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Executives

Michael Carvill – Managing Director

Tony McCluskey – Financial Director

Jeremy Dibb – Corporate Development & Investor Relations

Eamonn Keenan – Marketing Manager

Analysts

Cedar Ekblom – Bank of America Merrill Lynch

Des Kilalea – RBC Capital Markets

Caren Crowley – Davy Stockbrokers

Daniel Lurch – Macquarie

Richard Hatch – RBC Capital Markets

Roger Bell – JP Morgan

Gerry Hennigan – Goodbody Stockbrokers

Kenmare Resources plc (OTC:KMRPF) Q2 2014 Earnings Conference Call August 27, 2014 4:00 AM ET

Michael Carvill

Ladies and gentlemen, thanks everybody for attending. Welcome to Kenmare Resources’ Half-Yearly Results Presentation. So, there is myself, Tony McCluskey, Finance Director and Jeremy Dibb, who is our new Corporate Development and Investor Relations Manager here and I believe on the line we have Eamonn Keenan, who is Marketing Manager to respond to any marketing questions. We have a short presentation here, so we’ll go through this presentation, which is a short update on production and market and more in-depth analysis of the results themselves.

So, just in terms of an overview. The general theme has been relatively strong performance on side, we’ve seen significant improvements in our zircon production, improvements in – sorry ilmenite production, improvements in our zircon production which haven’t been a strong, but still nonetheless 12% improvements. The reason zircon is lower in terms of percentage of improvement from ilmenite is because in first couple of months of the year, zircon was affected more badly by electricity stoppages and then, we had a significant shutdown to upgrade the zircon circuits in the April and May, but that has been a successful upgrade and zircon is now producing at a much higher rate.

This increase in production has been somewhat negated or has been negated by pretty weak product market and we’ve seen product prices erode and consequently while our shipments have increased by 36% the total revenues have remained relatively flat and consequently we have a reduced EBITDA. Given that circumstance, we’re focused on the management of our costs at site and optimization of our operations at site and that has been successful and producing about 14% cost per tonne reduction in cost per tonne of finished products.

Given the circumstances that we felt it was important to ensure we could conserve as much cash as possible in the operation and we have negotiation with our lenders to amend that agreements to differ debt servicing impairments that was a successful amendment, which has been affected and remove the requirement to service debt except for senior interest – senior debt interest payments in August of 2014 – February of 2015 and August of 2015. Just move on a little.

So, just running through the key performance indicators, as I said very positive increase in production with HMC up 26%, ilmenite up 47% and zircon up 12%, you can see the graph there of steady production. We expect production to increase in the second half and zircon to increase somewhat disproportionately, because it was hampered somewhat in first half. There has been an increase in closing stocks and there is a function of increased production and a weaker market.

And as I mentioned our total cost per tonne has reduced by 14% and we expect that to continue to – sorry has reduced by 14% and we expect that continue to reduce in the second half, not reduction it’s not simply a function of higher volumes, but its higher volumes and lower costs, it’s a combination of both of those. So, you can see then on this graph on the right hand side, the effect this has had on our EBITDA, which has been eroded by the higher absolute costs since we are producing more tonnes, but revenues being flat.

So that’s basically an overview of the situation, I would like to ask Tony to give you a detailed presentation on the results themselves.

Tony McCluskey

Okay, thanks Michael and thanks everybody for joining us for our half-yearly updates, you can see that there - I propose to talk to the key elements of the interim statement and the balance sheets.

Starting on Slide 7 here with the income statement. Revenue as Michael mentioned is flat total sales volumes are up 36%. We have a greater increase in ilmenite and what I will do is I go into that mixed variance in the next slide, but notwithstanding the increase in volumes the mixture of the mix variance on the lower prices as resulted in a 2% increase in revenues. We are now producing of a fully expanded plant so as you would expect with a 37% increase in volume, our costs have gone up accordingly.

And that includes a significant increase a non-cash costs, which again I’ll come back to a little bit later. And the net of that is whilst as we have increased an absolute term on a per tonne basis we’ve seen a 6% reduction on fully loaded costs on a 14% reduction in cash operating cost. So it’s moving in the right direction and as I said I’ll come back to the in a little while.

Our net finance costs have reduced and this is partly because we incurred fees on a ranging costs when we put in place the corporate facility in the first half of 2013, which are not repeated and on the other hands to some extend that reduction was hit by an increased sub-debt costs, so the sub-debts which I’ll come back to – is increasing over time and the subordinated debt interest rate is a 11% compared to the senior debt which is about 5.5%, 6% on average.

And the balance sheet includes European Investment Bank debt which is in Euro so there is always a small movement on the euro dollar. Dollar is our functional reporting currency. So we have a smaller foreign exchange gain of $2 million there, but really as suppose the bigger picture here is that the reduction and prices and the mix that we’ve seen impact on our revenue line has flow directly down to the last reported for the period of $31 million.

Notwithstanding that we’ve generated a positive EBITDA from operation of our $2 million and 2014 is a still – is still a ramp up here we finished the expansion of Phase II last year. So as we go through the second half of the year we would expect to see further increases in production and further reductions in cost per tonne. So with that we’ll see an improving margin.

