K RESOURCES - hannam.partnershannam.partners/media/1090/hp-kenmare-resources-16oct2017.pdf · ~1Mtpa for 2017-19E, and is on track to hit this target in FY17E after a solid first

Kenmare Resources

Equity Research

16 October 2017

GICS Sector Materials

Ticker LN:KMR

Target price (Sep'18E) GBp 500

Share price 13-Oct-17 GBp 321

Market cap 13-Oct-17 (US$m) US$465m

2016A 2017E 2018E

Ilmenite shipments kt 952 969 1003

Zircon shipments kt 65 68 74

Rutile shipments kt 7 9 9

Revenue/t shipped $/t 133 195 244

Cost/t of finished product $/t 136 126 128

Revenue $m 141 210 270

EBITDA $m 5 73 129

EBITDA margin % 4% 35% 48% D&A $m -31 -34 -44

Net interest expense $m -28 -7 -5

Tax credit/(expense) $m 2 -2 -5

FX/revaluations/other $m 36 -2 0

Net income $m -15 28 75

EPS US¢ -28 25 69

Cashflow from operations $m -3 61 128

Interest & tax paid $m -3 -9 -10

Capex $m -7 -25 -37

Other $m -15 -1 0

Free cash flow $m -27 26 80

Net cash/(debt) $m -45 -19 62

Market cap $m 340 465 465

Enterprise value - rolling $m 385 484 403

Enterprise value - current $m 504 504

EV/Sales x 2.4 1.9

EV/EBITDA x 6.9 3.9

P/E x 16.9 6.2

FCF yield % 6% 17%

KENMARE RESOURCES BACK FROM BRINK, BUT RECOVERY STILL UNDERAPPRECIATED After years of turbulence – operational issues, poor markets, balance sheet

stress – Kenmare’s prospects have improved. A major restructuring has

reduced debt to manageable levels, power supply issues at the Moma mine

have been mitigated, while the TiO₂ feedstock market has rebounded. KMR

heads into 2018 with minimal net debt, solid margins, and several attractive

growth options to harness the potential of its world-class resources in

Mozambique. However, we believe the equity market has been slow to

recognise KMR’s improved investment case. Shares currently trade at ~0.7x

our base case Sep’18E NPV of 470p (which includes the recently announced

expansion of Wet Concentrator Plant B), or ~0.6x including the potential to

fully optimise capacity though the addition of a third WCP. Applying

multiples of 1.0x our base case and 0.5x potential growth, we set a 500p Sep’18

target, implying 56% upside to the current price.

OPERATIONS STABILISED AND BALANCE SHEET DE-RISKED Upgrades to the Mozambican grid, the addition of back-up power generators

and the installation of voltage stabilisation equipment have improved Moma’s

productivity since Q4’15. The company expects annual ilmenite output to be

~1Mtpa for 2017-19E, and is on track to hit this target in FY17E after a solid

first nine months. More consistent operations have driven unit costs lower,

with KMR guiding to $120-132/t vs a peak of $199/t in 2013. Meanwhile,

gross debt has been reduced to ~$100m from a peak of ~$387m, after a major

debt restructuring in mid-2016 placed the business on a more sustainable

footing.

POSITIVE NEAR-TERM TIO₂ PRICING & LONG-TERM FUNDAMENTALS In addition to an internal transformation, KMR has benefitted from

improving TiO₂ feedstock markets. Although momentum in Chinese spot

ilmenite prices waned during a summer lull in demand, prices have improved

in recent weeks (as noted by KMR in its Q3 trading update). Furthermore,

KMR’s six-monthly contract prices with western customers – covering two-

thirds of output - should increase in H2’17, driving annual FCF into positive

territory. Longer-term, we believe TiO₂’s consumer-related applications will

support strong demand into later stages of economic development. Indeed, we

note China still represents only 25% of global TiO₂ pigment demand, versus

over 50% of iron ore, copper and aluminium.

ORGANIC GROWTH POTENTIAL Moma’s Mineral Separation Plant (“MSP”) was designed to produce 1.2Mtpa

of ilmenite, but the Wet Concentrator Plants (“WCPs”) have constrained

output to ~1Mtpa in 2017E. We see several straightforward opportunities to

expand output by increasing mining and WCP capacity, accelerating the

monetisation of Moma’s uniquely large reserve-base: firstly, KMR announced

on 11th Oct that it has completed a definitive feasibility study on an expansion

of WCP B to be delivered in phases through 2018; in addition, we also factor

in an adjustment to Moma’s mine plan to exploit higher grade zones sooner,

boosting our base case DCF; and finally KMR has outlined the potential to add

a small third concentrator (“WCP C”), which we estimate could be worth a

further 70p per share in DCF value, although we exclude this project from our

base case as it remains at the prefeasibility stage.

GROWTH & CAPITAL RETURN POTENTIAL: CATALYSTS FOR RE-RATING Our estimates put KMR on EV/EBITDAs of 6.9x/3.9x for FY17/18E, a

significant discount to peers at 11.6x/7.6x based on Bloomberg consensus.

With our expectation that FCF will swing further into positive territory in

H2’17 and FY18E, and decisions on expansions to come, we see catalysts for

KMR’s multiples to re-rate as growth and/or cash returns begin to be reflected

in the stock. Even after servicing debt, we believe sufficient spare cash should

be available by Dec’18E for Management to consider dividend payments.

Roger Bell, CFA +44-207-907-8500

[email protected]

Hannam & Partners (Advisory) LLP 2 Park Street

Mayfair

London W1K 2HX

200

250

300

350

400

450

Oct

-16

Nov

-16

Dec

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Jan

-17

Feb

-17

Mar

-17

Ap

r-17

May

-17

Jun

-17

Jul-

17

Au

g-17

Sep-

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Oct

-17

Kenmare share price (GBp)

FTSE All-share Mining Index (rebased)

mailto:[email protected]

Hannam & Partners Research Kenmare Resources

2

CONTENTS

Investment Summary ........................................................................................................................................................3

Background .......................................................................................................................................................................... 3

Operations on a more stable footing ................................................................................................................................... 3

At last generating cash post debt restructuring – medium-term capital return potential ................................................ 4

Value-accretive development options ................................................................................................................................ 4

TiO2 demand should benefit from later-cycle status ......................................................................................................... 5

Supply unlikely to balance demand at current prices ........................................................................................................ 5

Mineral sands price deck - spot prices recovering post summer lull ................................................................................ 6

Earnings estimates ............................................................................................................................................................... 6

32% discount to base case DCF, with further upside potential ......................................................................................... 7

500p price target only partially reflects growth options .................................................................................................... 7

Room for Multiple re-rating vs peers ................................................................................................................................. 8

Sensitivities .......................................................................................................................................................................... 8

Risks ..................................................................................................................................................................................... 9

Kenmare re-booted .......................................................................................................................................................... 10

A short history of Kenmare and Moma ............................................................................................................................ 10

History ............................................................................................................................................................................... 10

Reserve & Resource base ................................................................................................................................................... 11

mine plan ........................................................................................................................................................................... 12

Moma mining & processing facilities ............................................................................................................................... 13

Product specifications - Ilmenite ...................................................................................................................................... 16

Product specifications - Rutile and Zircon ....................................................................................................................... 17

Realised price assumptions ................................................................................................................................................ 17

Demand to remain robust & Supply constrained at current prices ................................................................................. 18

Operations have overcome a plethora of issues ................................................................................................................ 20

mining consistency is the key ........................................................................................................................................... 20

Improved mining rates offset grade decline ..................................................................................................................... 21

Impressive cost turnaround, but fewer “easy wins” remain ............................................................................................ 21

Attractive expansion options ........................................................................................................................................... 23

New WCP appears affordable but more conservative options still on the table ............................................................ 24

DCF analysis & price target derivation ............................................................................................................................. 25

Financials – summary P&L, Income Statement & Cash flow ............................................................................................ 27

Board of directors ............................................................................................................................................................ 28

Other Senior Management ................................................................................................................................................ 28

Appendix – Mineral Sands Primer ................................................................................................................................... 29

What are Mineral Sands? .................................................................................................................................................. 29

End uses of Ilmenite & Rutile: TiO2 pigment & Titanium metal .................................................................................... 29

Mineral Sands value chain ................................................................................................................................................ 30

Sulphate process ................................................................................................................................................................ 31

Chloride process ................................................................................................................................................................ 31

Pigment demand outlook strongly correlated to GDP .................................................................................................... 31

A “later-cycle” product: China still only 25% of demand ............................................................................................... 32

Pigment demand forecasts ................................................................................................................................................ 33

Paint remains a relatively fragmented industry ............................................................................................................... 33

Pigment supply: ample capacity in China, tightness ex china ......................................................................................... 34

TiO2 feedstock Demand .................................................................................................................................................... 36

TiO2 Feedstock Supply...................................................................................................................................................... 37

Key feedstock suppliers ..................................................................................................................................................... 37

Supply unlikely to balance demand at current prices ...................................................................................................... 38

Supply-demand balance & pricing expectations .............................................................................................................. 39

DISCLAIMER .................................................................................................................................................................. 41


3

INVESTMENT SUMMARY

After a near-death experience in 2016, Kenmare has enjoyed ~21 months of operational stability, improving mineral

sands markets, and minimal balance sheet stress. With contract pricing for its TiO2 feedstock products set to further

increase in H2’17E, we forecast KMR will achieve its first ever year of positive free cash flow generation (post-capex)

since commencing commercial operations at the Moma mine in 2009 and investing in the Phase 2 expansion from

2010-13. Having de-risked both operationally and financially, we believe equity markets have been slow to recognise in

Kenmare an under-valued opportunity to gain exposure to attractive long-term fundamentals for TiO2 feedstocks.

Applying a conservative nominal WACC of 16% (13.2% real), our DCF-based valuation generates an Sep’18 NPV/share

of 470p, with a further ~70p of NPV upside dependent upon potential expansions under consideration. We apply a 1.0x

target P/NPV multiple to our base case – comprising Moma’s existing operations plus the recently approved expansion

of WCP B - and a 0.5x multiple to further potential growth, to derive an Sep’18E price target of 500p/share, implying

56% upside from the current share price.

BACKGROUND

Headquartered in Dublin, Kenmare owns and operates the

Moma mineral sands mine in Mozambique. Moma is the

world’s largest mineral sands single site operation with the

longest reserve/resources life in the industry (166 years at

current capacity). Of the company’s ~1.02Mt in finished

product shipments in 2016, ~952kt were ilmenite and ~7kt

were rutile, key feedstocks in the production of titanium

dioxide white pigment, while ~65kt were zircon, a form of

zirconium silicate primarily used in ceramics and refractories.

In 2017E, we estimate 73% of KMR’s sales will come from

ilmenite, with 25% from zircon. The company’s current

market cap is $465m, while net debt stood at $39m as of June

2017, giving an enterprise value of $504m.

OPERATIONS ON A MORE STABLE FOOTING

Kenmare has a history of poor operational delivery at Moma, in part due to the instability of power supply in

Mozambique, but also due to poorly scoped, under-powered dredges. Following multiple measures by EDM to upgrade

and stabilise electricity transmission to Northern Mozambique, as well as the installation by KMR of a “dip-doctor” to

address momentary lapses in power supply, Moma has managed to achieve guided production levels for the last six

quarters, with ilmenite output expected to stabilise at ~1 Mtpa over the 2017-19 period. Nonetheless, despite the

addition of a dry mining operation to supplement the dredges, the facilities in place are still below the specification

required to reach the company’s original Phase II target of 1.2 Mtpa.

Total ore excavated (Mt, left-hand scale) and heavy mineral grade (%, right-hand scale)

Source: Company reports, H&P estimates

Total finished product output (kt, left-hand scale) and unit cost per tonne ($/t, right-hand scale)

Source: Company reports, H&P estimates

3.5 4.

25.

86.

9 7.7

7.5

8.7 9.0

8.8

3.2

8.2 9.

17.

17.

1 7.4

7.2

8.5

8.4 9.

07.

8 8.4

8.4 8.

99.

09.

0

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Q4

2012

A

Q2

2013

A

Q4

2013

A

Q2

2014

A

Q4

2014

A

Q2

2015

A

Q4

2015

A

Q2

2016

A

Q4

2016

A

Q2

2017

A

Q4

2017

E

Q2

2018

E

Q4

2018

E

Ore excavated (Mt, lhs) HMC grade (%, rhs)

-

50

100

150

200

250

-

50

100

150

200

250

300

Q1

2014

AQ

2 20

14A

Q3

2014

AQ

4 20

14A

Q1

2015

AQ

2 20

15A

Q3

2015

AQ

4 20

15A

Q1

2016

AQ

2 20

16A

Q3

2016

AQ

4 20

16A

Q1

2017

AQ

2 20

17A

Q3

2017

AQ

4 20

17E

Q1

2018

EQ

2 20

18E

Q3

2018

EQ

4 20

18E

Rutile finished product (kt)Zircon finished product (kt)Ilmenite finished product (kt)Unit cost/tonne of finished product ($/t, est)

Ilmenite

73%

Zircon

25%

Rutile

2%

KMR FOB revenue split by product 2017E

Source: H&P estimates


4

AT LAST GENERATING CASH POST DEBT RESTRUCTURING – MEDIUM-TERM CAPITAL RETURN POTENTIAL

With a global glut of feedstocks, struggling operations, and limited

capital market access during the Iluka offer period, it became clear

by early 2016 that KMR was unable to service the Moma project

loans. Rather than allowing KMR to fall into bankruptcy and

selling the assets in administration to Iluka, the creditors chose to

support the issuance of $275m in new equity and accept a

significant write-down on the debt. The result post-restructuring

was a significant reduction in KMR’s net debt burden from ~$375m

as of Jun-2016 to ~$45m by Dec’16. Of the new equity raised,

$100m was placed with the State General Reserve Fund of the

Sultanate of Oman (SGRF), with a further $146m committed by

new and existing institutional investors, and $20m underwritten by

the lending group.

Gross debt outstanding post the deal was $100m, incurring interest of 6m US LIBOR + 4.75%. As such, we estimate

annual net interest expenses will fall to ~$6.5m in 2017E compared to ~$37m in 2015A. Along with higher realised

prices and modestly lower unit costs, we expect the lower interest burden to shift KMR into free cash flow positive

territory in 2017, driving net debt down to ~$19m by Dec’17E, and delivering net cash of $62m by Dec’18E. Even after

debt repayments, we believe KMR should be in a position to consider capital returns to shareholders by the end of next

year, in-line with its stated medium-term aim, subject to decisions around potential growth options outlined below.

VALUE-ACCRETIVE DEVELOPMENT OPTIONS

With ~80% of Moma’s cost-base fixed, and spare capacity in the mineral separation plant (designed for 1.2Mtpa in

output), KMR has several low-capex, high return options to increase production and lower unit costs by adding capacity

to the wet concentrator plants (“WCPs”). The company has completed a definitive feasibility study and has approved

$16m in capex for a 20% expansion of WCP B, with the upgrade to be delivered in phases during 2018. In addition to

this, KMR is conducting a pre-feasibility study on establishing a smaller, third wet concentrator plant (“WCP C”), with

1,000tph dredging and processing capacity (vs nameplate capacities of 3.5ktph for WCP A and 2.0ktph for WCP B).

Alongside these projects, KMR has the option to improve Moma’s grade profile and boost HMC output by moving WCP

B to a higher grade area such as Pilivili or Congolone instead of the scheduled transition to the Nataka deposit in 2021.

