Roger Bell, CFA. Hannam & Partners (Advisory) LLP 2 Park Street Mayfair London W1K 2HX

Transcription

1 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Equity Research 16 October 2017 KENMARE RESOURCES BACK FROM BRINK, BUT RECOVERY STILL UNDERAPPRECIATED After years of turbulence operational issues, poor markets, balance sheet stress Kenmare s prospects have improved. A major restructuring has reduced debt to manageable levels, power supply issues at the Moma mine have been mitigated, while the TiO₂ feedstock market has rebounded. KMR heads into 2018 with minimal net debt, solid margins, and several attractive growth options to harness the potential of its world-class resources in Mozambique. However, we believe the equity market has been slow to recognise KMR s improved investment case. Shares currently trade at ~0.7x our base case Sep 18E NPV of 470p (which includes the recently announced expansion of Wet Concentrator Plant B), or ~0.6x including the potential to fully optimise capacity though the addition of a third WCP. Applying multiples of 1.0x our base case and 0.5x potential growth, we set a 500p Sep 18 target, implying 56% upside to the current price. GICS Sector Materials Ticker LN:KMR Target price (Sep'18E) GBp 500 Share price 13-Oct-17 GBp 321 Market cap 13-Oct-17 (US$m) US$465m OPERATIONS STABILISED AND BALANCE SHEET DE-RISKED Upgrades to the Mozambican grid, the addition of back-up power generators and the installation of voltage stabilisation equipment have improved Moma s productivity since Q4 15. The company expects annual ilmenite output to be ~1Mtpa for E, and is on track to hit this target in FY17E after a solid first nine months. More consistent operations have driven unit costs lower, with KMR guiding to $ /t vs a peak of $199/t in Meanwhile, gross debt has been reduced to ~$100m from a peak of ~$387m, after a major debt restructuring in mid-2016 placed the business on a more sustainable footing. POSITIVE NEAR-TERM TIO₂ PRICING & LONG-TERM FUNDAMENTALS In addition to an internal transformation, KMR has benefitted from improving TiO₂ feedstock markets. Although momentum in Chinese spot ilmenite prices waned during a summer lull in demand, prices have improved in recent weeks (as noted by KMR in its Q3 trading update). Furthermore, KMR s six-monthly contract prices with western customers covering twothirds of output - should increase in H2 17, driving annual FCF into positive territory. Longer-term, we believe TiO₂ s consumer-related applications will support strong demand into later stages of economic development. Indeed, we note China still represents only 25% of global TiO₂ pigment demand, versus over 50% of iron ore, copper and aluminium. ORGANIC GROWTH POTENTIAL Moma s Mineral Separation Plant ( MSP ) was designed to produce 1.2Mtpa of ilmenite, but the Wet Concentrator Plants ( WCPs ) have constrained output to ~1Mtpa in 2017E. We see several straightforward opportunities to expand output by increasing mining and WCP capacity, accelerating the monetisation of Moma s uniquely large reserve-base: firstly, KMR announced on 11 th Oct that it has completed a definitive feasibility study on an expansion of WCP B to be delivered in phases through 2018; in addition, we also factor in an adjustment to Moma s mine plan to exploit higher grade zones sooner, boosting our base case DCF; and finally KMR has outlined the potential to add a small third concentrator ( WCP C ), which we estimate could be worth a further 70p per share in DCF value, although we exclude this project from our base case as it remains at the prefeasibility stage. 2016A 2017E 2018E Ilmenite shipments kt Zircon shipments kt Rutile shipments kt Revenue/t shipped $/t Cost/t of finished product $/t Revenue $m EBITDA $m EBITDA margin % 4% 35% 48% D&A $m Net interest expense $m Tax credit/(expense) $m FX/revaluations/other $m Net income $m EPS US Cashflow from operations $m Interest & tax paid $m Capex $m Other $m Free cash flow $m Net cash/(debt) $m Market cap $m Enterprise value - rolling $m Enterprise value - current $m EV/Sales x EV/EBITDA x P/E x FCF yield % 6% 17% Roger Bell, CFA Kenmare share price (GBp) FTSE All-share Mining Index (rebased) rb@hannamandpartners.com Hannam & Partners (Advisory) LLP 2 Park Street Mayfair London W1K 2HX GROWTH & CAPITAL RETURN POTENTIAL: CATALYSTS FOR RE-RATING Our estimates put KMR on EV/EBITDAs of 6.9x/3.9x for FY17/18E, a significant discount to peers at 11.6x/7.6x based on Bloomberg consensus. With our expectation that FCF will swing further into positive territory in H2 17 and FY18E, and decisions on expansions to come, we see catalysts for KMR s multiples to re-rate as growth and/or cash returns begin to be reflected in the stock. Even after servicing debt, we believe sufficient spare cash should be available by Dec 18E for Management to consider dividend payments.

2 CONTENTS Investment Summary...3 Background... 3 Operations on a more stable footing... 3 At last generating cash post debt restructuring medium-term capital return potential... 4 Value-accretive development options... 4 TiO2 demand should benefit from later-cycle status... 5 Supply unlikely to balance demand at current prices... 5 Mineral sands price deck - spot prices recovering post summer lull... 6 Earnings estimates % discount to base case DCF, with further upside potential p price target only partially reflects growth options... 7 Room for Multiple re-rating vs peers... 8 Sensitivities... 8 Risks... 9 Kenmare re-booted A short history of Kenmare and Moma History Reserve & Resource base mine plan Moma mining & processing facilities Product specifications - Ilmenite Product specifications - Rutile and Zircon Realised price assumptions Demand to remain robust & Supply constrained at current prices Operations have overcome a plethora of issues mining consistency is the key Improved mining rates offset grade decline Impressive cost turnaround, but fewer easy wins remain Attractive expansion options New WCP appears affordable but more conservative options still on the table DCF analysis & price target derivation Financials summary P&L, Income Statement & Cash flow Board of directors Other Senior Management Appendix Mineral Sands Primer What are Mineral Sands? End uses of Ilmenite & Rutile: TiO2 pigment & Titanium metal Mineral Sands value chain Sulphate process Chloride process Pigment demand outlook strongly correlated to GDP A later-cycle product: China still only 25% of demand Pigment demand forecasts Paint remains a relatively fragmented industry Pigment supply: ample capacity in China, tightness ex china TiO2 feedstock Demand TiO2 Feedstock Supply Key feedstock suppliers Supply unlikely to balance demand at current prices Supply-demand balance & pricing expectations DISCLAIMER

3 Q4 2012A Q2 2013A Q4 2013A Q2 2014A Q4 2014A Q2 2015A Q4 2015A Q2 2016A Q4 2016A Q2 2017A Q4 2017E Q2 2018E Q4 2018E Q1 2014A Q2 2014A Q3 2014A Q4 2014A Q1 2015A Q2 2015A Q3 2015A Q4 2015A Q1 2016A Q2 2016A Q3 2016A Q4 2016A Q1 2017A Q2 2017A Q3 2017A Q4 2017E Q1 2018E Q2 2018E Q3 2018E Q4 2018E INVESTMENT SUMMARY After a near-death experience in 2016, Kenmare has enjoyed ~21 months of operational stability, improving mineral sands markets, and minimal balance sheet stress. With contract pricing for its TiO2 feedstock products set to further increase in H2 17E, we forecast KMR will achieve its first ever year of positive free cash flow generation (post-capex) since commencing commercial operations at the Moma mine in 2009 and investing in the Phase 2 expansion from Having de-risked both operationally and financially, we believe equity markets have been slow to recognise in Kenmare an under-valued opportunity to gain exposure to attractive long-term fundamentals for TiO2 feedstocks. Applying a conservative nominal WACC of 16% (13.2% real), our DCF-based valuation generates an Sep 18 NPV/share of 470p, with a further ~70p of NPV upside dependent upon potential expansions under consideration. We apply a 1.0x target P/NPV multiple to our base case comprising Moma s existing operations plus the recently approved expansion of WCP B - and a 0.5x multiple to further potential growth, to derive an Sep 18E price target of 500p/share, implying 56% upside from the current share price. BACKGROUND Headquartered in Dublin, Kenmare owns and operates the Moma mineral sands mine in Mozambique. Moma is the world s largest mineral sands single site operation with the longest reserve/resources life in the industry (166 years at current capacity). Of the company s ~1.02Mt in finished product shipments in 2016, ~952kt were ilmenite and ~7kt were rutile, key feedstocks in the production of titanium dioxide white pigment, while ~65kt were zircon, a form of zirconium silicate primarily used in ceramics and refractories. In 2017E, we estimate 73% of KMR s sales will come from ilmenite, with 25% from zircon. The company s current market cap is $465m, while net debt stood at $39m as of June 2017, giving an enterprise value of $504m. KMR FOB revenue split by product 2017E Source: H&P estimates Zircon 25% Rutile 2% Ilmenite 73% OPERATIONS ON A MORE STABLE FOOTING Kenmare has a history of poor operational delivery at Moma, in part due to the instability of power supply in Mozambique, but also due to poorly scoped, under-powered dredges. Following multiple measures by EDM to upgrade and stabilise electricity transmission to Northern Mozambique, as well as the installation by KMR of a dip-doctor to address momentary lapses in power supply, Moma has managed to achieve guided production levels for the last six quarters, with ilmenite output expected to stabilise at ~1 Mtpa over the period. Nonetheless, despite the addition of a dry mining operation to supplement the dredges, the facilities in place are still below the specification required to reach the company s original Phase II target of 1.2 Mtpa. Total ore excavated (Mt, left-hand scale) and heavy mineral grade (%, right-hand scale) % 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% Total finished product output (kt, left-hand scale) and unit cost per tonne ($/t, right-hand scale) Ore excavated (Mt, lhs) Source: Company reports, H&P estimates HMC grade (%, rhs) Rutile finished product (kt) Zircon finished product (kt) Ilmenite finished product (kt) Unit cost/tonne of finished product ($/t, est) Source: Company reports, H&P estimates 3

