Annual Report 2013

Chairman’s Statement

Kenmare’s strategy has been to build a world class mining and processing facility to complement the 100 year plus life of the Moma orebodies. Using these facilities and their ability to provide us with an operating cost advantage through dredge mining and direct export, we have established a significant position in global feedstock supply thereby creating the opportunity for solid returns to shareholders.

The past year saw Kenmare complete its Phase II expansion investment programme in the Moma Titanium Minerals Mine, one of the world’s largest producers of titanium pigment feedstock and zircon. This was achieved during a challenging commodity price environment, which impacted cash flow and profitability, yet will ultimately position Kenmare well for the expected recovery in the feedstock market.

The Phase II expansion has increased production capacity by 50%, providing us with the ability to meet 8% of global titanium feedstock demand and 4% of global zircon demand. This project commenced in 2010 and is now operating and contributing to the output of the Mine. Most of the new facilities included in the expansion were installed by the middle of the year, and the second half of 2013 was a period of commissioning and ramp up. I am pleased to say that the commissioning and ramp up process has gone well. The major items of equipment installed in the expansion have demonstrated an ability to perform at design throughput capacity.

Operations +-

During the year, Kenmare mined 23,951,200 tonnes of ore and produced 1,137,200 tonnes of HMC. 720,100 tonnes of ilmenite product were produced along with 31,400 tonnes of zircon, including 10,300 tonnes of secondary zircon product. Zircon production was lower than expected, mainly due to an extended shut-down of part of the processing facilities during commissioning.

Our new dredge and WCP B achieved design capacity during the second half of 2013, and the average throughput levels for the first couple of months of 2014 were at design capacity. Our new feed preparation plant, the Wet High Intensity Magnetic Separation (“WHIMS”) Plant, has been performing at planned throughput levels and the Auxiliary Ilmenite Plant reached design recovery levels within a couple of weeks of being commissioned.

However, sustained operation of these plants at design utilisation levels is subject to ongoing optimisation work and has been hampered by difficulties that the Mozambique state electrical utility, Electricidade de Moçambique (“EdM”), has been experiencing in achieving stable transmission of power. Electrical power at the Mine has been highly volatile over recent months, as a result of a combination of increased base load, electrical storm activity, and increased power demand in the Southern Hemisphere summer months, which has pushed demand towards the transmission network’s capacity limits, mainly at peak periods.

Kenmare has been working proactively with EdM in a number of areas to resolve these issues:

  • Current and near term
    A load management plan is being implemented by EdM, which is designed to prevent the load on the northern transmission network rising above stability limits at peak times. This programme has contributed to improvements in network stability. Additionally, Kenmare is working with EdM on a number of projects for the optimisation of the operation of the network to limit the frequency of supply interruptions.
  • Short and medium term (one-year horizon)
    EdM is enhancing the transmission capacity of the network by adding a set of series capacitors. These capacitors are expected to increase the capacity at Nampula from 118 MW to approximately 170 MW. This should allow several years’ load growth before capacity limits are approached again.
  • Medium and long term (five-year horizon)
    EdM is in the financing stage of a major project to add a new 400 kV line to the northern network, which should resolve power transmission issues for the long term future. EdM plans for this project to be completed by 2018.

I reported last year that Kenmare was installing a synchronous condenser (referred to as a “Dip Doctor”), designed to minimise voltage dips and sustain power. This was installed during the year and, when operating, is effective in reducing the effect of these dips. However, due to operational difficulties and storm damage, the availability of the Dip Doctor during January and February 2014 was lower than planned.

We have also been enhancing our standard operating procedures and equipment to minimise downtime caused by voltage fluctuation. This has been very successful in our mining and wet concentrator plants, where typical downtimes after a stoppage have been very significantly reduced to less than an hour. The expanded Mineral Separation Plant (“MSP”) is inherently more sensitive to voltage fluctuations and for the time being is taking longer to recover. Accordingly, we are dedicating additional resources to resolving this issue.

Kenmare has entered into a contract for the use of diesel generator units to supply power to the MSP. These will ensure stable power supply to the MSP during the summer months of December to March, when we encounter most of our voltage stability problems, and would act as a standby facility in case of failure of the transmission system during the rest of the year. More stable power supply will increase both the quantum and predictability of production.

