of the themes that I pulled out there, and then we move to Q&A at the end. Thanks.

Good afternoon, everyone. It's Ben Baxter speaking. First of all, I'm going to walk through the production and the WCP A project. First of all, the half -- the first half of the year was a safe half with no lost time injuries recorded, and that's a significant win for the business. On the production side, I guess these numbers are the one that jumps out and stands out is the ZrTi contribution and really increasing our concentrates production. But looking through all of the numbers, heavy mineral concentrate was down 37%. And that came off the back of reduced ore grades, which were expected during the -- relative to year-on-year last year's numbers. As we enter the end of the Namalope mining for WCP A, the grades are expected to fall, and that has happened. But we also saw a 6% reduction in the excavated ore, and that comes from the fact that we were we didn't get the ramp-up as expected from the WCP A upgrade. And I'll talk a bit more about that on the next slide. We also saw that in Q2, we stopped the dry mining contribution to the WCP B operation and that brought down the amount of mining that took place. And this was done both to manage costs and liquidity, but also to give us a better product mix for products that we're selling during the first half of the year. We do expect production to strengthen going forward into the second half. This is coming principally from WCP B, which is expected to have a strong performance in the second half. And also, we have -- we've restarted the dry mining now to help contribute towards that. We've forecast steady improvements in WCP A through the second half. And so that will also bring increased excavated ore contribution. And we also have the start-up of a second selective mining operation taking place in Q4 that will bring some additional capacity to the business. On the final or finished products, ilmenite production was down 40%, slightly worse off than the HMC side of things. That came about because the ilmenite grade in the HMC was slightly lower. That was offset, I guess, by -- on the zircon and rutile side, which experienced the opposite of higher grades in the HMC. And so you can see that their numbers were slightly better off than the HMC production number. We were also able to reprocess some of the intermediate stocks that we had during the quarter, and that improved the zircon and the rutile production as well. As I mentioned at the head, concentrates were significantly up, 770% year-on-year. And this was just -- this was due to the new product that Tom was discussing at the head of the meeting. We converted a historical stockpile of tailings into production. now that we have confidence in the sale of that material with clear routes to sale through the rest of 2026 and into 2027. And in fact, that conversion meant that our concentrates guidance for the year is now being met. As Tom said, shipments are our primary goal of the year, and they were up 53% year-on-year. This was due to -- with stock drawdown taking place on site, but we also took back into stock some 17,000 tonnes of ilmenite that have now still to be sold following a previous sale falling through. We remain on track for the main guidance number of more than 1.1 million tonnes for the year. We did tweak our guidance around ilmenite production rather than -- and we're saying that we will approximately meet the 800,000 tonne level rather than exceed it. And this is reflected from the expectations that we have for WCP A for the rest of the year and the ramp-up being slower than we previously had expected. Also the dry mining stoppage, which I referenced that took place in Q2 and the later start-up of the selective mining operation, the second selective mining operation than had previously been expected. On the next slide, please. I'll just walk through the WCP A performance. So -- nearly all the major construction and installation work is complete. We -- the operation -- the plant is in operation now. It's not a project. And that's reflected in the capital expenditure, which has really now gone down to a very low level. We guided that we'd spend $30 million this year, $23 million of that million has already been spent, and there's a remaining $7 million for the rest of the year, and that's associated to the development as we move forward with the mine and moving towards Nataka. The dredge performance is the issue that we've -- that's been holding us back through Q2. We had expected improvements faster than we've experienced, and this came about because we had further repeated problems with swing winch brakes and getting through the stock of spares that we had, and that brought about some downtime whilst we waited for new spares to be delivered. We also saw with the increasing production that we were getting that some premature wear was taking part in various parts of the dredge and that also caused us some downtime and longer waiting times for spares. The downtime, as I mentioned, we've -- the swing winch brakes have probably been the largest component. But happily, we have agreed a permanent solution under design warranty with the manufacturer. And so that part, we will, in the second half of this year now, move to an alternative design, and that will take that problem away. The pumping system, there are still some components of that, which are under investigation, and we remain in good communication with the manufacturer on how to resolve those issues. We have to partly mitigate that changed some of the operating methods that we use to help improve the production, and that started -- we've started to see some benefits from that. Elsewhere in the plant, we said that in Q2, we would debottleneck the downstream feed preparation desliming area, and that was successfully delivered. And so moving forward, we expect this sort of continued improvement of production to take place as we further debottleneck areas, bring the -- resolve the premature wear components and get ourselves slowly but surely through these teething problems that we've been having. And so we have built into our forecasts further progressive improvements for the rest of the year and that's how we expect to proceed. I'll pass on to the next slide and Cillian.

