Execution and finance risk addressed
Kenmare Resources, (JEV) reported its first full year financial results since it completed Phase Two commissioning of its Moma mine in Mozambique. While the bottom line showed a FY13 net loss of US$44.1m (largely due to one-off warrant charges and debt restructuring costs), this masks Moma’s positive production performance, which resulted in EBITDA of US$29.0m. Revenue was down 31% y-o-y to US$137.9m mainly on price (excluding US$23.6m of capitalised sales), with costs increasing 2% to US$133.2m. All in all the results point to an operation highly geared to commodity markets with production and costs stabilising. Moma’s power supply remains the main operational uncertainty and plans are advanced to improve stability via diesel generators, which should improve operational results further.
2013 inventory draw down to drive price recovery
The pigment industry is the main driver (90% of demand) of ilmenite (TiO2) demand. 2013 saw the industry severely reduce its TiO2 inventory, causing the ilmenite price to drop 21% (2012-13) to c US$210/t. Demand recovered c 9% in 2013, and should continue to recover over 2014 (the northern hemisphere is now entering its painting season). A similar reason drives zircon demand, with a sharp reduction in 2013 ceramic zircon inventories driving market expectations of c 5% demand growth in 2014. Ceramic-grade zircon currently trades at US$1,000/t (2012: US$2,500/t).
Better predictability during summer months
The installation of bespoke electrical equipment to better manage disruptions to its power supply due to Mozambique’s summer storms, plus the likely installation of diesel generators at Moma’s mineral separation plant, has potential to pretty much eradicate further power supply disruption. Once installed, they should provide far more consistent operational and financial results. Indeed with the restructuring of its debt complete, Kenmare should be set to provide investors with the first full year of steady state production without risks associated with financing or project execution.
EBITDA margin to increase 33% by end FY14?
EBITDA margins will have to widen from 21% to 35%, and revenues to increase 88% to US$260.4m in FY14 to reach current consensus estimates. Without forward guidance being supplied it is difficult to judge the credibility of such forecasts. Although Kenmare has made a firm decision to install diesel generators, short-term power disruption cannot be ruled out and could affect consensus forecasts.
To Read the Entire Report Please Click on the pdf File Below