This could be a lower capex solution to support medium-term production volumes, offsetting the expected decline in

grades under the current mine plan as WCP A moves towards the end of the Namalope deposit in 2026. Given the clear

NPV benefit of choosing to move WCP B to Pilivili instead of Nataka in 2021, we factor this option into our base case,

although this plan is still to be officially confirmed by KMR. We estimate this relatively straightforward mine plan

revision would be worth ~93p/share in DCF value. Such a move may also allow KMR to defer construction of WCP C;

indeed, KMR stated in its H1’17 results that options to reduce or defer capex were being considered.

Nonetheless, assuming total capex for WCP C of ~$90m (roughly in-line with guidance given by the company at

scoping study level in 2016), a three-year build from 2019-2021E, and a long-term ilmenite price of $200/t, we estimate

construction of a third wet concentrator would still be viable, with a payback period of ~5.5 years from first capital

spend and an IRR of ~33%, adding 73p/share in value on a DCF basis.

Projected Free Cash Flow yields under different expansion scenarios

Source: H&P estimates. *Instead of move to Nataka under current plan.

Net (debt)/cash profile under different expansion scenarios


0%

10%

20%

30%

40%

2017

E

2018

E

2019

E

2020

E

2021

E

2022

E

2023

E

2024

E

2025

E

2026

E

2027

E

2028

E

2029

E

2030

E

FCF yield - current operations (%)

+WCP B expansion (%)

+WCP B move to Pilivili* (H&P base case) (%)

+WCP C addition (%)

-500

-250

0

250

500

750

1000

2008

A

2009

A

2010

A

2011

A

2012

A

2013

A

2014

A

2015

A

2016

A

2017

E

2018

E

2019

E

2020

E

2021

E

2022

E

2023

E

2024

E

2025

E

Net cash/(debt) - current operations ($m)

+WCP B expansion ($m)

+WCP B move to Pilivili* (H&P base case) ($m)

+WCP C addition ($m)

SGRF

29.1%

M&G

19.9%

Majedie

9.5%

Capital

Group

6.5%

European

Investme

nt Bank

7.2%

EAIF

2.8%

Other

25.0%


5

TIO2 DEMAND SHOULD BENEFIT FROM LATER-CYCLE STATUS

Approximately 90% TiO2 feedstock is used in the production of titanium dioxide pigments, of which ~60% is used in

paint and ~30% in plastics. With many of TiO2’s end-uses associated with rising standards of living and increases in

disposable wealth, in comparison to other basic materials (such as iron ore and base metals), demand growth is expected

to remain robust in the later phases of economic growth in the developing world before reaching a plateau. Despite

Chinese demand having risen at a CAGR of 10% since 2000, and stagnant demand in N America and Europe, China still

only represents 25% of global TiO2 pigment demand, versus over 50% of global demand for iron ore, aluminium and

copper.

Per capita consumption in China and other developing economies remains less than half that of N America and Europe,

with under 20% of the world’s population consuming more than 40% of its TiO2. We therefore expect improving

standards of living in developing economies to continue to support robust global demand growth, even if China’s rapid

growth slows to a more moderate pace.

China’s share of global demand for key basic materials

Source: H&P estimates, Bloomberg

In addition, pigment inventories are reportedly low at present, meaning restocking demand should support pigment

output more than underlying demand growth. This should spur a continuation of recent solid demand for TiO2

feedstocks.

Kenmare should also benefit from a recent trend in China towards the chloride process of pigment production, after

nearly two decades of rapid proliferation of less technically-difficult sulphate plants. China’s domestic sources of

ilmenite feedstocks are not suitable for direct or indirect use in the chloride process; therefore, assuming this shift

continues, China is expected to become increasingly reliant upon importing higher-quality feedstocks such as chloride

ilmenite for upgrading into chloride slag. (All KMR’s ilmenite output is suitable for use in both the chloride and

sulphate processes).

SUPPLY UNLIKELY TO BALANCE DEMAND AT CURRENT PRICES

There is no geological scarcity of potential titanium dioxide supply. However, existing production capacity is

insufficient to meet future demand, and we believe feedstock prices will need to remain at current levels or higher for a

sustained period to incentivise new projects. Firstly, we see little evidence of a significant overhang of potentially price-

insensitive Chinese ilmenite supply – typically a by-product of titano-magnetite iron ore mining operations - waiting to

return to the market as iron ore and ilmenite prices recover. Chinese iron ore output has already rebounded over the

last 12 months; we therefore believe China has also been operating at close to full ilmenite production capacity since

H2’16, with the exception of occasional, non-price-driven, temporary environmental shutdowns. Secondly, Iluka’s

acquisition of Sierra Rutile and decision to proceed with a ~50% expansion has arguably allowed it to de-prioritise

growth in the Murray Basin at Balranald, while the company’s Cataby project is effectively replacing the Tutunup

South mine which is due to close in 2018.

And thirdly, RIO’s investment decision on

the Zulti South project to sustain

feedstock production for its chloride slag

plants at Richards Bay Minerals may be

complicated by the expected

commissioning in 2018 of Cristal/Tasnee’s

Jazan smelter in Saudi Arabia, which could

add up to 40% to global chloride slag

supply.

74%

55% 50% 49% 47% 44% 41%30% 27% 26% 25%

14%

0%

20%

40%

60%

80%

Iro

n o

re

(sea

bo

rne)

Alu

min

iu

m

Cop

per

Zin

c

Nic

kel

Stee

l

Lea

d

Go

ld

Pla

tin

um

Pal

lad

ium

TiO

2

Pig

men

t

Silv

er

5000

6000

7000

8000

2009A 2011A 2013A 2015A 2017E 2019E

Total apparent feedstock demand Total feedstock shipments

TiO2 feedstock supply/demand (kt of contained TiO2)

Source: H&P estimates, Company reports


6

MINERAL SANDS PRICE DECK - SPOT PRICES RECOVERING POST SUMMER LULL

In its July 12th trading update, KMR noted that while its contracted ilmenite prices should see a further uplift in H2’17

vs H1 levels, Chinese spot prices had retreated from their June peaks. However, more recently on October 11th, KMR

reported that domestic Chinese ilmenite prices were strengthening again following an improvement in pigment

demand post the usual summer lull, and on tighter mine supply, as a wave of environmental inspections and subsequent

shutdowns impacted small ilmenite mines in key producing regions such as Sichuan. We believe this strength should

feed through to seaborne prices later this quarter, once current stockpiles have been reduced.

We base our earnings estimates and DCF analysis for KMR on the ilmenite, zircon and rutile price deck below, which

translates into average realised ilmenite prices of ~$167/t for H2’17 (+7% HoH), $161/t for FY17E, $188/t for FY18E,

$188/t for FY19E and ~$200/t in real-terms for FY20E onwards. Approximately two-thirds of KMR’s ilmenite is sold on

multi-year volume contracts with price re-sets every six months, with the remainder sold on a spot basis, primarily to

China. Thus, there is often a lag between improving or deteriorating spot market conditions and KMR’s realised prices.

Therefore, although Chinese spot prices have risen over the last 12 months, KMR’s overall achieved price per tonne

sold should continue to increase in H2’17 and into 2018E.

Ilmenite, Zircon & Rutile realised price assumptions in nominal terms

2015A 2016A H1'17A H2'17E 2017E H1'18A H2'18E 2018E 2019E 2020E

Ilmenite spot price – REAL* $/t, FOB est 135 109 155 170 163 183 185 184 180 200

Ilmenite spot price – NOMINAL* $/t, FOB est 135 109 155 172 163 186 191 189 190 216

% of sales on spot %, est 15% 19% 33% 30% 31% 33% 33% 33% 15% 15%

Ilmenite contract price - NOMINAL $/t, FOB est 135 104 155 163 159 180 193 187 188 203

% of sales on contract %, est 85% 81% 67% 70% 69% 67% 67% 67% 85% 85%

KMR realised ilmenite price – nominal $/t, FOB 135 105 155 167 161 182 192 188 188 205

Iluka zircon "reference" price – REAL $/t 986 810 950 1154 1052 1204 1200 1202 1200 1200

Iluka zircon "reference" price – NOMINAL $/t 986 808 950 1165 1041 1230 1241 1236 1265 1296

KMR "standard" primary zircon disc. to ref. %, est 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

KMR "special" primary zircon disc. to ref. %, est -37% -32% -52% -47% -50% -32% -25% -29% -25% -25%

KMR realised primary zircon price – nominal $/t, FOB 820 691 719 1013 823 1131 1163 1148 1186 1215

KMR secondary zircon discount to reference %, est -65% -78% -75% -75% -74% -65% -55% -60% -55% -55%

KMR realised secondary zircon price - nominal $/t, FOB 345 179 245 301 271 431 559 493 569 583

Rutile spot price – REAL $/t, FOB 721 716 741 787 764 845 857 851 834 926

KMR realised "on-spec" rutile price – nominal $/t, FOB 721 716 741 797 768 864 886 875 879 1001

KMR realised "off-spec" rutile price - nominal $/t, FOB 433 394 445 478 463 518 532 525 527 600

Weighted average price per tonne shipped $/t, FOB 174 133 186 206 195 237 250 244 251 269

Source: H&P estimates and company reports. *Note: we factor 2.5% annual inflation into our model from H2’17 onwards.

While we believe the early summer pull back in spot Chinese ilmenite pricing was in part driven by slowing

momentum in the restocking cycle as well as seasonally lower demand, we expect spot prices to continue to recover

later this year and into H1’18, as demand returns post a seasonal lull and potential shortages emerge due to rolling

environmental shutdowns in China. However, by mid 2018E, we believe some currently idled supply (e.g. in India,

Vietnam) may return, causing prices to plateau in 2019. Post-2019, however, we assume a long-term real price of $200/t

for ilmenite, as we believe solid underlying demand growth, declining Chinese supply and disciplined growth from the

major producers ex-China will imply healthy pricing is required to keep the market in balance.

EARNINGS ESTIMATES

With guidance of 950-1,050kt of ilmenite production, 72-83kt of zircon, 9-10kt of rutile and cash operating costs of

$120-132/t of finished product having been reiterated with KMR’s trading update on 11th October, our estimates for

2017E sit roughly in the middle of these ranges, with the exception of zircon which we expect to be towards the bottom

of the range, as flagged in the release (see below). Based on our price assumptions, this leads to our EBITDA and EPS

estimates of $73m and 25cps for FY17E, generating free cash flow of $26m, the first positive annual result since Moma’s

commencement of commercial operations in 2009 (albeit Phase 2 capex did dampen FCF during the 2010-2013 period).

Having reduced debt levels significantly through the financial restructuring in 2016, this positive FCF should see KMR

move into a net cash position by mid-2018.

We expect EBITDA and EPS to continue to improve in 2018E on higher realised prices as spot price improvement feeds

through to KMR’s realisations, and shipments remain solid. However, we expect modest upward pressure on unit costs

to emerge in 2019E – in excess of our underlying inflation assumption of 2.5% pa - as heavy mineral head grades

decline towards Namalope’s published reserve grade of ~3.7%.


7

Summary shipment forecasts, income statement, cash flow & net debt

2015A 2016A 2017E 2018E 2019E 2020E

Ilmenite shipments Kt 744 952 969 1003 1015 914

Zircon shipments Kt 50 65 68 74 76 70

Rutile shipments Kt 6 7 9 9 9 8

Revenue/t shipped $/t 174 133 195 244 251 269

Cost/t of finished product $/t 166 136 126 128 133 148

Revenue $m 143 141 210 270 281 272

EBITDA $m -12 5 73 129 131 119

EBITDA margin % -8% 4% 35% 48% 46% 44% D&A $m -36 -31 -34 -44 -48 -49

Net interest expense $m -37 -28 -7 -5 -4 -1

Tax credit/(expense) $m 1 2 -2 -5 -5 -5

FX/revaluations/other $m 23 36 -2 0 0 0

Net income $m -61 -15 28 75 74 63

EPS US¢/sh -436 -28 25 69 67 57

Cashflow from operations $m 9 -3 61 128 130 121

Interest & tax paid $m -6 -3 -9 -10 -9 -6

Capex $m -6 -7 -25 -37 -23 -24

Other $m 1 -15 -1 0 0 0

Free cash flow $m -2 -27 26 80 98 90

Net cash/(debt) $m -328 -45 -19 62 160 251 Source: H&P estimates, company reports.

32% DISCOUNT TO BASE CASE DCF, WITH FURTHER UPSIDE POTENTIAL

Based on the assumptions outlined above and a conservative 16% WACC, we estimate a Sep’18E DCF valuation for

Kenmare in its current operating configuration of 313p/share (or 349p/share including net cash which would be

accumulated by Sep’18E). Within our base case we also include the 20% expansion of WCP B, worth a further

~37p/share, as well as an adjustment to the mine plan to move WCP B to Pilivili in 2021, instead of Nataka, which we

estimate is worth another ~93p/share in NPV. We have not included the potential addition of a 1ktph-capacity WCP C

in our base case forecasts, as it remains at the pre-feasibility stage. However, given KMR’s much improved balance sheet

and cash flow profile, we believe a total capex budget of around $90m for the project should be easily affordable, and

could be worth ~72p/share in NPV-upside, assuming a 3-year build from 2019-2021.

Aside from fully utilising Moma’s Mineral Separation Plant capacity – spreading fixed costs - these potential expansions

and mine plan adjustments would help to offset the expected decline in grades as WCP A moves towards the end of the

Namalope deposit in 2026. Therefore, based on the assumptions above, we estimate these projects could add as much as

~370ktpa of ilmenite output from 2021E onwards, as compared with the existing operations and mine plan. The dilution

of fixed costs and potentially better grade profile could also reduce unit costs by up to ~20%, as compared with our base

case assumptions.

Moma ilmenite output including potential growth options (kt)

Source: Company reports; H&P estimates. *Estimated production uplift from moving WCP B to the Pilivili zone in 2021 instead of current planned move to Nataka, assuming Pilivili Indicated Resource grade of 4.2% total heavy minerals can be translated to Reserves.

Finished product unit cost ests with impact of potential growth (US$/t)

Source: Company reports; H&P estimates

500P PRICE TARGET ONLY PARTIALLY REFLECTS GROWTH OPTIONS

We estimate the addition of WCP C could add up to 72p/share to our base case, which would give a total DCF valuation

of ~543p. However, given this project remains at the pre-feasibility study stage and uncertainty over the final capex

budget, we apply a P/NAV multiple of 0.5x in our price target derivation to this potential growth. Still, this generates a

0

200

400

600

800

1000

1200

1400

2009

A20

10A

2011

A20

12A

2013

A20

14A

2015

A20

16A

2017

E20

18E

2019

E20

20E

2021

E20

22E

2023

E20

24E

2025

E20

26E

2027

E20

28E

2029

E20

30E

+WCP C addition (kt)

+WCP B move to Pilivili* (kt)

+WCP B expansion (kt)

Current operations/mine plan (kt)

80

100

120

140

160

180

200

220

240

2010

A20

11A

2012

A20

13A

2014

A20

15A

2016

A20

17E

2018

E20

19E

2020

E20

21E

2022

E20

23E

2024

E20

25E

2026

E20

27E

2028

E20

29E

2030

E

Current operations/mine plan ($/t)

+WCP B expansion ($/t)

+WCP B move to Pilivili (H&P base case) ($/t)

+WCP C addition ($/t)


8

Sep’18E price target of 500p (rounding to the nearest 20p), implying 56% upside from the current share price and

suggesting the market is overlooking KMR’s potential value-creation.