So getting into the detail in a little bit with this somewhat frightening graph here it’s – there are two elements that have impacted on the revenue. So we’ve see a very significant uplift both in production of ilmenite and in the sale of that ilmenite by 41%, but the increase in Zircon production and therefore zircon sales has been hampered a) by power problems which we experienced earlier in the year and when the mineral separation plant goes down. The mineral separation plant recovers relatively quickly for ilmenite, but there is a longer recovery time for the zircon circuits. So this is all been set out in our statement of the 8th of July when we put our production numbers out.

And the second element that impacted on zircon is that the circuits there we’re still being worked on during the first half of the year. The good news about debt is that for the second half of the year we would expect to see both an absolute increase in production volume and importantly an increase in this ratio of primary zircon to secondary zircon.

And that’s good because the zircon additional production will flow cash directly to our bottom line and zircon as you know is a higher value product and so in the second half of the year we see this mixed variance improved both in absolute terms and in relative terms for mix. Pricing unfortunately is subdued compared to the first half of 2013, ilmenite prices are off 13%.

We have see zircon prices bought remain just a comment that the primary products, that we sell is a composite of a standard product and the special product. The standard product is in or about $1000 or more and the special product which is about a quarter of our total production is about 25% less than price. So we’ll be producing and we’ll be selling more of that as we go on.

This is the usual reconciliation that we provide of the income statement back to the cash cost to run the business and taking the cash operating costs adjusting for fresh, because most people for Kenmare work on an FOB basis. Then adjusting for the non-cash costs, principally depreciation which has moved from $12 million to $20 million and the reason that its increased is because depreciation is calculated on the unit of production basis.

So in our case for 2014, you have both the full cost of the plant which is about $950 million on a depreciation basis at the end of the period and you have higher production levels. So both of those things results in the increase of about $8 million from $12 million to $20 million. Again, this is non-cash and I suppose the focus for Kenmare is back to what is the cash cost to run the business.

And hence we do this adjustment, include the additional cost of finished products and you can see that the adjusted cash operating costs have increased by 25%, but the total finished products that we produced in this half year period compared to the half year of 2013 has increased by 45% and that results in a reduction in the absolute cost per tonne by 6%, but adjusting out for the non-cash items, the cash costs per tonne has decreased by 14%. So I think that’s moving in the right direction.

And I think this slide here serves to emphasize the work that we’ve been doing on the costs to-date. So since 2012 the second half of the year, we’ve seen a 20% drop in cash operating cost per tonne to a $177 per tonne in the second half – sorry in the first half of 2014. And this $177 is for all of our finished products not just for ilmenite, so we set a blend of ilmenite, zircon and rutile and that’s to reduce the whole suite, so that should be compared to the weighted average of the final products that we produce, not just ilmenite.

And as I said it’s a function of increased production, but also a theme that we’ve been talking about in this presentations over the last six or nine months of increased management focus on costs and I suppose just to break that out a little bit for you. Having sort of reoriented ourselves from a construction phase over the last number of years to operating this plant efficiently, we’ve focused not that we didn’t before, but we’ve been able to focus with the expanded plant finished on how best to optimize this plant and I think we’ve seen it over the last six months, we will see a continued program over the next six months and then again in 2015.

To-date the areas that I would point to are set out in the board here. So labor is just under a third of our total costs, so that’s clearly the biggest ticket item and we’ve been really concentrating on keeping our headcount down. So department by department all of the heads have been looking at the number of employees and making sure that there is no over staffing.

I mean we’ve reduce the short-term employees and short-term contracts, I think about this time last year we had about 200 and we've lot less than that now and with reduced headcount comes with that a reduction in the all of the on costs, so for example, catering, flights in and out all of that stuff reduces as well.

In addition to which the catering contract in particular we’ve negotiated that and we’ve improved our rates as we get bigger we've economies of scale and we've more buying power. So all that stuff that you would have expected to come with this, we’re starting to see that flow in H1 and as we go through the rest of the year and the plant continuous to settle down we’ll be able to effect I think more savings.

And engineering similarly comes to some extent from economies of scale, but just to note that in the first part of last year you may remember we had dry mining plants, we got rid of one of them and focused on moving back to being dredge mining operation to the maximum extent possible.

Early lest year we had finished the time-up of the hill at the back end of 2012. We were renting a lot of machines and again now that the building is behind us we’re really focused on minimizing costs throughout the organization, so we’ve returned bulldozers and front-end loaders that are no longer required and of course this is resulted in reduced cost per tonne. And then, just more generally for example transporting materials from South Africa and elsewhere we’ve been able to sit down and streamlining that. In a way that we haven’t be able to do when we’ve been busy with the construction phase.

So, that’s not really the end of the story and we’re looking now more generally at the organization structure not just leaving the departments as they stand, but looking after in a deeper way to see if there is any further, if there any further changes and we believe we can’t achieve further reductions and headcounts. And looking again at the contractor supplier arrangements where this larger bigger facility to see we can put through further savings that are function of scale and better negotiations.

So, a lot of work has been completed in the first six-months on costs and I think it’s been a very active period of management time. And I would expect to see more that coming into the second half. So as suppose we sort of touched on this and we promised on previously, but yeah I think it’s important to look at that there is some meat in the bone there. This is the – sorry about that that should reads that labor payroll 32% for H1 2014, but this is the typical pie that we give and again as we move from H1 2013 to H1 2014, the ratios are not that different but we understand our costs I think quite well now as we continue to go through time, we’ll see them reduce.