4 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Hannam & Partners Research AT LAST GENERATING CASH POST DEBT RESTRUCTURING MEDIUM-TERM CAPITAL RETURN POTENTIAL With a global glut of feedstocks, struggling operations, and limited capital market access during the Iluka offer period, it became clear by early 2016 that KMR was unable to service the Moma project loans. Rather than allowing KMR to fall into bankruptcy and selling the assets in administration to Iluka, the creditors chose to support the issuance of $275m in new equity and accept a significant write-down on the debt. The result post-restructuring was a significant reduction in KMR s net debt burden from ~$375m as of Jun-2016 to ~$45m by Dec 16. Of the new equity raised, $100m was placed with the State General Reserve Fund of the Sultanate of Oman (SGRF), with a further $146m committed by new and existing institutional investors, and $20m underwritten by the lending group. EAIF 2.8% European Investme nt Bank 7.2% Capital Group 6.5% Other 25.0% Majedie 9.5% SGRF 29.1% M&G 19.9% Gross debt outstanding post the deal was $100m, incurring interest of 6m US LIBOR %. As such, we estimate annual net interest expenses will fall to ~$6.5m in 2017E compared to ~$37m in 2015A. Along with higher realised prices and modestly lower unit costs, we expect the lower interest burden to shift KMR into free cash flow positive territory in 2017, driving net debt down to ~$19m by Dec 17E, and delivering net cash of $62m by Dec 18E. Even after debt repayments, we believe KMR should be in a position to consider capital returns to shareholders by the end of next year, in-line with its stated medium-term aim, subject to decisions around potential growth options outlined below. VALUE-ACCRETIVE DEVELOPMENT OPTIONS With ~80% of Moma s cost-base fixed, and spare capacity in the mineral separation plant (designed for 1.2Mtpa in output), KMR has several low-capex, high return options to increase production and lower unit costs by adding capacity to the wet concentrator plants ( WCPs ). The company has completed a definitive feasibility study and has approved $16m in capex for a 20% expansion of WCP B, with the upgrade to be delivered in phases during In addition to this, KMR is conducting a pre-feasibility study on establishing a smaller, third wet concentrator plant ( WCP C ), with 1,000tph dredging and processing capacity (vs nameplate capacities of 3.5ktph for WCP A and 2.0ktph for WCP B). Alongside these projects, KMR has the option to improve Moma s grade profile and boost HMC output by moving WCP B to a higher grade area such as Pilivili or Congolone instead of the scheduled transition to the Nataka deposit in This could be a lower capex solution to support medium-term production volumes, offsetting the expected decline in grades under the current mine plan as WCP A moves towards the end of the Namalope deposit in Given the clear NPV benefit of choosing to move WCP B to Pilivili instead of Nataka in 2021, we factor this option into our base case, although this plan is still to be officially confirmed by KMR. We estimate this relatively straightforward mine plan revision would be worth ~93p/share in DCF value. Such a move may also allow KMR to defer construction of WCP C; indeed, KMR stated in its H1 17 results that options to reduce or defer capex were being considered. Nonetheless, assuming total capex for WCP C of ~$90m (roughly in-line with guidance given by the company at scoping study level in 2016), a three-year build from E, and a long-term ilmenite price of $200/t, we estimate construction of a third wet concentrator would still be viable, with a payback period of ~5.5 years from first capital spend and an IRR of ~33%, adding 73p/share in value on a DCF basis. Projected Free Cash Flow yields under different expansion scenarios 40% 30% 20% 10% Net (debt)/cash profile under different expansion scenarios % -500 FCF yield - current operations (%) +WCP B expansion (%) +WCP B move to Pilivili* (H&P base case) (%) +WCP C addition (%) Source: H&P estimates. *Instead of move to Nataka under current plan. Net cash/(debt) - current operations ($m) +WCP B expansion ($m) +WCP B move to Pilivili* (H&P base case) ($m) +WCP C addition ($m) Source: H&P estimates. *Instead of move to Nataka under current plan. 4

5 Iron ore (seaborne) Aluminiu m Copper Zinc Nickel Steel Lead Gold Platinum Palladium TiO2 Pigment Silver Hannam & Partners Research TIO2 DEMAND SHOULD BENEFIT FROM LATER-CYCLE STATUS Approximately 90% TiO2 feedstock is used in the production of titanium dioxide pigments, of which ~60% is used in paint and ~30% in plastics. With many of TiO2 s end-uses associated with rising standards of living and increases in disposable wealth, in comparison to other basic materials (such as iron ore and base metals), demand growth is expected to remain robust in the later phases of economic growth in the developing world before reaching a plateau. Despite Chinese demand having risen at a CAGR of 10% since 2000, and stagnant demand in N America and Europe, China still only represents 25% of global TiO2 pigment demand, versus over 50% of global demand for iron ore, aluminium and copper. Per capita consumption in China and other developing economies remains less than half that of N America and Europe, with under 20% of the world s population consuming more than 40% of its TiO2. We therefore expect improving standards of living in developing economies to continue to support robust global demand growth, even if China s rapid growth slows to a more moderate pace. China s share of global demand for key basic materials 80% 74% 55% 60% 50% 49% 47% 44% 41% 40% 20% 0% 30% 27% 26% 25% 14% Source: H&P estimates, Bloomberg In addition, pigment inventories are reportedly low at present, meaning restocking demand should support pigment output more than underlying demand growth. This should spur a continuation of recent solid demand for TiO2 feedstocks. Kenmare should also benefit from a recent trend in China towards the chloride process of pigment production, after nearly two decades of rapid proliferation of less technically-difficult sulphate plants. China s domestic sources of ilmenite feedstocks are not suitable for direct or indirect use in the chloride process; therefore, assuming this shift continues, China is expected to become increasingly reliant upon importing higher-quality feedstocks such as chloride ilmenite for upgrading into chloride slag. (All KMR s ilmenite output is suitable for use in both the chloride and sulphate processes). SUPPLY UNLIKELY TO BALANCE DEMAND AT CURRENT PRICES There is no geological scarcity of potential titanium dioxide supply. However, existing production capacity is insufficient to meet future demand, and we believe feedstock prices will need to remain at current levels or higher for a sustained period to incentivise new projects. Firstly, we see little evidence of a significant overhang of potentially priceinsensitive Chinese ilmenite supply typically a by-product of titano-magnetite iron ore mining operations - waiting to return to the market as iron ore and ilmenite prices recover. Chinese iron ore output has already rebounded over the last 12 months; we therefore believe China has also been operating at close to full ilmenite production capacity since H2 16, with the exception of occasional, non-price-driven, temporary environmental shutdowns. Secondly, Iluka s acquisition of Sierra Rutile and decision to proceed with a ~50% expansion has arguably allowed it to de-prioritise growth in the Murray Basin at Balranald, while the company s Cataby project is effectively replacing the Tutunup South mine which is due to close in And thirdly, RIO s investment decision on the Zulti South project to sustain feedstock production for its chloride slag plants at Richards Bay Minerals may be complicated by the expected commissioning in 2018 of Cristal/Tasnee s Jazan smelter in Saudi Arabia, which could add up to 40% to global chloride slag supply. TiO2 feedstock supply/demand (kt of contained TiO2) A 2011A 2013A 2015A 2017E 2019E Total apparent feedstock demand Total feedstock shipments Source: H&P estimates, Company reports 5