DCF-based price target derivation for KMR using 16% WACC

16% WACC DCF $m Target P/NPV Valuation $m USc/sh GBp/sh

Current Moma operations - DCF $452.7 1.0X $452.7 413 313

WCP B expansion - DCF $53.3 1.0X $53.3 49 37

WCP B move to Pilivili - DCF $134.2 1.0X $134.2 122 93

Sep'18E net cash/(debt) $39.8 1.0X $39.8 36 28

NPV - base case estimates $680.0

$680.0 620 470

WCP C addition - DCF $105.1 0.5X $52.6 48 36

Valuation / Price target (rounded to nearest 20p) $785.1 $732.6 668 500

Source: H&P estimates NPV including growth options & PT vs current share price

Source: H&P estimates, Bloomberg. Notes: *Estimated NPV uplift from moving WCP B to the Pilivili zone in 2021 instead of current planned move to

Nataka, assuming Pilivili Indicated Resource grade of 4.2% total heavy minerals can be translated to Reserves. **Price Target is rounded to nearest 20p.

ROOM FOR MULTIPLE RE-RATING VS PEERS

Moma’s patchy operational delivery, a country-risk premium for Mozambique and the perception of a significant stock

overhang stemming from the lenders taking stock for debt in last year’s restructuring (equivalent to ~10% of the

shareholder register), as well as relatively limited free float at present, have all weighed upon KMR’s traded multiple to

earnings despite the company’s obvious progress in recent quarters. However, we believe ongoing operational stability,

combined with delivery of positive free cash flow in 2017E, could be the catalysts for a re-rating to begin.

Kenmare earnings multiples & FCF yields (on H&P estimates) versus peer group based on Bloomberg consensus

Mkt cap

($m)

EV

($m)

P/E ratio EV/EBITDA FCF yield

2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E

KMR (H&P est.) 468 504 16.9 6.2 6.3 6.9 3.9 3.9 6% 17% 21%

Base Resources 194 313 3.9 3.6 11.0 2.9 2.7 3.9 -- -- --

Blue Jay 179 171 -- -- -- -- -- -- -- -- --

Iluka 3,253 3,487 37.4 18.7 17.1 13.1 8.8 8.8 8% 5% 6%

MDL 121 107 -- -- -- -- -- -- 10% 19% 15%

Lomon Billions 5,788 6,174 14.8 13.2 11.7 9.9 8.9 -- -- -- --

Tronox 3,156 6,067 -- 19.5 15.5 13.3 6.5 5.9 -- -- --

Peer group median

14.8 15.9 13.6 11.5 7.6 5.9 9% 12% 11%

KMR vs peer group

14% -61% -54% -40% -49% -35% -334bp 541bp 1,047bp Source: H&P estimates, Bloomberg. Market caps and EVs priced as of close on Friday 13th October

SENSITIVITIES

In estimating KMR’s earnings and deriving our NPV, we have made assumptions around future titanium dioxide and

zircon prices, as well as operating and capital costs. The bar chart below left shows the sensitivity of FY17 & 18E

EBITDA to 10% increases in these key input assumptions. The greatest sensitivity is to the ilmenite price, with a 15%

change in FY18E EBITDA for every 10% change in input assumption. (The sensitivity is greater in FY18E as we only

flex assumptions for H2’17E). Similarly, our DCF-based NPV valuation is most sensitive to ilmenite prices, as shown

below right, while opex (unit cash cost per tonne) is also an important driver, with our zircon and capex estimates

somewhat less important to our base case NPV.

313470

543 500

321

3793 28

73

0

100

200

300

400

500

600

DC

F/s

har

e -

curr

ent

oper

atio

ns

+WC

P B

exp

ansi

on

+WC

P B

mov

e to

Pil

ivil

i*

+Sep

'18E

net

cas

h

Sep'

18E

NP

V -

bas

e

case

+WC

P C

ad

dit

ion

Sep

'18E

NP

V -

ups

ide

case

Pri

ce T

arge

t**

assu

min

g 0.

5x W

CP

C

KM

R s

har

e p

rice

13-O

ct


9

Sensitivity of KMR 2017/18E EBITDA to a 10% increase in base case ilmenite price, zircon price and unit opex assumptions


Sensitivity of KMR Sep’18E NPV/share to ilmenite price, zircon price, unit opex and capex assumptions


RISKS

The risks to the investment case for Kenmare are typical of any single-asset mining business – i.e. price risk, volume

risk, operating risk and geopolitical risk. Specifically, in the case of Kenmare, we identify the following:

• TiO2 feedstock prices: as shown above, KMR’s earnings and DCF value are highly sensitive to the price of

TiO2 feedstocks. Lower than expected prices could have a negative impact on our forecasts and KMR’s share

price performance.

• Zircon prices: while less important than TiO2 feedstock prices, lower than expected zircon prices could also

have a negative impact on our forecasts and KMR’s share price performance.

• Demand for pigment: lower than expected end-demand for white pigment could have an impact on TiO2

pigment production and in turn have a negative impact on Kenmare’s feedstock shipment volumes, which

could inhibit share price performance.

• Disruptions to operations: while we believe the company has learnt from past experiences and mitigated the

risk of operational underperformance, Moma still faces multiple challenges which could impact upon planned

production rates and/or operating costs, e.g. weather-related disruptions, power reliability, variability in ore

grades, clay content, hardness and slurry ability, although the company has mitigated this risk by drilling out

the orebody for several years forward to test grade, clay content and hardness.

• Country risk: Mozambique has so far proved to be a relatively stable host regime for KMR’s operations, with

incremental changes to the legal and fiscal framework around mining last implemented in 2014. (None of

which affected KMR due to its fiscal stability agreements, which have never been changed in the company’s

30 years of operation in Mozambique). Nonetheless, as evidenced by multiple examples across the global

natural resources industry, investors should take heed of the risk of governmental interference, especially

given KMR’s concentration on a single asset. We attempt to discount this risk by applying a relatively

conservative 16% WACC.

8%

3%

-9%

15%

6%

-11%

-15% -10% -5% 0% 5% 10% 15% 20%

Ilmenite

Zircon

Opex

EBITDA '17E EBITDA '18E

0

100

200

300

400

500

600

700

800

900

-30% -20% -10% 0% 10% 20% 30%

Sep

'18E

NP

V in

GB

p

Ilmenite Zircon Opex Capex


10

KENMARE RE-BOOTED

A SHORT HISTORY OF KENMARE AND MOMA

Kenmare Resources is an Irish incorporated mining company headquartered in Dublin.

First established in 1972, in 1986 a group of investors acquired KMR as a cash shell and

shifted the company’s focus to minerals exploration, with Michael Carvill appointed

CEO. In 1987 Kenmare Resources Plc was listed on the London Stock Exchange,

followed by a listing on the Irish Stock Exchange in 1994. From 1987 onwards KMR

acquired interests in several exploration licenses in Mozambique, including the

Congolone heavy mineral sands deposit, as well as the Niassa greenstone gold belt and

the Ancuabe Graphite Mine, which KMR operated from 1994 to 1999.

KMR’s minerals sands activities accelerated in 1996 when BHP became a JV partner in

the development of Congolone (located on Mozambique’s NE coast), and by 1999 had

identified additional heavy mineral deposits at Namalope, Mualadi and Pivilli. However,

in 1999 the JV was dissolved as BHP retreated from the titanium feedstock market, and

by 2001 KMR had acquired 100% of the licence. Namalope formed the basis of a

feasibility study in 2001, which allowed KMR to secure financing and begin

construction of the Moma Mine in 2004.

Phase I of Moma reached commercial production in 2009, with a nameplate capacity of 800ktpa of ilmenite (a heavy

mineral containing titanium dioxide), along with rutile and zircon by-products. In 2010, KMR embarked on a “Phase

II” project to expand capacity by 50% to 1.2Mtpa, with an initial capex estimate of ~$200m (“+/-25%”), funded by a

combination of project debt from a consortium of lenders, and new equity. After a ~$200m+ overspend and more than a

year later than planned, Phase II was commissioned in 2013; however, due to flaws in equipment specifications and

EPC contractor underperformance, as well as challenging local operating conditions (not least the inconsistency of

electricity supply), the mine has never fulfilled its 1.2Mtpa design capacity.

HISTORY

Exacerbated by four years of falling titanium dioxide feedstock prices from 2012-2016, Moma struggled to generate

sufficient operating cash flow to service its project debts. Interest payments on subordinated loans were rolled into the

debt balance, pushing net debt to over $300m by mid-2014. With the balance sheet under severe pressure, Iluka

Resources, an international, ASX-listed mineral sands miner, was reported to have an approach to acquire Kenmare in

June 2014, and commenced a due-diligence process. During a lengthy offer period, KMR’s funding situation continued

to deteriorate, effectively leaving the company’s fate in the hands of the lenders.

Rather than taking ownership of the assets in bankruptcy and selling at a discount to Iluka, the lenders chose a rescue

package involving $275m in new equity ($100m of which came from the State General Reserve Fund of the Sultanate of

Oman), and accepted a write-down on the value of their debts. The net result was a ~$300m reduction in KMR’s net

debt to ~$45m and a significant alleviation of the annual net interest burden, from $37m in 2015A to ~$6m pa from

2017E. Moma is now on the brink of finally generating positive free cash flow for KMR, aided by a recovery in mineral

sands prices and more stable operations following improvements to Mozambique and Moma’s power infrastructure.

2010’s2000’s1990’s1980’s

1986: Kenmare start-up to explore mineral wealth in Mozambique

1992: Enters BHP Mineral Sands Joint Venture

2010: Phase II Expansion funding and commence development

2001: Feasibility studies on the Moma Mine were completed in February 2001

1992 – 1999:Additional activities in Mozambique incl. Niassa Gold

1999: BHP exits the JV and Kenmare regains 100% ownership of mineral sands assets

2004 - 2010:Mine construction and ramp-up

2004: Detailed analysis showed a strong market for Momaproducts. This allowed Kenmare to approach lenders to finance the Mine and appoint an EPC contractor

2013: Phase II Expansion commissioning and ramp-up

1987: Exploration in continental Africa (incl. Mozambique) and the Philippines

Kenmare Namalope

mine

Mozambique


11

Post-restructuring, KMR’s gross debt facility was reduced to $100m, with a reduced interest rate of US 6m LIBOR plus

3.75% on senior debt and 4.75% on subordinated debt (equivalent to ~6% pa at present); a repayment holiday until

Q1’18 also gave additional flexibility.

Post-restructuring, KMR’s executive committee can now focus on

maximising shareholder value from Moma. With the Phase II

processing plant equipment having been designed to reach

1.2Mtpa in ilmenite output, Management has outlined studies to

upgrade the key bottleneck – i.e. insufficient dredging and wet

processing capacity – through the expansion of WCP B and,

potentially, addition of WCP C (with total combined capex for

both previously estimated at ~$100m in a 2016 scoping study).

This would increase ore-throughput at the front-end of the

process to allow the nameplate 1.2Mtpa target to be reached in

the near-to-medium-term, as well as help to offset the longer-

term effect of falling grades in the Namalope orebody as the

company progresses towards the end of the life of this deposit by

~2026 (before shifting focus to other, potentially higher-grade

zones).

Assuming mineral sands market dynamics remain robust, Moma’s uniquely long ~42-year reserve and >100-year

resource life could easily support modular, value-accretive expansions, in our view. However, given KMR’s troubled

operational and financial track-record, management may choose to accumulate cash, reward patient shareholders with

dividends, and make a thorough assessment of any growth plans before deploying significant capital on further

expansions.

RESERVE & RESOURCE BASE

The current Resource area covers a 160-km stretch along the NE coast of Mozambique, with a combined Resource of

over 8bn tonnes (inclusive of Reserves) with heavy mineral content grading ~2.9%. (Ilmenite represents ~82% of the

heavy mineral content, with zircon just under 6% and rutile just under 2%.)

Kenmare’s reported JORC compliant Reserves and Resources at Moma, as of Dec 2015, are outlined below. Current

mining operations are focused on the Namalope reserve. KMR’s mining licence at Namalope is valid until 2029;

however, operations are scheduled to transition to the Nataka zone in two stages in 2021 and 2026.

SGRF

29%

M&G

20%Majedie

9%Capital

Group

7%

European

Investme

nt Bank

7%

EAIF

3%

Other

25%

Current KMR shareholders

Source: Bloomberg, Kenmare Resources


12

MINE PLAN

Source: Kenmare Resources

At current ore throughput rates, the Namalope and Nataka Reserves would support a life-of-mine of ~42 years,

although throughput needs to increase to prevent a decline in final product output over the LoM, as KMR has

preferentially mined higher grade areas, meaning total heavy mineral head grades will trend lower over time. As

discussed later, we estimate a possible expansion in throughput capacity could reduce the reserve-life to ~32 years,

albeit over 130 years of resources would remain to be developed.

Moma Reserve & Resource statement

Reserves Category Ore % % Ilmenite % Ilmenite % Rutile % Zircon THM Ilmenite Rutile Zircon

(Mt) THM in THM in ore in ore in ore (Mt) (Mt) (Mt) (Mt)

Namalope Proved 201 3.8 81 3.1 0.071 0.22 8 6.2 0.14 0.44

Namalope Probable 76 3.3 81 2.7 0.06 0.19 2.5 2.1 0.05 0.14

Nataka Probable 1,248 3.1 82 2.6 0.06 0.17 39 32 0.7 2.11

Total Reserves

1,525 3.2 82 2.6 0.06 0.18 49 40 0.88 2.7

Resources Category Sand % % Ilmenite % Ilmenite % Rutile % Zircon THM Ilmenite Rutile Zircon

(Mt) THM in THM in sand in sand in sand (Mt) (Mt) (Mt) (Mt)

Congolone Measured 204 3.3 80 2.7 0.069 0.22 6.8 5.4 0.14 0.44

Namalope Measured 112 3.8 81 3 0.07 0.22 4.2 3.4 0.08 0.24

Namalope Indicated 127 2.9 81 2.3 0.05 0.17 3.7 3 0.07 0.21

Congolone Indicated 53 3.9 79 3.1 0.08 0.24 2.1 1.7 0.04 0.13

Nataka Indicated 1321 3.2 84 2.7 0.05 0.17 42.9 36 0.7 2.23

Pilivili Indicated 293 4.2 82 3.4 0.08 0.24 12.2 10 0.2 0.7

Congolone Inferred 19 2.6 79 2.1 0.06 0.15 0.5 0.4 0.01 0.03

Pilivili Inferred 3 2.3 78 1.8 0.04 0.13 0.1 0 0 0

Mualadi Inferred 327 3.2 80 2.6 0.06 0.21 10 8.4 0.2 0.7

Nataka Inferred 3,637 2.6 82 2.1 0.04 0.14 93 77 1.6 4.96

Mpitini Inferred 287 3.6 80 2.9 0.07 0.24 10 8.3 0.2 0.7

Marrua Inferred 54 4.1 80 3.3 0.19 0.19 2.2 1.8 0.1 0.1

Quinga North Inferred 71 3.5 80 2.8 0.14 0.28 2.5 2 0.1 0.2

Total Resources

6,507 2.9 83 2.4 0.05 0.16 190 157 3.5 11


To maximise the value of the resource, KMR is considering options to accelerate the development of Congolone and

Pilivili, and moving mining activity to these zones when the Namalope reserves are depleted, rather than transitioning

to Nataka as currently planned. During 2017, KMR has plans to convert resources to reserves at both Congolone and

Pilivili. The fact that Kenmare has multiple options for the future development of Moma in-line with growing TiO2

demand is primarily due to the vast scale of the deposit - unique in the mineral sands industry - with a combined

reserve-resource life of more than 100 years based on Measured & Indicated Resources, or over 160 years including

Inferred Resources.

