Half-yearly report

 

 

 

The principal activity of Kenmare Resources plc is the operation and expansion of the Moma Titanium Minerals Mine in Mozambique. The mine contains reserves of valuable heavy minerals, which include the titanium minerals ilmenite and rutile, as well as the high-value zirconium silicate mineral, zircon.

 

Ore containing these minerals is mined using dredges and concentrated in a floating wet concentrator plant (WCP), which pumps a heavy mineral concentrate (HMC) to a mineral separation plant (MSP), where it is separated into final products for export.  Sand and clay tailings from the WCP and MSP are permanently disposed in the mined-out dredge path, which will be progressively rehabilitated with the objective of returning the land to conditions capable of supporting uses that are equal to or better than prior land use.

 

 

Commissioning delays and equipment shortcomings at the Moma Mine have resulted in lower than planned production and income levels. We have now dealt with the reasons for these delays and anticipate significant increases in Mine output. Today we are announcing a successful placing which raised US$30 million. These funds will facilitate the ongoing ramp-up of production to target levels.

 

As previously reported, a number of items of equipment supplied by the turnkey contractor were not fit for purpose and had to be replaced under the defects provision. The contractor has now replaced both the dredge pump motors and the vibrating screens in the MSP. However, waiting for these replacements has considerably delayed our ramp-up programme.

 

Both prior to and following installation of the replacement dredge pump motors, additional technical resources were provided to assist mine management in the key task of increasing dredge production to design levels. Close co-operation among mine management, the contractor, the dredge manufacturer, and other dredging experts is contributing to the increase in the dredge performance. Kenmare senior management will monitor this process closely during the course of the remaining production ramp-up.

 

As production of HMC increased, so has the feed rate to the MSP.  Additional technical resources have also been provided to help resolve remaining issues that have been identified in the MSP, in particular with the rutile and zircon circuit, and to accelerate any rectification works that may be required to increase output of final products as the mine production ramps-up.

 

As a consequence of the above, during the 6 months ended 30 June 2008, production was restricted to 111,000 tonnes of ilmenite. Recent ilmenite production was as follows: April 12,000 tonnes, May 20,000 tonnes, June 31,000 tonnes and July 28,000 tonnes. August production was lower due to a 7 day shut down for remedial works and due to a build-up of fine clay particles (slimes) in the mining pond. The remedial works have been successfully completed and the slimes are now being pumped out of the pond on an ongoing basis. Co-products rutile and zircon were also restricted during the period. A monthly production rate of approximately 66,000 tonnes of ilmenite, plus co-products, rutile and zircon, by the end of this year remains our objective. The Board remains determined to take all steps necessary to achieve this target. The contractor, who is responsible for the achievement of specified performance levels in accordance with the construction contract, is also co-operating with Kenmare to enable ramp-up to design levels.

 

The only part of the processing plant that has not been taken over from the construction contractor is a roaster plant, the purpose of which is to upgrade one ilmenite product. The roaster is due to be completed later this year. However, market demand remains strong and we are supplying unroasted ilmenite to customers until roasted ilmenite becomes available.

 

In addition to the ramp-up, operating and expansion activities during the period under review, management at Moma dealt very effectively with the consequences of a cyclone that passed over the mine in early March. Remediation works are largely completed, with the exception of some repairs to the accommodation village that are due to be finished in September. Our insurance policy has responded to this situation and a claim application is being processed.

 

The market for all our products continues to strengthen and demand from our customers has increased. Demand for titanium feedstocks is predicted to continue to grow steadily by at least 3% per annum. Supply disruptions in a number of countries have exacerbated the current supply shortage, resulting in higher prices. These higher prices will more than offset recent operating cost increases.

 

The Moma Titanium Minerals deposits contains resources which have a life, at current target production levels, of over 100 years. Given the favourable market conditions, there is a very strong case for expansion. A dedicated team is developing a feasibility study for the expansion of our output by approximately 50% to 1.2 million tonnes of ilmenite plus co-products zircon and rutile. This study will be presented to the Board later this year, at which time expansion financing plans can be finalized.

 

 

The Kenmare Moma Development Association (KMAD) supports and contributes to the development of the communities in the area surrounding the mine through a variety of capacity building, infrastructure and cultural projects. KMAD has successfully completed its third year of work under an initial development plan and is now preparing an updated strategy for the next five years, as well as a detailed implementation plan for the next three years. Kenmare remains committed to supporting KMAD, and appreciates all support given by employees and others who have contributed to it.

 

 

The loss for the period of US$8.1 million (2007: US$0.1 million) arises primarily from foreign exchange losses on Euro-denominated loans and corporate operating costs, partially offset by deposit interest earned and gain on sale of investments. The Euro strengthen against the US Dollar during the first six months of 2008, resulting in a foreign exchange loss of US$8.5 million (2007: US$2.1 million) on Euro-denominated long-term senior and subordinated project debt.

 

During 2008, Kenmare continued the process of increasing production towards the target levels planned by management.  Senior management will keep under review the impact of the Group's policy of capitalising costs in the coming months. Operating costs associated with ramp-up of production, net of revenues generated from production sales, were capitalised as deferred development expenditure. Loan interest of US$13 million, net of interest earned on deposit of loan disbursements, and construction contract delay damages were also capitalised as deferred development expenditure.  In total, deferred development expenditure increased by US$31 million for the period. Additions to property, plant and equipment amounted to US$1.6 million. Expenditure, net of sales receipts, was funded from bank loans and cash on hand.