Yes. Good afternoon, everyone. So just to touch on our markets and what we saw in the second quarter. Really, we saw solid demand across our product suite in the second quarter of the year. And that's what really supported the stronger shipments we saw in the second quarter and read through the first half. Starting on ilmenite. I think we saw that demand was pretty stable on the pigment side and continues to be strong on the metal side. But as Tom touched on, there's probably different dynamics in different regions in the pigment side, particularly at the moment. And for us, we've seen the impact of the war in the Middle East affecting what type of pigment is being made in China. And -- the war has caused high sulfuric acid prices, high sulfur and sulfuric acid prices. And in China, what we've seen is that, that is giving a competitive advantage to chloride pigment. And we've seen chloride pigment grow to record levels and continue to gain market share in China. And that's where most of our ilmenite that goes into China is consumed. It's almost entirely consumed in titanium metal and in the chloride pigment after beneficiation. So that was a real demand pull in terms of volumes for us in the second quarter. However, as Tom said, the second quarter pricing was lower as we expected it to be, and that's on the back of the supply picture where we continue to see strong levels of Mozambican -- or not Mozambican, but African concentrates going into China as well as Chinese domestic ilmenite production increasing as well. So while we see strong demand for our type of ilmenite, I think overall, we saw some pressure on ilmenite pricing as a result of continued growth in supply. The curtailments in production elsewhere has tightened the market a bit in -- outside of China. On the zircon side, a bit of a better story. There's less zircon contained, particularly in Mozambican concentrates, but also not with the domestic ilmenite. So on the supply side, not seeing the same level of growth from those areas, while we are seeing curtailment in suspensions of production, and that has really taken away any overhang and caused some shortages in places. And as a result, we've seen really across the board in all regions, prices start to increase in the second quarter, and that's continuing into the third quarter. And Kenmare gets value from zircon across five of its products now. And we've seen price increases for the zircon contained in all of those products in Q2 and moving into Q3. And that's one of the things that's supporting the strong ZrTi demand that we're seeing and the strong shipments we've seen. Zircon is one of the key components along with monazite and ilmenite. So the contained zircon is getting more value in the ZrTi and as well as that, I think the type of ilmenite that is in the ZrTi, there's a limited amount of in the world, and we're seeing strong demand for that type of ilmenite, which is why we're seeing the level of demand, which gives us confidence to say we're expecting the strong sales into the second half and really we have demand going into the first half of next year as well. And with that, I think I'll pass back to Tom.

Thanks very much, Cillian. Look, maybe just to recap, Kenmare operates Moma. Moma has been around for a long time. It's going to be around for a very long time, decades and decades to come. The WCP A investment and the move to Nataka, WCP A is first. All our other plants will follow, and they will all end up at Nataka. So that's the key to the future of the business. And we're investing and ready for that move. And obviously, a little bit still to do on WCP A, but as Ben said, working well with the contractor and hopefully have a clear path to getting that done before too long. Moma, as Cillian outlined, is a preferred supplier to lots of our customers. Many of our customers have been with us for 10, 15 years plus. We've got good quality products. consistent availability and our products are suitable for a wide range of applications. And that helps us. It helps us get the best customers and stay with them for a long, long time. And that gives us good visibility, particularly on our sales into the next quarter and towards the end of the year. We're investing so we can work -- live through cycles like the one that we're in at the moment. We -- before development CapEx, we generated operating cash flow in the first 6 months of this year, and that's at what we hope is pretty much the bottom of the cycle. We've done a lot of work with our team at site on operating cost improvements. And I think one of the things we highlighted in our earlier calls with shareholders today is that we're on track to achieve our operating cost guidance and despite the fact that, obviously, we are seeing slightly higher diesel prices. And reality that the diesel price impact has principally -- of the U.S. around conflict. It's principally been around freight costs and vessel availability and timing. Aside from that, it's been comparatively limited. We have seen an increase in cost of domestic diesel within Mozambique, but only since the start of May, and let's see how things go over the next few months. And look, as I mentioned when I talked about our negotiations with the government, we've had a good partnership with the government. We hope to extend that for many years to come. We've invested already $25 million in the community around Moma, and we've committed to making further significant investments to increase the capacity, to improve livelihoods to diversify the economy to create infrastructure. This is an important part of the fact that we'll be there for decades to come. And we believe the government recognizes that. And hopefully, that will be reflected in a renewal of our implementation agreement for too long. So with that, I'd like to thank you for joining. Happy to hand over for any questions people may have.