6 MINERAL SANDS PRICE DECK - SPOT PRICES RECOVERING POST SUMMER LULL In its July 12th trading update, KMR noted that while its contracted ilmenite prices should see a further uplift in H2 17 vs H1 levels, Chinese spot prices had retreated from their June peaks. However, more recently on October 11 th, KMR reported that domestic Chinese ilmenite prices were strengthening again following an improvement in pigment demand post the usual summer lull, and on tighter mine supply, as a wave of environmental inspections and subsequent shutdowns impacted small ilmenite mines in key producing regions such as Sichuan. We believe this strength should feed through to seaborne prices later this quarter, once current stockpiles have been reduced. We base our earnings estimates and DCF analysis for KMR on the ilmenite, zircon and rutile price deck below, which translates into average realised ilmenite prices of ~$167/t for H2 17 (+7% HoH), $161/t for FY17E, $188/t for FY18E, $188/t for FY19E and ~$200/t in real-terms for FY20E onwards. Approximately two-thirds of KMR s ilmenite is sold on multi-year volume contracts with price re-sets every six months, with the remainder sold on a spot basis, primarily to China. Thus, there is often a lag between improving or deteriorating spot market conditions and KMR s realised prices. Therefore, although Chinese spot prices have risen over the last 12 months, KMR s overall achieved price per tonne sold should continue to increase in H2 17 and into 2018E. Ilmenite, Zircon & Rutile realised price assumptions in nominal terms 2015A 2016A H1'17A H2'17E 2017E H1'18A H2'18E 2018E 2019E 2020E Ilmenite spot price REAL* $/t, FOB est Ilmenite spot price NOMINAL* $/t, FOB est % of sales on spot %, est 15% 19% 33% 30% 31% 33% 33% 33% 15% 15% Ilmenite contract price - NOMINAL $/t, FOB est % of sales on contract %, est 85% 81% 67% 70% 69% 67% 67% 67% 85% 85% KMR realised ilmenite price nominal $/t, FOB Iluka zircon "reference" price REAL $/t Iluka zircon "reference" price NOMINAL $/t KMR "standard" primary zircon disc. to ref. %, est 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% KMR "special" primary zircon disc. to ref. %, est -37% -32% -52% -47% -50% -32% -25% -29% -25% -25% KMR realised primary zircon price nominal $/t, FOB KMR secondary zircon discount to reference %, est -65% -78% -75% -75% -74% -65% -55% -60% -55% -55% KMR realised secondary zircon price - nominal $/t, FOB Rutile spot price REAL $/t, FOB KMR realised "on-spec" rutile price nominal $/t, FOB KMR realised "off-spec" rutile price - nominal $/t, FOB Weighted average price per tonne shipped $/t, FOB Source: H&P estimates and company reports. *Note: we factor 2.5% annual inflation into our model from H2 17 onwards. While we believe the early summer pull back in spot Chinese ilmenite pricing was in part driven by slowing momentum in the restocking cycle as well as seasonally lower demand, we expect spot prices to continue to recover later this year and into H1 18, as demand returns post a seasonal lull and potential shortages emerge due to rolling environmental shutdowns in China. However, by mid 2018E, we believe some currently idled supply (e.g. in India, Vietnam) may return, causing prices to plateau in Post-2019, however, we assume a long-term real price of $200/t for ilmenite, as we believe solid underlying demand growth, declining Chinese supply and disciplined growth from the major producers ex-china will imply healthy pricing is required to keep the market in balance. EARNINGS ESTIMATES With guidance of 950-1,050kt of ilmenite production, 72-83kt of zircon, 9-10kt of rutile and cash operating costs of $ /t of finished product having been reiterated with KMR s trading update on 11 th October, our estimates for 2017E sit roughly in the middle of these ranges, with the exception of zircon which we expect to be towards the bottom of the range, as flagged in the release (see below). Based on our price assumptions, this leads to our EBITDA and EPS estimates of $73m and 25cps for FY17E, generating free cash flow of $26m, the first positive annual result since Moma s commencement of commercial operations in 2009 (albeit Phase 2 capex did dampen FCF during the period). Having reduced debt levels significantly through the financial restructuring in 2016, this positive FCF should see KMR move into a net cash position by mid We expect EBITDA and EPS to continue to improve in 2018E on higher realised prices as spot price improvement feeds through to KMR s realisations, and shipments remain solid. However, we expect modest upward pressure on unit costs to emerge in 2019E in excess of our underlying inflation assumption of 2.5% pa - as heavy mineral head grades decline towards Namalope s published reserve grade of ~3.7%. 6

7 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E Hannam & Partners Research Summary shipment forecasts, income statement, cash flow & net debt 2015A 2016A 2017E 2018E 2019E 2020E Ilmenite shipments Kt Zircon shipments Kt Rutile shipments Kt Revenue/t shipped $/t Cost/t of finished product $/t Revenue $m EBITDA $m EBITDA margin % -8% 4% 35% 48% 46% 44% D&A $m Net interest expense $m Tax credit/(expense) $m FX/revaluations/other $m Net income $m EPS US /sh Cashflow from operations $m Interest & tax paid $m Capex $m Other $m Free cash flow $m Net cash/(debt) $m Source: H&P estimates, company reports. 32% DISCOUNT TO BASE CASE DCF, WITH FURTHER UPSIDE POTENTIAL Based on the assumptions outlined above and a conservative 16% WACC, we estimate a Sep 18E DCF valuation for Kenmare in its current operating configuration of 313p/share (or 349p/share including net cash which would be accumulated by Sep 18E). Within our base case we also include the 20% expansion of WCP B, worth a further ~37p/share, as well as an adjustment to the mine plan to move WCP B to Pilivili in 2021, instead of Nataka, which we estimate is worth another ~93p/share in NPV. We have not included the potential addition of a 1ktph-capacity WCP C in our base case forecasts, as it remains at the pre-feasibility stage. However, given KMR s much improved balance sheet and cash flow profile, we believe a total capex budget of around $90m for the project should be easily affordable, and could be worth ~72p/share in NPV-upside, assuming a 3-year build from Aside from fully utilising Moma s Mineral Separation Plant capacity spreading fixed costs - these potential expansions and mine plan adjustments would help to offset the expected decline in grades as WCP A moves towards the end of the Namalope deposit in Therefore, based on the assumptions above, we estimate these projects could add as much as ~370ktpa of ilmenite output from 2021E onwards, as compared with the existing operations and mine plan. The dilution of fixed costs and potentially better grade profile could also reduce unit costs by up to ~20%, as compared with our base case assumptions. Moma ilmenite output including potential growth options (kt) Finished product unit cost ests with impact of potential growth (US$/t) WCP C addition (kt) +WCP B move to Pilivili* (kt) +WCP B expansion (kt) Current operations/mine plan (kt) Source: Company reports; H&P estimates. *Estimated production uplift from moving WCP B to the Pilivili zone in 2021 instead of current planned move to Nataka, assuming Pilivili Indicated Resource grade of 4.2% total heavy minerals can be translated to Reserves. Current operations/mine plan ($/t) +WCP B expansion ($/t) +WCP B move to Pilivili (H&P base case) ($/t) +WCP C addition ($/t) Source: Company reports; H&P estimates 500P PRICE TARGET ONLY PARTIALLY REFLECTS GROWTH OPTIONS We estimate the addition of WCP C could add up to 72p/share to our base case, which would give a total DCF valuation of ~543p. However, given this project remains at the pre-feasibility study stage and uncertainty over the final capex budget, we apply a P/NAV multiple of 0.5x in our price target derivation to this potential growth. Still, this generates a 7

