Kenmare Resources plc (KMR) Earnings Call Transcript

Good morning, and welcome to the Kenmare Resources' First Half 2020 Results Briefing. [Operator Instructions]. Finally, I would like to advise all participants that this call is being recorded. Thank you. I would now like to hand over to Mr. Michael Carvill, Managing Director of Kenmare Resources. Michael, you may begin your call.

Thanks, Colin. Good morning, everyone, and welcome to Kenmare Resources' H1 2022 results presentation. As said, I'm Michael Carvill, I'm the Managing Director. In the room with me are Tony McCluskey, Finance Director; Ben Baxter, Chief Operations Officer; and Jeremy Dibb, Corporate Development and IR manager, and we will all be available to answer any questions after a short presentation that we're going to make. Just before I get into the main body of the presentation, I'd like to mention that this will be Tony's last presentation as Finance Director of Kenmare before he retires and goes and spends some time settling and enjoying himself. And so Tony has been working with Kenmare for 31 years. During that time, we've gone from, again, a very basic exploration company through the development of the Moma mining project through into being a mine production company. So it's been a process of genesis and change with many traumas during the time. And on behalf of everyone at Kenmare, I'd like to thank Tony for the great contribution he's made over those years as a work colleague and a brand. And anyway, we'll hear more from some more from Tony from hereon. I'll just move in. And if I could look at Slide 4, Thank you, Michael. Kenmare is now the largest supplier of ilmenite, titanium feedstock mineral into the global world market. We represent about 8% of global titanium feedstock production. And we have the capacity to operate at 1.2 million tonnes of ilmenite supply plus gold products and zircon, rutile and mineral sands concentrate per annum. During the period between 2018 and 2020, we completed three development projects, which allowed us to increase our capacity to that level. Just turning through to Slide 5. We operate the company with view of creating a sustainable competitive advantage and we do that based on three main pillars; operating responsibly; delivering low-cost production; and then allocating capital that's generated efficiently. In terms of operating responsibility, we believe a fit and engaged workforce is an absolutely key component of that. And we are delighted to say that we have achieved a lot of time injury frequency rate of Zero. So over -- also during H1 2022, we passed the milestone of having 10 million man-hours worked without a single lost time injury. And we think that's a remarkable achievement. And it's a huge credit to the management at the mine and to everybody that's working there for ensuring the safety of themselves and their work colleagues. We target first quartile position in the revenue to cost curve for the industry and that combined with record average sales prices has provided a strong cash flow, which has allowed us move towards two of our objectives, which are a strong balance sheet, and we have strengthened our balance sheet during H1 and improved shareholder returns, and we've increased our interim dividend by 51%. So turning to Slide 6. We're very aware that the world is facing great uncertainty at the moment. We have the firs war in Europe since the break of Yugoslavia, U.S.-China tensions have increased, interest rates have increased. And we realized that the demand for continuum pigment, which is the main use of titanium feedstocks is related to world GDP growth and forecast for world GDP book growth are reducing. However, at the moment, Kenmare's order book for H2 is largely committed. We are seeing strong demand for our products. And looking further into the future, it's very clear that major industrializing economies such as China and India have a very long way to go in terms of the consumption of titanium pigment per capita before this market becomes a mature market. So we see the market as having quite a long way to go before it becomes a fully mature market with a reduction in growth. Turning to Slide 7. The result of that is that we achieved a sales price of $429 per tonne for the material we exported combined with our shipment levels that produced $106 million worth of EBITDA and $63 million worth of profit. In terms of our capital projects, we have been installing a rotary interruptible power supply system at the mine so as to stabilize the voltage of power that's delivered to the mineral separation plant. Just to backtrack on that, we supply most of the electricity, the over 90% of the electrical power that is used in this mine is created sustainably by hydroelectric dam on the Zambezi river and that power is then transmitted through transmission grid to the mine. There's plenty of power available, but the transmission grade is long and vulnerable. And consequently, we have low volatility in the part that arrives at the project. The RUPs stabilizes that. It's not in operation, and it has been working absolutely perfectly. We're absolutely delighted with the performance of RUPs and since it's been in operation, the mineral separation plant has seen -- has no knowledge of any dips whatsoever. It's been really fantastic. Our study on the movement of our concentrate plant, A to Nataka ore zone, which is the largest ore zone in our overall set within our license area is underway. We have been doing trial mining, looking at different methods of mining, those time lining tests have gone very well. We are delighted to say. And we're progressing to optimize the way we will mine the Nataka in the future. And with that, I'll ask Tony to give us an update on the finances.

