Hello, did you see their recent share buyback? The stock didn't respond that much, only a 1% gain. Also, do you know when their next earnings is? I looked online but there wasn't much information except sites that showed earnings to be "N/A."
This is a very detailed analysis. What bothers me a lot is the history of massive dilution. Why do you think it's not gonna happen again?
There will also be a discussion about Kenmare at the London Value Investing Club at 5th December. Definitely, I want to learn more from people that follow the company.
The dilution historically related to what in hindsight can be regarded as a once-off balance sheet restructuring to deal with a debt issue combined with production problems, and the price of ilmentite collapsing in 2015/2016. So essentially three things went wrong at the same time, and the likelihood of similar happening again is low, particularly when you consider the company's financial and market positions today.
The business is very different today, now having fully ramped operations and being in a net cash position and highly cash generative - its dividend and buyback programmes are testament to this.
Just one big concern. The key assets located in the Northern parts of Mozambique. This has been a very unstable region are recently with various insurgencies from both ISIS related and other terrorist groups causing havoc in the bordering Cabo Delgado province. Things look better presently....and the mining assets are a few hundred km's away from the insurgencies.
The Mozambique government is also known for its shady business dealings.
I was surprised that you did not discount this into your analysis. Maybe, for this reason, KMR should trade at a discount, though not nearly as large as the current discount.
Because of the geopolitical risks involved I think the asset would be worth more to a larger more diversified mining company than to minority shareholders. A takeover argument is thus very compelling. However this would again acquire approval from Mozambique government ?
The insurgency has been largely confined to Cabo Delagado, which is ~700 miles further to the North from Moma, so it is quite removed from Kenmare's operations, and has had no impact to date on KMR. Furthermore, government forces supported by Rwandan troops have successfully pushed back the militants. The latest news reports now indicate the insurgency is weakening following Rwandan intervention:
So I don't think a large discount is warranted for KMR on this issue. Also my base case multiple of 6x is below comps at 7x - 8x, so I effectively incorporate a discount to peer multiples anyway.
Regarding the point about Mozambique government, KMR has a very positive relationship with the government (KMR has been in Mozambique since 1987) and has invested significantly in local communities around Moma, so I don't see the government doing anything that would damage KMR's operations or value. Also KMR is a meaningful source of tax and royalty revenues in Mozambique so again I don't see a major risk here.
On your final takeover point, yes an acquirer would likely need Mozambique government approval to complete a takeover of KMR, which I don't believe would be withheld if the acquirer continued to invest in the local economy. Given the importance of ESG mandates (which include local investment/development) now for all miners and natural resource companies, I don't see this as a hurdle to a takeover of KMR.
"The model implies KMR will be running at an underlying FCF yield of ~21% (ex-Nataka capex) by FY23, rising to a 30%+ yield by FY25."
Can you help me with this math (using your #s, slightly cheaper today)? Are you basically taking starting EV + cumulative cash build by FY25 and calculating the EV/UFCF yield in FY25 at that point? Because I only see ~100m of FY25 FCF on today's market cap of ~$600m or ~16% fwd FCF yield. Less if discounted back.
Is another way to think of it: Current EV + nakata required capex = $823m. Add up FCF from now until FY25 = ~400-450m so get 50% of EV back in next 4 years? Seems pretty good, but not amazing given prices are well above trough levels (i.e. macro needs to keep being okay). Thoughts?
On the math - the ~21% FCF yield in FY23 = $193m EBITDA - $48m capex - $38m tax = $107m FCF (working capital neutral and no interest as debt free at that point).
EV in FY23 = $623m market cap (as shown in model in FY23 column) - net cash of $120m (also shown) = EV of $503m
107/503 = 21.3% FCF yield on FY23 EV.
Same calc for FY25, using numbers in model FY25 column. Note cumulative net cash position of $292m in FY25, or EV of $330m with $107m of FCF.
Once again great work, Conor! Nonetheless I think there is small mistake in the "Recent Results & Trading Update" table. Shouldn't the second column be FY 21 instead of FY 20?
Hello, did you see their recent share buyback? The stock didn't respond that much, only a 1% gain. Also, do you know when their next earnings is? I looked online but there wasn't much information except sites that showed earnings to be "N/A."