8 DCF/share - current operations +WCP B expansion +WCP B move to Pilivili* +Sep'18E net cash Sep'18E NPV - base case +WCP C addition Sep'18E NPV - upside case Price Target** assuming 0.5x WCP C KMR share price 13-Oct Hannam & Partners Research Sep 18E price target of 500p (rounding to the nearest 20p), implying 56% upside from the current share price and suggesting the market is overlooking KMR s potential value-creation. DCF-based price target derivation for KMR using 16% WACC 16% WACC DCF $m Target P/NPV Valuation $m USc/sh GBp/sh Current Moma operations - DCF $ X $ WCP B expansion - DCF $ X $ WCP B move to Pilivili - DCF $ X $ Sep'18E net cash/(debt) $ X $ NPV - base case estimates $680.0 $ WCP C addition - DCF $ X $ Valuation / Price target (rounded to nearest 20p) $785.1 $ Source: H&P estimates NPV including growth options & PT vs current share price Source: H&P estimates, Bloomberg. Notes: *Estimated NPV uplift from moving WCP B to the Pilivili zone in 2021 instead of current planned move to Nataka, assuming Pilivili Indicated Resource grade of 4.2% total heavy minerals can be translated to Reserves. **Price Target is rounded to nearest 20p. ROOM FOR MULTIPLE RE-RATING VS PEERS Moma s patchy operational delivery, a country-risk premium for Mozambique and the perception of a significant stock overhang stemming from the lenders taking stock for debt in last year s restructuring (equivalent to ~10% of the shareholder register), as well as relatively limited free float at present, have all weighed upon KMR s traded multiple to earnings despite the company s obvious progress in recent quarters. However, we believe ongoing operational stability, combined with delivery of positive free cash flow in 2017E, could be the catalysts for a re-rating to begin. Kenmare earnings multiples & FCF yields (on H&P estimates) versus peer group based on Bloomberg consensus Mkt cap EV P/E ratio EV/EBITDA FCF yield ($m) ($m) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E KMR (H&P est.) % 17% 21% Base Resources Blue Jay Iluka 3,253 3, % 5% 6% MDL % 19% 15% Lomon Billions 5,788 6, Tronox 3,156 6, Peer group median % 12% 11% KMR vs peer group 14% -61% -54% -40% -49% -35% -334bp 541bp 1,047bp Source: H&P estimates, Bloomberg. Market caps and EVs priced as of close on Friday 13 th October SENSITIVITIES In estimating KMR s earnings and deriving our NPV, we have made assumptions around future titanium dioxide and zircon prices, as well as operating and capital costs. The bar chart below left shows the sensitivity of FY17 & 18E EBITDA to 10% increases in these key input assumptions. The greatest sensitivity is to the ilmenite price, with a 15% change in FY18E EBITDA for every 10% change in input assumption. (The sensitivity is greater in FY18E as we only flex assumptions for H2 17E). Similarly, our DCF-based NPV valuation is most sensitive to ilmenite prices, as shown below right, while opex (unit cash cost per tonne) is also an important driver, with our zircon and capex estimates somewhat less important to our base case NPV. 8

9 Sep'18E NPV in GBp Hannam & Partners Research Sensitivity of KMR 2017/18E EBITDA to a 10% increase in base case ilmenite price, zircon price and unit opex assumptions -15% -10% -5% 0% 5% 10% 15% 20% Sensitivity of KMR Sep 18E NPV/share to ilmenite price, zircon price, unit opex and capex assumptions Ilmenite 8% 15% Zircon 3% 6% Opex -9% -11% Source: H&P estimates EBITDA '17E EBITDA '18E 0-30% -20% -10% 0% 10% 20% 30% Ilmenite Zircon Opex Capex Source: H&P estimates RISKS The risks to the investment case for Kenmare are typical of any single-asset mining business i.e. price risk, volume risk, operating risk and geopolitical risk. Specifically, in the case of Kenmare, we identify the following: TiO2 feedstock prices: as shown above, KMR s earnings and DCF value are highly sensitive to the price of TiO2 feedstocks. Lower than expected prices could have a negative impact on our forecasts and KMR s share price performance. Zircon prices: while less important than TiO2 feedstock prices, lower than expected zircon prices could also have a negative impact on our forecasts and KMR s share price performance. Demand for pigment: lower than expected end-demand for white pigment could have an impact on TiO2 pigment production and in turn have a negative impact on Kenmare s feedstock shipment volumes, which could inhibit share price performance. Disruptions to operations: while we believe the company has learnt from past experiences and mitigated the risk of operational underperformance, Moma still faces multiple challenges which could impact upon planned production rates and/or operating costs, e.g. weather-related disruptions, power reliability, variability in ore grades, clay content, hardness and slurry ability, although the company has mitigated this risk by drilling out the orebody for several years forward to test grade, clay content and hardness. Country risk: Mozambique has so far proved to be a relatively stable host regime for KMR s operations, with incremental changes to the legal and fiscal framework around mining last implemented in (None of which affected KMR due to its fiscal stability agreements, which have never been changed in the company s 30 years of operation in Mozambique). Nonetheless, as evidenced by multiple examples across the global natural resources industry, investors should take heed of the risk of governmental interference, especially given KMR s concentration on a single asset. We attempt to discount this risk by applying a relatively conservative 16% WACC. 9

10 KENMARE RE-BOOTED A SHORT HISTORY OF KENMARE AND MOMA is an Irish incorporated mining company headquartered in Dublin. First established in 1972, in 1986 a group of investors acquired KMR as a cash shell and shifted the company s focus to minerals exploration, with Michael Carvill appointed CEO. In 1987 Plc was listed on the London Stock Exchange, followed by a listing on the Irish Stock Exchange in From 1987 onwards KMR acquired interests in several exploration licenses in Mozambique, including the Congolone heavy mineral sands deposit, as well as the Niassa greenstone gold belt and the Ancuabe Graphite Mine, which KMR operated from 1994 to Kenmare Namalope mine Mozambique KMR s minerals sands activities accelerated in 1996 when BHP became a JV partner in the development of Congolone (located on Mozambique s NE coast), and by 1999 had identified additional heavy mineral deposits at Namalope, Mualadi and Pivilli. However, in 1999 the JV was dissolved as BHP retreated from the titanium feedstock market, and by 2001 KMR had acquired 100% of the licence. Namalope formed the basis of a feasibility study in 2001, which allowed KMR to secure financing and begin construction of the Moma Mine in Phase I of Moma reached commercial production in 2009, with a nameplate capacity of 800ktpa of ilmenite (a heavy mineral containing titanium dioxide), along with rutile and zircon by-products. In 2010, KMR embarked on a Phase II project to expand capacity by 50% to 1.2Mtpa, with an initial capex estimate of ~$200m ( +/-25% ), funded by a combination of project debt from a consortium of lenders, and new equity. After a ~$200m+ overspend and more than a year later than planned, Phase II was commissioned in 2013; however, due to flaws in equipment specifications and EPC contractor underperformance, as well as challenging local operating conditions (not least the inconsistency of electricity supply), the mine has never fulfilled its 1.2Mtpa design capacity. HISTORY 1986: Kenmare start-up to explore mineral wealth in Mozambique 1992: Enters BHP Mineral Sands Joint Venture 2001: Feasibility studies on the Moma Mine were completed in February : Phase II Expansion funding and commence development 1980 s 1990 s 2000 s 2010 s 1987: Exploration in continental Africa (incl. Mozambique) and the Philippines : Additional activities in Mozambique incl. Niassa Gold 1999: BHP exits the JV and Kenmare regains 100% ownership of mineral sands assets : Mine construction and ramp-up 2004: Detailed analysis showed a strong market for Moma products. This allowed Kenmare to approach lenders to finance the Mine and appoint an EPC contractor 2013: Phase II Expansion commissioning and ramp-up Exacerbated by four years of falling titanium dioxide feedstock prices from , Moma struggled to generate sufficient operating cash flow to service its project debts. Interest payments on subordinated loans were rolled into the debt balance, pushing net debt to over $300m by mid With the balance sheet under severe pressure, Iluka Resources, an international, ASX-listed mineral sands miner, was reported to have an approach to acquire Kenmare in June 2014, and commenced a due-diligence process. During a lengthy offer period, KMR s funding situation continued to deteriorate, effectively leaving the company s fate in the hands of the lenders. Rather than taking ownership of the assets in bankruptcy and selling at a discount to Iluka, the lenders chose a rescue package involving $275m in new equity ($100m of which came from the State General Reserve Fund of the Sultanate of Oman), and accepted a write-down on the value of their debts. The net result was a ~$300m reduction in KMR s net debt to ~$45m and a significant alleviation of the annual net interest burden, from $37m in 2015A to ~$6m pa from 2017E. Moma is now on the brink of finally generating positive free cash flow for KMR, aided by a recovery in mineral sands prices and more stable operations following improvements to Mozambique and Moma s power infrastructure. 10

11 Post-restructuring, KMR s gross debt facility was reduced to $100m, with a reduced interest rate of US 6m LIBOR plus 3.75% on senior debt and 4.75% on subordinated debt (equivalent to ~6% pa at present); a repayment holiday until Q1 18 also gave additional flexibility. Post-restructuring, KMR s executive committee can now focus on maximising shareholder value from Moma. With the Phase II processing plant equipment having been designed to reach 1.2Mtpa in ilmenite output, Management has outlined studies to upgrade the key bottleneck i.e. insufficient dredging and wet processing capacity through the expansion of WCP B and, potentially, addition of WCP C (with total combined capex for both previously estimated at ~$100m in a 2016 scoping study). This would increase ore-throughput at the front-end of the process to allow the nameplate 1.2Mtpa target to be reached in the near-to-medium-term, as well as help to offset the longerterm effect of falling grades in the Namalope orebody as the company progresses towards the end of the life of this deposit by ~2026 (before shifting focus to other, potentially higher-grade zones). Current KMR shareholders EAIF 3% European Investme nt Bank 7% Capital Group 7% Other 25% Majedie 9% SGRF 29% M&G 20% Source: Bloomberg, Assuming mineral sands market dynamics remain robust, Moma s uniquely long ~42-year reserve and >100-year resource life could easily support modular, value-accretive expansions, in our view. However, given KMR s troubled operational and financial track-record, management may choose to accumulate cash, reward patient shareholders with dividends, and make a thorough assessment of any growth plans before deploying significant capital on further expansions. RESERVE & RESOURCE BASE The current Resource area covers a 160-km stretch along the NE coast of Mozambique, with a combined Resource of over 8bn tonnes (inclusive of Reserves) with heavy mineral content grading ~2.9%. (Ilmenite represents ~82% of the heavy mineral content, with zircon just under 6% and rutile just under 2%.) Kenmare s reported JORC compliant Reserves and Resources at Moma, as of Dec 2015, are outlined below. Current mining operations are focused on the Namalope reserve. KMR s mining licence at Namalope is valid until 2029; however, operations are scheduled to transition to the Nataka zone in two stages in 2021 and