 

The Group total cash and cash equivalents at 30 June 2008 amounted to US$47.7 million (2007: US$68.4 million), of which US$43.0 million was in restricted banks accounts over which project lenders retain security, including US$15 million that can currently only be used with the consent of project lenders. The Group total debt at 30 June 2008 amounted to US$352.4 million (2007: US$309.3 million). During the period, payments of senior loan interest and principal totalled US$17 million (2007: US$5.5 million), and disbursement of additional standby subordinated loans amounted to US$22 million.

 

 

The Group's business may be affected by risks similar to those faced by many companies in the mining industry. These include geological, political, operational and environmental risks and changes in the macroeconomic environment. The main risks applicable to the Moma mine are set out below:

 

The main use for ilmenite and rutile is as a feedstock for titanium dioxide pigment, primarily used in the manufacture of paint, plastics and fabrics. Zircon is primarily used in the ceramics industry. Consumption of titanium dioxide pigment and ceramics is closely correlated with global economic activity and demand can vary over time. There is a risk that changes in the macroeconomic environment, and changes in the mining industry, may result in increases in operating costs. Senior management monitor closely customer sales contracts and manage the mine's cost base to ensure it remains competitive.

 

Achieving target design production levels is dependent upon completion of remaining construction activities and the ability of mine management to continue to increase production levels. Senior management will continue to carefully manage the construction contract and allocate the required resources to enable the mine management to overcome hurdles that may present themselves during the course of the remaining ramp-up period.

 

Achieving successful delivery of the remaining project works, production ramp-up and the planned expansion depends on the availability of sufficient finance. The Board carefully monitors senior management's financing activities both with respect to existing loans and prospective sources of funds.  Project loan documentation requires the maintenance of a Contingency Reserve Account. The amount of funds required to be on deposit in this bank account is determined by a calculation involving projected capital and operating costs, revenues, interest and principal payments and reserve account contributions required to achieve completion under the project loan documentation.  Absent a waiver, failure to timely make a required deposit to the Contingency Reserve Account would give rise to an event of default under the Senior and Subordinated Loan documentation.  A continuing failure to make a required deposit to the Contingency Reserve Account would, with notice and the passage of time, result in an event of default which, among other things, would give project lenders the right to exercise their security interests, which encompass substantially all of the assets of the Moma Project as well as the shares in the project companies. Senior management is maintaining a close dialogue with project lenders and, taking account of existing financial resources available to the Group, will ensure that plans are in place to maintain sufficient funding to achieve target production levels.

 

The development of the Mine has been financed in part by Euro and US Dollar denominated senior and subordinated loans. The Euro denominated loans expose the Group to currency fluctuations. The borrowings issued at floating rates expose the Group to cash flow interest risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. Senior management regularly monitors and reports to the Board on these currency and interest rate risks.  The Board has determined that the Group's current policy of not entering into derivative financial instruments to manage such risks continues to be appropriate in light of the mix of fixed and floating rate exposures. The Group's policy with respect to liquidity and cash flow risk is to aim to ensure continuity of funding mainly through the issue of shares, bank loans and cash generated from operations.

 

Kenmare is committed to managing its operations in accordance with applicable guidelines issued by the World Bank and the African Development Bank, in addition to the environmental laws and standards in force in Mozambique. Kenmare's Environmental Management Plan sets out the monitoring activities, management and training programs, reporting activities, auditing and mitigation measures that are required in order to identify and reduce any negative impacts of its operations and to comply with applicable environmental laws and guidelines.  Senior management regularly reports to the Board on the status of compliance with the Group's environmental obligations, and aims to ensure that this plan is properly implemented and maintained.

 

Kenmare is committed to conduct its business in a manner that minimises the exposure of its employees, contractors and the general public to the health and safety risks of its operations to. Kenmare operations personnel worked 734,443 hours in the six months to 30 June 2008, with three lost-time injuries. The safety performance by the project contractor and sub-contractors was also excellent, with over 7.4 million consecutive lost-time injury-free man-hours worked to the period end.  Malaria is a key risk at Moma and Kenmare continues to develop and implement programs to minimise its impact on all personnel at Moma. Kenmare will also continue to ensure that appropriate health and safety standards are maintained in all Group activities.

 

 

The key tasks for the Group in the coming months are the successful completion of the remaining project works, increasing production to target levels, delivery of a feasibility study for a mine expansion, and development of plans to fund the expansion. Kenmare will continue to monitor Group funding requirements and obligations under the financing documentation, and will ensure that plans are in place to maintain sufficient funding to achieve target production levels.

 

 

There were no related party transactions in the half year that materially affected the financial position or performance of the Group in the period. In addition, there were no changes in the related party transactions set forth in the last annual report that have had or could have a material effect on the financial position or performance of the Group in the first six months.

 

 

This report contains certain forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

 

By order of the Board,

 

 

Charles Carvill

Chairman

29 August 2008