Kenmare Resources plc (KMR) Earnings Call Transcript

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kenmare Resources plc H1 2025 Results. [Operator Instructions] I would now like to turn the call over to Tom Hickey, Managing Director. Please go ahead.

Thank you very much, and welcome, everybody. Thanks for taking the time to join us on our interim results conference call. With me here, I have James McCullough, our CFO; Ben Baxter, our COO, and we'll bring you through today's presentation. Maybe just as an intro, many of you are familiar with Kenmare. I mean, we're one of the largest players in the titanium mineral space. We operate the Moma mine in Mozambique. We have done -- been there for nearly 40 years and producing for nearly 20. And we're very focused on being there for many, many decades to come and being a good citizen while we're there. And I think we were particularly pleased in the first half of the year to become a constituent of the FTSE4Good Index for the first time. So just an interesting mark of how we try to do our work. Looking at the specifics of the first half of the year. I think from an operational perspective, despite some challenges on the ground in Mozambique that I'll touch on a little later, our operations were stable and consistent and safe. We had no lost time injuries in the first half of the year in our operations or in our development projects. We're on track to achieve our 2025 production and operating cost guidance. But we are seeing, and we'll talk about a little later, maybe slightly weaker markets in the short to medium term. We expected it this year, but the outlook is probably a little bit more moderate than we expected, and we can see that reflected in the results through an impairment loss that James will take you through. One of the big signposts for this year is our capital project. As I said, we have a multi-decade mine life. We've been investing to move towards our biggest ore body in Nataka for the last number of years. It's a $340 million investment to upgrade our WCP A plant, which is our largest mining plant, to bring 2 new very powerful dredges to Moma and to invest in the infrastructure necessary to mine at Nataka. And I think we've been very pleased with progress on that project in the first half of the year. We spent just under $100 million. The budget still remains $341 million. We successfully brought the 2 new dredges from the Netherlands to land at Moma, and they're currently sitting in the staging pond, which is being filled with water even as we speak. And as we've said in the past, every day that we successfully deliver elements of this project, it's being derisked. By the end of this year, most of the core elements of the project should be delivered, and I think that will be a big important signpost for us, and Ben will take us through project progress on that a little later. I think all of those things, the operations, the progress of the capital program make us optimistic about the future and helped us declare an interim dividend of $0.10 a share. And I suppose are evidence of our commitment to keep paying dividends throughout this capital investment cycle. It was a busy half year in other ways, however, as well. We had a possible offer approach from a consortium of Oryx Global Partners and my predecessor CEO, Michael Carvill, people who understand the space very well and obviously, Michael, who understands the company like no other. It was a serious approach. And I think it was -- while we were in an offer period for just over 3 months, ultimately, the company terminated discussions. And I think it was an interesting time in that it gave us the ability to engage with our shareholders to understand how we thought about value of Kenmare now and in the future. And it shone a light on the fundamental value of the business. I mean, ultimately, I think investor sentiment was that an approach at a time when markets are a bit weaker when one of our key agreements that I'll touch on it in a few moments, remains outstanding, and we're in the middle of a capital program might not be the best way to recognize full value of the business. But I think certainly, none of us are wedded to Kenmare remaining independent. There certainly -- we're open to any approaches that might come in the future, and I suppose it is part of life as a public company. I think I suppose the final element of the first half, which was, as I said, quite a busy period is Mozambique itself. Mozambique had challenges in the first -- towards the back end of last year and the first quarter of this year arising from disruption and civil unrest associated with the presidential election and transition to a new government. That was reflected on the ground with damage to government property, widespread protest and I suppose a disappearance or a reduction in day-to-day administration governance and security activities. And we do see that reflected a little bit in the first half of the year. It did cause us some extra costs. It did cause us some disruption. Thankfully, that's all quietened down now. We're back to very much normal operations, and we were able to get through that period safely. But I think what that process also did was it kind of interrupted the ongoing negotiations we have had about our implementation agreement. Many of you will know this implementation agreement is one of our foundation agreements. It covers how we operate our processing and export activities and the fiscal terms associated with that. It's not -- it doesn't impact on our day-to-day mining activities. And that agreement nominally expired at the end of December last year, 21st of December, albeit we have been continuing to operate in the normal course in accordance with the legacy terms with the government support. And