12 MINE PLAN Current mine area WCP A to 2024 WCP B to 2020 Source: 5km 100+ year life at Phase II expanded production level (1) At current ore throughput rates, the Namalope and Nataka Reserves would support a life-of-mine of ~42 years, although throughput needs to increase to prevent a decline in final product output over the LoM, as KMR has preferentially mined higher grade areas, meaning total heavy mineral head grades will trend lower over time. As discussed later, we estimate a possible expansion in throughput capacity could reduce the reserve-life to ~32 years, albeit over 130 years of resources would remain to be developed. Moma Reserve & Resource statement Reserves Category Ore % % Ilmenite % Ilmenite % Rutile % Zircon THM Ilmenite Rutile Zircon (Mt) THM in THM in ore in ore in ore (Mt) (Mt) (Mt) (Mt) Namalope Proved Namalope Probable Nataka Probable 1, Total Reserves 1, Resources Category Sand % % Ilmenite % Ilmenite % Rutile % Zircon THM Ilmenite Rutile Zircon (Mt) THM in THM in sand in sand in sand (Mt) (Mt) (Mt) (Mt) Congolone Measured Namalope Measured Namalope Indicated Congolone Indicated Nataka Indicated Pilivili Indicated Congolone Inferred Pilivili Inferred Mualadi Inferred Nataka Inferred 3, Mpitini Inferred Marrua Inferred Quinga North Inferred Total Resources 6, Source: To maximise the value of the resource, KMR is considering options to accelerate the development of Congolone and Pilivili, and moving mining activity to these zones when the Namalope reserves are depleted, rather than transitioning to Nataka as currently planned. During 2017, KMR has plans to convert resources to reserves at both Congolone and Pilivili. The fact that Kenmare has multiple options for the future development of Moma in-line with growing TiO2 demand is primarily due to the vast scale of the deposit - unique in the mineral sands industry - with a combined reserve-resource life of more than 100 years based on Measured & Indicated Resources, or over 160 years including Inferred Resources. 12

13 Measured & Indicated Resource life compared with peers % 5.6% % % % 2.7% Kenmare Tronox Iluka-Sierra Rutile MDL Base Resources Resource life (years, lhs) THM grade (%, rhs) Source:, H&P estimates 4.0% 2.0% 0.0% MOMA MINING & PROCESSING FACILITIES Mineral sands are mined in two different dredge mining operations at the Namalope site. First, the area to be mined is flooded to create an artificial pond, from which the mineral sands can be dredged and piped to a Wet Concentrator Plant, which also floats in the pond alongside the dredges, for the first step of the separation process. Two dredges in one pond feed Wet Concentrator Plant A ( WCP A ), and one in the other pond feeds Wet Concentrator Plant B ( WCP B ). The WCPs use spiral gravity separators to separate heavy minerals from silica sand and clay tailings. The resulting product from the WCPs is called Heavy Mineral Concentrate (HMC), which is stockpiled before further processing, while the tailings are deposited straight back into a series of settling ponds. Source: As ore is continually cut from the face of the pond and tailings re-deposited, the dredge pond itself moves over the orebody as the mining progresses. Due to the difficulty KMR has encountered in ramping up its dredge mining operations to consistently meet the Phase II project targets, the company has also added supplemental dry mining operations to feed the two WCPs. Moma simplified heavy mineral concentrate production flow-sheet 13

14 Source: Company presentations After the WCP stage, the HMC is stockpiled ahead of further processing in the Mineral Separation Plant ( MSP ). The target minerals ilmenite, rutile and zircon constitute approximately 90% of the HMC. Front-end loaders are used to transfer HMC from the stockpiles to the MSP. The first stage of the MSP is Wet High Intensity Separation ( WHIMS ), which divides the concentrate into magnetic and non-magnetic streams. The magnetic concentrate contains the ilmenite (which is weakly magnetic); this is dried before further purification using electrostatic separators in either of Moma s two ilmenite plants. (As outlined below, KMR markets three different ilmenite products with differing qualities and grades). The non-magnetic concentrate (containing rutile and zircon) passes through a further stage of gravity separation to remove any remaining silica and other materials, before electrostatic separation into various rutile and zircon product streams. The final products are stored at the site in a 220kt warehouse, before being conveyed 2.4 kilometres to the coast, leading to Kenmare s own all-weather 400m jetty. The material is loaded onto KMR s two transhipment vessels, which then transport the products to a transhipment point 10km offshore where they self-discharge onto sea-going vessels. Moma simplified Mineral Separation Plant flow-sheet Source: Company presentations Moma s other facilities include a 170 km 110 kv power transmission line, a sub-station, a leased 10 MW diesel generator plant, an additional 6 MW of standby diesel power generation capacity, an accommodation village, offices, laboratory, a jet-capable airstrip, water supply and sewage treatment plants. 14

15 Aerial view of one of Moma s dredge mining ponds, floating wet concentrator plant, mineral separation plant and transhipment vessel jetty (top left) Source: PRODUCT MIX PIGMENTS THE KEY END-MARKET Kenmare is a major global supplier of mineral sands from the Moma mine. Most of Moma s output is ilmenite, accounting for 952kt or 93% of total tonnes sold in 2016, with co-product zircon (6%) and rutile (1%). In terms of revenues, we estimate ilmenite accounted for ~73% of FOB sales in 2016, with the higher-value-per-tonne zircon shipments representing 25% of sales and rutile ~3%. (KMR does not provide a precise breakdown of revenues or realised prices). Breakdown of end-product shipments by weight 2016A Est. breakdown of FOB revenue 2016A Zircon 6% Rutile 1% Zircon 25% Rutile 2% Ilmenite 93% Ilmenite 73% Source: Company reports Source: Company reports, H&P estimates. Ilmenite and rutile are raw materials to produce TiO2, 90% of which is used in the manufactures of pigments used in paints, plastics, paper and other applications, while ~6% is used in the production of titanium metal and ~4% in welding fluxes. As such, pigments are by far the most important end-market driver for KMR, accounting for approximately twothirds of the company s sales. Overall, including TiO2 contained in both ilmenite and rutile as well as other intermediate feedstocks (slag, synthetic rutile), Moma s output accounts for around 6-7% of global titanium dioxide feedstock production, making KMR the fourth largest supplier behind Rio Tinto, Tronox-Cristal and Iluka. Global TiO2 feedstock supply is relatively fragmented, with the top four producers only accounting for just over 50% of supply. 15

16 Global TiO2 feedstock* market share India 9% Vietnam 1% Other 15% Other China 14% Kenmare Resources 7% Tronox- Cristal 16% Iluka 6% TiO2 feedstock breakdown by end use: TiO2 white pigment accounts for 90% of applications Other pigments 4% Fibres 2% Inks 4% Paper & pulp 8% Titanium metal 6% Welding electrode 4% Paint 52% Lomon Billions 4% Kronos 2% Rio Tinto 26% Plastics 20% Source: H&P estimates, Company presentations *In terms of TiO2 content; e.g. for Kenmare with an average 53% TiO2 content, production is 0.903Mt*0.53 Source: H&P estimates, company presentations Meanwhile zircon is commonly used as an opacifier in ceramics, as well as in refractories and foundries. Again, Kenmare is the fourth largest producer behind Iluka, Rio Tinto and Tronox-Cristal, although zircon is, compared to TiO2, a more concentrated industry, with the top four supplying over 75% of the market. Global zircon market share Zircon demand breakdown by end use India 4% TiZir 4% Kenmare 6% Other 13% Tronox- Cristal 22% Iluka 33% Rio Tinto 18% Other 2% Specialty chemicals & materials 20% Foundries 12% Refractories 16% Ceramic tiles & sanitary ware 50% Source: H&P estimates, Company presentations Source: H&P estimates, Company presentations PRODUCT SPECIFICATIONS - ILMENITE Kenmare s ilmenite is marketed as three different products, labelled IP1, IP2 and IP3, with varying qualities and grades. While 90% of titanium feedstocks are used to produce 100% pure TiO2 pigment, the route from feedstock to pigment can follow several different paths (see below), broadly subdivided into the chloride process and sulphate process. Moma s highest grade ilmenite product, IP3, which has a TiO2 content of ~56.5%, can be used directly in the chloride process the majority of demand coming from Chemours, the only producer with technology capable of processing ilmenite directly into a chloride pigment. Roughly 25% of Moma s ilmenite output is in this category; with an industry average of around 5%, this is a key competitive advantage compared to other ilmenite producers. The other products from Moma - IP1 with ~52.5% TiO2 and IP2 with ~51% TiO2 are more suited to be used in the sulphate process, or can be used indirectly in the chloride process, but would first require upgrading to an intermediate chloride slag product. 16

