Kenmare Resources offers ‘strong value in under-supplied market’, Peel Hunt analyst

Kenmare Resources plc (LON:KMR) was the topic of conversation when DirectorsTalk caught up with Peel Hunt Mining Research Analyst Peter Mallin-Jones.

Q1. How would you summarise the Q2 results?

A1. While we had anticipated that ore grades would fall, the slimes issues meant that overall recoveries and also tonnes mined were lower than we looked for, meaning overall production of 243kt ilmenite was down on our 275kt estimate. Add in the periods of heavy swells in June particular, limiting shiploading activities, both output and sales volumes were down on our expectations. Against that it is pleasing to see net debt reducing slightly more than we expected, suggesting that despite lower revenues, cash generation was strong.

Q2. Will Kenmare’s efforts to address the ‘slime’ issue improve H2 output?

A2. Key to slimes management is having enough water in the overall system to allow enough time for the slimes to settle out before that water is sucked back into the wet concentrator plant. A combination of factors in 2Q meant water levels dropped, speeding up water flow and meaning more slimes re-entered the plant. Through the quarter the site team worked to enlarge the water paddocks behind the plant – something that can only be done steadily while the dredge moves forward through its path. With larger paddocks containing more water, the team should be able to accelerate mining rates while also holding slimes levels low. Higher rates of mining means more ore to process while holding slimes down should see plant recoveries picking up back to normal levels. In combination this should drive a step up in production rates in 2H on 1H.

Q3. How do you see demand and pricing for Kenmare’s core product, ilmenite?

A3 Prices for ilmenite have ticked up steadily so far through 2022. This suggests that buyers are struggling to secure material and have few options when it comes to playing one supplier off against another. It also suggests inventory levels at slag plants and pigment plants are also relatively low. While there are some new operations starting up, and supply has steadily been rising in recent years, there are also mines that are steadily depleting down, limiting the ability of the new mines to add to production. Mine supply doesn’t look like it has been able to meet demand for several years now, something that has led to the steady draw down of inventories. Obviously there are worries over the level of end user demand given high energy costs and rising interest rates, but for the time being at least we suspect reduced demand at the retail end of the pigment chain would likely result in a degree of restocking to more comfortable inventory levels along the chain, sustaining demand for feedstock.

Q4. How are things progressing for WCP A’s move to the Nataka area?

A4. Management is progressing the pre feasibility study for the move. This will progress to a more tightly defined and costed feasibility study next year. One thing that has come out of the work to date is the option to being work on the required desliming circuit for WCP A well ahead of the move. This could allow WCP A to cope more easily with the higher level of slimes on its dredge path for the remainder of its time at the Namalope deposit. It would also have the effect of lifting mining capacity – something that may allow the team to rebuild intermediate stockpiles of semiprocessed material ahead of the A move. Lastly it would likely also spread out the capex spend over a longer period easing the funding requirements.

Q5. How do you view Kenmare Resources as an investment opportunity?

A5. Given the undersupplied market and the low implied ilmenite price being factored in by the market, we think the Kenmare shares offer strong value. It has a robust balance sheet and the ability to sustain dividend payments while funding the move of the A plant. Trading at very low EV/EBITDA multiples the market looks to be ascribing next to no value for the 100+year long life of mine.

Kenmare Resources (LON: KMR) is an established mining company, which operates the Moma Titanium Minerals Mine, located on the north east coast of Mozambique.

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