In 2014, when titanium minerals miner Kenmare Resources became the subject of an unwanted bid approach from Australia’s Iluka Resources, the Irish company turned to Rothschild investment banker Andrew Webb to help lead its defence.
Iluka finally got the message in late 2015 and walked away. But by then Iluka’s share-based bid had been reduced dramatically over 18 months, from almost €500 million to about €80 million – following a slump in the price of ilmenite, the key titanium mineral produced at Kenmare’s Moma mine in Mozambique, as China ramped up ore supplies at a time when demand was also waning.
Months after fending off the would-be suitor, Kenmare, which has been led since 1986 by managing director Michael Carvill, resorted to a $275 million (€255 million) rescue fundraising, mainly to pay down debt, which stood at almost $375 million at the time.
It was a deal, however, that came at a massive cost to shareholders who wouldn’t or couldn’t participate in the cash call. Their stakes were diluted by almost 90 per cent. It also brought the investment arm of the sultanate of Oman in as the company’s new main investor, taking a 29.2 per cent interest for $100 million.
The past number of years have been somewhat better for Kenmare. The company delivered record earnings before interest, tax, depreciation and amortisation (ebitda) of $214 million and $298 million in 2021 and 2022 respectively.
This was driven by increased product and as the average price achieved for ilmenite, which is used in the manufacture of everything from paints and plastics to ceramics and textiles, soared by two-thirds to $364 a tonne amid tight global supplies in the wake of the peak of the Covid-19 pandemic and Russia’s invasion of Ukraine.
Earnings for last year are expected by the market to amount to a still-very-healthy $230 million, as ilmenite prices have eased and production was hit at Moma in early 2023 by a severe lightning strike.
After a torrid period following the emergency 2016 fundraising, Kenmare has managed since 2019 to return more than $230 million to shareholders, split roughly between cash doled out for dividends and stock buy-backs. Oman has been the biggest seller into the buy-backs – cutting its stake to 17.1 per cent.
But there’s a problem. Shares in Kenmare have slumped by more than 40 per cent from a peak two years ago and are now wallowing at a level where the underlying cash flow – once investment spend is stripped out – equates to about 33 per cent of the share price. In other words, the market is offering little or no value to the 100-year expected future lifespan of the Moma mine.
Davy analyst Colin Grant said in note last month that Kenmare, with a market value of about €333 million, was trading on a low enterprise value, including debt, of three times ebitda forecasts for 2024. His share price target for Kenmare is €8.50, a long way above the €3.74 level at which it is currently trading.
A decade after Iluka first made overtures, Webb, now Kenmare’s chairman of more than three years, is facing pressure from certain quarters of the shareholder base to surrender the company’s independence.
The Irish Times reported this week that JO Hambro, a London-based investment firm that owns about 6 per cent of Kenmare, has written to Webb and the rest of the board calling on it to assess its “strategic options”, adding that it favoured an outright sale of the Dublin-listed company as its stock languishes at a depressed value.
JO Hambro highlighted in a newsletter issued earlier this month to its own investors that the Kenmare share price decline in recent times has been accelerated since the turn of the year in a “delayed reaction” to a disappointing trading update before Christmas that pointed to lower production expectations for 2024 at Moma and higher expected investment costs on a key project.
Carvill may own just over 0.4 per cent of the company but he has managed the group’s crucial relationships with the government and local authorities of Mozambique
An upgrade of its main mining plant and work relating to its transition to a different location at Moma is now expected to cost $341 million by 2027 – up by more than a quarter from the figure outlined at a capital markets day last April.
JO Hambro also noted that Kenmare had tweaked its dividend guidance in December. While the company reiterated a policy of distributing 20-40 per cent of profits to shareholders, it said absolute levels of cash paid out may decline in the coming years, partially depending on commodity prices. It previously said it was “comfortable with the absolute level of dividends for the medium term”.
The UK firm said it had initially written to the Kenmare board in late 2022, expressing a view that small-cap stocks focused on a single country and a single commodity were unlikely to be accurately valued by the stock market.
JO Hambro now claims that the recent disappointing update has “impaired credibility and likely new interest in the stock” and that its preference now is for a sale of the company, “where the cashflows would be valued more appropriately”.
“We believe large elements of the shareholder base would agree with this view, and as a result, we have written to the board calling on them to assess strategic options,” it said.
A spokesman for Kenmare said this week that the company was “engaging” with JO Hambro on points raised in its newsletter. He also highlighted the $230 million that has been returned to shareholders since 2019 and fact that it has a strong balance sheet, with almost $21 million of net cash at the end of last year.
An investment manager at another major shareholder, who declined to be named, said his firm shares JO Hambro’s views. He added that a widespread belief that Carvill, who has led the company since its exploration days, is reluctant to countenance a sale and that was “contributing to the depressed share price”.
Carvill may own just over 0.4 per cent of the company (a bone of contention for some, who criticise the low levels of Kenmare shares that the board holds), but he has managed the group’s crucial relationships with the government and local authorities of Mozambique.
The question is: where does Webb, the man Carville hired in 2014 to help thwart a takeover, now stand?
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