look, I think we've been engaged in this renewal process for not far off 3 years now. We've engaged with a wide range of government stakeholders because this is an agreement that cuts across a number of different government departments. It covers fiscal terms. It covers a mining project and so quite a few people are interested. And of course, during that time, we've also had a change of government and a change of ministers, and we've had to, I suppose, resume and reintroduce people to the project. At the outset, I should say that the agreement as drafted back in 20 years ago contains an automatic right of renewal for Kenmare. But we recognize that times are different now. We recognize that the incentives that were necessary to get the project going aren't appropriate for the future and the government needs a better return from the project. And we have voluntarily proposed a significantly improved return for Mozambique from Kenmare. In March, we proposed that the royalty, which was previously 1% would go to 2.5% and that we would apply withholding taxes on services from outside the country. Council of Ministers felt that, that wasn't sufficient, but we understand that, that approved substantially all other parts of the renewal at that point in time. And look, I should stress that during all our discussions with stakeholders in country, they stressed that they regard Kenmare as a good corporate citizen. We fulfilled every obligation we made when we launched the project. We employ over 1,700 people. We have excellent social programs. We're in the presence where exactly the sort of company that Mozambique wants to have operating in the country. So we're very hopeful that we will conclude an agreement, but the process has become elongated. Following that Council of Ministers, we proposed a phased increase in the royalty rate up to a maximum of 3.5% and withholding taxes previously. And certainly, we would have been very hopeful when myself and my colleague, Gareth Clifton, had the good fortune to meet with the President at the end of June. We had a positive meeting there. And I suppose we stressed to the President the importance of this agreement for Kenmare. The fact that this -- our objectives for the next 20 years are very much aligned with the country's objectives. We want investment. We want improved prosperity. We want continued social programs for the people in and around our mines. We want a clear platform to make the investments that we're undertaking to do. And I think it's important for Kenmare. I think it's important for the country. We'd like to see that agreement concluded and resolved as soon as possible. We were a little bit concerned last week to see a suggestion by a government spokesperson that the agreement had been concluded. That's certainly not our position. And obviously, we had to dispel that notion. And we're very hopeful that we'll be able to conclude everything in the short term. But I think we can't be certain that that's the case and hence, the note of caution that we have in the statement today. So this is something that there's a lot of attention on Kenmare and we know in the investment community, and you should be assured that we're giving it the attention it deserves. That's, I suppose, the intro for me. What I'll do now is hand over to James McCullough, who will take you through the financial results for the first half. Thanks, James.

Thanks, Tom, and good morning, everyone. Look, just looking at key focus areas across the financial results. I'll start off with revenue on the top line. As Tom mentioned, slight price declines in the half, but we had a supportive sales mix. So we had more zircon in the mix this year versus H1 last year and a slight increase in shipments. So that led to a slight uptick on the revenue side. On costs, we saw some price or cost escalation rather at the mine. Costs at the mine were up around 7% or 6%. And then we had a number of one-offs, which together reduced profitability. We still kind of achieved solid EBITDA of $47 million at a margin of 30%. Looking through on the CapEx side. So we're now happily through the peak CapEx on the WCP A program. H1 was the peak half for CapEx in that program. So we spent around $95 million. 60% of the project CapEx is now spent around $210 million. H2 CapEx will be $70 million, which is still quite high, but tailing off. And from 2026 on, it will tail off fairly substantially. And as Tom mentioned, still on track with a budget of $341 million. As we flagged in July, we have taken an impairment in these results of just over $100 million. That's primarily relating to a lower pricing outlook as well as costs associated with the implementation agreement renewal terms that we proposed that Tom just outlined. The impairment is noncash. It doesn't affect operations in any way, and it doesn't affect our thinking on the dividend. And we have declared a dividend of $0.10 per share, which will bring total shareholder returns from Kenmare since 2019 to north of $300 million. And look, I suppose a reasonably good outlook rather on H2. Shipment volumes, we expect to tick up both through better weather, but also the bringing on board or we're looking to bring on board a third transshipment vessel for the remainder of the year. Product mix in the second half should be more zircon weighted and some of the exceptional costs that I'll go through shortly, we hope not to see again in H2. Moving on to the summary income statement. You can see some of these factors playing out. So flat revenue, cost increase, but still solid EBITDA at the bottom line there of $47 million. That EBITDA has been enabled by good performance in challenging conditions. So looking at shipments, firstly, shipments were up by 2% versus H1 last year. A stronger Q1, a good -- a