It’s not just been about operating costs, but also we’ve been working hard to make sure that the sustaining CapEx has been tightly controlled, but I mean as suppose the bigger message from this particular chart here, is that we’ve had a long period of capital investment we started this in 2004 [ph] and we made our initial investment in Phase I and then we moved on quite quickly to Phase II. So 2014 is an interesting here in that we are increasing our production but our capital programs have essentially come to an end with the exception of sustaining capital costs. And that’s as you would expect and as we promised but it’s good to see it come through in the first six-months of 2014.

Moving onto the balance sheet, really know major surprises here the plant, property and equipment is the largest item as always on our balance sheet we see the reduction and depreciation and then the increase and sustaining CapEx as I mentioned earlier. Inventories are up Michael touched on this, so that’s principally the increase in finished products at the end of the year we do 107,000 tonnes at the end of June, we do 177,000 tonnes. Most of that is ilmenite, but there is slightly higher amount of zircon at the end of June, which were sold actually in July, there is always a little bit of lumpiness in this inventory number.

Trade and other receivables are relatively flat again you didn’t see a big change in the revenue line, so our debtor days hasn’t changed materially, so that’s relatively flat. And in terms of cash we’ve seen a reduction in cash, but of course this is after paying the senior debt principal and interest on the first half February and after paying for the sustaining capital and other working capital movements. The bank loans are come to in a movement and again creditors and provisions relatively flat.

So, the total debt is $350 million at the end of June the average interest rate was 9.2% slightly higher than at the end of the year again this is because the ratio of subordinated debt to senior debt has been increasing over time as we continue to pay down the senior debt.

The seniors now about a quarter of our total project debt, just under a quarter and at the end of July as announced on the 1st of August we’ve completed this debt amendment which as suppose of function of the June product market, which we’ve seen and it’s enabled us to conserve cash and we’ve worked closely with our lender group over the last decade or more so they have come to the party there and we are very appreciative of that.

The nature of the debt announcement as of the deal is to differ the senior principle and the subordinated principle in interest that otherwise would have been paid on the 1st of August of year and the 1st of February and the 1st of August next year. Subject to cash sweep where we build up cash above $80 million that will fall to be paid at the back end of 2015 and the total quantum is about $80 million. We've agreed as part of that amendment to continue to work closely with our lender, there is an increased reporting requirement; there is budget that we will be preparing for the end of January next year.

So I think there will be a continued on going and somewhat higher engagement with our lender group as we go through the next sort of nine months 12 months and in addition to that Absa/Barclays extended a loan which was taken out originally at the beginning of last year to Kenmare Resources Plc for $20 million that was due to be repaid in march next year and that’s been pushed out by 12-months. So we did that as part of the whole deal in order to give ourselves sort of a sensible window of headroom for cash.

So over the next 18-months our capital repayment – sorry our capital payments as an investment in fixed capital is down and we have no debt obligation except senior interest until the back end of 2015. so that’s really the debt and this here is an analysis of the debt at the 30th of June, there isn’t really any major news in that no major surprises that very much tracts the end of the year plus adjusted for the payment that we made to senior debt on the 1st of February.

So with that ladies and gentlemen, I thank and I will hand back to Michael.

Michael Carvill

Thanks folks, just like to give you some of our impression and our view with regard to the market and for the products. So we sell into the pigment market, it’s our customer base and so its important how the pigment market is performing as it manufactures and sales more pigment, it requires more feedstock and so demand hasn’t continued to increase in the pigment market, despite painting season in North America, there is a traditional painting season in spring in the United States and in the Northern Europe and if there is a harsh weather condition that tends to inhibit the painting season quite considerably, but despite that - and that was very much the case this year, but despite that there has been continued increasing demand for global pigment and so that’s quite positive.

And so for the last in two year or 18-months we have been looking at significant pigment finished goods inventories, the pigment industry has been setting with inventories of finished good which are larger than normal and larger than they feel appropriate and consequently they have been selling those inventories down rather than making - manufacturing new pigment to satisfy demand and at last there are at a stage where there are most of the pigment manufactures are saying that their inventory levels are at normal seasonal levels and consequently we are saying something of an upturn in pigment plant operating rate, so again that’s quite good.

However, on the other hand, Chinese demand has been quite subdued. There is over capacity in the Chinese pigment industry and they have been exporting significant amounts of Chinese pigment into the rest of the world which is a reverse of a phenomenon of about two years ago when Chinese was a net importer of pigment. So they still import high quality pigment for automobile et cetera, but that they are exporting a significant amount of pigment into the market which has inhibited pigment price traction. So the pigment industry hasn’t been able to move its prices forward as rapid as it would otherwise would have been the case in a recovery such as this.

Nonetheless, we continue to expect above trend line growth in pigment demand for the rest of this decade, so the overall environment for demand of pigment and therefore demand of feedstocks is positive. And as far as the Chinese market itself, it’s a Chinese market that led pigment price is down and with that – with some of the major Chinese producers are being very aggressive, but towards the end of the first quarter we started to see a reversal of this trend and since then there have been five separate price increase fees with they in the Chinese pigment industry.

And so they’ve increased about a $100 per tonne from the low point and this is the chart from Bloomberg so we’ve got to put the source on the slide and those numbers are still lower than the international market for pigment, but nonetheless it is a change in trend and a positive change in trend. So how does that all affect the feedstock market.

