Kenmare debt and bid talks rumble on

Kenmare Resources increased production of ilmenite by 19% in 2014 and zircon by 62%. There should be further growth this year, too, according to MD Michael Carvill following upgrade work carried out over the past few months. Of more interest to investors right now, however, are talks with lenders to avert a debt default and a bid approach by £1.5 billion Aussie miner Iluka Resources.

Talks with Iluka have been rumbling on since June last year when Kenmare admitted it had received a non-binding conditional proposal from the Australians - 0.036 Iluka shares per Kenmare share. Since then, they've conducted significant technical and non-technical due diligence, including visits to Kenmare's Dublin HQ and Moma titanium minerals mine in northern Mozambique. There's no fresh news in this latest missive.

"No mention of potential predator, Iluka, which we imagine is comfortable playing the waiting game," said Investec Securities on Friday.

There is word, however, on discussions with its lenders. A day before the deadline for Kenmare to submit its budget for 2015, the company said it had been granted an extension by one month to 28 February. Terms of a financing amendment should also be finalised "in the coming weeks." At the end of December, Kenmare had bank loans of $337 million (£224 million), down from $355 million a year ago, although cash had dropped to $21.8 million from $67.6 million.

Analysts at Mirabaud currently estimate debt repayments plus interest of just over $100 million are due in the second half of 2015, much of it in December. “We now estimate a cash shortfall by the end of 2015 of up to $100 million depending on product pricing over the course of 2015,” it says.

Clearly, low prices do nothing for Kenmare's balance sheet. Weak titanium feedstock demand during the fourth quarter, especially in China, caused a drop in ilmenite prices. Chinese domestic production is up and activity is winding down ahead of the Lunar New Year. However, Kenmare does expect demand for imported ilmenite into China to increase as the year progresses. It also reckons US economic growth and lower oil prices should provide a boost. Zircon pricing remained stable through the quarter.

New operations chief Ben Baxter is tasked with cutting further costs at Moma in 2015 following some progress last year. It has been suggested that the appointment of the former Rio Tinto man signals Kenmare is preparing for life after Iluka.

Ilmenite production rose to 854,600 tonnes in 2014 from 720,100 tonnes the year before, and zircon production hit 50,800 tonnes, up from 31,400 tonnes. Total shipments of finished products jumped 18% to 800,000 tonnes.

"The build-up of unsold inventory is not a good sign of near term relief in our view, at least not until after Chinese New Year," say analysts at VSA Capital.

Severe flooding has knocked out the power grid in northern Mozambique, which means Kenmare has been running off diesel power since mid-December. Thankfully, this shouldn't hit 2015 sales.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.