Revamped Mozambique miner Kenmare still has everything to prove

By David Whitehouse

A cosy analyst consensus has developed that Kenmare Resources, the owner of the Moma mine in Mozambique, has turned the corner after narrowly avoiding bankruptcy in 2016.

The broker Peel Hunt in July raised its price target for Kenmare to 440p from 430p, implying upside of more than 100% from the current price of 216p.

Earnings before interest, taxes, depreciation and amortization (EBITDA) may increase by about 50% by 2021, says Roger Bell, director of mining research at Hannam & Partners in London.

• The dividend yield may reach about 5% by 2021, he says.
• Bell argues that there will be a solid net cash position on the balance sheet by 2021, creating scope for new projects or a special dividend.

Note, though, that Kenmare is a client of both Peel Hunt and Hannam & Partners.

Kenmare is due to pay its first dividend in October and the company plans to pay a minimum of 20% of after-tax profit as dividends from 2019. That will be small consolation for anyone who has held Kenmare for the last five years and who would now be carrying losses of around 90%.

• The company carried out a debt for equity swap in 2016 as prices for the  ilmenite mineral collapsed. Institutions were willing to subscribe for new equity and were able to take the hit.
• The company, which has operated in Mozambique since 1994, never paid a dividend until it had to get shareholder approval for  refinancing.
• Still, Kenmare CEO Michael Carvill, whose father was chairman between 1986 and 2012, received total remuneration of $1.7 million in 2018, up from $1.5 million in 2017 as small shareholders nursed their losses.

Kenmare’s Moma mine in Mozambiquecontains the titanium minerals ilmenite and rutile, which are mainly used to produce titanium dioxide pigment, as well as the mineral zircon. Titanium dioxide pigment is used in paints, paper and plastics.

• First-half results for Kenmare, which is traded in London and Dublin, will be published on August 20.

Chinese property market

Kenmare in July said it was on course to meet its 2019 guidance. Michael Carvill said that there was increased demand for ilmenite leading to higher prices, and predicted that this would continue through the second half of the year.

The prospectus for Kenmare’s refinancingin 2016 linked ilmenite prices to the state of the Chinese property market. Rising real-estate prices in Chinese cities, the prospectus said, meant that demand for ilmenite had started to grow again and pigment producers had been able to raise prices.

• The Chinese real-estate outlook now is far from clear.
• Analysts at the Reserve Bank of Australia stressed the uncertain outlook for China’s property markets in research in March.
• New home prices in China continued to rise in June, but at a slower pace in May, according to Reuters. Sales by floor area dropped 2.2%.

Neither are there clear signs of tightness in the titanium dioxide market.

• According to petrochemical market information provider ICIS, titanium dioxide supply levels in Europe and North America were ample in the second quarter.
• European demand failed to show its usual seasonal pick-up due to economic uncertainty.

Kenmare remains fundamentally what it was before the refinancing: a miner with a single asset in Mozambique whose profitability depends on a broad range of economic factors beyond its control.

• Yet Kenmare’s refinancing has allowed an uncritical bull story to take hold.

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