Well, first thing to say is that feedstock price is how continued to weaken through this the first half of 2014. And then when I particularly so why is that happen well feedstock – sorry pigment plant operating with only know cranking up to more higher levels. So consequently in the first half it being operating at lower than normal operating rates.

As well as that there are some inventories of feedstock which have been so sloshing around the system and have to be used up prior to an increase in demand being come in apparent of feedstock producers. So this over shadow of ilmenite inventory and they until recently the low operating rates have continue to provide a bit of lower hang and the shadow on the market which as a lower prices to weaken. That is being complemented by the arrival into the market of new supply.

Now there is being significant retrenchment of supply when new suppliers coming into the market feeling that it has to find a home and that how is cost got aggressive price behavior and brought price is down. Nonetheless in terms of an outlook we see the development of significant titanium slagging capacity.

Firstly in Saudi Arabia and in China has providing a significant additional increase in market for ilmenite – that ilmenite come up these supplied by domestically produced Chinese ilmenite it’s not suitable, it doesn’t make chloride slag and these slag plants are all design to manufacturer slag for the chloride process.

And with the advent of those slag plants we see significant demand increase which we anticipate being able to absorb this supply that has come on. So the situation is the market is still weak despite improving demand for pigment, but we anticipate eventually that this will turnaround no we’re not saying exactly when we find it difficult to call a moment we thought about it, but we call it before as the rest of the industry but we’ll see.

Just in terms of the point that we have meant successively that a lot of the industry is operating had a non-sustainable basis, this is just a chart of that ilmenite concentrate imports into China from Vietnam and pretty well all Vietnamese production goes into China.

So this is really a try to Vietnamese production. And the green line is price and so this is $350 of tonne in 2012 and you can see that price in cent device significant increase in production from Vietnam, but as prices to winkled became no longer economic to manufacturer and production came down from a 125,000 tonnes per month of imported ilmenite consternate into Vietnam.

From Vietnam into China going to present levels up about 30,000 tonnes. So that’s a combination of the fact that it just completely on economic to operate there their mines at these levels and the depletion of resource based in the North of Vietnam and the requirement to moved onto Mekong Delta area where grids are lower and the economics are even worse.

So that you can see that now even though prices are higher than initial prices in 2010, production is lower and that’s because of depletion of resources and increased operating costs. So even if you are in Vietnam and you are using your mom and pop and your granny to help manufacture the material, you still need pump and pellers, you need pipes, you need fuels and costs have generally gone up. So we believe that significant proportion of world feedstock production is uneconomic at this level we believe that prices will come up eventually.

Zircon market, zircon demand has remained stable in half one with a gradual recovery in China and the U.S. and some parts of South America, so zircon has been more stable basically, price had declined modestly, but then they’ve recovered and there has been significant restraint by the producers in the manufacture of zircon and consequently producer inventories have gradually declined and so generally it’s a relatively stable outlook for zircon. Again, market is expected to go somewhat above trend.

And finally, we put up this chart which is an analysis of the share price of Kenmare plotted against the average revenue, monthly revenue - quarterly revenue per tonne that we have got for our ship products and you can see that there is very – there is this revenues per tonne in the blue line and the share price in the green line and the revenue per tonne is obviously delayed by a couple of months because it’s a quarterly number, but you can see there is a very close correlation and we feel as prices gradually improved that it will have consequent effect on Kenmare’s share price.

Operations, I touched on all of this – on this stuff earlier on in the very first slide, it’s been a positive half for our operations, the first couple of months were characterized by very difficult electricity conditions, those have passed away, electricity is very stable at the moment, we have imported diesel electric generating system to site that has been installed it’s been commissioned, it’s been tested, it has run our mineral separation plant very successfully and so its now sitting there ready to operate as we move into the summer period and hit those difficult electricity conditions in the later part of this year, we should not run into those difficulties in processing our zircon and keeping the mineral separation plant running. And, again this is the zircon output was hampered in the last half of last year and the first half of this year by those electricity issues.

Safety is very important as with all mining companies to us, we are really focused on it very strongly every time any of the senior management had signed [ph] this is a critical area of their investigations and their activities. Unfortunately there are a couple of lost time injuries, which brought our lost time injury frequency above our normal level, which is about 0.4 not a level that we expect, but that has been the level that we have been running at for the last while.

So, there has been renewed focus on it, major new campaign, I went on and launched that new campaign and we’re pleased to see there has been a significant reduction in lost time injury frequency rates and with two successive months with no lost time injuries. In terms of environment, we’re complaint with all the required compliances that we need to be, it’s a very non-environmentally damaging process, we are not using acid or mercury or anything like that and we have actually started this process handing land back to the land owners and so that’s started this year and its an rolling ongoing business and its been successful.

Just quickly to highlight Mozambique. We believe that Mozambique is a good location and we’ve worked very successfully with the government, the government has done a good job of balancing its growth requirements its infrastructure and education and poverty elevation requirements with managing to maintain a sensible macro economic posture and we are very happy to work there we see there is an election coming up.

We note that the government has come to an agreement with the opposition party Renamo, which had been sort of threatening some destabilization issues but that is now have been removed as an issue and we are continuing to work hard to insure that the local communities benefit from the presence of the mine in their locality and to ensure that we have a positive working relationship with them, which we do utilizing a not-for-profit development organization called KMAD which performance lots of projects in the local area.