100+ year life at Phase IIexpanded production level(1)

5km

Current mine areaWCP A to 2024WCP B to 2020


13

Measured & Indicated Resource life compared with peers

Source: Kenmare Resources, H&P estimates

MOMA MINING & PROCESSING FACILITIES

Mineral sands are mined in two different “dredge mining” operations at the Namalope site. First, the area to be mined is

flooded to create an artificial pond, from which the mineral sands can be dredged and piped to a “Wet Concentrator

Plant”, which also floats in the pond alongside the dredges, for the first step of the separation process. Two dredges in

one pond feed Wet Concentrator Plant A (“WCP A”), and one in the other pond feeds Wet Concentrator Plant B

(“WCP B”). The WCPs use spiral gravity separators to separate heavy minerals from silica sand and clay tailings. The

resulting product from the WCPs is called Heavy Mineral Concentrate (HMC), which is stockpiled before further

processing, while the tailings are deposited straight back into a series of settling ponds.


As ore is continually cut from the face of the pond and tailings re-deposited, the dredge pond itself moves over the

orebody as the mining progresses. Due to the difficulty KMR has encountered in ramping up its dredge mining

operations to consistently meet the Phase II project targets, the company has also added supplemental dry mining

operations to feed the two WCPs.

Moma – simplified heavy mineral concentrate production flow-sheet

102

65

40 2013

3.3%2.7%

5.6%

1.5%

4.8%

0.0%

2.0%

4.0%

6.0%

0

50

100

150

Kenmare Tronox Iluka-Sierra Rutile MDL Base Resources

Resource life (years, lhs) THM grade (%, rhs)


14

Source: Company presentations

After the WCP stage, the HMC is stockpiled ahead of further processing in the Mineral Separation Plant (“MSP”). The

target minerals – ilmenite, rutile and zircon – constitute approximately 90% of the HMC.

Front-end loaders are used to transfer HMC from the stockpiles to the MSP. The first stage of the MSP is Wet High

Intensity Separation (“WHIMS”), which divides the concentrate into magnetic and non-magnetic streams. The

magnetic concentrate contains the ilmenite (which is weakly magnetic); this is dried before further purification using

electrostatic separators in either of Moma’s two ilmenite plants. (As outlined below, KMR markets three different

ilmenite products with differing qualities and grades).

The non-magnetic concentrate (containing rutile and zircon) passes through a further stage of gravity separation to

remove any remaining silica and other materials, before electrostatic separation into various rutile and zircon product

streams.

The final products are stored at the site in a 220kt warehouse, before being conveyed 2.4 kilometres to the coast,

leading to Kenmare’s own all-weather 400m jetty. The material is loaded onto KMR’s two transhipment vessels, which

then transport the products to a transhipment point 10km offshore where they self-discharge onto sea-going vessels.

Moma – simplified Mineral Separation Plant flow-sheet

Source: Company presentations

Moma’s other facilities include a 170 km 110 kV power transmission line, a sub-station, a leased 10 MW diesel

generator plant, an additional 6 MW of standby diesel power generation capacity, an accommodation village, offices,

laboratory, a jet-capable airstrip, water supply and sewage treatment plants.


15

Aerial view of one of Moma’s dredge mining ponds, floating wet concentrator plant, mineral separation plant and transhipment vessel jetty (top left)


PRODUCT MIX – PIGMENTS THE KEY END-MARKET

Kenmare is a major global supplier of mineral sands from the Moma mine. Most of Moma’s output is ilmenite,

accounting for 952kt or 93% of total tonnes sold in 2016, with co-product zircon (6%) and rutile (1%). In terms of

revenues, we estimate ilmenite accounted for ~73% of FOB sales in 2016, with the higher-value-per-tonne zircon

shipments representing 25% of sales and rutile ~3%. (KMR does not provide a precise breakdown of revenues or

realised prices).

Breakdown of end-product shipments by weight – 2016A

Source: Company reports

Est. breakdown of FOB revenue – 2016A

Source: Company reports, H&P estimates.

Ilmenite and rutile are raw materials to produce TiO2, 90% of which is used in the manufactures of pigments used in

paints, plastics, paper and other applications, while ~6% is used in the production of titanium metal and ~4% in welding

fluxes. As such, pigments are by far the most important end-market driver for KMR, accounting for approximately two-

thirds of the company’s sales. Overall, including TiO2 contained in both ilmenite and rutile as well as other

intermediate feedstocks (slag, synthetic rutile), Moma’s output accounts for around 6-7% of global titanium dioxide

feedstock production, making KMR the fourth largest supplier behind Rio Tinto, Tronox-Cristal and Iluka. Global TiO2

feedstock supply is relatively fragmented, with the top four producers only accounting for just over 50% of supply.

Ilmenite

93%

Zircon

6%

Rutile

1%

Ilmenite

73%

Zircon

25%

Rutile

2%


16

Global TiO2 feedstock* market share

Source: H&P estimates, Company presentations *In terms of TiO2 content; e.g. for Kenmare with an average 53% TiO2 content, production is 0.903Mt*0.53

TiO2 feedstock breakdown by end use: TiO2 white pigment accounts for 90% of applications

Source: H&P estimates, company presentations

Meanwhile zircon is commonly used as an opacifier in ceramics, as well as in refractories and foundries. Again,

Kenmare is the fourth largest producer behind Iluka, Rio Tinto and Tronox-Cristal, although zircon is, compared to

TiO2, a more concentrated industry, with the top four supplying over 75% of the market.

Global zircon market share

Source: H&P estimates, Company presentations

Zircon demand breakdown by end use

Source: H&P estimates, Company presentations

PRODUCT SPECIFICATIONS - ILMENITE

Kenmare’s ilmenite is marketed as three different products, labelled IP1, IP2 and IP3, with varying qualities and grades.

While 90% of titanium feedstocks are used to produce 100% pure TiO2 pigment, the route from feedstock to pigment

can follow several different paths (see below), broadly subdivided into the “chloride process” and “sulphate process”.

Moma’s highest grade ilmenite product, IP3, which has a TiO2 content of ~56.5%, can be used directly in the chloride

process – the majority of demand coming from Chemours, the only producer with technology capable of processing

ilmenite directly into a chloride pigment. Roughly 25% of Moma’s ilmenite output is in this category; with an industry

average of around 5%, this is a key competitive advantage compared to other ilmenite producers.

The other products from Moma - IP1 with ~52.5% TiO2 and IP2 with ~51% TiO2 – are more suited to be used in the

sulphate process, or can be used indirectly in the chloride process, but would first require upgrading to an intermediate

“chloride slag” product.

Kenmare

Resources

7%Tronox-

Cristal 16%

Iluka 6%

Rio Tinto

26%Kronos 2%

Lomon

Billions 4%

Other China

14%

Vietnam 1%

India 9%

Other 15%

Paint

52%

Plastics

20%

Paper &

pulp

8%

Inks

4%

Fibres

2%

Other

pigments

4%

Titanium

metal

6%

Welding electrode

4%

Iluka 33%

Rio Tinto

18%

Tronox-

Cristal

22%

Kenmare

6%

TiZir 4%

India 4%

Other 13%

Ceramic

tiles &

sanitary

ware

50%

Refractories

16%

Foundries

12%

Specialty

chemicals &

materials

20%

Other

2%


17

Ilmenite should not be considered a commodity in the true sense. Each of KMR’s feedstock products has a different

value in use for each pigment producer, depending on which process the pigment producer follows, what blend of

feedstocks their plant is set up to use, how much upgrading the ilmenite requires before it can be used, etc.

This has two important consequences: firstly, it makes the pricing opaque, as few producers or end users release

commercially sensitive details of the prices agreed within their contracts; secondly, it means the demand outlook for

the different grades of ilmenite differs depending on the growth in sulphate or chloride processing capacity.

For instance, until ~2012, China invested heavily in less technically challenging and less capital-intensive sulphate

processing capacity, driving stronger demand growth for lower grade ilmenite products (often referred to as “sulphate

ilmenite”), such as KMR’s IP1 and IP2. However, the chloride process is less environmentally-damaging and more

energy-efficient, and has therefore accounted for most new capacity in recent years, with some old sulphate plants in

China and elsewhere now being decommissioned or run at lower utilisation rates. We estimate the sulphate process’

share of global pigment production capacity has fallen from a peak of ~61% in 2012 to ~56% by 2017E.

We expect this trend to continue to boost demand for higher-grade and lower-impurity ilmenites; we note that even

KMR’s “lower-grade” IP1 and IP2 products can still be upgraded to chloride slag for use in the chloride process, and are

therefore attractive to Chinese importers, as the majority of Chinese domestic ilmenite supply is only appropriate for

the sulphate process. This is another important advantage over other low-grade ilmenite suppliers.

PRODUCT SPECIFICATIONS - RUTILE AND ZIRCON

Rutile is a higher-grade form of titanium dioxide feedstock, containing ~90% TiO2, and can therefore be used to

produce pigment via either the chloride or sulphate process, as well as used directly in welding electrode. KMR

produces and sells rutile either “on-spec” or “off-spec”; off-spec rutile typically has greater contamination from

deleterious elements and sells at a ~40% discount to on-spec product. Broadly speaking, rutile follows similar demand

and pricing trends to ilmenite, and, at ~1% of Moma’s output and ~2% of revenue, is not a significant driving factor in

KMR’s investment case. Therefore, for modelling purposes, we assume rutile prices move proportionately to ilmenite.

Zircon, on the other hand, is an important co-product and top-line driver for KMR, at ~7% of tonnage and ~23% of

revenue in 2017E. The company breaks its reported zircon production into “primary” and “secondary” qualities;

primary zircon can be further sub-divided into “standard” and “special grade” product lines. As with ilmenite, zircon is

a non-commoditised market, with different prices for different qualities and forms of the product. However, industry

leader Iluka does report a “reference price” for zircon; KMR’s standard zircon product sells roughly in-line with this

reference price level, while special grade sells at around a 25% discount and secondary at around a 55% discount.

REALISED PRICE ASSUMPTIONS

Reliable, timely data on current spot prices for ilmenite, rutile and zircon is difficult to find. The most frequently

reported spot price series for ilmenite are for domestic Chinese and imported material. KMR noted in its Q2 trading

update on 12th June, Chinese import spot prices fell in June, albeit from elevated levels. Subsequently in its 11th

October update, KMR reported domestic Chinese prices have been rising again in recent weeks, as supply tightness

emerged following environmental inspections and pigment demand returned after the seasonal summer lull. With

domestic prices rising, the more thinly traded import spot prices should follow suit over the coming weeks in our view.

However, only ~33% of KMR’s ilmenite is sold on a spot basis to China; the remainder sold on multi-year contracts

with volume off-take agreements, with negotiated price re-sets on either an annual or semi-annual basis. As spot prices

are above the Jan’17 levels and demand remains solid, KMR expects its contracted ilmenite prices to improve in H2’17E

vs H1’17. This should mean overall realised prices also increase on average; we estimate a ~7% improvement in realised

ilmenite prices in H2, including the effect of higher contract pricing, as shown in the table below.

We also factor in an improvement in the proportion of on-spec vs off-spec rutile recovered, as the company continues

to optimise the its mineral separation plant, which effectively boosts our estimated average realised price per tonne of

rutile shipped. Similarly, KMR is taking steps to increase the proportion of higher value primary zircon recovered by

the MSP, leading to improving average realised prices per tonne of zircon shipped on our forecasts.


18


2015A 2016A H1'17A H2'17E 2017E H1'18A H2'18E 2018E 2019E 2020E



















Realised ilmenite price assumptions (nominal)


Realised zircon price assumptions (nominal)


DEMAND TO REMAIN ROBUST & SUPPLY CONSTRAINED AT CURRENT PRICES

As we discuss in more detail in the Appendix to this report, we believe the recent fall in Chinese import prices was

primarily driven by a seasonal slump in Chinese demand as customers draw down on inventories; we therefore view

this slump as temporary, with demand and spot pricing likely to improve when order books are refilled in

September/October.

• In the near-term, we believe the pigment inventory cycle remains favourable: as noted by Iluka with its semi-

annual results, pigment inventories remain below seasonal norms, which should mean pigment production reflects

restocking demand as well as underlying growth in end use.

• KMR should also benefit from China’s shift towards chloride pigment capacity. This is likely to increase reliance

on imported feedstocks as much of China’s domestic ilmenite supply – predominantly mined in inland provinces in

SW China – is not of high enough quality to use directly or indirectly in the chloride process. Some of KMR’s non-

Chinese competitors also do not produce ilmenite of adequate quality for the chloride process.

• Longer-term, we believe TiO2 pigment’s “later-cycle” characteristics should continue to drive demand growth.

Chinese intensity of TiO2 pigment use at ~1.1kg per capita remains roughly half of that of developed western

economies. In contrast to metals and other materials, demand for paint and plastics, and therefore pigment, has

typically grown faster in the later stages of economic growth as countries urbanise and standards of living increase.

This should mean TiO2 demand still has room for growth in-line with GDP. Indeed, China’s share of global

pigment demand in 2016 was “only” 25%, as compared to over 50% in iron ore, aluminium and copper.

• Furthermore, even with an already relatively low share of global pigment demand in China, it is worth noting that

a significant portion of the pigment “consumed” in China is in fact re-exported to the US and other developed

economies in the form of finished products, e.g. painted cars, white goods, plastics. China’s intensity of use and

share of global pigment demand should continue to outpace the rest of the world as domestic demand for

consumer products grows.

50

100

150

200

250

300

350

2008

A

2009

A

2010

A

2011

A

2012

A

2013

A

2014

A

2015

A

2016

A

2017

E

2018

E

2019

E

2020

E

2021

E

2022

E

2023

E

2024

E

2025

E

2026

E

Ilmenite spot price ($/t, FOB est)

KMR realised ilmenite price ($/t, FOB)

0200400600800

100012001400160018002000

2012

A

2013

A

2014

A

2015

A

2016

A

2017

E

2018

E

2019

E

2020

E

2021

E

2022

E

2023

E

2024

E

2025

E

2026

E

Iluka zircon "reference" price ($/t)

KMR realised primary zircon price ($/t, FOB)

KMR realised secondary zircon price ($/t, FOB)


19

TiO2 pigment use vs GDP per capita

Source: H&P estimates, Bloomberg, Company reports

On the supply-side, while there is no geological scarcity of potential titanium dioxide supply, we believe existing

production capacity is insufficient to meet future demand, requiring feedstock prices to remain at current levels or

higher for a sustained period to incentivise new projects.

• We see little evidence of a significant overhang of potentially price-insensitive Chinese ilmenite supply waiting to

return to the market as iron ore and ilmenite prices recover. Chinese iron ore output has already recovered since

H2’16 in-line with improving prices; the scope for further supply to return now appears limited, especially

considering a new round of environmental inspections in China (as flagged by Base Resources in its FY17 results

on 29th August).