Thanks, Michael. And thanks for your opening remarks. As well as the challenges. I remember many highs over the last 31 years as well. So good morning, everybody, and welcome from me to our H1 results update. On Page 9, you'll see from the income statement that the strong product markets that Michael touched on, has enabled us to again increase our revenues compared to the same period last year, which, in turn, has increased our profitability and earnings. Certainly looking at the pie on the right-hand side, you can see the effect of revenue increasing by 9% despite a reduced volume because of shipping constraints, which I'll talk about later. We have increased our average price by 52% and that the mix of that price has been more weighted to our non-ilmenite sales than the low end in 2021. So just to emphasize that this is really due to a mix on shipping rather than any change in production. And we see the 2022 situation as more reflective of the future. Back to the income statement then, cost of sales and other operating costs, relatively flat. Finance and foreign exchange costs are down as a result of the reduced debt, again, which we'll come to later. And tax at $6 million is up from the first half last year, which is back to a more normalized rate. I think we flagged during H1 last year that the 2.6% was anomalously low. And the result of all of that is an increase in profit after tax and EBITDA of just under 30% in both cases. And that leaves us with a very healthy EBITDA margin of 58%. Moving on then to our revenue slide on Slide 10. Product markets, as I've said, have continued to strengthen through the first half of the year. The ilmenite price is up 36%. Our primary zircon is up 52% and the mix swing that I touched on in the previous slide has also helped the average in total. And if you look at the graph on the top right-hand side. The price for the first half of ilmenite is actually $349, which is well up from the lows that we've seen about 5 years ago. That said, shipments during the period were lower. We have two major weather systems that came through in the first quarter that we previously reported on in our production updates, and they impacted on shipping. In addition to that, one of our two transshipment vessels underwent a 5-year scheduled dry dock in Durban, and that vessel is due back later this week. So we'll be back in service. So I think it was particularly pleasing to see the other transshipment vessel, which is our PEG performed very well during the period, but it did, as a net effect, reduced the amount of product that we had available to ship. Most of that then, of course, is in the shed and available for shipment in the second half of the year. Moving on then to the statement where we reconcile our income statement to the cash cost of ilmenite produced, I mean dropping straight to the bottom of that slide, you can see how the effect of co-product revenues from our zircon, rutile and mineral sands concentrate has enabled us to reduce the cost per tonne of ilmenite to $105 per tonne, which is down 9%. Just stepping into the statement for a moment for a couple of call-outs there. Depreciation, as you can see, is up. That's a function of additions, metal disposals and some changes in depreciation rates. But probably the more meaningful number there is the increase in product stock, which is a function of the lower shipments. So $28 million is adjusted from our cost of sales to bring us back to the cash operating cost of producing the products that we have produced during the period. And that is up -- the inflation that you hear about more generally in the mining industry is certainly becoming evident to Kenmare and one to watch in the second half of the year. We didn't see so much of it in the first quarter because we have large consumable stocks, but it started to become evident in the second quarter. And it's not across one area. It's across a number of them, which I've touched on, on the right-hand side. Our finished production is down for the first half of the year, and that's why we've ended up with a relatively higher cost per tonne of $184. But with improved production in the second half of the year, we'd expect to see this reduce. But look, the bottom line we have per tonne of ilmenite is $105 and that compares to the $349 that I mentioned on the earlier slide, and that illustrates the strong cash generation that is evident from this business during the last 6 months. Moving on then to the net debt bridge. And this strong operating cash flow with that margin that I've just talked through, has enabled us to reduce net debt from $83 million at the end of December to $66 million. The movement in property, plant and equipment, dividends, interests and fees are all relatively normal. But what we wouldn't be expecting to see and they're expecting to see a reversal on this is the working capital change of $28 million, which mainly relates to the movement of finished products. So just to put a bit of color on that, at the end of December, we had 89,000 tonnes of finished products, and that increased to 215,000 tonnes of finished products in the sheds at the end of June, and this is due to the shipment constraints. So that's available for sale in the second half of the year with the Bronagh J back in service and both our transshipment vessels operating well. Moving on then to the balance sheet. It's nice to see that the balance sheet has continued to strengthen with that reduction in net debt. You'll see the inventories up from $60 million to $91 million, most of which relates to the stock effect that I touched on. The trade and other receivables moves around. It's a function of the timing of ships. And cash is reduced to just over $30 million. But I guess that's after all the normal operating capital costs. It's also after paying $24 million as a final dividend in the first half of the year, and repayment of $55.7 million of debt. So between dividends and debt, that $30 million is still there after a total of $80 million. And of the debt, $15.7 million relates to the first payment on our term loan facility as scheduled. There'll be another one of those in the second half and we have sufficient cash to pay down fully on a revolving credit facility. This facility has been renewed and has been extended to December 2023. And we were pleased to see that we were able to do that with our lending banks at a margin of 4% -- 4.5%, which is just down from 5%. So -- that was a positive development in the last few weeks. And then finally, for me, we continue to deliver on the commitments that we've made to shareholders to return cash. This is on the back of the 13.5% share buyback, which we successfully completed in Q4 of 2021. The payout ratio is as we had in 2021, which is 25% of profit after tax. Thus, we will be paying $10.4 million of an interim dividend, and that is $0.01098 per share. So that's a dividend per share increase of over 50% for the period, using the usual 1/3, 2/3 interim final list. So with that, thank you for listening. And I'll hand you over to Ben Baxter.