So finally, just I want to remind you that, that the Moma deposit is world-class deposit of titanium minerals and at our expanded operations it has a expected life of over a 100 years we mean it by direct mining which is lowest cost form of mining using for all its problem the hydro generated power is a low class power source and we explored by sea directly from sun. We are non-established producer we have a strong market following from our customers.

Our customers we have just renegotiated our contracts for the second half of the year and none of our long-term customer have even thought to requires to follow price is going to whereas spot prices in China have got to and it hasn’t been part of the discussion at all because we don’t recognize those as a sustainable prices.

And so we believe that this company does continue to provide a good exposure to urbanization of the developing world and so thanks to everybody for coming to listen we are happy to take questions from the floor and then I think afterward we will take questions from the phone.

Question-and-Answer Session

Cedar Ekblom – Bank of America Merrill Lynch

Good morning gentleman. It’s turned on. Okay. Thanks for Michael the presentation and I have two questions first you have any comment on the Iluka bid. And secondly in terms of rated production for or in terms of production for next year and where do you see that sitting versus your rate of production targets. Do we need more CapEx in order to get to the $1.2 million tonnes of the ilmenite?

Michael Carvill

Thanks Cedar. We are undertake of our panel rules and therefore we are not commenting further on the Iluka bid and so sorry about that but no I don’t believe that we need any further capital whatsoever to get to the 1.2 million tonnes per year operating rate. We have been operating at those rates it’s a question of brining our utilization levels up to the required among.

Des Kilalea – RBC Capital Markets

Des Kilalea, RBC could you comment whether the June Zircon production can be replicated for the rest of the year and also an update on labor.

Michael Carvill

June production can be improved on I believe for the rest of the year and there is nothing particularly wonderful about June production except that this circuits weren’t done for expansion or upgrade work and so that’s what's the real thing it happened in June we have the circuits developed and they operated normally and we believe that we can improve the recovery levels from that point. And in terms of labor we have positive labor relations, we have a three year deal with the Labor Union and that’s we’re operating normally, so how you think about in terms of numbers or...

Des Kilalea – RBC Capital Markets

Yes I was thinking of any sort of flow back from South Africa instability.

Tony McCluskey

None at all nothing, nothing like that at all.

Des Kilalea – RBC Capital Markets

In terms of July number for [Indiscernible].

Michael Carvill

We haven’t disclosed that so and I don’t think we can give it here. Sorry.

Caren Crowley – Davy Stockbrokers

Good morning gentlemen, Caren Crowley from Davy. Just a couple questions, on sustaining CapEx Tony, $5 million in the first half of the year and tracking below forecast. Any update to the forecast then I believe guidance was in the order of $20 million per annum, so possibly lower than in that mutuality [ph] can you comment on that?

Tony McCluskey

Yes. I think you have summarized it very neatly there. This theme of cost savings that you’re seeing coming through in OpEx, we’ve been working on what is an appropriate level of OpEx on sustaining CapEx and to that end the sustaining CapEx for the six months is $5 million. And you are right; we guided $20 million for the full-year. I expect it to be less than $20 million Caren, so I expect to see some savings coming through the second half of the year. I expect it to be a little bit higher than $5 million in H2 so it wont be doublet, it will be somewhere between the two.

Caren Crowley – Davy Stockbrokers

And just on the market, how reliant is Kenmare in China, so in terms of sales volumes can you indicate what percentage goes into China and you also said that there is a differential between what the Chinese will pay ilmenite and what Western producers will pay ilmenite. And the Western producers aren’t looking to narrow the differential. Can you guide what that differential is in dollars per tonne if possible?

Tony McCluskey

Well, our exposure to China was we sold about 14% of our ilmenite to China in 2013, anticipate selling is slightly more than that in 2014. In the first half I think we sold about 20% of ilmenite to China. Yes the reason the market in China is lower than the market in the rest of the world as we see it, is that most of the existing producers in Western world have already locked in supply arrangements and so therefore a new producer really doesn’t have that much capacity to get in there and therefore their total focus is on supplying China and in general Chinese consumers tend not to have long-term arrangements but tend to buy as they need the material. And consequently the new supply is directed directly to China. What’s the difference; I would say $30 a tonne.

Caren Crowley – Davy Stockbrokers

Thanks guys.

Unidentified Analyst

[Indiscernible] Canaccord Genuity and now private holder in your company. Two questions if I may, you mentioned that you have Diesel-powered generation on side, would you consider or would it be worthwhile running that mineral separation plant entirely on the Diesel-power to avoid the interruptions that might occur or would that be too expensive? And the second question relates to the first half shipments, were there any particular one-off shipments in there that might have given an abnormally low average price that may not be repeated in the second half?

Tony McCluskey

In terms of the Diesel generator that’s exactly our plan. Our plan is that we run them a 100% of the time during the summer months, so sort of from December, January, February or maybe I think we cause it for four months so maybe mid-November to mid-March and that we don’t with for an electricity stoppage we just start to run them and just continue to run them right through that period so that there is standard steady operation of the mineral separation plant that’s the plan which is…

Unidentified Analyst

And in terms of costs.

Tony McCluskey

I think it’s about $7 million isn’t it?