• Secondly, Iluka’s acquisition of Sierra Rutile and decision to proceed with a ~50% expansion has arguably allowed

it to de-prioritise growth in the Murray Basin at Balranald, while the company’s Cataby project is effectively

replacing the Tutunup South mine which is due to close in 2018.

• And thirdly, RIO’s investment decision on the Zulti South project to sustain feedstock production for its chloride

slag plants at Richards Bay Minerals may be complicated by the expected commissioning in 2018 of

Cristal/Tasnee’s Jazan smelter in Saudi Arabia, which could add up to 40% to global chloride slag supply.

Overall these factors give us confidence in the supply-demand outlook for feedstocks and we expect deficits to emerge

over the coming years, as shown below. Therefore, as outlined in the price assumptions table above, we assume real

long-term prices of $200/t of ilmenite from FY20E onwards, implying a modest increase from the current ~$180/t level.

We assume rutile prices follow a similar path, and factor in a modest further improvement in zircon, in-line with

Iluka’s commentary.

TiO2 feedstock supply/demand (in kt of contained TiO2)


5000

5500

6000

6500

7000

7500

2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E


0.00

0.50

1.00

1.50

2.00

2.50

3.00

0 5000 10000 15000 20000 25000 30000 35000 40000 45000

TiO

2 p

igm

ent

use

per

cap

ita

(kg)

GDP per capita (real 2005 USD)

China - hist

China - est

N America - hist

N America - est

Europe - hist

Europe - est

APAC ex China - hist

APAC ex China - est

C & S America - hist

C & S America - est

ME & Africa - hist

ME & Africa - est

>80% of world

population, <60% of

<20% of world population, >40%

of global pigment demand


20

OPERATIONS HAVE OVERCOME A PLETHORA OF ISSUES

As mentioned above, Moma’s “Phase II” expansion project began in 2010 and initially promised to expand ilmenite

output by ~50% to 1.2Mtpa. This was to be achieved through an expansion of WCP A’s nameplate ore processing

capacity from 3,000 tonnes per hour (tph) to 3,500 tph in 2011, as well as the addition of WCP B with nameplate

capacity of 2,000 tph, completed in 2013. However, the 1.2Mtpa ilmenite output target has never been achieved, as

operations have faced a variety of challenges (outlined below).

Issue Mitigation

Oct-2010: operations were suspended for a month, and partially impacted

through Q1’11, after a settling pond wall was breached causing an outflow of

water, sand and clay, causing damage to a nearby village.

Safety procedures improved

2011: KMR experienced a band of clay rich ore which proved harder than

expected to process through WCP A, hampering dredging operations &

impacting HMC output. This prompted KMR to add a dry mining operation at

Moma to supplement the dredges and allow consistent utilisation of the

WCPs.

KMR added a dry mining operation at Moma to

supplement the dredges and allow consistent

utilisation of the WCPs. One of the two dredges at

WCP A was eventually replaced with a more

powerful dredge.

2011: KMR began to experience capex escalation because of the high-level of

construction activity in the global mining industry, as well as delays in the

delivery of WCP B due to design amendments. Further delays also emerged in

issuing drawings for upgrades to the Mineral Separation Plant due to

underperformance by the EPCM contractor, E+PC, part of the Aveng Group.

2011: the first of many power supply issues which have frequently hampered

operations, in this instance due to faulty voltage stabilisation equipment on

the main grid. This was followed in early 2012 by an unusually active cyclone

season causing an “exceptional number” of power dips.

Voltage Stabilisation Equipment (Dip Doctor)

installation was completed in June 2013

Mid-2012: WCP B further delayed due to “dimensional inaccuracies in

structural steel sections (strong backs) delivered to site”, which required

rectification, causing delays and cost overruns. Truck drivers’ strike in South

Africa caused further delays in the delivery of components later in 2012.

KMR appointed an additional contractor on site

H2 2012: upgrades to the grid conducted by Electricidade de Mocambique

(EdM) resulted in disruptions in Q3 & Q4.

To reduce voltage dips arriving at KMR's substation,

EdM installed new static VAR compensator (SVC)

on the power line at Mocuba, which is now

working. In cooperation with EdM, KMR also

refurbished a second SVC at the Alto Molocue

substation.

Q4 2012 - H1 2013: Operations were impacted in Q4’12 by greater than

expected disruptions associated with the raising of the WCP A dredge pond

from a low-lying area 12m above sea-level to the dunal plateau (32m above

sea-level), causing ilmenite output to slump to just 575kt for 2012; this process

continued to impact production through H1’13.

One-time move in life of Namalope deposit - dunal

plateau is due to be mined until 2026.

H2 2013: unplanned power outages, rather than dips, became a more frequent

occurrence; meanwhile longer than expected disruptions due to

commissioning of the expanded facilities at the Mineral Separation Plant

impacted on output in Q3.

October 2013: a fire in the trommel section of WCP A after routine welding

works disrupted HMC output in October and November 2013.

Hot works safety procedures reviewed and training

to ensure compliance provided

Jan-Feb 2015: extensive flooding in Mozambique caused a prolonged grid

power outage. More localised flooding caused a further outage in Mar-2015

Back-up power generators kept MSP running &

could process HMC stockpiles

H1 2015: Difficult market conditions forced the company to commence a

compulsory redundancy process at the mine in early 2015; subsequent

unofficial industrial action disrupted mine production for 9 days in June 2015.

Redundancy process was complete by H2 2015

2015 onwards: power instability issues were primarily related to the grid’s

inability to handle peak power demand in Northern Mozambique, as well as

temporary outages during repair works.

EdM increased transmission capacity on the power

network by 50 MW (42%) in Dec 2015 and a further

10 MW in mid-2016. Power generation was also

boosted in Northern Mozambique in 2016 by a ship-

based 100 MW mobile plant.

MINING CONSISTENCY IS THE KEY

The key bottleneck to achieving nameplate 1.2Mtpa output, and lowering unit costs of production, has been the

inconsistency of Moma’s dredge-mining operations. Amongst the many operational setbacks, the two predominant

issues have been power supply disruptions and more difficult than expected mining conditions, especially clay content.

However, ore excavation rates have shown an encouraging improvement in recent quarters, due to several internal

measures – including more detailed logging of clay content to help anticipate changes in mining conditions - as well as

improvements to Mozambique’s power infrastructure.

Power interruptions have typically been most severe during the Southern Hemisphere summer months of December,

January and February, due to seasonal rainfall and electrical storms. KMR has mitigated this by running the MSP with


21

back-up power generators during these months, whilst managing power dips from the grid with synchronous condenser

(“Dip Doctor”) technology. As shown in the chart below-right, the 8.4Mt of ore excavated in Q1’17 was a record for the

first quarter of the year, while the H1’17 total of 17.4Mt was Moma’s best ever first-half mining performance. Tougher

mining conditions in Q3 hampered ore excavation, but conditions are expected to improve in Q4 and the company was

able to sustain finished product output levels using stockpiled HMC.

Total ore excavated vs heavy mineral grade at Moma (annual basis) – 2012A-2026E

Source: company reports, H&P estimates

Total ore excavated vs heavy mineral grade at Moma (quarterly basis) – Q4’12A-Q4’18E


IMPROVED MINING RATES OFFSET GRADE DECLINE

We believe the lessons learned, the impact of COO Ben Baxter over the last three years and measures taken at Moma

can continue to deliver improved mining reliability over the coming quarters. Nevertheless, KMR’s ilmenite production

guidance of ~1Mtpa for 2017-19E remains below the Phase 2 nameplate capacity of 1.2Mtpa; output under the current

mine plan is likely to decline thereafter as heavy mineral grades are expected to fall as WCPs A and B come towards the

end of the Namalope reserves. We show our estimates for intermediate heavy mineral concentrate and final product

output below. Offsetting the decline in HMC grades at Namalope, our base case assumption is that KMR will be

complete the expansion of WCP B as guided in its Q3 trading update, and will adjust the mine plan to move WCP B to

the higher grade Pilivili zone in 2021, instead of the planned move to the lower grade Nataka deposit.

Total HMC output at Moma (annual basis) – 2010A-2026E


Total finished product output at Moma (annual basis) – 2010A-2026E


IMPRESSIVE COST TURNAROUND, BUT FEWER “EASY WINS” REMAIN

Kenmare reports total cash cost per tonne of finished product (“unit cost”), which strips out D&A and other non-cash

items from the total P&L operating costs, as well as adjusting for the impact of lags between production and sales.

Despite operations being in a higher-grade area of the deposit at the time, unit costs peaked at $199/t in 2013, in part

due to additional costs incurred during the ramp-up of the Phase 2 expansion. Since 2013, improving finished product

19.6 24

.034

.127

.5 30.1 33

.6 35.5 38

.238

.436

.938

.238

.238

.438

.236

.3

5.9%

4.6% 4.

8% 5.0%

4.4%

4.3%

4.1%

3.7% 3.

8%3.

8%3.

8%3.

8%3.

8%3.

6%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2012

A20

13A

2014

A20

15A

2016

A20

17E

2018

E20

19E

2020

E20

21E

2022

E20

23E

2024

E20

25E

2026

E

Ore excavated (Mt, lhs)

HMC grade (%, rhs)3.

5 4.2

5.8

6.9 7.

77.

58.

7 9.0

8.8

3.2

8.2 9.

17.

17.

1 7.4

7.2

8.5

8.4 9.

07.

8 8.4

8.4 8.

99.

09.

0

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Q4

2012

A

Q2

2013

A

Q4

2013

A

Q2

2014

A

Q4

2014

A

Q2

2015

A

Q4

2015

A

Q2

2016

A

Q4

2016

A

Q2

2017

A

Q4

2017

E

Q2

2018

E

Q4

2018

E

Ore excavated (Mt, lhs)

HMC grade (%, rhs)

60%

65%

70%

75%

80%

85%

90%

95%

100%

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2009

A20

10A

2011

A20

12A

2013

A20

14A

2015

A20

16A

2017

E20

18E

2019

E20

20E

2021

E20

22E

2023

E20

24E

2025

E20

26E

Total HMC output (Mt)

HMC recovery rate as % of heavy mineral content

473 67

8 63

7 57

5 720 85

5 76

4 903

993

978

1,00

5 91

4 92

3 96

0 96

0 96

3 96

0 85

9

60%

70%

80%

90%

-

500

1,000

1,500

2009

A20

10A

2011

A20

12A

2013

A20

14A

2015

A20

16A

2017

E20

18E

2019

E20

20E

2021

E20

22E

2023

E20

24E

2025

E20

26E

Rutile finished product (kt)

Zircon finished product (kt)

Ilmenite finished product (kt)

Finished product recovery as % of HMC processed


22

output has diluted fixed costs, and alongside a cost reduction programme, has driven unit costs down even as grades

have fallen.

For 2017, KMR is guiding to unit costs of $120-132/tonne of finished product. Given the likelihood of ongoing pressure

on mined grades, and our view that the “easy” gains in boosting mining reliability have already been realised, we do not

model significant further unit cost reductions, with a relatively flat profile over the 2017-19E period, and average

annual increase of ~2.6% over the 2020-2030E period. This is modestly outpacing our underlying inflation assumption

of 2.5% pa due to declining grades, although this is less than the ~3.7% CAGR which we estimate would be the case

without the expansion of WCP B and relocation of WCP B to Pilivili in 2021. Including the potential addition of WCP

C, our forecast long-term unit cost profile would fall by a further ~10% (equivalent to a ~1.5% CAGR to 2030E).

Nonetheless, we forecast the unit cost reductions achieved so far, combined ongoing realised price improvements, will

drive a significant increase in EBITDA per tonne shipped (and hence absolute EBITDA), albeit still below the per tonne

levels seen at the peak of the last pricing cycle in 2012.

Moma cash costs per tonne of finished product ($/t, left scale) vs heavy mineral grade (%, right scale) – 2010-2026E

Source: H&P estimates, company reports

EBITDA per tonne of finished product shipped ($/t, left scale) vs shipments (kt, right scale) – 2010-2026E

Source: H&P estimates, company reports

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

60

80

100

120

140

160

180

200

220

2010

A20

11A

2012

A20

13A

2014

A20

15A

2016

A20

17E

2018

E20

19E

2020

E20

21E

2022

E20

23E

2024

E20

25E

2026

E

Unit cost/tonne of finished product ($/t, est)

HMC grade (%, rhs)

(160)

-

160

320

480

640

800

960

1,120

1,280

(20)

30

80

130

180

2009

A20

10A

2011

A20

12A

2013

A20

14A

2015

A20

16A

2017

E20

18E

2019

E20

20E

2021

E20

22E

2023

E20

24E

2025

E20

26E

Total finished product shipments (kt, rhs)

EBITDA/tonne shipped ($/t, lhs)


23

ATTRACTIVE EXPANSION OPTIONS

As mentioned above, Moma’s “Phase II” expansion project began in 2010 and initially promised to expand ilmenite

output by ~50% to 1.2Mtpa. This was to be achieved through an expansion of WCP A’s nameplate ore processing

capacity from 3,000 tonnes per hour (tph) to 3,500 tph, as well as the addition of WCP B with nameplate capacity of

2,000 tph. However, for a variety of reasons outlined above, operations have never achieved their full nameplate

capacity.

With ~80% of Moma’s cost-base fixed, and spare capacity in the mineral separation plant (which was designed for

1.2Mtpa in output), KMR has several low-capex, high return options to increase production and lower unit costs by

adding capacity to the wet concentrator plants (“WCPs”).

The company is currently conducting studies on several projects to expand HMC output:

- 1 - Expand WCP B’s capacity by 20%: a definitive feasibility study was completed during Q3’17, with a $16m capex

budget and one-year build confirmed. KMR plans to deliver the project in phases throughout 2018, and we

therefore include this upgrade in our base case forecasts.

- 2 – Move to a higher-grade zone: pending conversion of Resources to Reserves, KMR could adjust the current mine

plan to move operations to higher grade zones such as Pilivili or Congolone. The most obvious opportunity to do

this would be in 2021 when WCP B was scheduled to transition to Nataka from its current location in the

Namalope Reserve. The company is in the process of proving the Pilivili and Congolone Resources to the Reserve

category, and we have assumed in our base case that WCP B does move to Pilivili instead of Nataka in 2021,

boosting its mined grade profile.

- 3 – add a third concentrator: KMR has outlined the potential to establish a smaller, third wet concentrator plant

(“WCP C”), with 1,000tph dredging and processing capacity. A pre-feasibility study is currently underway with

the company having previously indicated that it expects combined total capex for both options 1 and 2 to come to

~$100m, on the basis of a 2016 scoping study. We do not include WCP C in our base case but have attempted to

model its potential impact, assuming a hypothetical $90m budget and three-year build from 2019-2021.

Overall, with an expanded WCP B and the addition of WCP C, “name-plate” wet-concentrating capacity, fed by both

dredging and dry mining, would increase from the (never fully utilised) ~5.5ktph at present to ~6.9ktph. The location of

WCP C could also be chosen to optimise heavy mineral head grades in the ore processed, partially offsetting an ongoing

decline in the mined grades in the Namalope deposit.

Assuming total capex of ~$16m for the WCP B expansion and $90m for WCP C, and a long-term ilmenite price of

$200/t, we estimate the potential expansions and mine plan adjustments would have a payback period of ~5 years and

achieve a combined IRR of 54%, adding 202p/share in value on a DCF basis (Sep’18E), although it should be noted we

already include 130p of this value in our base case NPV.