That's great. Thank you very much indeed for your presentation. [Operator Instructions] While the company take a few moments to read those questions submitted today I would like to remind you that recording of this presentation along with a copy of the slides and the published Q&A can be accessed via investor dashboard. And Katharine, at this point, if I may now hand over to you to chair the Q&A, and I'll pick up from Tom at the end. Thank you.

Thank you. So the first question is, when will the deal be done with the government? It's going on too long.

I agree with that. Look, there's no firm time line. And as I said, we continue to operate under the legacy terms after we had a little bit of challenge to the government earlier this year when they started to try to impose or the tax authorities started to try and impose some of the new terms, and we had to remind them that nothing was agreed until everything was agreed. In all our engagements over the years, and I've met a number of different ministers and the President, each on multiple occasions plus the technical team with whom we operate. They're all sensible commercial people who really value the contribution that Kenmare has made to the country and who consistently say that they intend to renew this agreement that the principal issue at under discussion is the royalty that we pay. Historically, it was 1% and we've proposed that it would increase progressively from 2.5% at the start of the renewal period to 3.5% over the 20-year period, plus that we will pay withholding tax. And that's kind of a 4x, 4x improved return for the government on this agreement. Our rights to renewal are clear. We have the right to renew on legacy terms. It's our choice and I suppose a recognition of the need that we invest on better terms for government. And -- but if government doesn't reach or propose an agreement that we can live with, we do have the right to go to arbitration, which we don't want to do. And in our engagement with shareholders consistently over the last year, 1.5 years, their counsel to us has been to keep seeking a negotiated solution. That's what we're doing, but we won't do that at any cost. So I am hopeful, as you can probably tell that we're certainly near the end of the beginning of this. I am hopeful that we've given them everything that they need to make a considered assessment of it. And that before too long, we'll understand what the path forward is.

A bit of a follow-up question. Has the Mozambican Government attempt to impose new tax rules on Kenmare earlier this year been rescinded?

Yes. Yes. I mean that was one arm of government, the tax authority. And to be fair, they have been charged with increasing collections on behalf of government. But when we highlighted that they have provided assurances to us that we would continue to operate under the old terms, that was remedied pretty quickly, and they've confirmed that continues to be the case. So yes, we're operating as we always have, and it certainly isn't overhang the negotiations in any way.

Are the tax and regulatory conditions in Mozambique currently stable enough to invest with confidence for the long term?

Look, Mozambique has been a great partner for us for 20 years plus. And we're one of the first renewal processes for agreements of this nature that has come up. And I think the government is trying to get to grips with social expectations, the evolving natural resources environment, the fact that they have abundant natural resources, most notably LNG offshore and trying to make sure that the nation gets a fair return from them. For us, we certainly had good conditions in the past. Hopefully, we can reach an agreement that's fair on this occasion. And look, I think, obviously, we've invested heavily in our assets over the last number of years for the long term. We can't move the ore body. So we are going to be in Mozambique for a long time. But certainly, how we allocate capital in the future because this is hopefully the last big capital investment we have to do, how we allocate capital in the future, whether we diversify the business, whether we change the kind of mix of debt that we have versus what we return to shareholders in the way of dividends and buybacks. All of these are questions that we will need to address. But for 2026, our objective is to keep balance sheet flexibility to, as Ben said, to progressively increase our tonnes and to get through this more difficult period in the market.

Is there a risk that ZrTi could become subject to the new mining law that imposes a raw or export ban?