Jeremy Dibb

Yes, a little bit less than that so maybe about sort of 3% of total OpEx assuming that we’re run it for that period, I suppose the central point with the diesel gensets is we don’t need to run if right now, you referred to the June month, which was an interesting month is a test case because I mean we are overall looking at here sustainability. So during a ramp-up here we had a month where we are relatively stable electricity supply and then the downtime, which we all talked about during the first quarter for zircon particularly didn’t happen and so right now Damien [ph] I think the think as we don’t need to - and so why would we incur the additional costs.

Tony McCluskey

So, in terms of average revenue the revenue was lower – the average revenue was lower because of per zircon production in the first half and that was in January and February, zircon circuits which run at high temperature were disproportionately affected by the electricity drops.

So, and that means – and that’s because whenever there is a high rick of electricity the whole plant then includes on because it takes several ores to get it up and going again. So as soon as get it up and going again relatively quickly the ilmenite circuits are starting to function, but the zircon circuits have to come back up to temperature which can take quite of few ores.

Unidentified Analyst

[Question Inaudible].

Michael Carvill

If I can take that it’s the mix point that I referred to expect this, let’s we break it down on a monthly basis, which I haven’t done it’s kind of hard to get in there, but because we have a lower volume of zircon produced you only build up the critical minimum volumes for zircon closer to the end of the second quarter and what that meant was that we actually had a significant zircon shipment in July had that zircon shipment gone out 10 days earlier that would have lifted the average price realize for all products and we would have a sort of seen a flatter situation.

So, it’s a very good question and it’s one – that will be a future not just for Kenmare but other titanium mineral produces over time or you have certain shipments that happen just before the year end and then certain shipments happened after the year-end. I remember this happened in 2012 as well we’ve three shipments that went out, one of them in December was something like $12 million.

So that’s a very meaningful number, when you look at an average. But my point is it can be a little bit lumpy with respect to this half period had that zircon shipment gone out, notwithstanding the lower production it would have lifted the average, but as appose for me the key in the second half of the year, is that we’ll see both an increase in absolute zircon production and also the ratio of primary zircon to secondary zircon a significantly improved as we saw earlier on the graph and we expect to see that to in a sustainable basis that’s really good because all of that money improves our margin and on essentially a fixed cost base it drops straight to the bottom line, it doesn’t costs us anymore.

Daniel Lurch – Macquarie

Good morning, Daniel Lurch from Macquarie just a quick question on the Iluka again given that there are still and speculation in the market on revise, but will you request from the Iluka at some point to put up a bit or and answer there is another bit of request expected?

Michael Carvill

I mean that’s something that we are keeping under review, but we are subject to takeover panel rules and we’ve been caution very strongly that this is a subject that we can talk about openly in this four month rate. So, not looking to be evasive of but those of the rules were subject to I am sorry.

Richard Hatch – RBC Capital Markets

Thanks. Good morning, Richard Hatch from RBC, a couple of Tony and Tony the second half and with production ramping should be expect to see high charge?

Tony McCluskey

You will expect to see a slight increase on the H1 and the thing there Richard is we – your depreciation charge should be applied to the total investment in plant, property and equipment, which is don’t whether put up in the balance sheet and then after that, you can simply flexes with production, some of it is mining HMC but in the main it’s finished products. So, because we’ve produced to orders at 445,000 tonnes ilmenite in the first half of the year and we would expect to see an uplift, then you’ll see a prorate uplift in the depreciation.

Richard Hatch – RBC Capital Markets

Thanks. And then, secondly just on what capital should be expected to see a decrease in stocks over the second half that prorate?

Tony McCluskey

Well, as was there are two elements to that firstly there is the market – there are the market points that Michael made that we’ll see how the second half of the year plays out for ilmenite, we are selling all the zircon and all the rutile that we produce and there has been some build up in ilmenite.

I think more broadly I can answer your question in that I would see overtime certainly into 2015 we would see those stock level reduce, the extent to which we sell ilmenite in the second half of the year, I think there is still something of an open question there and whether we will be able to drop stocks before the end of the year.

I think there is still something we are debating ourselves, to the extent that we could do it Richard by pushing stocks in, but then taking further bath [ph] in price I don’t think helps anybody. So it’s not simply could you do it? But maybe should you do it type question and I think we will see how the market recovers to answer that. Thanks.

Unidentified Analyst

Good morning gents, Rene Clair [ph] with Deutsche Bank. Just on the ilmenite price, in the term of the exit price for the quarter versus the average price for the first half in terms of sulphates and in term of chloride, could you give us any color on where we are there coming of - if we are entering the second half of a lower base than the average price or inline with the first half?

Michael Carvill

Little bit lower.

Unidentified Analyst

Can you quantify that?

Michael Carvill

For sulphate maybe $10 lower, for chloride about the same.

Unidentified Analyst

And then on rutile given improvement on the zircon side, presumably the next focus is in improving recoveries and sell them there, could you put any kind of timeframe on that maybe third quarter, fourth quarter for the rest of this year or should we be looking for some positive surprised there?

Michael Carvill

Yes we are seeing improvements in rutile production already and quality. So yes it’s a big focus and there is work underway and work planned in the rutile circuits, but these rutiles has been extremely difficult to get good recovery in the off rutile in this particular ore body and this minerals suite. So it’s very hard to predict to exactly to what's going to happened. We do it in the lab, it seems to work and then we industrialize it and it doesn’t quite work as well, so there are indications that we can improve rutile volumes reasonably significantly, but we would rather just wait and get those rather than number take them.