solid Q1. Q2 was a little weaker as weather was worse than expectations, and we had some maintenance activity. But the outlook for shipping with that third vessel is strong and weather typically is better in the second half. Looking at the market itself, the prices for the individual products were down slightly, and we would expect a continued sort of modest decrease as we go into the second half. But as I said, we'll look at probably a product mix, so higher zircon and rutile content to support the average prices that we received. On the cost side, so the costs were up 16%. That's $17 million in total. I can think about that in terms of changes and increases at the mine itself as well as things that happened away from the mine. So at the mine, direct costs were up 6% or 4% on a unit cost basis. Main drivers there were labor where we had slightly higher FTE numbers and salaries and bonuses payable on 2024 performance. So labor was up around $4 million overheads. We had increased production overhead costs of around $2 million. And then some of the issues that Tom mentioned earlier around security, we had around an additional $1.5 million this year versus last year in terms of security costs and the of replacement and repairs associated with theft. Moving away from the mine and to sort of indirect and other costs, which were up $10 million year-on-year. The implementation agreement royalty, which we have accrued from the beginning of January, so about 2.5% versus 1% previously. That's an accrual of around $2.5 million. And then we had head office costs were up by about $3 million, the bulk of which was related to legal and advisory fees associated with that possible offer earlier in the year. And then look, we had $3.3 million in insurance proceeds that came in, in 2024, which makes the comparison -- the year-on-year comparison more difficult from a 25% perspective. Some of these costs will remain as we go through H2 and beyond. So the implementation agreement, for example, that will stay at 2.5% and some of those production overheads will be sticky. Others will reduce. So the costs associated with the possible offer were obviously very event related. As Tom said, the security conditions are ameliorating at the mine. So we would hope to see some reduction in the cost there and the insurance proceeds, obviously, were a one-off. So we kind of have a positive outlook on costs coming into the second half. Looking at net debt. So net debt has increased from $25 million to $85 million over the half. The standout item really is the CapEx. So H1, as I said, is the biggest half for CapEx in the WCP A project. H2 will be around $70 million, so $25 million lower and then into H1 '26, it will probably be around $20 million. So you'll start to see that orange bar shrinking fairly dramatically over the next few releases. And then also on the outflows, we had the $0.17 final dividend payout. And all of this funded through operating cash flow, a good contribution from working capital as we converted receivables from sales at the end of last year into cash, offset slightly by lower creditors and higher inventory. If we take a look at the profile for CapEx in WCP A, substantially derisked at this stage. The majority of CapEx is now spent. We're up at around 60% or around $210 million was spent by the end of the first half. And the spend rate will decrease rapidly. So in the next 12 months from the end of the first half, we will have about half as much to spend as we had in the previous -- in the previous 12 months. Funding sources for this, we had $45 million cash at hand and $70 million of undrawn debt capacity at the end of the half and then operating cash flow into the second half, supported by the higher shipping performance that we're anticipating, stronger product mix and a leveling off of some of those higher standard costs that I've just spoken about. Worth noting here maybe that we are updating guidance for the development project capital phasing. The total budget remains at $341 million, but we're moving from $150 million anticipated spend in 2025 up to $165 million with a reduction in 2026 spend from $52 million down to $30 million. And that's really reflecting phasing of the project and phasing of payments. We are making good progress. You'll see a lot of pictures from Ben. There's an awful lot of work going on there at the moment. And of course, this all translates to costs going out the door. So all of that has to be paid for. Look, I went dwell on the balance sheet. Some just run through the working capital elements. Inventory up as production exceeded sales. So a good store of unrealized value there. Cash contribution from receivable reduction as we saw those strong sales in Q4 convert into cash. And then just to mention on the creditors side, the creditors number is down versus December. And if you think about that in the context of the project that we're doing and the amount that we're spending there, really, we've got a lot of contractors working on that project. Some of them are small contractors who are -- we are depending on them for the delivery of the project, and they, in turn, are depending on us for prompt payment. So we're paying them promptly to keep the project derisked. Overall, though, on the balance sheet, we've got net current assets of north of $175 million and $70 million of undrawn debt capacity, as I said, at the end of the first half. And then finally, on the dividend, I already mentioned that we are committed to sort of keep paying dividends through the investment cycle. We haven't considered the impairment in estimating the dividend, and we have declared $0.10 per share, which brings total returns since 2019 to over $300 million or around $2.50 per share. With that, I think I will hand over to Ben.