17 Ilmenite should not be considered a commodity in the true sense. Each of KMR s feedstock products has a different value in use for each pigment producer, depending on which process the pigment producer follows, what blend of feedstocks their plant is set up to use, how much upgrading the ilmenite requires before it can be used, etc. This has two important consequences: firstly, it makes the pricing opaque, as few producers or end users release commercially sensitive details of the prices agreed within their contracts; secondly, it means the demand outlook for the different grades of ilmenite differs depending on the growth in sulphate or chloride processing capacity. For instance, until ~2012, China invested heavily in less technically challenging and less capital-intensive sulphate processing capacity, driving stronger demand growth for lower grade ilmenite products (often referred to as sulphate ilmenite ), such as KMR s IP1 and IP2. However, the chloride process is less environmentally-damaging and more energy-efficient, and has therefore accounted for most new capacity in recent years, with some old sulphate plants in China and elsewhere now being decommissioned or run at lower utilisation rates. We estimate the sulphate process share of global pigment production capacity has fallen from a peak of ~61% in 2012 to ~56% by 2017E. We expect this trend to continue to boost demand for higher-grade and lower-impurity ilmenites; we note that even KMR s lower-grade IP1 and IP2 products can still be upgraded to chloride slag for use in the chloride process, and are therefore attractive to Chinese importers, as the majority of Chinese domestic ilmenite supply is only appropriate for the sulphate process. This is another important advantage over other low-grade ilmenite suppliers. PRODUCT SPECIFICATIONS - RUTILE AND ZIRCON Rutile is a higher-grade form of titanium dioxide feedstock, containing ~90% TiO2, and can therefore be used to produce pigment via either the chloride or sulphate process, as well as used directly in welding electrode. KMR produces and sells rutile either on-spec or off-spec ; off-spec rutile typically has greater contamination from deleterious elements and sells at a ~40% discount to on-spec product. Broadly speaking, rutile follows similar demand and pricing trends to ilmenite, and, at ~1% of Moma s output and ~2% of revenue, is not a significant driving factor in KMR s investment case. Therefore, for modelling purposes, we assume rutile prices move proportionately to ilmenite. Zircon, on the other hand, is an important co-product and top-line driver for KMR, at ~7% of tonnage and ~23% of revenue in 2017E. The company breaks its reported zircon production into primary and secondary qualities; primary zircon can be further sub-divided into standard and special grade product lines. As with ilmenite, zircon is a non-commoditised market, with different prices for different qualities and forms of the product. However, industry leader Iluka does report a reference price for zircon; KMR s standard zircon product sells roughly in-line with this reference price level, while special grade sells at around a 25% discount and secondary at around a 55% discount. REALISED PRICE ASSUMPTIONS Reliable, timely data on current spot prices for ilmenite, rutile and zircon is difficult to find. The most frequently reported spot price series for ilmenite are for domestic Chinese and imported material. KMR noted in its Q2 trading update on 12th June, Chinese import spot prices fell in June, albeit from elevated levels. Subsequently in its 11 th October update, KMR reported domestic Chinese prices have been rising again in recent weeks, as supply tightness emerged following environmental inspections and pigment demand returned after the seasonal summer lull. With domestic prices rising, the more thinly traded import spot prices should follow suit over the coming weeks in our view. However, only ~33% of KMR s ilmenite is sold on a spot basis to China; the remainder sold on multi-year contracts with volume off-take agreements, with negotiated price re-sets on either an annual or semi-annual basis. As spot prices are above the Jan 17 levels and demand remains solid, KMR expects its contracted ilmenite prices to improve in H2 17E vs H1 17. This should mean overall realised prices also increase on average; we estimate a ~7% improvement in realised ilmenite prices in H2, including the effect of higher contract pricing, as shown in the table below. We also factor in an improvement in the proportion of on-spec vs off-spec rutile recovered, as the company continues to optimise the its mineral separation plant, which effectively boosts our estimated average realised price per tonne of rutile shipped. Similarly, KMR is taking steps to increase the proportion of higher value primary zircon recovered by the MSP, leading to improving average realised prices per tonne of zircon shipped on our forecasts. 17

18 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Hannam & Partners Research Ilmenite, Zircon & Rutile realised price assumptions in nominal terms 2015A 2016A H1'17A H2'17E 2017E H1'18A H2'18E 2018E 2019E 2020E Ilmenite spot price REAL* $/t, FOB est Ilmenite spot price NOMINAL* $/t, FOB est % of sales on spot %, est 15% 19% 33% 30% 31% 33% 33% 33% 15% 15% Ilmenite contract price - NOMINAL $/t, FOB est % of sales on contract %, est 85% 81% 67% 70% 69% 67% 67% 67% 85% 85% KMR realised ilmenite price nominal $/t, FOB Iluka zircon "reference" price REAL $/t Iluka zircon "reference" price NOMINAL $/t KMR "standard" primary zircon disc. to ref. %, est 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% KMR "special" primary zircon disc. to ref. %, est -37% -32% -52% -47% -50% -32% -25% -29% -25% -25% KMR realised primary zircon price nominal $/t, FOB KMR secondary zircon discount to reference %, est -65% -78% -75% -75% -74% -65% -55% -60% -55% -55% KMR realised secondary zircon price - nominal $/t, FOB Rutile spot price REAL $/t, FOB KMR realised "on-spec" rutile price nominal $/t, FOB KMR realised "off-spec" rutile price - nominal $/t, FOB Weighted average price per tonne shipped $/t, FOB Source: H&P estimates and company reports. *Note: we factor 2.5% annual inflation into our model from H2 17 onwards. Realised ilmenite price assumptions (nominal) Ilmenite spot price ($/t, FOB est) KMR realised ilmenite price ($/t, FOB) Source: H&P estimates Realised zircon price assumptions (nominal) Iluka zircon "reference" price ($/t) KMR realised primary zircon price ($/t, FOB) KMR realised secondary zircon price ($/t, FOB) Source: H&P estimates DEMAND TO REMAIN ROBUST & SUPPLY CONSTRAINED AT CURRENT PRICES As we discuss in more detail in the Appendix to this report, we believe the recent fall in Chinese import prices was primarily driven by a seasonal slump in Chinese demand as customers draw down on inventories; we therefore view this slump as temporary, with demand and spot pricing likely to improve when order books are refilled in September/October. In the near-term, we believe the pigment inventory cycle remains favourable: as noted by Iluka with its semiannual results, pigment inventories remain below seasonal norms, which should mean pigment production reflects restocking demand as well as underlying growth in end use. KMR should also benefit from China s shift towards chloride pigment capacity. This is likely to increase reliance on imported feedstocks as much of China s domestic ilmenite supply predominantly mined in inland provinces in SW China is not of high enough quality to use directly or indirectly in the chloride process. Some of KMR s non- Chinese competitors also do not produce ilmenite of adequate quality for the chloride process. Longer-term, we believe TiO2 pigment s later-cycle characteristics should continue to drive demand growth. Chinese intensity of TiO2 pigment use at ~1.1kg per capita remains roughly half of that of developed western economies. In contrast to metals and other materials, demand for paint and plastics, and therefore pigment, has typically grown faster in the later stages of economic growth as countries urbanise and standards of living increase. This should mean TiO2 demand still has room for growth in-line with GDP. Indeed, China s share of global pigment demand in 2016 was only 25%, as compared to over 50% in iron ore, aluminium and copper. Furthermore, even with an already relatively low share of global pigment demand in China, it is worth noting that a significant portion of the pigment consumed in China is in fact re-exported to the US and other developed economies in the form of finished products, e.g. painted cars, white goods, plastics. China s intensity of use and share of global pigment demand should continue to outpace the rest of the world as domestic demand for consumer products grows. 18

