Kenmare raising Ł179m to increase output

Allan Seccombe | Fri, 05 Mar 2010 10:11

[miningmx.com] --ILMENITE producer Kenmare Resources is raising Ł179.6m in an underwritten rights issue to increase capacity of its Moma operation in Mozambique by 50 percent to 1.2 million tonnes a year to bump up revenues and decrease debt as it takes advantage of improved market conditions.

LSE-traded Kenmare will realise Ł170.8m after costs from the exercise which is at a substantial discount to its share price. Kenmare is placing shares at 12 pence each, a 42% discount to the closing mid-market price on 4 March. For its Irish listing, the discount came in at 46%.

The expansion plans were completed in January this year and would allow Kenmare to “exploit the potential market opportunity presented by the projected shortage of titanium dioxide feedstock resulting from increased demand – expected supply deficit by 2012,” it said.

This optimistic outlook stands in stark contrast to major South African titanium feedstock producer Exxaro Resources, which said in December it could not justify a R1bn expansion of its ilmenite operations the country’s east coast.

Exxaro plans to close its KwaZulu-Natal smelter and extraction plant over the next five years, but would seek out feedstock if “the outllok for the mineral sands industry improve substantially.”

Mineral sands, such as titanium oxide, are used in the manufacture of paint pigments and are therefore tied to the construction market. One analyst described the market as being in “bit of a mess”.

Libertas Capital Corporate Finance pointed out in a note that two major mineral sands producers, Iluka and Rio Tinto, have made production cutbacks of about a third of capacity to prop up prices. Titanium Resources is restarting production after a dredger capsized.

“As we have previously stated, the mineral sands industry is in dire straits,” Libertas said in a note “Kenmare’s statement that they are ramping up production owing to constrained supply is therefore somewhat surprising.”

Carvill said: "Demand growth at rates above the average historic trend growth rate driven by cyclical recovery and increased demand from China and other developing countries, coupled with constrained supply are expected to result in a shortage of titanium minerals production developing during 2012."

He pointed out development projects had been cancelled or suspended, large capital budgets for expansions could not be justified, depleted resources and rising power costs would impact on the supply side.

Kenmare said its $200m expansion would reach full production at the end of 2012. Somme Ł133m or $200m of the raising will go to engineering, procurement and contstruction of the expansion.

This includes upgrading the two dredgers already in operation and adding a third. The wet concentrator plant will be upgraded and a second added. The mineral separation plant will be upgraded too.

The first phase of the project ran into time and funding overruns because of issues with the contractor, Bateman Engineering. Full production of ilmenite, a titanium feedstock, and zircon is expected at the end of the first half of this year.

The expansion will see ilmenite output rise to 1.2 million tonnes a year, zircon to 80,000 tonnes from 50,000 tonnes and rutile to 22,000 tonnes from 14,000 tonnes.

The plant was to have been handed over in November 2006, but Bateman needed to address design deficiencies and the final handover only took place at the end of 2009.

Given that experience, the remaining Ł37m ($57m) is being put aside to cope with any cost increases in the expansion project and to service debt repayments that may not be covered from operating cash flows.

Kenmare had loans of $356m by end-December 2009 and cash of $17m.

Kenmare, which also released annual results on Friday, said cashflows from the operation were below budget because of operational issues combined with a downturn in the market during 2009, which resulted in deferred shipments and low prices.