Thanks, Tony, and good morning to you all. If we can move to Slide 16. I'd like to start by highlighting and reiterating what Michael had said that our strongest safety performance is continuing, and we have had zero lost time injuries in the first half of the year, which is a fantastic result. And that has meant now that in June, we celebrated 10 million hours -- man-hours without an injury on site, which means that our last injury was in early 2021. The performance is not luck. It's due to an awful lot of work and focus that's gone into improving the way we do hazard identification and risk assessment on site. And it's been bolstered by the fact that we have implemented a leadership coaching program in the business where all leaders have taken part. And this is improving employee engagement, and that is particularly in the areas of safety. On to Slide 17. And more broadly speaking, we're advancing our sustainability goals. So whilst as I've just said, we've seen the safe and engaged workforce in prudent. We're also seeing additions around the health of our employees, and we've implemented a wellness program in the first half to not only improve health but also the prosperity and of the employees. We're continuing to build thriving communities and we're doing that supporting and collaborating with a company called Moz Parks. They're busy building at the moment, an industrial park on the edge of the mine. And what this will do is we'll bring in local industry, improve the amount of industry that's immediately adjacent to the mine and create local employment. Our rehabilitation is still very much a focus. And we've been working on combining improvements in biodiversity as well as provision of subsistence farming land for local communities that we're doing this through the development of an agro-forestry trial, and we're seeing that we're expecting this to improve the quality of our rehabilitation going forward. And then lastly, we're working on our supply chain. We've completed an audit of all of our major suppliers, and this has been focused around their sustainability credentials so that we can develop ourselves of knowing our supply chain better and building trust in our own and governance in our own business. Moving on to Slide 18 and into production. We had a challenging first half to the year. And what I would say is, however, that since May, we've really started to deliver much stronger performance. And that's been good to see. The production was limited by heavy mineral concentrate production at the mine, and this was impacted by, as Tony mentioned earlier, two tropical storms that took place in Q1 and then also a general increase in the levels of slimes that we experienced in the mining process. However, the slime's levels were stabilized, and that was completed by May. And since then, we've seen very much stronger HMC performance until now. Just by way of explanation, the slimes' levels are steadily increasing in the Namalope ore zone. And this means that good pivot management and settling is becoming more challenging. The Nataka pre-feasibility study has now shown us that mining in Nataka from 2025 will require an upfront desliming circuit as for the one that we already have at WCP B. But -- so we're now investigating and evaluating the potential to bring forward that investment to see whether we can get the early benefits in the remaining time in Namalope. For more information on the science, you can refer back to the appendix in the presentation pack. So the impact of all of that was that production of finished products was down 10% in the first half of the year, and that was in line with the amount of HMC that was processed by the mineral separation plant. However, the zircon and the rutile production was better based on very good recoveries and the MSP is performing very well. So when we look forward with the improved performance we've seen in the last 3 months, and we expect that to continue moving forward. And this -- what this will do is it will ensure that we do achieve our guidance levels this year, albeit it will be at the bottom end of the range. On to shipments. Shipments were down 29% in the first half of the year, and this was due to the poorer weather we experienced and also the reduced shipping capacity. The Bronagh J transshipment vessel, which is our larger transshipment vessel, was undertaking its 5-yearly dry dock maintenance program. And that vessel has now completed its -- it's maintenance and is returning to site, and we expect it to be back in service in the coming days. What this means is going forward in the second half is that with the very good performance from the PEG vessel combined with Bronagh J returning to service. We expect to be able to have sufficient capacity to catch up on the shipping of the finished products that -- and we have healthy stocks at that right now. And we expect those stocks to be normalized by the first half of next year. Moving to Slide 19. The Nataka pre-feasibility study is progressing well, and it's delivering some important results. You might recall that Nataka is our largest ore body, comprises 79% of the resources that we have. And WCP A is expecting to mine to and into the Nataka zone from 2025, and it will be dredging corridor to a high-grade zone -- high-grade dredge path from that time. On the current status, Michael mentioned, we've been very pleased with the hydromining testing work that we've been doing in the first half of the year. And we're comfortable that we have the right mining methods to mine Nataka well. We're currently in the process now of trading off the combinations of dredging and that hydromining method, and we'll be in a position to talk more about that in the early part of next year. The PFS is due to be completed by the end of this year, and we will give some update in the early part of next year, as I say. Some parts of this study have completed and already moved into definitive feasibility study. This is particularly in the processing area. We're starting to get now firmer views of the way forward with Nataka. And what this has meant is that we have now an initial estimate of the capital cost of this project. And we believe it will be not less than $225 million. We are continuing to finalize that mining method. We're trading off the capital versus the operating cost and coming up with the most optimal solution. And so there will be some further refinements to that number, but -- and we'll be able to give you more details on that at the end of the year. On to Slide 20, I'd like to just give a little bit of an update on the RUPS. This is a project which has really -- has moved into delivery and it's really doing very, very well. The projects in operation and it's actively mitigating supply disruptions in the grid. This means that we will not need to use diesel generators to mitigate power dips going forward. And therefore, we will expect to see significant diesel consumption -- diesel reductions, bringing operating cost savings but also reducing our carbon dioxide emissions. And we expect in 2024 that this project will deliver a 12% reduction in our overall emissions of the business. In the more immediate we're seeing the reduced diesel consumption, and we're seeing the improved utilization that the stable power supply brings, and this is having a knock-on benefit into the mineral recoveries in the mineral separation plant. So overall, a very pleasing project that's now working very well. With that, I'll pass over to Michael to give us some marketing outlook.

