SHARES in UK-listed mineral sands producer, Kenmare Resources, surged a fifth as it edged closer to an overhaul of its balance sheet which will include a share issue of between $275m and $368m.
Importantly, three of the firm’s strategic shareholders have agreed to support the capital raise for an aggregate amount of $115m, a development described by Investec Securities today as “no small sum”.
If completed, the capital raise would help cut Kenmare’s debt by nearly three quarters to no more than $100m. Shares would be issued at just over £1.09 per unit. Kenmare is currently trading at 85 pence per share, a 20% increase in the first few hours of trade on the London Stock Exchange.
Kenmare, which mines titanium minerals and zircon from the Moma mine in northern Mozambique, is currently valued at £19.4m. Shares on a 12-month return basis are 77% lower.
As part of the share issue, which Kenmare hopes to complete by August, it signed a $100m cornerstone investment with State General Reserve Fund of the Sultanate of Oman (SGRF). However, discussions with a second cornerstone investor, King Ally, had been terminated by mutual consent after the parties encountered uncertainty of deal terms and completion.
All in all, Kenmare would raise between $275m to $368m which would enable it to cancel up to $293m in debt and leave it with some $75m for working capital purposes.
“We are pleased that we have signed an agreement for the investment of $100m by SGRF and are encouraged by the level of interest shown by a broad range of investors in the capital raise,” said Michael Carvill, CEO of Kenmare in a statement.
Three major shareholders in Kenmare indicated they would support the capital raise for some $115m, including M&G which will protect its 19.97% stake in the firm as a result.
“Early indications of investment from three of the main shareholders of Kenmare, in combination with lender underwriting position the company well to achieve the minimum target of $275m,” said Carvill.
Investec Securities said winning the support of M&G was no mean feat. “While Kenmare has lost one of its cornerstones, it appears that existing shareholders are stepping up in a meaningful way,” it said.
It added: “$115m from three shareholders is no small sum. The banks are also getting involved in order to see their debt being repaid, accepting $3 for every $4 owed and underwriting part of the raise”.
Carvill said that with the finalisation of key transaction agreements completion of the capital raising ought to be achieved in “the next few weeks”.
Conditions in the titanium market, especially ilmenite, have been depressed owing to excess iron ore production from which ilmenite is produced as a by-product.
However, Kenmare estimated that inventories would be exhausted this year and that a supply deficit would materialise by about 2020. Market conditions for zircon were not expected to revive in the foreseeable future.
Moma, which has been troubled in recent years by power shortages in Mozambique and social discontent, is expected to produce 950,000 tonnes of ilmenite in Kenmare’s 2016 financial year, a 24% increase over output in 2015.
“Production and cost guidance for 2016 remains unchanged and the product market is already showing a long awaited improvement in prices, reversing four years of significant downward pressure,” said Carvill.
“With increased power stability at the Mine, a recapitalised balance sheet, a new strategic investor and a higher free float than would have existed with two strategic investors, we believe that the completion of the capital restructuring will leave Kenmare in a strong position in an industry with expectations of a growing supply deficiency,” he added.