Unidentified Analyst

Sorry just follow-up on that if I may. Is the trade off there – the zircon recoveries is it moved et cetera?

Michael Carvill

No, not really. One of the key things has been preventing zircon entering the rutile circuit and that has been a key element or key focus of the metallurgist and so we've put in screening system that screen a zircon part, zircon tends to be slightly larger particle sizes and screen out the zircon and that has provided - and then we split the rutile into two different size fractions and then separate it like that and it seems to work better. So it’s a very difficult separation process, its not easy, it doesn’t fall easily for us, but it is improving.

Unidentified Analyst

One follow-up question on cost. You spoke a lot about what you have done to reduce costs, what further gains can be made from here? Should we expect the decline in cost from here to slow just going into second half in 2015?

Jeremy Dibb

Look I would hope not. When I was asked questions about cost earlier this year I was suitably wage and so what I said is I prefer to report cost savings and quantify them and then give a little bit color as we have just done there now. I'm confident to say that we will see from further cost savings and I would see them again in 2015 seeder [ph] so I see this trend, its remarkably straight, but I would see this trend continuing for a while, but there is a wider rooted branch review that we are working on at the moment having taken some of the earlier gains and I can certainly see some areas in that that we can see improvements. I would sort of be a little bit cautious, I'm trying to quantify it until we've done more work on that rather than create expectations, but I do see further gains.

Michael Carvill

There is a big program for improving onsite management processes and in that process as that program develops they get supervisors get better at supervising, superintendants get better at running their departments et cetera and it becomes apparent that they don’t need quite as many people. So we expect to see some additional reductions in total manpower.

Unidentified Analyst

And then, lastly on the date obviously you pushed out for maturities which is a good thing, but ultimately your cost to remains very, very high and any income we’re seeing generated at the operating level is simply being setup by financing costs. And what more can you do on that because I think that’s a key question for a lot of shareholders. Is there more that you can do on the date or that simply a situation of waiting for the product markets to recover in order to pay down that very expensive project that’s you have in place.

Tony McCluskey

I think now it’s a horrible time to try to do something with your balance sheet and I think we would be better positioned to answer your question. When we see some flicker of turn on the product markets and where I’ve touched on this is in the slide and that we’re continuing to engage with our lenders and so we will have discussions with them, again over the next few months. I guess at this stage I just be a little bit slow to kind of predict were those discussions will go and it is something we’re conscious of and I think it is a reasonable and fair point that you make. And I think we’ll let that mature and see where it takes us.

Unidentified Analyst

Maybe a touch early yet, but have you started negotiation ship for the fourth quarter or you just half yearly contractors is in that?

Tony McCluskey

For the second half yes, we have. And those were, those are being successful negotiations in that our customers have being quite prepared to they are being some reduction in price, but no were near what’s if they had being rigorously following spot prices in China that would have eventuated.

So our customers have being clear in their understanding that prices that are being seen going through China and which some of the industry commentators are taking us prices in the market are unsustainable another appropriate for long-term supply contracts and they haven’t start to enforce anything like that.

Unidentified Analyst

What do you say some reduction price and you are saying relative to the first half…

Tony McCluskey

Relative to first half yes…

Unidentified Analyst

Second half of last year.

Tony McCluskey

First half of this year.

Unidentified Analyst

[Question Inaudible]

Tony McCluskey

Yes.

Unidentified Analyst

[Question Inaudible]

Tony McCluskey

Of ilmenite yes. But we expect to have higher proportionate zircon.

Unidentified Analyst

Okay.

Michael Carvill

So that’s an important you’re absolutely right even though hopefully it’s not too much, but we’ll have more zircon of that zircon we’ll have more high quality, higher price zircon and as we go through the second half of the year, even though I haven’t quantified it and response to your question we should see a lower cost per tonne.

So that net national all of that as you should see an increasing margin and some more additional cash coming out, I mean it’s still doesn’t answer the question that was asked about loans of cash to payback debt, but it is a move in the right direction and it is controlling the things that we as company can control that are at the mine.

Unidentified Analyst

All right. Just a quick follow-up on your comment on the new chloride capacity in the China and the Middle East. What do you expect this is a timeline on that how is just going with that new technology in China and given what is your expectations regarding the Chinese imports of adequate chloride feedstock or by upgrading this like domestically what is your view on that.

Tony McCluskey

Well, in terms of the overall slide picture they just haven’t plant that’s being develop by [Indiscernible] is at the start of commissioning that the moment so they expect to be putting their first charge into that and heating up their furnaces within weeks, so that’s the first one.

And they hadn’t billions is well under construction and the manufacture of its light plant, you mentioned as a slight plan that has been in operation and which they should done because they used that slag plant to feed the chloride line, they built a chloride line about 18-months ago, but found that it didn’t work, but and so they have spent the last 18-months addressing the issues within that line that were causing difficulties.

They have now succeeded in manufacturing chloride pigment and so we see the likelihood that they’ll start-up their slag plant pretty shortly and in fact in think they’ve said in October, November.

So, I think that there is a broad scale view within the Chinese pigment manufacturing industry that they will manufacture their own high grade feedstock from ilmenite that ilmenite necessarily has to be imported ilmenite, because you cant use domestic Chinese. And I think that that fits with the attitude they have adopted in other mineral processing industries as well. So, we don’t see them importing high grade feedstock we see them manufacturing and importing ilmenite.