If KMR chooses to go down the path of expanding WCP B, moving to Pilivili and adding WCP C, we estimate a

potential boost to long-term ilmenite production of ~370ktpa, +50% versus the likely trajectory if KMR were to stick

with the current operations and mine plan. Compared to ~1Mtpa ilmenite output for 2017-19E, we estimate production

would peak at around 1.2Mtpa and average ~1.1Mtpa over 2021-2030E. Fixed cost dilution through full utilisation of

the MSP should also offset the impact of declining grades, lowering unit costs and boosting EBITDA per tonne.

Shipments (kt, lhs) and EBITDA/t ($/t, rhs): base case, with expanded WCP B, move to Pilivili in 2021 and with WCP C addition

Source: Company reports; H&P estimates. *Instead of move to Nataka under current plan.

Cash cost/tonne of finished product ($/t): base case, with expanded WCP B, move to Pilivili in 2021 and with WCP C addition

Source: Company reports; H&P estimates. *Instead of move to Nataka under current plan.

0

500

1000

1500

2009

A20

10A

2011

A20

12A

2013

A20

14A

2015

A20

16A

2017

E20

18E

2019

E20

20E

2021

E20

22E

2023

E20

24E

2025

E20

26E

2027

E20

28E

2029

E20

30E

+WCP C addition (kt)+WCP B move to Pilivili* (kt)+WCP B expansion (kt)Current operations/mine plan (kt)H&P base case ilmenite output

80

130

180

230

2010

A20

11A

2012

A20

13A

2014

A20

15A

2016

A20

17E

2018

E20

19E

2020

E20

21E

2022

E20

23E

2024

E20

25E

2026

E20

27E

2028

E20

29E

2030

E

Current operations/mine plan ($/t)

+WCP B expansion ($/t)

+WCP B move to Pilivili (H&P base case) ($/t)

+WCP C addition ($/t)


24

NEW WCP APPEARS AFFORDABLE BUT MORE CONSERVATIVE OPTIONS STILL ON THE TABLE

Based on the DFS capex estimate of $16m for the expansion of WCP B, as well as previously communicated

preliminary, scoping study-level guidance of ~$90m in total capex for WCP C, we believe the projects should be easily

covered by projected operating cash flows in the coming years, with no need for additional debt or equity funding.

Capex assumptions ($m): base case, with expanded WCP B and with WCP C addition

Source: H&P estimates, Company reports. * Assuming WCP B moves to Pilivili instead of Nataka in 2021; note there is no incremental capex for this move as the plant would in any case have to be moved from Namalope to Nataka in 2021 under the current mine plan.

FCF generation (as % of market cap): base case, with expanded WCP B and with WCP C addition


However, WCP C is still only at the prefeasibility study stage. Alongside these projects, KMR also has options to

improve Moma’s grade profile by moving WCP B to higher grade areas such as Congolone or Pilivili – which have

indicated heavy mineral resource grades of 3.9% and 4.2%, respectively - instead of the scheduled transitions to the

Nataka deposit (with a reserve grade of just 3.1% heavy minerals) in 2021-22 and 2025-26 respectively.

The company stated at its H1’17 results on 22nd August that it is investigating options to optimise production volumes

whilst minimising or deferring near-term capital spend. An accelerated move to a higher-grade zone could be one such

option. While it would involve forfeiting some free cash flow while the WCPs are relocated, it would result in higher

HMC production without requiring additional dredging capacity, thereby optimising the volumes fed to the Mineral

Separation Plant. Given the capex overruns and ramp-up delays experienced during the Phase 2 expansion, we believe

management may choose this more conservative approach to optimising HMC production, deferring additional capital

expenditures to maximise medium-term cash flow.

BALANCE SHEET IMPROVEMENT OFFERS MEDIUM-TERM CAPITAL RETURN POTENTIAL

Struggling in the face of inconsistent power supply, falling feedstock prices and spiralling interest costs, KMR’s net debt

hit a peak of $375m in mid-2016, while EBITDA was, at the time, in negative territory. However, operations have

stabilised in the last 12 months, prices have recovered and the H2’16 debt restructuring has reduced net interest to

more manageable levels. We forecast positive free cash flow generation from 2017E onwards, to greater or lesser degree

depending on decisions on growth projects. Under our base case scenario, we forecast net debt to fall to ~$19m by end

Dec’17E and a positive net cash balance of ~$62m by Dec’18E.

Gross debt should also begin to fall in 2018 from the current $100m as scheduled repayments on the amended debt

facilities resume. Even after accounting for the cash sweep mechanism on the debt, we believe spare cash should be

available by end 2018E for Management to consider commencing capital returns to shareholders, in-line with its stated

medium-term aim.

0

25

50

75

100

125

150

175

200

2008

A20

09A

2010

A20

11A

2012

A20

13A

2014

A20

15A

2016

A20

17E

2018

E20

19E

2020

E20

21E

2022

E20

23E

2024

E20

25E

2026

E20

27E

2028

E20

29E

2030

E+WCP C addition ($m)



0%

10%

20%

30%

40%

2017

E

2018

E

2019

E

2020

E

2021

E

2022

E

2023

E

2024

E

2025

E

2026

E

2027

E

2028

E

2029

E

2030

E

FCF yield - current operations (%)

+WCP B expansion (%)

+WCP B move to Pilivili* (H&P base case) (%)

+WCP C addition (%)


25

Net (debt)/cash profile ($m): base case, with expanded WCP B, move to Pilivili and with WCP C addition

Source: H&P estimates, Company reports. *Instead of move to Nataka under current plan.

Debt repayment profile: scheduled repayments & forecast cash sweep under H&P base case assumptions


DCF ANALYSIS & PRICE TARGET DERIVATION

Our 500p price target is derived from a discounted cash flow analysis using a nominal 16% weighted average cost of

capital, equivalent to 13.2% in real terms. We apply a target multiple of 1.0x to our $589m DCF valuation (post-debt) of

Kenmare’s existing operations, and a target multiple of 0.7x to our DCF valuations for the WCP B expansion project and

the potential addition of WCP C. Rounding to the nearest 10p, this gives a Sep’18E price target of 500p per share (using

spot USD/GBP FX of $1.32/£). This implies ~56% upside from KMR’s current share price of 321p.

DCF-based price target derivation for KMR using 16% WACC

16% WACC DCF $m Target P/NPV Valuation $m USc/sh GBp/sh

Current Moma operations - DCF $452.7 1.0X $452.7 413 313

WCP B expansion - DCF $53.3 1.0X $53.3 49 37

WCP B move to Pilivili - DCF $134.2 1.0X $134.2 122 93

Sep'18E net cash/(debt) $39.8 1.0X $39.8 36 28

NPV - base case estimates $680.0

$680.0 620 470

WCP C addition - DCF $105.1 0.5X $52.6 48 36

Valuation / Price target (rounded to nearest 20p) $785.1 $732.6 668 500

Source: H&P estimates. NPV including growth options & PT vs current share price

Source: H&P estimates, Bloomberg. Notes: *Estimated NPV uplift from moving WCP B to the Pilivili zone in 2021 instead of current planned move to

Nataka, assuming Pilivili Indicated Resource grade of 4.2% total heavy minerals can be translated to Reserves. **Price Target is rounded to nearest 20p.

We apply a 16% nominal weighted average cost of capital to KMR’s free cash flows, calculated based on the company’s

current interest rate on its amended debt facilities (i.e. 6m US LIBOR + 475 basis points), a beta of 1.26x, an equity

market risk premium of 6.7% and a Mozambique country risk premium of 6%. We assume a target gearing of 10% debt

to total capital.

As outlined above, we have assumed long-term real prices of $200/t for ilmenite and $1,200/t for zircon. While we

believe these to be appropriate assumptions, we provide a scenario analysis below of our NPV per share for Moma’s

current operations applying different ilmenite, zircon and WACC inputs. At a 16% WACC, we believe KMR’s current

-600

-400

-200

0

200

400

600

800

1000

2008

A

2009

A

2010

A

2011

A

2012

A

2013

A

2014

A

2015

A

2016

A

2017

E

2018

E

2019

E

2020

E

2021

E

2022

E

2023

E

2024

E

2025

E

Net cash/(debt) - current operations ($m)



+WCP C addition ($m)

0

5

10

15

20

25

30

35

40

2017E 2018E 2019E 2020E 2021E 2022E

Scheduled minimum debt repayment ($m)Accelerated repayments with cash sweep ($m)

313470

543 500

321

3793 28

73

0

100

200

300

400

500

600

DC

F/s

har

e -

curr

ent

oper

atio

ns

+WC

P B

exp

ansi

on

+WC

P B

mov

e to

Pil

ivil

i*

+Sep

'18E

net

cas

h

Sep'

18E

NP

V -

bas

e

case

+WC

P C

ad

dit

ion

Sep'

18E

NP

V -

ups

ide

case

Pri

ce T

arge

t**

assu

min

g 0.

5x W

CP

C

KM

R s

har

e p

rice

13-O

ct


26

share price is discounting a long-term ilmenite price of ~$180/t, with little value ascribed to the potential expansion

projects.

Derivation of 16% weighted average cost of capital assumption

WACC calculation

US risk free rate 2.2%

KMR credit risk spread (back calc) 4.0%

Cost of debt 6.2%

Effective tax rate 0.0%

Post-tax cost of debt 6.2%

Beta applied 1.26

Equity risk premium 6.7%

Mozambique risk premium 6.0%

Cost of equity 16.8%

Target gearing (debt/[debt+equity]) 10.0%

WACC 16.0%


Sensitivity of Sep’18E NPV/sh (GBp) to WACC & LT ilmenite price Long-term ilmenite price from 2020E ($/t, real)

160 180 200 220 240

Nom

inal

WA

CC

12% 398 508 619 730 841

14% 351 443 535 627 719

16% 315 392 470 548 625

18% 286 352 419 485 552

20% 262 320 378 436 493

Sensitivity of Sep’18E NPV/sh (GBp) to WACC & LT zircon price

Long-term zircon price from 2020E ($/t, real)

840 945 1,050 1,155 1,260 N

omin

al W

AC

C

12% 536 578 619 661 703

14% 465 500 535 570 605

16% 411 440 470 500 529

18% 368 393 419 444 470

20% 333 356 378 400 422

Source: H&P estimates, Bloomberg Source: H&P estimates, Bloomberg


27

FINANCIALS – SUMMARY P&L, INCOME STATEMENT & CASH FLOW

Source: H&P estimates, Company reports, Bloomberg


28

BOARD OF DIRECTORS

Name Role Tenure

(years) Other Directorships

Steven James Mctiernan Chairman (non-exec)

Principal, Sandown Energy Consultants Ltd

Board Member, Energy Solutions Inc

Michael Francis Carvill Managing Director 32 Director, Vico Properties Plc

Director, Chatom Investments Ltd

Director, Portland Gate Ltd

Director, Stelle Ltd

Director, Empson Road Ltd

Director, Carvill Scotland Ltd

Terence Fitzpatrick Technical Director 24 n/a

Anthony Mccluskey

"Tony" Finance Director 18 n/a

Peter Bacchus Board Member (non-

exec) 0.2 Board Member, Galaxy Resources Ltd

Board Member, Gold Fields Ltd

Board Member, Nord Gold Se

Graham Martin Board Member (non-

exec) 1 n/a

Timothy Keating "Tim" Board Member (non-

exec) 1

Head:Mining Invsmt Private Equity, State General Reserve

Fund

Board Member, Kore Potash Ltd

Elizabeth Headon Board Member (non-

exec) 6 n/a

Gabriel Smith Board Member (non-

exec) 4 n/a

OTHER SENIOR MANAGEMENT

Name Role Tenure (years) Other Directorships

Ben Baxter Chief Operations Officer 3 n/a

Deirdre Corcoran Financial Controller & Company Secretary 17 n/a

Jeremy Dibb Corporate Development & Investor Relations 3 n/a

Gareth Clifton Mozambique Manager 16 n/a

Eamonn Keenan Group General Manager, Sales & Marketing 23 n/a


29

APPENDIX – MINERAL SANDS PRIMER

WHAT ARE MINERAL SANDS?

The term “mineral sands” refers to beach sand deposits which contain useful concentrations of “heavy minerals” such as

ilmenite, rutile and zircon. These minerals originally form as crystals within igneous rocks (e.g. basalt or granite). As

the rocks are weathered and eroded, the minerals are washed down to the coast via rivers or glaciers.

Heavy minerals have a relative density of between 4 and 5.5, compared to ~2.65 for quartz (which forms the majority of

ordinary beach sand). Consequently, over millions of years, waves and wind carry away the lighter quartz particles,

leaving behind the useful heavy minerals.

Some beach sand deposits are amenable to dredge mining – wherein an area of the sand is flooded and excavated using

dredges – or dry mining techniques (which are often used where there are higher levels of clay). The heavier particles

can then be separated from the lighter sands using gravity separation, producing a “heavy mineral concentrate” (HMC).

Dredge mining at Moma


The HMC is then further subdivided, often using magnetic and electrostatic separation, into various saleable mineral

products: ilmenite, rutile and leucoxene, which contain titanium dioxide; zircon, a form of zirconium silicate; and

monazite, a phosphate mineral containing oxides of rare earth metals and thorium.

Name Formula % TiO₂ Colour Density (g/cm3) Crystal form Transparency

Ilmenite FeTiO₃ 52.6% Black 4.50-5.00 Hexagonal Opaque

Perovskite CaTiO₃ 58.0% Black, brown, reddish-brown,

yellow 4.26-4.48 Monoclinic

Rutile

TiO₂ 95.0% Reddish-brown, red, yellowish,

black

4.23-5.50 Tetragonal Opaque or sub-

transparent Anatase 3.82-3.97 Tetragonal

Brookite 4.08-4.18 Orthorhombic

Titanite CaTiSiO₅ 35-40% Brown, green, grey, yellow,

black Monoclinic Transparent to opaque

http://file.scirp.org/pdf/MSA_2014052916520642.pdf

END USES OF ILMENITE & RUTILE: TIO2 PIGMENT & TITANIUM METAL

The heavy minerals ilmenite, rutile and leucoxene contain titanium dioxide and are collectively known as titanium

dioxide (TiO2) feedstocks. TiO2 is a non-toxic inert product with a very high refractive index, which gives it a superior

ability to disperse light and create a brilliant white colour. Titanium dioxide pigments account for ~90% of demand (in

terms of contained TiO2 by weight). The pigments are used in the manufacture mainly of paints, but also other

coatings, papermaking, plastics and cosmetics. TiO2 pigment can have one of two crystalline forms - “anatase” or

“rutile”, each with slightly different properties determining their suitability for the various end-uses.

Titanium metal production accounts for ~6% of the end-use of TiO2 units by weight. Titanium has a very high strength

to weight ratio, a high melting point and is very resistant to corrosion. This makes it a preferred metal for many

applications including in jet engines, power and desalination plants and many medical and electronic uses. Rutile is also

used in welding electrodes, accounting for the remaining ~4% of demand for TiO2 units.

http://file.scirp.org/pdf/MSA_2014052916520642.pdf


30

TiO2 feedstocks: 90% of demand for TiO2 units is from TiO2 pigments

TiO2 pigment: 58% of TiO2 pigment is used in coatings (paint)

Coatings/paint: Mainly architectural (43%) & general industrial (28%) uses

Source: PPG presentation

MINERAL SANDS VALUE CHAIN

Ilmenite, rutile and leucoxene can, broadly speaking, follow one of two processing paths to produce pigment, known as

the “sulphate process” or “chloride process”.