19 TiO2 pigment use per capita (kg) Hannam & Partners Research TiO2 pigment use vs GDP per capita >80% of world population, <60% of <20% of world population, >40% of global pigment demand GDP per capita (real 2005 USD) China - hist China - est N America - hist N America - est Europe - hist Europe - est APAC ex China - hist APAC ex China - est C & S America - hist C & S America - est ME & Africa - hist ME & Africa - est Source: H&P estimates, Bloomberg, Company reports On the supply-side, while there is no geological scarcity of potential titanium dioxide supply, we believe existing production capacity is insufficient to meet future demand, requiring feedstock prices to remain at current levels or higher for a sustained period to incentivise new projects. We see little evidence of a significant overhang of potentially price-insensitive Chinese ilmenite supply waiting to return to the market as iron ore and ilmenite prices recover. Chinese iron ore output has already recovered since H2 16 in-line with improving prices; the scope for further supply to return now appears limited, especially considering a new round of environmental inspections in China (as flagged by Base Resources in its FY17 results on 29th August). Secondly, Iluka s acquisition of Sierra Rutile and decision to proceed with a ~50% expansion has arguably allowed it to de-prioritise growth in the Murray Basin at Balranald, while the company s Cataby project is effectively replacing the Tutunup South mine which is due to close in And thirdly, RIO s investment decision on the Zulti South project to sustain feedstock production for its chloride slag plants at Richards Bay Minerals may be complicated by the expected commissioning in 2018 of Cristal/Tasnee s Jazan smelter in Saudi Arabia, which could add up to 40% to global chloride slag supply. Overall these factors give us confidence in the supply-demand outlook for feedstocks and we expect deficits to emerge over the coming years, as shown below. Therefore, as outlined in the price assumptions table above, we assume real long-term prices of $200/t of ilmenite from FY20E onwards, implying a modest increase from the current ~$180/t level. We assume rutile prices follow a similar path, and factor in a modest further improvement in zircon, in-line with Iluka s commentary. TiO2 feedstock supply/demand (in kt of contained TiO2) A 2010A 2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E Source: H&P estimates, Company reports Total apparent feedstock demand Total feedstock shipments 19

20 OPERATIONS HAVE OVERCOME A PLETHORA OF ISSUES As mentioned above, Moma s Phase II expansion project began in 2010 and initially promised to expand ilmenite output by ~50% to 1.2Mtpa. This was to be achieved through an expansion of WCP A s nameplate ore processing capacity from 3,000 tonnes per hour (tph) to 3,500 tph in 2011, as well as the addition of WCP B with nameplate capacity of 2,000 tph, completed in However, the 1.2Mtpa ilmenite output target has never been achieved, as operations have faced a variety of challenges (outlined below). Issue Oct-2010: operations were suspended for a month, and partially impacted through Q1 11, after a settling pond wall was breached causing an outflow of water, sand and clay, causing damage to a nearby village. 2011: KMR experienced a band of clay rich ore which proved harder than expected to process through WCP A, hampering dredging operations & impacting HMC output. This prompted KMR to add a dry mining operation at Moma to supplement the dredges and allow consistent utilisation of the WCPs. 2011: KMR began to experience capex escalation because of the high-level of construction activity in the global mining industry, as well as delays in the delivery of WCP B due to design amendments. Further delays also emerged in issuing drawings for upgrades to the Mineral Separation Plant due to underperformance by the EPCM contractor, E+PC, part of the Aveng Group. 2011: the first of many power supply issues which have frequently hampered operations, in this instance due to faulty voltage stabilisation equipment on the main grid. This was followed in early 2012 by an unusually active cyclone season causing an exceptional number of power dips. Mid-2012: WCP B further delayed due to dimensional inaccuracies in structural steel sections (strong backs) delivered to site, which required rectification, causing delays and cost overruns. Truck drivers strike in South Africa caused further delays in the delivery of components later in H2 2012: upgrades to the grid conducted by Electricidade de Mocambique (EdM) resulted in disruptions in Q3 & Q4. Q H1 2013: Operations were impacted in Q4 12 by greater than expected disruptions associated with the raising of the WCP A dredge pond from a low-lying area 12m above sea-level to the dunal plateau (32m above sea-level), causing ilmenite output to slump to just 575kt for 2012; this process continued to impact production through H1 13. H2 2013: unplanned power outages, rather than dips, became a more frequent occurrence; meanwhile longer than expected disruptions due to commissioning of the expanded facilities at the Mineral Separation Plant impacted on output in Q3. October 2013: a fire in the trommel section of WCP A after routine welding works disrupted HMC output in October and November Jan-Feb 2015: extensive flooding in Mozambique caused a prolonged grid power outage. More localised flooding caused a further outage in Mar-2015 H1 2015: Difficult market conditions forced the company to commence a compulsory redundancy process at the mine in early 2015; subsequent unofficial industrial action disrupted mine production for 9 days in June onwards: power instability issues were primarily related to the grid s inability to handle peak power demand in Northern Mozambique, as well as temporary outages during repair works. Mitigation Safety procedures improved KMR added a dry mining operation at Moma to supplement the dredges and allow consistent utilisation of the WCPs. One of the two dredges at WCP A was eventually replaced with a more powerful dredge. Voltage Stabilisation Equipment (Dip Doctor) installation was completed in June 2013 KMR appointed an additional contractor on site To reduce voltage dips arriving at KMR's substation, EdM installed new static VAR compensator (SVC) on the power line at Mocuba, which is now working. In cooperation with EdM, KMR also refurbished a second SVC at the Alto Molocue substation. One-time move in life of Namalope deposit - dunal plateau is due to be mined until Hot works safety procedures reviewed and training to ensure compliance provided Back-up power generators kept MSP running & could process HMC stockpiles Redundancy process was complete by H EdM increased transmission capacity on the power network by 50 MW (42%) in Dec 2015 and a further 10 MW in mid Power generation was also boosted in Northern Mozambique in 2016 by a shipbased 100 MW mobile plant. MINING CONSISTENCY IS THE KEY The key bottleneck to achieving nameplate 1.2Mtpa output, and lowering unit costs of production, has been the inconsistency of Moma s dredge-mining operations. Amongst the many operational setbacks, the two predominant issues have been power supply disruptions and more difficult than expected mining conditions, especially clay content. However, ore excavation rates have shown an encouraging improvement in recent quarters, due to several internal measures including more detailed logging of clay content to help anticipate changes in mining conditions - as well as improvements to Mozambique s power infrastructure. Power interruptions have typically been most severe during the Southern Hemisphere summer months of December, January and February, due to seasonal rainfall and electrical storms. KMR has mitigated this by running the MSP with 20

21 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E % 4.8% 5.0% 4.4% 4.3% 4.1% 3.7% 3.8% 3.8% 3.8% 3.8% 3.8% 3.6% % A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E , Q4 2012A Q2 2013A Q4 2013A Q2 2014A Q4 2014A Q2 2015A Q4 2015A Q2 2016A Q4 2016A Q2 2017A Q4 2017E Q2 2018E Q4 2018E Hannam & Partners Research back-up power generators during these months, whilst managing power dips from the grid with synchronous condenser ( Dip Doctor ) technology. As shown in the chart below-right, the 8.4Mt of ore excavated in Q1 17 was a record for the first quarter of the year, while the H1 17 total of 17.4Mt was Moma s best ever first-half mining performance. Tougher mining conditions in Q3 hampered ore excavation, but conditions are expected to improve in Q4 and the company was able to sustain finished product output levels using stockpiled HMC. Total ore excavated vs heavy mineral grade at Moma (annual basis) 2012A-2026E % 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% Total ore excavated vs heavy mineral grade at Moma (quarterly basis) Q4 12A-Q4 18E % 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% Source: company reports, H&P estimates Ore excavated (Mt, lhs) HMC grade (%, rhs) Source: company reports, H&P estimates Ore excavated (Mt, lhs) HMC grade (%, rhs) IMPROVED MINING RATES OFFSET GRADE DECLINE We believe the lessons learned, the impact of COO Ben Baxter over the last three years and measures taken at Moma can continue to deliver improved mining reliability over the coming quarters. Nevertheless, KMR s ilmenite production guidance of ~1Mtpa for E remains below the Phase 2 nameplate capacity of 1.2Mtpa; output under the current mine plan is likely to decline thereafter as heavy mineral grades are expected to fall as WCPs A and B come towards the end of the Namalope reserves. We show our estimates for intermediate heavy mineral concentrate and final product output below. Offsetting the decline in HMC grades at Namalope, our base case assumption is that KMR will be complete the expansion of WCP B as guided in its Q3 trading update, and will adjust the mine plan to move WCP B to the higher grade Pilivili zone in 2021, instead of the planned move to the lower grade Nataka deposit. Total HMC output at Moma (annual basis) 2010A-2026E % 95% Total finished product output at Moma (annual basis) 2010A-2026E 1,500 90% % 85% 1,000 80% % 75% % % % - 60% - 60% Total HMC output (Mt) HMC recovery rate as % of heavy mineral content Source: company reports, H&P estimates Rutile finished product (kt) Zircon finished product (kt) Ilmenite finished product (kt) Finished product recovery as % of HMC processed Source: company reports, H&P estimates IMPRESSIVE COST TURNAROUND, BUT FEWER EASY WINS REMAIN Kenmare reports total cash cost per tonne of finished product ( unit cost ), which strips out D&A and other non-cash items from the total P&L operating costs, as well as adjusting for the impact of lags between production and sales. Despite operations being in a higher-grade area of the deposit at the time, unit costs peaked at $199/t in 2013, in part due to additional costs incurred during the ramp-up of the Phase 2 expansion. Since 2013, improving finished product 21