Thanks, James. Good morning, everybody. I'll start, as usual, with a discussion of our safety performance on Slide 17. I'm delighted to say that we were injury-free during the first half of the year, and that was extending a continuation from 2024. That brought down our lost time injury frequency rate to 0.03 injuries per 200,000 man hours worked. The milestone of 7 million hours without an injury was reached in July. Unfortunately, then we had an injury just in the beginning of the second half. But perhaps the most impressive part of our safety record at the moment is with the development projects, the WCP A project is now exceeding 2 million hours without an accident. And the last one, in fact, was in January 2021. And if you think about contractor workforces, transient workers coming in and coming out to deliver services to the project, it's very difficult to get the safety culture going there. So it's really a very strong performance. And the Trabalho Seguro program that we're operating for safety is really the main driver of our improved performance over the last few years, where we're focusing on leadership, focusing on standards and planning for safety and making sure that leaders spend a lot of time in the field coaching. So a really good performance on that side of things. On to the next Slide 18, and the production outcomes. We're maintaining our guidance today after what I would call a steady first half of the year. Heavy mineral concentrate production was up 2%, and that knocked on into a 1% increase in ilmenite production. The increase came with additional grades but partially offsetting a reduction in the ore volumes. That was largely due to the fact that WCP B was mining harder material or at least we took the opportunity to mine harder material, knowing that the grades of that material were higher. The outlook looking forward is that we expect those excavated ore volumes to increase in the second half of this year. That's once the 2 new high-capacity dredges are commissioned into -- at the end of Q3 and also with the improved performance of the selected mining operation, which is now up and running and producing to expectation. And that will offset the 3- to 4-week delay or downtime for WCP A expected in September whilst we complete the project. As I said, ilmenite production was up 1%, slightly down because of some lower recoveries in Q2. But the main thing I'd draw your attention to was the co-product production, which was 28 -- primary zircon was up 28% and actually was a record H1 performance for zircon production. Rutile was equally -- was also very strong at 20% above the previous year. And this came about because we were able to draw down some intermediate stockpiles, but also the circuits were operating at high recoveries, and we were translating zircon feed into more valuable primary products. The net effect of that was that the concentrate production, which is obviously lower value products was down 9%, and that was also due to some maintenance in the circuits there. Shipments were up 2%. It was a half of 2 halves, if you like. We had a very good Q1 and then a poor Q2. Q2 impacted by not only worse weather than expected, but also some maintenance on both vessels. And in fact, the Peg transshipment vessel went to dry dock in early June. Moving on to Slide 19 and to update you on our selective mining operation. This is a capital-light project that we've implemented to get additional production capacity. The project has been progressively commissioned through the first half of the year and is now running at 300 tonnes an hour and delivering to expectation in terms of its heavy mineral concentrate production. It was ramped up through the first half and produced 12,000 tonnes of heavy mineral concentrate, but that was back weighted. And looking forward, we still expect to produce 50,000 tonnes of heavy mineral concentrate in the full year. Our confidence, I guess, is shown in the SMO because we've engaged to build a second SMO, SMO 2, and that will incorporate some of the design upgrades and learnings from the first unit, which is now running. So we expect this second unit will have some boosted reliability and also we've learned how to increase some of the throughputs as well. SMO 2 will be commissioned through the first half of 2026. And we'll see a rising capacity through that period to get up to 1,000 tonnes an hour. We expect the cost of that to be in the order of $15 million. And I guess what we see from the combination of the 2 units is that we have a capital-efficient alternative to the previously planned [ WCP ] upgrade. And so hence, we see the opportunity to improve margins in that regard. To highlight James' comments around the increased shipments, we see the opportunity to increase shipments. And you can see from the graph at the bottom on Slide 20 that inventories have been accumulating. In -- whilst