The sulphate process employs simpler technology and can handle lower grade ores (hence lower grade ilmenites are

often referred to as “sulphate ilmenites” and higher grade as “chloride ilmenites”). However, the sulphate process is

generally costlier on a unit opex basis, and can be more capital intensive depending on the plant set up required. The

chloride process, first commercialised by Du Pont in the 1950s, was developed later than the sulphate process, and

offers waste disposal, energy and quality advantages.

Often, in both the sulphate and chloride processes, lower grade ilmenite needs to first be upgraded using a smelting

process to remove the iron content (which can be sold separately as a pig iron by-product). The smelter slag is known as

“sulphate slag” or “chloride slag” depending on the pigment production process for which the slag is destined to be used.

“Sulphate slag” generally contains around 72-85% TiO2, whereas “chloride slag” contains ~85-87%.

From raw material to end use – mineral sand processing routes


TiO2

pigme

nt 90%

Titanium

metal 6%

Welding electrode

4%

Coatings

(paint)

58%

Plastics

22%

Paper

& pulp

9%

Inks

4%

Fibres

2%Other

5%

Architectural

43%

General

Industrial

28%

Auto

OEM

8%

Refinish

6%

Protective &

Marine 12%

Packaging

2%Aerospace

1%


31

SULPHATE PROCESS

In the sulphate process, a blend of feedstocks (including slag and ilmenites) is “digested” using concentrated sulphuric

acid. The acid reacts with the unwanted iron to produce iron sulphate which can be separated from the dissolved

titanium dioxide.

The three key chemical reactions in the sulphate process are shown below:

1. FeTiO₃ + 2H₂SO₄ → TiOSO₄ + FeSO₄ + H₂O (Dissolution of raw material)

2. TiOSO₄ + H₂O → TiO₂n.H₂O + H2SO₄ (TiO₂ precipitation)

3. TiO₂n∙H₂O → TiO₂+ nH₂O (TiO₂ calcination and conditioning)

The sulphate process accounts for approximately 40-45% of total TiO2 pigment output. The process employs simpler

technology than the chloride process, and consequently has seen significant growth in recent decades due to the rapid

expansion of the Chinese pigment industry. However, the use of lower grade feedstocks leads to larger quantities of iron

sulphate waste products, while the pigment end-product is in the form of “anatase” TiO2, which is more suitable for use

in paper, ceramics and inks, but is considered lower-quality for most other applications.

CHLORIDE PROCESS

The chloride process generally requires a higher TiO2 grade in the feedstock input blend, and therefore normally uses a

significant proportion of rutile or synthetic rutile (90-95% TiO2) along with higher grade chloride ilmenites and slags.

The TiO2 content is first “reduced” in a fluid bed reactor using coke (i.e. carbon) as a reducing agent along with gaseous

chlorine at a temperature of 900-1000°C. This produces a gas stream containing oxides of carbon and titanium

tetrachloride [TiCl4] (as well as chlorides of iron and other metals depending on the impurities in the feedstock). As the

gas is cooled, the other metal chlorides can be separated out by condensation. The TiCl4 is cooled further to produce a

pure liquid; this can then be oxidised at a high temperature (>1500°C) to produce TiO2 and chlorine gas which is reused

at the beginning of the process.

The main chemical reactions of the chloride route are as follows:

1. 2TiO2 + 3C + 4Cl₂ → 2TiCl4 + 2CO + CO₂

2. TiCl₄ (impure gas) → TiCl₄ (pure liquid)

3. TiCl₄ + O₂ → TiO2 + 2Cl₂

Although the chlorine associated with the titanium tetrachloride is recycled in the process, the chlorine associated with

the metal impurities (usually iron) is not recovered. Overall chlorine consumption therefore relates to the level of

impurity in the feedstock: on average, approximately one tonne of chlorine is required to produce 5-6 tonnes of TiO2.

The chloride process is considered environmentally safer and is less labour intensive than the sulphate process. It also

allows tighter quality control and produces TiO2 pigment in the “rutile” crystalline form, making it more suited to

higher value application such as automotive paint and manufactured goods.

Currently the chloride process accounts for ~55-60% of global pigment output. Although chloride pigment supply

growth has been slower than sulphate in recent decades due to the development of the Chinese industry, in 2013 this

trend began to reverse with the commissioning of several fluidised-bed plants. Environmental concerns, as well as,

potentially, a more recent reduction in sulphate ilmenite supplied as a by-product of domestic Chinese iron ore mining,

could also have contributed to the reversal in the trend toward sulphate pigment capacity. Furthermore, even though

China is a large net exporter of pigment in overall terms, these are made up mostly of lower-grade sulphate pigment

products; the expansion of chloride pigment facilities is an effort to reduce China’s ongoing reliance on imports of

higher-quality pigment.

PIGMENT DEMAND OUTLOOK STRONGLY CORRELATED TO GDP

With many of the end-applications of TiO2 pigment strongly associated with improving standards of living – paint,

plastics etc. – it is perhaps unsurprising that demand growth has shown a strong link to GDP (albeit with greater swings

during times of economic recession and recovery due to the impact of inventory cycles.)


32

Global per capita TiO2 pigment demand growth versus GDP – inventory

cycles have caused exaggerated swings in demand in recent years…

…but longer-term correlation of pigment demand with GDP per capita is

relatively high


A “LATER-CYCLE” PRODUCT: CHINA STILL ONLY 25% OF DEMAND

In comparison to many other commodities, TiO2 is often considered a “later-cycle” product, with demand growth

remaining strong into the later-stages of economic development due to pigment’s greater use in consumer products.

Indeed, China still only represents ~25% of global demand, versus over 50% for iron ore, aluminium and copper.

China’s share of global demand for key basic materials


China’s relatively low share of global demand is all the more surprising given the “offshoring” of consumer goods’

supply chains from the developed to the developing world. From 2000-2015 Chinese TiO2 pigment demand grew at a

CAGR of ~10% pa, while N American demand shrank at a rate of 1.5% and Europe (including CIS) grew at just 0.5%.

Despite significant room for further expansion, when plotted against GDP growth, per capita TiO2 usage in China has

arguably outpaced the normal trend for developing economies. We therefore assume the pace of Chinese demand

growth is likely to moderate in coming years, albeit this could be offset by faster growth in other Asian economies and

South America as Brazil comes out of recession.

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

2001

A20

02A

2003

A20

04A

2005

A20

06A

2007

A20

08A

2009

A20

10A

2011

A20

12A

2013

A20

14A

2015

A20

16E

2017

E20

18E

2019

E20

20E

Global TiO2 pigment consumption/capita - %YoY

Global GDP/capita (USD, real 2005 prices) - %YoY

R² = 0.349

0.60

0.65

0.70

0.75

0.80

0.85

3000 4000 5000 6000 7000

TiO

₂p

igm

ent

use

per

cap

ita

(kg)


Global demand - hist

Global demand - est

Linear (Global demand - hist)

74%

55%50% 49% 47%

44%41%

30% 27% 26% 25%

14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Iron ore

(seaborne)

Aluminium Copper Zinc Nickel Steel Lead Gold Platinum Palladium TiO2

Pigment

Silver


33

TiO2 pigment use vs GDP per capita

Source: H&P estimates, Bloomberg, Company reports

PIGMENT DEMAND FORECASTS

Global pigment demand has grown at a CAGR of 2.1% from 2000-2015, with China accounting for the overwhelming

majority of demand growth (at a CAGR of 10%). The demand growth trend has been punctuated by several short, sharp

downward adjustments, most notably during the global financial crisis in 2008-09, as well as a severe destocking cycle

in 2012. In 2015 a less severe slowdown in demand occurred on the back of a cooling Chinese economy and recessions

in South America.

Looking forwards, while we expect US and European demand to remain fairly stagnant, and Chinese demand growth to

begin undershooting its GDP progression, as outlined above we believe a recovery in S America and catch-up in the

pace of demand growth in APAC ex-China should allow for a ~2% CAGR in global demand over the 2015-2020 period.

TiO2 pigment demand by region: we expect ~2% CAGR in demand to continue, primarily driven by APAC

APAC’s share of global pigment demand has increased in the last two decades, displacing N America & Europe


PAINT REMAINS A RELATIVELY FRAGMENTED INDUSTRY

The split of global pigment demand broadly reflects the end-demand for paint and coatings, with just over 40% of

coatings demand coming from APAC and just under 50% from EMEA and N America. PPG estimates the global

coatings market at around $130bn; based on 2016 revenues, Sherwin-Williams (which recently merged with Valspar) is

the largest coatings player, with around 12% market share. While certain niches may be more concentrated, coatings,

in general, appears to be a relatively fragmented industry, with the top five players representing just 37% of the global

market, on our estimates. It remains to be seen whether this picture will change significantly in the coming years if the

recent wave of consolidation continues in the paints and chemicals industry more widely. While PPG’s attempts to

acquire Akzo Nobel have been rebuffed, for now, Sherwin-Williams successfully completed the acquisition of Valspar

in June this year.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

0 5000 10000 15000 20000 25000 30000 35000 40000 45000

TiO

2 p

igm

ent

use

per

cap

ita

(kg)


China - hist

China - est

N America - hist

N America - est

Europe - hist

Europe - est

APAC ex China - hist

APAC ex China - est

C & S America - hist

C & S America - est

ME & Africa - hist

ME & Africa - est

>80% of world

population, <60% of

<20% of world population, >40%

of global pigment demand

0

1000

2000

3000

4000

5000

6000

7000

2000

A

2002

A

2004

A

2006

A

2008

A

2010

A

2012

A

2014

A

2016

E

2018

E

2020

E

China APAC ex China C & S America

Mid E & Africa Europe N America

2.2% CAGR

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000

A

2002

A

2004

A

2006

A

2008

A

2010

A

2012

A

2014

A

2016

E

2018

E

2020

E

China APAC ex China C & S America

Mid E & Africa Europe N America


34

Global paint demand by region: split is broadly in-line with the regional split of demand for TiO2 pigment

Source: PPG company presentations

Paint industry market share by sales (assuming ~$130bn total market size); top 5 players under 40% of market

Source: Bloomberg, PPG, H&P estimates

The paint industry is seeking to sustain margins which have been on an improving trend for several years, but have

come under pressure in 2017 as raw material prices have recovered. Both PPG and Sherwin-Williams commented in

their Q2 results that they intend to attempt to pass on these raw material costs in the form of higher selling prices. If

paint producers are unable to push prices higher, pressure may come back on to raw material suppliers such as TiO2

pigment producers. However, any pressure on TiO2 pigment prices is likely to be mitigated by the fact that TiO2 is still

only ~15-25% of the coating producers’ cost base, as shown below right. Furthermore, despite recent mergers in paints

and coatings, we note pigment production remains a more concentrated industry, with the top five producers now

supplying nearly 70% of the market post the Tronox-Cristal merger. Particularly outside China, where pigment plant

utilisation rates are healthy, we believe the balance of power is in favour of the pigment suppliers.

Median paint producer EBITDA margins Q1’06– Q2’17: recent margin pressure follows multi-year upturn

Source: Bloomberg. *Median of publicly available quarterly EBITDA margins reported by PPG Industries Inc, Sherwin-Williams, Axalta Coating Systems, RPM International, Ferro Corp, Asian Paints, Nippon Paint, Kansai Paint, Akzo Nobel, Valspar.

Illustrative cost base for architectural and industrial coatings – TiO2 pigment is only 15-25% of cost base

Source: PPG company presentations; H&P estimates

PIGMENT SUPPLY: AMPLE CAPACITY IN CHINA, TIGHTNESS EX CHINA

In spite of a relatively supportive demand outlook, it should be noted that global pigment production capacity appears

more than sufficient to feed consumption in the short to medium-term, with utilisation likely to hover around the

~70% level for the foreseeable future. This is for the most part a legacy of China’s rapid buildout of sulphate pigment

facilities in the last 10-15 years, with the trend only recently shifting towards chloride capacity.

US &

Canada

17%

EMEA

32%

APAC

43%

LatAm

8%

Akzo

Nobel

coatings

6%PPG 11%

Sherwin-

Williams/Valspar

12%

BASF

coatings 3%Nippon

Paint 3%

RPM 4%

Axalta 3%

Other

58%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Mar

-06

Jan

-07

Nov

-07

Sep-

08

Jul-

09

May

-10

Mar

-11

Jan

-12

Nov

-12

Sep-

13

Jul-

14

May

-15

Mar

-16

Jan

-17

Median coatings/paint producer EBITDA margin

Titanium

Dioxide Titanium

Dioxide

Resins &

LatexResins &

Latex

Solvents &

Pigments

Solvents &

PigmentsAdditives

Additives

Manufacturing

Manufacturing

Packaging

PackagingDistribution

Distribution

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Architectural coatings Industrial coatings


35

While this over-supply of sulphate pigment capacity should have no direct consequences on TiO2 feedstock demand, it

does, in our view, mean the pigment market is likely to remain susceptible to deep inventory cycles, in turn sending

waves through the feedstock market.

It should be noted that the under-utilisation is, unsurprisingly, most acute in the sulphate pigment industry,

particularly in China. Looking forwards, as China seeks to redress the balance between chloride and sulphate -

potentially even closing capacity - this should provide a relative advantage to feedstock suppliers such as Kenmare

whose product can be used in both the sulphate and chloride pigment production processes.

Outside China, industry participants have reported high pigment capacity utilisation rates, with limited spare capacity

to fill any supply gaps as a result of Chinese shutdowns. It is therefore expected that the inventory cycle should remain

on a tightening trend in the short to medium-term, supporting pigment producer margins.

Demand for TiO2 from pigments, metal and other, & implied global pigment plant utilisation rate -2010-20E


Split of sulphate and chloride pigment capacity: China predominantly sulphate, vs chloride in rest of world


Despite accounting for around 40% of capacity, we believe China’s share of global TiO2 pigment output was only

around 28% in 2015 – testament to the level of underutilisation in the Chinese industry. Within China’s share, the

largest player is Lomon Billions (a merger between Sichuan Lomon Titanium and Henan Billions) at around 8-9% of

global supply.

Ex-China, the key suppliers are: Chemours (formerly DuPont’s pigment division which was spun off prior to DuPont’s

merger with Dow Chemicals), with around 19% global market share; Cristal Global with around 11% share, which has

agreed a merger with Tronox (on 7%) to form the second largest player; Venator, formerly Huntsman’s pigments and

additives division before its IPO in August 2017, on 13% share; and Kronos on 9%.

0%

20%

40%

60%

80%

100%

0

1000

2000

3000

4000

5000

6000

7000

8000

2010

A

2011

A

2012

A

2013

A

2014

A

2015

A

2016

E

2017

E

2018

E

2019

E

2020

E

Metal & other demand (TiO2 equivalent, kt - lhs)

Pigment apparent demand (TiO2, kt - lhs)

Required global pigment capacity utilisation (% - rhs)

0%

20%

40%

60%

80%

100%

2010

A

2011

A

2012

A

2013

A

2014

A

2015

A

2016

E

RoW - chloride pigment cacpacity

RoW - sulphate pigment cacpacity

China - chloride pigment capacity

China - sulphate pigment capacity


36

Major TiO2 pigment producers – supply more consolidated than the paint industry


Median pigment producer* EBITDA margins Q1’14– Q2’17: recent upturn

Source: Bloomberg Median of publicly available quarterly EBITDA margins reported by Chemours, Tronox Ltd, Cristal Pigmentos do Brasil amd Kronos Worldwide Inc.