Market +-

The pigment industry, which is the main market for TiO2 feedstocks, experienced solid demand growth of approximately 9% in 2013, albeit from a low base following a major contraction of approximately 12% in 2012. However, this growth was met from the drawdown of significant quantities of pigment inventories that accumulated during 2012. As a result, low pigment plant operating rates prevailed throughout 2013, creating weak feedstock demand. Although pigment inventories reduced to more manageable levels and plant operating rates improved as the year progressed, the pricing environment for TiO2 feedstocks remains challenging and prices are now less than 50% of peak 2012 levels. We view the reduction in pigment inventories as an important step in the market cycle, which when further advanced will allow for a return to sustainable pricing.

Notwithstanding a 9% growth in pigment demand in 2013, the market has not yet recovered to 2011 levels. Based on the close historical correlation between pigment demand and global GDP growth rates, we expect pigment demand to continue to grow at above historical growth rates in order to return to the long term trend line. Indeed, pigment producers reported strong Q4 2013 sales volume growth compared to the same period in 2012, and some report a reduction of pigment inventories to normal seasonal levels. Consequently, we are seeing some signs of improving market conditions for our products in developed economies. However, the Chinese market remains weak. Ilmenite sales volumes for 2014 have started reasonably well as we see a more regular offtake pattern starting to emerge. The pigment industry is gearing up for an increase in demand for the painting season in the Northern Hemisphere, and after two subdued years, expectations remain high for an improved 2014. The resumption of demand growth in the more traditional markets of North America and Europe and continued urbanisation and economic growth in emerging economies are expected to provide a solid platform of support for offtake of Moma ilmenite production in the future. These factors should also result in an improving pricing environment for titanium feedstocks as the year progresses, but need to be balanced against the new supply that will enter the market.

The zircon market faced similar challenges to the titanium feedstock market in 2013 as the industry coped with uneven market demand conditions in different geographical regions and an overhang of inventory held by zircon producers. Zircon markets in Europe remained subdued while China and North America were more resilient. Ceramic grade zircon prices have fallen from peak levels of around US$2,500 per tonne in 2012 to current levels of approximately US$1,000 per tonne.

The largest application for zircon is in the production of ceramics. There has been some innovation in the ceramics industry to reduce the quantity of zircon used, driven by high prices and shortages in previous years. In the face of reduced offtake, some participants in the zircon mining industry have curtailed output. The market has therefore stabilised at this lower level and inventories are being depleted. Lower prices are reversing some of the thrifting and substitution in ceramic tile production given zircon’s superior properties, but manufacturers remain cautious, fearing another price spike if supply tightens again in the future. Therefore the price recovery in zircon is expected to be gradual.

The zircon market is expected to see a return to growth in 2014 given the improved outlook for the global economy and ongoing urbanisation trends in large emerging economies, where there is a preference for ceramic wall and floor tiles. Good growth can also be expected in specialty chemicals, zirconium metal and chemical zirconia, while digital printing in the ceramics industry also offers some interesting possibilities for increased zircon consumption.

Despite the challenging market conditions for titanium feedstocks and zircon in 2013, Kenmare was well supported by our customers. We expect to see an improving demand environment for titanium feedstocks and zircon in 2014 with continued strong support from our existing customer base and increased sales to new customers.

Finance +-

Kenmare generated earnings before interest, tax, depreciation and amortisation (“EBITDA”) of US$29.0 million during 2013 (2012: US$98.9 million). Reported revenue for the year was US$137.9 million, excluding the capitalisation of US$23.6 million (2012: nil) of revenue generated from the expansion facilities. Including the capitalised amount, total revenue for 2013 was US$161.5 million, compared with US$234.6 million the previous year.

A total of 677,900 tonnes of total products were sold in 2013, which was similar to the previous year (2012: 680,800 tonnes), whilst the weighted average product price achieved in 2013 dropped by 31%, resulting in the revenue reduction. A total of 77,500 tonnes of finished products were added to inventory during the year, restoring product in storage to more normal levels than prevailed at the beginning 2013.