Thanks, Ben. So it's good -- turn to Page 22, please. I mentioned at the start of our presentation that we had seen strong prices in H1 2022. And you can see from the graph on the top left-hand side than the fact that we have, in fact, in H2 '21 and H1 '22 in an uptick in the real of improvement of titanium feedstock prices and our average price. And part reason for that is the graph on the right-hand side, which is world slag production titanium slag production capacity. Previously, that paradigm in -- with regard to beneficiation of taking of feedstocks into titanium slags was that slag plant would be owned by a mining company, and it will be positioned close to our service directly by an integrated mining operation. So the material would be mined and then hits directly into slag plant for beneficiation. But there has been a rise of nonintegrated slag plans. And these plants then have to buy the ilmenite on the world market for beneficiation. They like the type of ilmenite that's produced at Moma and it's a very important growing market for Kenmare. So let me just turn to Slide 23. On the left-hand side, on the top of this slide, we can see the company generated demand supply balance for the titanium feedstock market in terms of titanium dioxide units. And you can see that during the years of 2015 to present there has been a small deficit of supply vis-a-vis demand. And that gap has been satisfied by the gradual drawing down of an excess world inventory that was generated between 2011 and 2015. And if you look over on the chart on the right-hand side, you can see that, that excess in industry inventory grew until 2015 and has gradually been leased up since then, and it's not back at a normal or a low level. So consequently, we believe that through the whole value add chain in the titanium dioxide industry, we are -- we believe that there are low levels of inventory. Looking again at the supply-demand balance, you can see that we are projecting that in 2023, that there will be a slight reduction in demand. We believe that this is consequent to the reduction in their world to the GDP. But even still, even with that reduction in demand, it requires new project capacity, new money capacity. We brought on to satisfy that demand. And so there needs to be a sufficient transition in the market to allow that new capacity to be developed. Turning to Page 24. As far as we're concerned, we're seeing strong pricing momentum continuing into Q3. We realize that the demand for titanium feedstock is related towards GDP and forecast for world GDP growth have been reducing. Nonetheless, our customers remain robust in their demand for our products, and we believe that we'll have no difficulty in supplying the market and the market absorbing our material into 2023. Zircon market is also tight. All of our customers in the West are keen to get more material than we can deliver. In China because of the very severe reduction in real estate activity the market is weak, but we don't really sell much zircon in China. Turning to outlook, Slide 26. Kenmare targets of first quartile position in revenue cost curve for the industry. The chart you see here is generated independently. It's sourced from a group called T2MI. They don't do it every year. So therefore, the protection we have from them independent protection is for 2023, and it has is in the first quartile. We believe we were in the first quartile in 2022 with our lower production this year, we might just nudge out of it. but we'll be seeking to reenter that first quartile position and that's a key target of our management of the company. Turning to Slide 27. I mentioned these three pillars on which we operate the business at the start of the presentation. So how have we done with regard to the main H1 2022 well, we mentioned the lowest ever lost time injury frequency rate. We are delighted with that. We believe it's a very good thing and with the RUPS in operation that helps in us meet a bunch of our ESG targets. We have an EBITDA margin of 58% which is a good EBITDA margin that puts -- allows us to generate a strong cash flow, which has allowed us to increase our dividend by 31% share. 51% compared with H1 2021 and has allowed us to reduce our net debt. So that's really the end of our presentation, and we'd be delighted take questions from anyone.