TIO2 FEEDSTOCK DEMAND

TiO2 feedstock demand is effectively a function of TiO2 pigment production, which in turn is a function of end

demand for pigment. However, how end demand for pigment feeds through to differing demand growth rates for the

various types of TiO2 feedstocks depends on several factors, including:

• Pigment & feedstock inventory cycles: apparent demand for pigments can undershoot real end demand during

pigment destocking cycles (and vice versa), reducing required pigment production and in turn impacting on

feedstock demand. Similarly, apparent demand for feedstocks can undershoot pigment production during feedstock

destocking cycles. Definitive data on pigment and feedstock inventory levels is difficult to source and compile;

market observers are therefore reliant upon commentary from industry players to judge the current impact of

inventory movements on demand. At present, we believe the pigment inventory cycle still favourable. As noted by

Iluka with its semi-annual results, pigment inventories remain below seasonal norms, which should mean pigment

production reflects restocking demand as well as underlying growth in end use. Feedstock demand has also

benefitted from restocking; however, as prices recover we assume the pace of restocking could slow in 2018E,

dampening apparent demand growth.

• The relative economics/popularity of the chloride vs sulphate process: China is shifting to the chloride process,

increasing reliance on imported ilmenite. Over the last two decades the rapid expansion in Chinese pigment

capacity has almost exclusively focused on the less technologically-complex sulphate production route. However,

since 2012, China has begun to add chloride pigment capacity – both for environmental reasons and to improve

self-sufficiency in higher quality pigments. Very little of China’s domestic feedstock supply – most of which is

mined in inland provinces in Southwest China – is appropriate for direct use in the chloride process due to low

grades. New chloride capacity is therefore predominantly being built in coastal provinces and will rely more

heavily on imported feedstocks; this in turn is positive for producers of higher grade TiO2 feedstock products such

as rutile and synthetic rutile, as well as producers such as KMR with the ability to supply ilmenite directly to the

chloride process.

• Pigment plant utilisation rates and relative feedstock price levels: when pigment plant utilisation rates are low,

pigment producers’ first response to an increase in demand is to increase the volume of cheaper, lower grade

feedstock material processed, favouring direct-feed ilmenite feedstock products. Ilmenite demand and pricing

therefore tends to react first during periods of recovering pigment demand. As plant utilisation rates increase,

further increases in pigment output require higher-grade feedstocks such as slag, synthetic rutile or rutile, shifting

demand growth in favour of these products – especially if ilmenite prices have already recovered strongly. Once

this point has been reach, further increases in ilmenite demand stem more from increases in slag output. As with

inventory levels, independent data on current pigment plant utilisation rates is difficult to source; however,

industry sources suggest European and North American pigment plants are currently running at close to full

utilisation, as noted by Venator in its recent IPO prospectus.

Chemours

(ex Du Pont)

19%

Cristal 11%

Tronox 7%

Venator (ex

Huntsman)

13%Kronos 9%

Lomon

Billions 9%

Other China

19%

Other 13%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Mar

-16

Sep-

16

Mar

-17

Median pigment producer EBITDA margin


37

TIO2 FEEDSTOCK SUPPLY

The supply dynamics for titanium dioxide feedstock are somewhat complicated by the wide variety of feedstock

qualities and the multiple different processing routes to produce TiO2 pigment. Ilmenite and rutile should, in our view,

be seen more as chemical feedstocks than true commodities:

• By-product output skews cost curves: As different deposits contain different relative concentrations of the various

heavy minerals, mineral sands miners often have one main product with the other minerals only produced as by-

products of the process. (e.g. zircon is a by-product of KMR’s ilmenite production; rutile is a by-product of Iluka’s

zircon production, etc.). Ilmenite is also found in hard rock deposits and as a by-product of magnetite iron ore

mining. The significant contribution of by-products in the mineral sands industry can have the effect of reducing

the elasticity of supply, as low prices do not necessarily dis-incentivise output (and vice versa).

• Not all ilmenite is created equal: The picture is further complicated by the number of different processing routes

raw minerals to end products; ilmenite is often, but not always, upgraded to titanium slag, an intermediate product

before the pigment production phase. Some ilmenite is also consumed in the production of synthetic rutile.

Pigment is manufactured using either the sulphate or chloride processes, and not all ilmenite is appropriate for use

in each process (and hence a distinction is often made between “sulphate ilmenite” and “chloride ilmenite”).

• Vertical integration reduces elasticity of feedstock demand in strong markets and elasticity of supply in weak

markets: Vertical integration is a common feature of the industry, with pigment producers often also owning slag

plants and mining assets. Pigment production plants are often configured to rely on a certain blend of input

material, usually from a combination of their own captive sources and trusted third-party suppliers under long-

term volume contracts. Pigment plants’ ability to switch to cheaper feedstock sources at short notice in response to

higher prices is limited. In weaker markets, some vertically integrated producers reduce their own feedstock

consumption and divert feedstock supply to the open market. This can make mineral sands a more volatile market

than would be expected as added supply can enter the market with lower price requirements at the wrong time in

the cycle.

TiO2 unit contribution by feedstock type* – 2016E

Source: H&P estimates. *In terms of TiO2 content arriving at pigment plant.

Typical TiO2 feedstock product specifications

TiO2 FeO Fe₂O₃ FeO:Fe₂O₃ Cr₂O₃

Premium Indian Ilmenite 52% 34% 13% 2.6 0.04%

East Australian Ilmenite 51% 25-29% 16-19% 1.5 0.30%

East African Ilmenite 48% 26% 20% 1.3 0.09%

Southeast African Ilmenite 52% 21% 28% 0.8 0.09%

West African Ilmenite 53% 19% 23% 0.8 0.16%

Premium Rutile 95%

5%

Standard Rutile 92%

8%

Leucoxene 90-91%

Synthetic Rutile 88-95%

Sulphate slag 70-90%

Chloride slag 85-87%

Upgraded slag (UGS) 95%

Source: Sheffield Resources, Iluka Resources, Materials Sciences and Applications: “A Review of the Production Cycle of Titanium Dioxide Pigment”, May 2014 (http://file.scirp.org/Html/1-7701335_46456.htm)

KEY FEEDSTOCK SUPPLIERS

Kenmare is the third largest titanium feedstock supplier behind Rio Tinto (in Madagascar, South Africa & Canada) and

Tronox (South Africa and Australia), soon to be merged with Cristal.

There are a few large producers in China and many smaller producers in India, Ukraine, Russia and Vietnam. They are

generally higher cost, being small scale with the Chinese production often a by-product of high-cost iron ore mines.

Sulfate

ilmenite

42%

Chloride

slag 17%

Rutile

11%

Synthetic

rutile 8%

Chloride

ilmenite

9%

Sulfate

slag 6%

UGS 3%

Chloride

fines 2%

Leucoxene

2%

http://file.scirp.org/Html/1-7701335_46456.htm

http://file.scirp.org/Html/1-7701335_46456.htm


38

Major TiO2 feedstock producers* – 2016E

Source: H&P estimates. *In terms of TiO2 content; e.g. for Kenmare with an average 53% TiO2 content, production is 0.903Mt*0.53

Median feedstock producer* EBITDA margins H1’11–17: Recent upturn

Source: Bloomberg. *Median of publicly available semi-annual EBITDA margins reported by Kenmare Resources, Iluka Resources, Base Resources, and Sierra Rutile Ltd.

In comparison to the TiO2 feedstock supply-side, specific types of feedstock show varying degrees of concentration. For

instance, the sulphate ilmenite market (i.e. lower grade ilmenites which are more suited to the sulphate pigment

process) is relatively fragmented, reflecting the abundance of lower grade material available in China, India and

elsewhere. In contrast, the chloride ilmenite market (i.e. slightly higher TiO2 grade ilmenites with fewer deleterious

elements, which can be fed directly into chloride pigment plants) is more concentrated, with Kenmare and Iluka

representing more than half of supply.

Sulphate ilmenite market share 2016E


Chloride ilmenite market share 2016E


SUPPLY UNLIKELY TO BALANCE DEMAND AT CURRENT PRICES

There is no geological scarcity of potential titanium dioxide supply, in our view. However, existing capacity is

insufficient to meet future demand, and we believe feedstock prices would need to remain at current prices or higher

for a sustained period to incentivise new projects. We see several key swing factors to consider on the supply side:

• China: domestic Chinese ilmenite production has increased as a by-product of Chinese iron ore mining,

particularly in inland provinces such as Sichuan; China currently supplies ~17% of global TiO2 feedstock by TiO2

content, of which nearly 70% comes from Sichuan. Approximately 80% of Chinese ilmenite supply is a by-product

of magnetite iron ore mining. Counterintuitively, despite the prolonged slump in iron ore prices from 2014 to late

2015, and a faltering recovery thereafter, official Chinese iron ore output data has been consistent in recent years.

Kenmare

Resources

7%

Tronox-

Cristal 16%

Iluka 6%

Rio Tinto

26%Kronos 2%

Lomon

Billions 4%

Other China

14%

Vietnam 1%

India 9%

Other 15%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Jun

-11

Dec

-11

Jun

-12

Dec

-12

Jun

-13

Dec

-13

Jun

-14

Dec

-14

Jun

-15

Dec

-15

Jun

-16

Dec

-16

Jun

-17

Median feedstock producer EBITDA margin

Kenmare

Resources

6%

Tronox-

Cristal 4%

Lomon

Billions 8%

Other

Sichuan

Province

25%

Other China

11%

India 13%

Kronos 9%

Ostchem

(Ukraine) 4%

IRC (Russia) 3%

Vietnam 2%

Other 15%

Kenmare

Resources

39%

Tronox-

Cristal 8%

Ostchem

(Ukraine) 3%

Iluka (Sierra

Rutile) 3%

Iluka

(Virginia)

25%

Chemours

10%

Other 12%


39

There is therefore little evidence of a significant overhang of potentially price-insensitive Chinese ilmenite supply

waiting to return to the market as iron ore and ilmenite prices recover.

Chinese ilmenite production (kt) vs iron ore price in $/t (2005-17E)

• Rio Tinto: RIO reported a 34% YoY increase in TiO2 slag output to 647kt in H1 2017, noting that improved

demand had absorbed excess inventory in the industry. While this run rate is still only ~60% of RIO’s full capacity

and is ~20% below the run rate achieved in 2013, returning to these historic slag plant utilisation rates is likely to

require an investment decision on the Zulti South ilmenite project at Richards Bay Minerals, to replace falling

output and depleted stockpiles from Zulti North. In a June 2014 presentation, RIO stated that it had commenced a

feasibility study on Zulti South and outlined a ~$400m capex budget for this ~700-800ktpa ilmenite project to be

commissioned in 2017. However, as of H1’17, RIO has yet to conclude the FS and the capex budget has not been

updated.

• Cristal – Jazan smelter: in 2012, Cristal, the world’s 2nd largest pigment producer, announced the construction of a

smelter at Jazan in Saudi Arabia in a JV with Tasnee, a Saudi industrial conglomerate. The smelter is to have a

design capacity of ~500ktpa of chloride slag. After a troublesome commissioning phase, Tasnee announced in June

that trial operations will commence in H1’18 with commercial production targeted for H2’18. At full capacity, we

estimate Jazan would represent a ~40% increase in global chloride slag output. This could have consequences for

RIO’s decision on restarting slag capacity at Richards Bay and in turn delay the approval of the Zulti South

extension, in our view. Hence, overall, we believe the start-up of Jazan should be positive for the ilmenite market.

• Iluka: in April 2016, the world’s largest zircon producer suspended its Jacinth-Ambrosia mine in South Australia

on the back of weakness in the zircon market. Iluka has continued to process HMC stockpiles from JA through its

Mineral Separation Plant at Hamilton, and confirmed its intention at its interim results on 16 Aug to restart the

operation as scheduled in December 2017. Historically JA has produced ~100-120ktpa of chloride ilmenite and

~30-49ktpa of rutile, representing around 1% of global feedstock supply by TiO2 content. Elsewhere, however,

Iluka has permanently shut mining capacity in the Murray Basin with the depletion of the Woornack, Rownack

and Pirro mines, as well as its US operations in Virginia, together around 4% of TiO2 supply, while the Tutunup

South mine in the Perth Basin is due to cease operations during H1’18. At Balranald, a greenfield project to replace

mining capacity in the Murray Basin, Iluka is still reviewing its development options, conducting a new definitive

feasibility study using unconventional mining methods; assuming the project goes ahead, Iluka does not expect

commercial quantities of HMC to be produced until 2021. In any case, we believe Balranald has been de-

prioritised, considering plans to expand production at Sierra Rutile (acquired in Dec’16) in Sierra Leone, from

~160ktpa to >240ktpa post-2020, as well as the ongoing construction of the Cataby project in Western Australia

(first output H1’19).

SUPPLY-DEMAND BALANCE & PRICING EXPECTATIONS

2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E

DEMAND

Feedstock demand from pigment production 5339 5640 5530 5920 5971 5954 6046 6166

Feedstock demand from titanium metal & other 855 898 1050 1071 1092 1092 1120 1176

Total underlying feedstock demand 6194 6538 6580 6991 7063 7046 7165 7342

% YoY -5% 6% 1% 6% 1% 0% 2% 2% Increase/(decrease) in feedstock inventory at consumers -50 -50 -50 0 150 50 -50 -25

Total apparent feedstock demand 6144 6488 6530 6991 7213 7096 7115 7317

% YoY -8% 6% 1% 7% 3% -2% 0% 3% SUPPLY

Total feedstock output 6740 6980 6585 6270 6630 7080 7065 6755

% YoY -6% 4% -6% -5% 6% 7% 0% -4% Decrease/(increase) in feedstock inventory at suppliers -596 -492 -55 721 300 -100 0 100

Total feedstock shipments 6144 6488 6530 6991 6930 6980 7065 6855

% YoY -8% 6% 1% 7% -1% 1% 1% -3% Notional balance - surplus/(deficit) 0 0 0 0 -283 -116 -50 -462

-

500

1,000

1,500

2,000

2,500

3,000

3,500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Ilmenite production Iron ore price(*10)


40


As discussed above, we assume that the rise in prices leads India and Vietnam restarting capacity during 2017/18E,

leading to underlying supply growth of ~7%. However, we believe the depletion of producers’ stockpiles in recent years

should imply actual shipment levels grow more modestly. Nonetheless, this initial supply response could lead to

narrowing deficits in 2018/19E, in our view.

Longer-term, we believe structural demand growth of ~2% pa and uncertainty around new supply will lead to widening

notional deficits by the end of the decade, requiring prices to remain healthy to incentivise production.


Given our expectation of a narrowing deficit in 2018/19E, we believe the current rising price cycle is likely to peak

around H1’18, moderate slightly into 2019E before recovering to a long-term real incentive price level of around $200/t.


2015A 2016A H1'17A H2'17E 2017E H1'18A H2'18E 2018E 2019E 2020E



















5000

6000

7000

8000

2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E



41

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Documents

K RESOURCES - hannam.partnershannam.partners/media/1090/hp-kenmare-resources-16oct2017.pdf · ~1Mtpa for 2017-19E, and is on track to hit this target in FY17E after a solid first