Kenmare Resources plc (LON:KMR) Managing Director Michael Carvill caught up with DirectorsTalk for an exclusive interview to discuss the three drivers of their strong share price performance.
Q1: The first driver of Kenmare Resources’ strong share price performance over the past 12 months is product markets. In your quarterly production announcements during the year, you’ve spoken about tight product markets underpinning your operation performance. Michael, can you tell me a bit more about the market conditions that you’ve seen during the year for your main product ilmenite?
A1: We’ve seen tight market conditions, as you mentioned, and we don’t perceive that there is significant inventory anywhere in the value chain, right from our sales as primary producers up to the final product market. That’s a good thing as it’s keeping demand for our products strong. We have been able to increase our production and place those higher volumes into the market at increasing prices throughout the year and again, that’s a good indication of a very tight product market.
We’re seeing strong economic growth in many economies post the first wave of the COVID-19 pandemic and that strong economic growth consumes more products that require titanium minerals, such as paint, paper and plastic. This is matched with a lack of investment in new mining production.
So, when all of those things are put together, we’re seeing a strong market environment, which we perceive will continue for some time to come.
Q2: What have the markets been like for zircon, one of your other products?
A2: Zircon is a key raw material in the ceramics industry. We saw a little bit of softness in the market towards the end of 2020, and then early in 2021 we have seen that market tightening. We have delivered quarter-on-quarter increase in prices as we’ve moved through Q2 and Q3 and we expect that Q4 will also produce a similar improvement in product prices.
Q3: Now, the second driver is operational growth. In Q3, you reported that your operations have now reached a run rate of 1.2 million tonnes of ilmenite per annum, which is their nameplate capacity. Why is this important?
A3: For the past 3 years we’ve been increasing our mining capacity to align with our processing capacity as this allows us to operate at maximum efficiency and reduce unit costs. Our mine is a relatively fixed cost entity and consequently, as we increase our production, the cost profile does not increase at the same rate. Therefore, as we produce more material, the cost per tonne is significantly reduced. We achieved our Mine’s nameplate capacity of 1.2 million tonnes per annum of ilmenite production in Q3 and we are now responsible for 10 percent of the world’s ilmenite supply.
Q4: Now, the third driver is shareholder returns. You’ve increased your target dividend payout to 25% of profit after tax, from 20% previously and last week you completed a tender offer. Michael, can you tell us what the tender offer entailed and how it benefits shareholders?
A4: The tender offer is best thought of as simply an accelerated market buyback of the company stock. We bought back 13.5% of the company stock in the tender offer and it was fully subscribed so we returned the full £61.8 million to shareholders. We got a very positive vote in the AGM, with over 99% of votes cast in favour of authorising the tender offer, so it was strongly backed by our shareholders.
We believe the tender offer was an effective way of providing a value enhancement for our shareholders in a cost effective manner for the company, especially when the share price and the market capitalisation of the company are below the levels that we believe are fair market value. It was also the right time to do it as Kenmare is generating strong cash flow after the successful completion of our major capital projects.
Q5: In addition to these three key share price drivers, Kenmare Resources has also taken big steps forward in terms of ESG this year. Michael, can you tell us some of the highlights?
A5: Our business has an inherent advantage in terms of sustainability as our primary power source at the mine is hydro power, which is a renewable energy source. We believe therefore that in terms of carbon units per tonne, our product is a factor better than any of our competitors’ products.
To pick out a few highlights from the year, we issued our inaugural sustainability report in April and we’re all very proud of this report. It represents a step forward in the sophistication of the company and demonstrates our commitment to sustainability in the past, present and future.
We’ve just passed through 6 million hours worked at the mine without a lost time injury, which is a new record for Kenmare and a major achievement.
We have also vaccinated over 95% of our workforce against COVID-19 and have distributed vaccines to the local health authorities for our host communities.