This is a very detailed analysis. What bothers me a lot is the history of massive dilution. Why do you think it's not gonna happen again?
There will also be a discussion about Kenmare at the London Value Investing Club at 5th December. Definitely, I want to learn more from people that follow the company.
Thanks for reading and commenting Dimitrios.
The dilution historically related to what in hindsight can be regarded as a once-off balance sheet restructuring to deal with a debt issue combined with production problems, and the price of ilmentite collapsing in 2015/2016. So essentially three things went wrong at the same time, and the likelihood of similar happening again is low, particularly when you consider the company's financial and market positions today.
The business is very different today, now having fully ramped operations and being in a net cash position and highly cash generative - its dividend and buyback programmes are testament to this.
Great work Conor.
Just one big concern. The key assets located in the Northern parts of Mozambique. This has been a very unstable region are recently with various insurgencies from both ISIS related and other terrorist groups causing havoc in the bordering Cabo Delgado province. Things look better presently....and the mining assets are a few hundred km's away from the insurgencies.
The Mozambique government is also known for its shady business dealings.
I was surprised that you did not discount this into your analysis. Maybe, for this reason, KMR should trade at a discount, though not nearly as large as the current discount.
Because of the geopolitical risks involved I think the asset would be worth more to a larger more diversified mining company than to minority shareholders. A takeover argument is thus very compelling. However this would again acquire approval from Mozambique government ?
Thanks for reading and commenting Drikus.
The insurgency has been largely confined to Cabo Delagado, which is ~700 miles further to the North from Moma, so it is quite removed from Kenmare's operations, and has had no impact to date on KMR. Furthermore, government forces supported by Rwandan troops have successfully pushed back the militants. The latest news reports now indicate the insurgency is weakening following Rwandan intervention:
https://www.france24.com/en/live-news/20220209-captured-jihadists-in-mozambique-say-insurgency-weakening
So I don't think a large discount is warranted for KMR on this issue. Also my base case multiple of 6x is below comps at 7x - 8x, so I effectively incorporate a discount to peer multiples anyway.
Regarding the point about Mozambique government, KMR has a very positive relationship with the government (KMR has been in Mozambique since 1987) and has invested significantly in local communities around Moma, so I don't see the government doing anything that would damage KMR's operations or value. Also KMR is a meaningful source of tax and royalty revenues in Mozambique so again I don't see a major risk here.
On your final takeover point, yes an acquirer would likely need Mozambique government approval to complete a takeover of KMR, which I don't believe would be withheld if the acquirer continued to invest in the local economy. Given the importance of ESG mandates (which include local investment/development) now for all miners and natural resource companies, I don't see this as a hurdle to a takeover of KMR.
Thanks for the comprehensive reply. I live in South Africa, so if there is anything you need from down here, don't hesitate to ask.
"The model implies KMR will be running at an underlying FCF yield of ~21% (ex-Nataka capex) by FY23, rising to a 30%+ yield by FY25."
Can you help me with this math (using your #s, slightly cheaper today)? Are you basically taking starting EV + cumulative cash build by FY25 and calculating the EV/UFCF yield in FY25 at that point? Because I only see ~100m of FY25 FCF on today's market cap of ~$600m or ~16% fwd FCF yield. Less if discounted back.
Is another way to think of it: Current EV + nakata required capex = $823m. Add up FCF from now until FY25 = ~400-450m so get 50% of EV back in next 4 years? Seems pretty good, but not amazing given prices are well above trough levels (i.e. macro needs to keep being okay). Thoughts?
Hi, thanks for reading and commenting.
On the math - the ~21% FCF yield in FY23 = $193m EBITDA - $48m capex - $38m tax = $107m FCF (working capital neutral and no interest as debt free at that point).
EV in FY23 = $623m market cap (as shown in model in FY23 column) - net cash of $120m (also shown) = EV of $503m
107/503 = 21.3% FCF yield on FY23 EV.
Same calc for FY25, using numbers in model FY25 column. Note cumulative net cash position of $292m in FY25, or EV of $330m with $107m of FCF.
Hope this clarifies.
Once again great work, Conor! Nonetheless I think there is small mistake in the "Recent Results & Trading Update" table. Shouldn't the second column be FY 21 instead of FY 20?
Thanks Roman, yes correct - table amended now to correct H1 FY21 & FY20 headings. Thanks