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Kenmare Resources – Production increasing with 50% expansion on schedule for 2012. At 33.76p a Buy with a 43.6p target price

Titanium feedstock prices are rising strongly. That was a key message in a trading statement published on January 20th by Kenmare Resources, the owner of a world class titanium asset at Moma in Mozambique which already produces around 7% of global supply and is set to become an even bigger player in the titanium market from 2012 onwards following a 50% expansion of production at this important mine. Titanium minerals are used as pigment in paints and the expected growth in demand is forecast to come from the emerging markets. The latest update from the Moma Mine revealed that production of heavy mineral concentrates increased by 8% in the second half of 2010 with tonnages of ilmenite and zircon 12% and 21% higher respectively. The second half saw 346,202 tonnes of finished product shipped from Moma which makes a total of 712,650 tonnes against 418,000 tonnes shipped in 2009 which represents a 70% improvem ent year-on-year. Given the one month stoppage following the breaching of the tailings pond in October, this does look like a strong performance which bodes well for the current year.

Progress is on schedule for the 50% expansion of output from the Moma Mine with the ramp up in production planned for 2012. The construction camp is being established with full mobilisation of the site scheduled for the end of the first quarter 2011. This planned expansion comes with impressive timing as increased demand for pigment led to a strong demand for titanium feedstocks in the final quarter of 2010.  Certainly the board anticipates a shortfall in the titanium supply and in early 2010 unveiled an ambitious expansion programme that has already been fully funded by a £180 million placing in March 2010. Apparently there is already strong interest from customers to enter new sales agreements covering the expanded production from Moma.

There is a real shortage in titanium feedstock supply despite many producers working at full capacity. In the coming years this shortage could become more acute due to limited new supply coming on stream. There is no doubt that there is strong demand for Kenmare’s main product ilmenite which stems from the USA, Europe and also the fast growing Chinese market. The board expects significant price increases for ilmenite sales volumes for 2011 over 2010 levels. Prices for zircon are also rising as stock remain at record low levels but there increased demand driven by China as well as recovering demand in Europe.

Production commenced at the Moma Mine on the northern coast of Mozambique in 2007 with a first stage target of 800,000 tonnes per annum (tpa) of ilmenite (containing between 50% and 60% TiO2),47,000tpa zircon and 18,000tpa rutile. The grade is around 4% heavy minerals in sand, of which ilmenite is accounts for 3.2% and there is no overburden. Mining takes place by low cost dredging methods on an artificially created pond. Proven and probable reserves within the dredge path now stands at 829 million tonnes at 3.1% ilmenite contains 20 million tonnes of the mineral which is sufficient for a 16 year life of mine even post the upgrade in capacity that is planned. Plus there is a resource base of 5,700 million tonnes with 160 million tonnes of contained ilmenite.

Titanium dioxide is used as a pigment because of its brightness and finds its way into a wide variety of products from paints and coatings to toothpaste and cosmetics. Growth in demand looks assured with Du Pont believing that 85% of that growth will come from emerging regions and this is not just a story about meeting the growing need of China but also increased demand from Latin America, Central Europe, Africa and the Middle East. Lack of investment in titanium production and the depletion of reserves in countries such as Australia coupled with low global inventories seem to be tightening up the supply/demand situation which has begun to be reflected in rising market prices. Export volumes from China have reportedly been skyrocketing in recent months as Chinese producers seem to be the only ones left with any spare capacity.

With a rebound in demand for titanium dioxide, the management saw a good opportunity to expand production at Moma from 800,000 to 1,200,000 tonnes per year of ilmenite. This expansion is deigned to have little effect on the existing operations as the plan involves the construction of a second dredge pond with a third dredge and Wet Concentrator Plant. The schedule calls for the detailed engineering and mechanical construction to be completed by the end of 2011 and mine commissioning set for 2012 with full production expected to be achieved before the end of that year. The board has been able to push the button on this development as in March 2010, Kenmare announced a $270 million fund raising at 12p; of this the upgrade represents $200 million plus the additional monies cover any increased projects costs.

Late last year well-respected financial institutions BlackRock Inc and JP Morgan Asset Management were seen to be taking advantage of any weakness in the share price to top up their holdings. Following a quarterly review of the London Stock Exchange’s FTSE UK Index Series, Kenmare has been included in the FTSE 250 Index of leading shares since September. Such a move improves the market perception of the company which should help further broaden shareholder base.

Despite the healthy increase in the share price of Kenmare over the past six months. Our analysis  allows us to place an increased target price on the shares of 43.6p, with a stance of buy.

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