Cost of sales for the year amounted to US$113.7 million (2012: US$134.5 million), including depreciation and amortisation of US$24.3 million (2012: US$18.5 million). Other operating costs amounted to US$19.5 million (2012: US$19.7 million). US$28.9 million (2012: nil) of costs relating to product produced during the ramp-up and commissioning of the expansion plant has been capitalised in property, plant and equipment.   

The operating profit for the year amounted to US$4.7 million (2012: US$80.4 million). Loan interest and finance fees of US$40.5 million (2012: US$28.7 million) include costs associated with a corporate facility established in 2013 with Absa Bank Limited (“Absa”), a member of Barclays, and the fair value of the costs associated with issue of warrants as part of the placing noted below. A foreign exchange loss of US$6.5 million (2012: US$0.6 million loss) arose during the year, principally due to losses on Euro-denominated loans. The tax charge for 2013 was US$2.0 million (2012: US$3.3 million), resulting in a loss after tax of US$44.1 million (2012: US$49.5 million profit) for the year.

In October 2013, the Board decided to raise additional equity for the Company and a placing was completed, raising net proceeds of approximately US$101.9 million. The proceeds of the placing were partially used to discharge certain near-term payment obligations in respect of the mine expansion of approximately US$20 million and to repay US$20 million of the Absa corporate facility.

A key post balance sheet event was the successful completion of a long process to re-profile deferred subordinated debt payment obligations. The deferred subordinated debt balance at 31 December 2013 was US$143.3 million, and before this re-profiling there was a requirement for Kenmare to bring this deferred subordinated debt current by 1 August 2015. After discussions with our lender group, agreement has been reached to reschedule all subordinated debt that remains deferred as at 31 July 2015; repaying half of this debt in August 2019 and the balance in nine semi-annual payments from August 2015 to August 2019. Given the current subdued nature of our product market, the re-scheduling of the subordinated debt payment obligations at an early stage was an important step in matching debt obligations with the Company’s ability to generate cash and, assuming recovery in product prices, will enable us to start paying dividends to shareholders in due course.

Board Structure & Corporate Governance +-

I reported last year that the Board had been strengthened by the appointment of two new Non-Executive Directors, Steven McTiernan and Gabriel Smith, both of whom bring considerable sectoral and financial experience to the Board. In December, Jacob Deysel resigned as a Director. The Board thanks Jacob for his contribution to the Board and looks forward to continue working with him as Kenmare’s Chief Operating Officer. This year we commissioned independent advice from external firms on the design of an updated executive remuneration framework and on our senior management structure, in line with the Board’s drive to ensure that the Company achieves best-practice in corporate governance.

Corporate Responsibility +-

Kenmare is committed to investing in the community in which it operates. One of the means by which it does so is through the Kenmare Moma Development Association (KMAD). KMAD operates in three main areas: livelihoods and economic development, health development, and education development. The opening in 2013 of the health clinic, constructed by KMAD, saw the delivery of a major piece of infrastructure which is already having a major beneficial impact on local communities. It is pleasing to note the results of the survey carried out in 2013 in conjunction with the District Social Welfare Department which found that 89% of people surveyed noted a general improvement in living conditions due to improved road access, improved education and health facilities, enhanced communications and availability of electricity together with a wider variety of goods available in local markets. These benefits flowed from the presence of the Mine and from work of KMAD and its partners. We will continue to work through our corporate social responsibility programme to maximise these benefits to local communities.

Outlook +-

Kenmare owns a mine now capable of producing 8% of the world’s consumption of titanium feedstocks and 4% of global zircon from a resource base that will last over 100 years. Management is focusing on cost control now that the expansion has been delivered, to ensure that Moma is one of the lowest cost mining operations globally. Through an equity placement and debt restructuring, the balance sheet has been re-engineered to better suit the subdued market environment in which we are operating. Despite power supply difficulties, the expanded operation has demonstrated its ability to run at design throughput capacity. Hence the Company is well placed to benefit from the expected demand recovery in titanium feedstock and zircon markets, and we look forward to gaining the benefit from the major investment which our shareholders have supported for many years.

Justin Loasby

Chairman