H2 has started well, Bronagh J is running well at the moment and delivering to her capacity. The Peg vessel is out at the moment, undergoing a dry docking for class certification, but she is due back on site in early September, and that project is on track. And weather is normally better through the second half of the year than in the first half. So despite those 3 things, we see the opportunity is there to further draw down stocks with the securing of a third transshipment vessel. We intend to rent this and through -- hopefully, through the second half of this year, accelerate the drawdown of those stocks. We're currently progressing that contract discussions. We've got a contractor, a vessel has been identified. We're going through the licensing and the insurance processes and making some minor modifications to our jetty to facilitate the loading. So we'll be able to -- as that all progresses over the coming month or so, we will hope to give you some more updates on the expected production -- or sorry, the expected shipments that will increase because of that project at our Q3 production update. Moving to the next slide. I'll just hold on the title slide a second because it's a photograph that shows very much where we are at the moment in the project. The dredges, as you can see there, have been landed and are secure in the staging pond. You can see to the top of that photograph that an active mining pond is currently progressing adjacent to the staging pond. And the next step of this project will be the linking of those 2 things. The feed preparation unit is there in the center of the photograph and is essentially complete. And at the moment, you can see that the pond, the staging pond is filling with water. This is over the last couple of days. And in fact, this morning, the dredges are free floating, and we expect this afternoon that the concentrator will be free floating. So very dynamic situation, but you can see there that the project is active and is progressing along quite well. On to Slide 22, it's good to share with you the journey that we've just been through with the new dredges. They are now, as you see, they're safely landed and in position at Moma. And this was one of the key aspects of the project, a key milestone and a key derisking milestone for our production -- for our delivery of the project overall. The dredges were manufactured in Holland and left Holland on a semisubmersible ship in early June, traveled by sea to offshore Moma. And we have a video which I'd like to share with you to show how that offloading process took place. So maybe the webcast could just play that video. Thanks. [Presentation]

So the 2 new dredges are high-capacity dredges. They are -- their purpose is to fill the WCP A concentrator in the future to a capacity of 3,500 tonnes an hour. They are oversized, so as to ensure that, that capacity is able to be achieved all or near all of the time. And you can see from that video how large they are. They were landed onto a purpose-built beachhead onto a roadway and then using self-propelled modular transporters, we brought them into the mining pond and parked them as per the photograph at the bottom right there that as you saw earlier, that is now a completed work site and flooded ready for the linking into the main plant. Just to remind you, you can view photographs on the website at the link at the bottom of the page there, and we are actively updating that almost on a daily basis with new photographs showing the progress. On to Slide 23. The time line is shown here. And really, I guess the headline here is we expect to be at full capacity with this operation by the year-end. We've landed the dredges, as you see on the left. We're now in the flooding process to prepare those plants to be swapped out. The next phase is really is to link the wet plant, the active wet plant, which is currently mining into the staging pond, and then we will commence a shutdown, which will, for 3 to 4 weeks, a process of changing out the pieces of equipment. Thereafter, sort of at the end of September, we expect to start commissioning process, and that process will -- is phased through the early parts of Q4 and on to -- we expect the production, as I said, to be running at full capacity by the end of the quarter. In the meantime, I'm happy to say that the tailings storage facility is -- has been proceeding ahead of schedule and is, in fact, going to be available for receiving slimes from the middle of September. So that will be now in time for the start-up of the new operation. And so really, overall, what I'd sort of say is that the project is progressing well. I hope you can see that it's well advanced now and the derisking of the spend is really -- is well underway. And we hope the bulk of this work will be complete in Q4. With that, I would like to pass on to Tom, who's going to do the marketing update.