Unidentified Analyst

Sorry, one more question. In terms of your balance sheet, what is your view on entering into a strategic long-term supply contract with a pigment producer for an upfront payment, obviously prices are low now, but to the extent you could reduce your very high interest costs. What’s the trade off there and what do you need to see?

Michael Carvill

I think that would be an interesting idea and it’s something that we reconsider and have chatted with some of our major customers with regard to it.

Unidentified Analyst

[Question Inaudible].

Michael Carvill

No.

Tony McCluskey

That’s jump and ahead Rene.

Unidentified Analyst

[Indiscernible] but what's the definition of cash shortfall in terms of the budget you have to present for 2015, is that an operating cash shortfall or is it what…

Tony McCluskey

It was solvency test, it’s the same type of budget that we would be producing every year it’s simply that they have accelerated it instead of producing - well we would have a budget produced by that stage anyway and normally it’s approved by the Board, it always goes through a process with lenders whereby we talk to and usually take the price tag from their industry market advisor, traditionally that’s company called IBMA they have - since they guys has retired there and we’ve taken technical inputs – we've developed these ourselves but they’ve been reviewed by SRK as independent engineer for the lenders. So we go through that process so simply formalizes that in the documentation and it’s a solvency test. So it’s the definition of cash short fall is having enough cash to survive effectively.

Roger Bell – JP Morgan

Good morning it’s Roger Bell from JP Morgan. Just a question about the balance sheet what sort of level of gearing would you say its appropriate longer-term for the company and what net debt to EBITDA or other metrically so looking to get to by the end of 2015 in order to be able to replace the debt that’s coming to you then with new debt essentially and how you started to considered de-risking the balance sheet through equity?

Michael Carvill

Yes, I think it’s a terrible time to be considering equity and its all unnecessary Roger I mean hence we went to the lenders and we gave ourselves this 18-month window they follow this very closely as well through their because they have been for 10 years. And so I don’t think that’s either necessary or appropriate right now. We are not looking at taking in additional debt or changing the debt to pay the $80 million odd that June by the end of 2015 based on our cash flow projections. We will generate enough cash to and to pay that down.

So to some of the question that Cedar asked earlier as we see the cash margin increasing I’ve been kind of focusing my answer is on the second half of 2014, but actually you go out to 2015 and assuming our exit rate is in or about the capacity you will see an increase in production, an increase in output on a consequent reduction, further reduction and cost per tonne.

So that should allow us generate the cash that we are talking about and I guess the answer to your question that would be a function of markets. I mean we look at our balance sheets last year and we had some thoughts about doing something with us and in the end we decided not to because the debt markets certain weren’t there for also or anybody else at the time we looked at it.

So I think that the answer is we will keep it under review I think it’s a very good question I don’t have the gearing ratio that I would like to throughout in this particular forum, but for the bottom of the cycle given that we generated in EBITDA of about $2 million its very remain question. My view is for that the sort of the middle of the cycle or obviously the top of the cycle we are not heavily geared. So I think that ones that we will just keep under review.

Roger Bell – JP Morgan

Thanks

Michael Carvill

Thanks. I think if there is nobody else with questions in the room that we could open it up to the phone to the online people. So if there is any questions from the people who have dialed in, we would glad to take them.

Gerry Hennigan – Goodbody Stockbrokers

Good morning. Gerry Hennigan of Goodbody Stockbrokers. Just a question on shipments Michael, they obviously lagged in terms of the first half of the year given market back opportunity, do you think that trend will continue into second half of the year and just on the zircon, I think you illustrated or you gave the figures in terms of your proportional exposure for ilmenite, but is there exposure to the Chinese markets for zircon as well and is there any variation price internationally or in China for zircon?

Michael Carvill

If I take the second one first Gerry, zircon that we sell into China is for the Zircon Chemicals Industry and not used as a zircon supplement to ceramic manufacturers and therefore it’s not exposed to the construction or housing market in China. So the zircon we sell there is our special zircon so it’s a different product for different use and we don’t see any particular price pressures, stronger price pressure on zircon in China than anywhere else in the world.

In terms of shipments, I think how shipments might go in the second half is really dependent on how the market develops, we will continue to increase our production and we have very strong demand for our zircon, our IP1 and our IP3 products, so our chlorinatable and high grade sulphate products and so the only question is regard to our normal sulphate product and how the market develops for that. To some extent that depends on how smoothly some of these slag plants commission and move forward.

Gerry Hennigan – Goodbody Stockbrokers

Okay. Just a follow-up if I can. I know you can’t say Michael about the Iluka situation but given the market backdrop have you been surprised that there has been more consolidation in the market?

Michael Carvill

Yes and No. I don’t think that there are many opportunities for a successful acquisitions other than ourselves. I think that the Moma project stands out way above any other projects in the market and so am I surprised that there is not more people trying to buy Moma sort of...

Gerry Hennigan – Goodbody Stockbrokers

Okay. Thanks very much.

Operator

There appears to be no further audio questions at the time.

Michael Carvill

No more questions. Okay, well thank you very much to ladies and gentlemen and thanks everybody for attending and staying so long and I hope it was interesting. Thanks a lot.

Tony McCluskey

Cheers.

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Source: Kenmare Resources' (KMRPF) Q2 2014 Results - Earnings Call Transcript
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