[Operator Instructions] Your first question comes from the line of Richard Hatch of Joh. Berenberg.

A few questions, please. First one, just doing a bit of feedback this morning just on the $225 million CapEx number for A, can you just talk around the comfort you've got on that number and the risk of seeing that increase? And -- and I mean, if we just think about WCP B, that the move there cost $127 million. So fairly sort of meaningful difference. Can you just perhaps then just remind us what the main kind of additional cost items are there that we need to be thinking about that kind of explains the difference between the two leads? That's the first one.

Okay. Rich, this is Michael responding on that. So firstly, some time has elapsed between the movements of B and the move of A. The move of A will end '26 and move of B was in '20. So we have inflation in the -- in the meantime. In addition to that, B is a larger plant. It's also an older plant and the way we are going to move it -- sorry, A is A larger plant and the larger plant, the way going to move it is different. We will be mining our way through a low-grade zone to the Nataka ore body. That -- so it's a longer, slower process of getting to Nataka. We have to build infrastructure tariffs, but the real principal difference is that with A, we will have to build a tailings storage facility. So when we are mining at Nataka, we will be separating our slimes, and pumping them to tailing storage facility where they will be stored. And the pumping and the dam associated with that is a significant cost out which was not involved with the move.

And you got a handle on what kind of CapEx kind of inflation we're talking about sort we're comparing -- I guess you can't compare like to like, but do you have a handle on it?

Well, no, I can't give you a precise percentage of the inflation there, Richard. But when you asked about the $225 million, we can't guarantee that it's not going to be more than $225 million but we felt that it was important to get that number, which we believe is a reasonable estimate of the cost into the market. So the people have a good understanding of the general quantity -- quantum of projects that we're dealing with here. It's a large project.

Yes. Understood. Okay. And the second is just on kind of staying around A and Nataka but also current mining. I mean slimes seems to have been kind of a headwind for a few quarters. And it's something that you're talking about kind of addressing the desliming circuit at the front end, which seems to make sense. When do you think you might be able to be in a position to put a green light on that to kind of address the slimes issue that you're seeing at current mining? And perhaps then and I guess does that desliming circuit comprise part of the $225 million?

Yes. The desliming circuit would comprise part of the $225 million. So it's an item that we expect to have to put into the -- into the concentrated plant A for mining and Nataka. And the idea would be that we would then simply just move that capital forward, or move it closer to present. And install it earlier so that we would get the benefit of it. But we're still mining Namalope before we get to Nataka. We're doing feasibility work on that desliming circuit at the minute. And so sometime in 2023, we will -- the other level where we can look at that as an investment decision and present it to our Board.

Okay. Do you have a handle on what the CapEx could be for the B slime?

Second. It has not even gone through pre-feasibility silt this stage. No pre-feasibility still has not been completed at this stage on it, Richard. So it'll be rash to put a number on it just yet.

Yes. Understood. Okay. Next one is just on inventories. I mean just kind of curious to your Slide 23 about the excess inventory levels that you're seeing have brought down to almost nothing. Can you perhaps just elaborate on the downstream, what you're seeing in the pigment producers and then further downstream, the paint companies, what are you kind of hearing in terms of inventory levels across the sector as we go downstream? And are you sort of comfortable that -- or have you a view on kind of where we are versus sort of like a normalized level?