Thanks very much, Ben. And as you can hear, been a lot going on at Moma right up to today. Looking outside of Moma, the market is very much a tale of 2 elements. But on the demand side and particularly on the Kenmare demand side, we're seeing beneficiation markets, titanium metal markets being very strong. And they're supporting demand and they're supporting demand, particularly for our type of ilmenite, good quality, low impurities available on long-term contract available predictably over the next number of years, and that's encouraging for us. We're also seeing that many of our customers in Europe are starting to see some benefits from the antidumping duties imposed on Chinese pigment producers and all our customers in the Western world are taking their contracted volumes, albeit, as we said, as James emphasized, slightly lower pricing than we saw last year. And the titanium metal market, we've talked about a lot in the last number of years as being an area which is growing rapidly and which Kenmare is growing rapidly within. And indeed, we signed 2 new agreements, supply agreements within that market segment just last month. So this is still something where we're seeing growth and opportunities for Kenmare. If we turn over to the supply side, we are, as we said in the statement and as James alluded to, probably seeing a little bit of oversupply. We have a lot -- there's a lot of Chinese processing capacity that's not fully utilized. It's demanding supply. We're seeing Chinese domestic ilmenite production increasing at a steady rate, not directly competitive with us, but it does kind of set prices or influence price setting within the market. So it does have an influence. And we're also seeing HMC producers from -- HMC produced by Chinese producers in Africa. Mozambique, very widespread, Nigeria, Sierra Leone. It has increased significantly in the last 12 months. It's an important part of the market servicing those processing plants in China. It's a little bit more opaque in that these are not public companies. They don't tend to report externally. And so we're working hard to understand the elements and players in that market and what that means for the trajectory of future supply. But I think what it is certainly doing is putting pressure into the ilmenite, zircon and rutile markets into China. And I suppose perversely further depressing the conditions for feedstock suppliers. We think that people are -- some people are starting to suffer. Certainly, if prior cycles are to go by, that would be a characteristic pattern. But it's hard to call a recovery. It's hard to call an improvement. And as James said, we've been -- we've moderated our expectations for pricing recovery or improvement over in the short term, less so in the long term, I think our estimates and indeed, those of independent consultants in the long term are down less than 5%. But those factors have certainly influenced and driven the impairment that we recognized in the first half. Going back to Kenmare, we've said throughout this year, we have a strong order book, and that hasn't changed. Long-term customers value our mine life, they value our supply. They value increasingly some of the environment and other elements of our projects. And I suppose the reasons why perhaps we're in the FTSE4Good Index. And the metal market, as I touched on, is supporting demand. We do expect pricing a little lower in the second half than the first half, small single-digit percent as oversupply persists. We do see recovery ahead, but it's probably a little bit further out than we might previously have estimated and maybe a little slower. On the zircon side, very similar. I mean, our sales, as James said, of zircon and rutile typically increased significantly in the second half and changed the product mix value. But global demand generally is a little bit subdued where we could see reconstruction of some elements for some parts of the world where there's conflict where we see a recovery in the Chinese real estate market where the tariff situation settle down and become more predictable, perhaps we'll see that sort of recovery, but we can't call it just yet. Our European customers are stable. Chinese demand is a little bit soft. And obviously, the HMC, the concentrates that are going into China don't just produce ilmenite, they produce zircon and rutile as well, and that is sitting on the market. So overall, a more muted price environment. From Kenmare's perspective, a good environment for demand for our products and Ben talked about our efforts to service that demand through the third transshipment vessel, but a bit early to call a price recovery. We're not seeing it yet. So just maybe lifting ahead and looking further out. As we've said, we're keeping our guidance in terms of production and cost. We've moderated and adjusted it slightly in terms of CapEx for this year, but not the overall CapEx cost of the WCP A upgrade project. More of it's happening this year because, as James said, our contractors' ability to support us is driven by our ability and our consistency in paying them. And I think that's caused maybe slightly faster cash outflows than we might have expected at the start of the year, but similarly reduces our CapEx burden going forward and certainly for next year. Good progress in the first half on SMO. As Ben said, well on track to deliver on objectives and good progress on finalizing a new transshipment vessel for a temporary period, but not quite there yet. And so if I look at Kenmare's purpose in life, and we did adopt a new purpose last year, transforming resources into opportunity for all. It is lived on a daily basis at Moma. We have a long-term production profile. We're investing to exploit our reserves and resources into the future and nothing has changed in that regard. We still, despite weaker pricing, have a good EBITDA margin. We're well through our WCP A upgrade and that upgrade is designed to maintain our strong position on the cost curve. Despite the significant capital investment, we still have material resources to fund that program and to make shareholder returns. And as I said on the market side, despite the challenges that many are seeing, our customers keep coming back to us. Many of the customers -- all the customers we would have had 17, 18 years ago are still with us. We're signing new ones. We signed at least 3 new supply agreements in the first half of this year, and we have good visibility into the future on that. And look, I think looking at Moma's place in the market in the world, we've been not far off 40 years in Mozambique, not far off 20 years producing. We're very proud of what we've achieved, and we're very excited about what we hope to achieve in the future. Clearly, we need our implementation agreement to be resolved to achieve that, and that's the message we consistently give to government. And we know government appreciates what we've done, but I suppose the government is trying to protect its interest and do the best deal for Mozambique. Hopefully, we can conclude it soon. So thanks for your time. Very happy to hand over to questions now, and I look forward to meeting many of you over the coming days and weeks.

[Operator Instructions] Your first question comes from the line of Colin Grant with Davy Capital Markets.

My question really is just to do with the implementation agreement discussions. You've noted in the press release that you gave a revised offer to the government of 3.5% on a phased basis. And well, firstly, I just want to confirm that the government rejected that offer. And then I also just want to get a sense as to whether or not there's any indication from the government as to what they're kind of holding out for, maybe it's 3.5%, but not on a phased basis, for example, just to give us some sense as to what I suppose the maximum outturn of this whole process might end up being? And finally, just on a related note, there are some withholding tax payments associated with the implementation agreement. If you could just give us a sense as to what the -- I suppose, what the quantity of those would be if it was 3.5% royalty payment each year going forward. That's great.

The easy ones, Colin, why don't you? So just on the royalty proposal that we made, you're correct. We did adjust our proposal to ministers in March to go to a max of 3.5% over the 20-year renewal period. That hasn't been rejected by the government. We've had some exchanges in relation to the renewal, but it hasn't been rejected and that remains our position. And indeed, although we're not sure of the veracity about the press speculation in Mozambique last week was not inconsistent with those figures. So that's as much as we know right now. And look, as I said, the meetings we've had with all the ministers and the President have always been cordial constructive and professional, and we hope they remain so. There's no real interaction between the royalty rates and the withholding tax elements of the renewal. The withholding tax is just basically a tax charged on services provided into Mozambique from outside the country, and some of those are services we provide ourselves like marketing. And our estimate of what those costs will be, and James can correct me if I'm wrong here, is of the order of $3 million, $4 million a year. And that's before we think about kind of optimizing them or whether we change our behaviors to try and mitigate it. But that's our -- based on our run rate, if we did nothing, that's the kind of level we'd be talking about.

Your next question comes from the line of Richard Hatch with Berenberg.

Just sort of more of a follow-on question. So if I look at the taxes report on payments to governments from 2024, you paid $20 million to the government of Mozambique. I'm just sort of looking at the future cash flow projections of this business when the CapEx drops away and companies, the ability to generate free cash flow yields of over 20%. So do you think that the government is aware of this and is therefore pushing for a more meaningful share of the free cash flow of this business?