22 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Hannam & Partners Research output has diluted fixed costs, and alongside a cost reduction programme, has driven unit costs down even as grades have fallen. For 2017, KMR is guiding to unit costs of $ /tonne of finished product. Given the likelihood of ongoing pressure on mined grades, and our view that the easy gains in boosting mining reliability have already been realised, we do not model significant further unit cost reductions, with a relatively flat profile over the E period, and average annual increase of ~2.6% over the E period. This is modestly outpacing our underlying inflation assumption of 2.5% pa due to declining grades, although this is less than the ~3.7% CAGR which we estimate would be the case without the expansion of WCP B and relocation of WCP B to Pilivili in Including the potential addition of WCP C, our forecast long-term unit cost profile would fall by a further ~10% (equivalent to a ~1.5% CAGR to 2030E). Nonetheless, we forecast the unit cost reductions achieved so far, combined ongoing realised price improvements, will drive a significant increase in EBITDA per tonne shipped (and hence absolute EBITDA), albeit still below the per tonne levels seen at the peak of the last pricing cycle in Moma cash costs per tonne of finished product ($/t, left scale) vs heavy mineral grade (%, right scale) E Unit cost/tonne of finished product ($/t, est) HMC grade (%, rhs) Source: H&P estimates, company reports 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% EBITDA per tonne of finished product shipped ($/t, left scale) vs shipments (kt, right scale) E 180 1, (20) Total finished product shipments (kt, rhs) EBITDA/tonne shipped ($/t, lhs) Source: H&P estimates, company reports 1, (160) 22

23 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E Hannam & Partners Research ATTRACTIVE EXPANSION OPTIONS As mentioned above, Moma s Phase II expansion project began in 2010 and initially promised to expand ilmenite output by ~50% to 1.2Mtpa. This was to be achieved through an expansion of WCP A s nameplate ore processing capacity from 3,000 tonnes per hour (tph) to 3,500 tph, as well as the addition of WCP B with nameplate capacity of 2,000 tph. However, for a variety of reasons outlined above, operations have never achieved their full nameplate capacity. With ~80% of Moma s cost-base fixed, and spare capacity in the mineral separation plant (which was designed for 1.2Mtpa in output), KMR has several low-capex, high return options to increase production and lower unit costs by adding capacity to the wet concentrator plants ( WCPs ). The company is currently conducting studies on several projects to expand HMC output: Expand WCP B s capacity by 20%: a definitive feasibility study was completed during Q3 17, with a $16m capex budget and one-year build confirmed. KMR plans to deliver the project in phases throughout 2018, and we therefore include this upgrade in our base case forecasts. - 2 Move to a higher-grade zone: pending conversion of Resources to Reserves, KMR could adjust the current mine plan to move operations to higher grade zones such as Pilivili or Congolone. The most obvious opportunity to do this would be in 2021 when WCP B was scheduled to transition to Nataka from its current location in the Namalope Reserve. The company is in the process of proving the Pilivili and Congolone Resources to the Reserve category, and we have assumed in our base case that WCP B does move to Pilivili instead of Nataka in 2021, boosting its mined grade profile. - 3 add a third concentrator: KMR has outlined the potential to establish a smaller, third wet concentrator plant ( WCP C ), with 1,000tph dredging and processing capacity. A pre-feasibility study is currently underway with the company having previously indicated that it expects combined total capex for both options 1 and 2 to come to ~$100m, on the basis of a 2016 scoping study. We do not include WCP C in our base case but have attempted to model its potential impact, assuming a hypothetical $90m budget and three-year build from Overall, with an expanded WCP B and the addition of WCP C, name-plate wet-concentrating capacity, fed by both dredging and dry mining, would increase from the (never fully utilised) ~5.5ktph at present to ~6.9ktph. The location of WCP C could also be chosen to optimise heavy mineral head grades in the ore processed, partially offsetting an ongoing decline in the mined grades in the Namalope deposit. Assuming total capex of ~$16m for the WCP B expansion and $90m for WCP C, and a long-term ilmenite price of $200/t, we estimate the potential expansions and mine plan adjustments would have a payback period of ~5 years and achieve a combined IRR of 54%, adding 202p/share in value on a DCF basis (Sep 18E), although it should be noted we already include 130p of this value in our base case NPV. If KMR chooses to go down the path of expanding WCP B, moving to Pilivili and adding WCP C, we estimate a potential boost to long-term ilmenite production of ~370ktpa, +50% versus the likely trajectory if KMR were to stick with the current operations and mine plan. Compared to ~1Mtpa ilmenite output for E, we estimate production would peak at around 1.2Mtpa and average ~1.1Mtpa over E. Fixed cost dilution through full utilisation of the MSP should also offset the impact of declining grades, lowering unit costs and boosting EBITDA per tonne. Shipments (kt, lhs) and EBITDA/t ($/t, rhs): base case, with expanded WCP B, move to Pilivili in 2021 and with WCP C addition 1500 Cash cost/tonne of finished product ($/t): base case, with expanded WCP B, move to Pilivili in 2021 and with WCP C addition WCP C addition (kt) +WCP B move to Pilivili* (kt) +WCP B expansion (kt) Current operations/mine plan (kt) H&P base case ilmenite output Source: Company reports; H&P estimates. *Instead of move to Nataka under current plan. Current operations/mine plan ($/t) +WCP B expansion ($/t) +WCP B move to Pilivili (H&P base case) ($/t) +WCP C addition ($/t) Source: Company reports; H&P estimates. *Instead of move to Nataka under current plan. 23

24 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E Hannam & Partners Research NEW WCP APPEARS AFFORDABLE BUT MORE CONSERVATIVE OPTIONS STILL ON THE TABLE Based on the DFS capex estimate of $16m for the expansion of WCP B, as well as previously communicated preliminary, scoping study-level guidance of ~$90m in total capex for WCP C, we believe the projects should be easily covered by projected operating cash flows in the coming years, with no need for additional debt or equity funding. Capex assumptions ($m): base case, with expanded WCP B and with WCP C addition WCP C addition ($m) +WCP B move to Pilivili* (H&P base case) ($m) +WCP B expansion ($m) Source: H&P estimates, Company reports. * Assuming WCP B moves to Pilivili instead of Nataka in 2021; note there is no incremental capex for this move as the plant would in any case have to be moved from Namalope to Nataka in 2021 under the current mine plan. FCF generation (as % of market cap): base case, with expanded WCP B and with WCP C addition 40% 30% 20% 10% 0% FCF yield - current operations (%) +WCP B expansion (%) +WCP B move to Pilivili* (H&P base case) (%) +WCP C addition (%) Source: H&P estimates. *Instead of move to Nataka under current plan. However, WCP C is still only at the prefeasibility study stage. Alongside these projects, KMR also has options to improve Moma s grade profile by moving WCP B to higher grade areas such as Congolone or Pilivili which have indicated heavy mineral resource grades of 3.9% and 4.2%, respectively - instead of the scheduled transitions to the Nataka deposit (with a reserve grade of just 3.1% heavy minerals) in and respectively. The company stated at its H1 17 results on 22nd August that it is investigating options to optimise production volumes whilst minimising or deferring near-term capital spend. An accelerated move to a higher-grade zone could be one such option. While it would involve forfeiting some free cash flow while the WCPs are relocated, it would result in higher HMC production without requiring additional dredging capacity, thereby optimising the volumes fed to the Mineral Separation Plant. Given the capex overruns and ramp-up delays experienced during the Phase 2 expansion, we believe management may choose this more conservative approach to optimising HMC production, deferring additional capital expenditures to maximise medium-term cash flow. BALANCE SHEET IMPROVEMENT OFFERS MEDIUM-TERM CAPITAL RETURN POTENTIAL Struggling in the face of inconsistent power supply, falling feedstock prices and spiralling interest costs, KMR s net debt hit a peak of $375m in mid-2016, while EBITDA was, at the time, in negative territory. However, operations have stabilised in the last 12 months, prices have recovered and the H2 16 debt restructuring has reduced net interest to more manageable levels. We forecast positive free cash flow generation from 2017E onwards, to greater or lesser degree depending on decisions on growth projects. Under our base case scenario, we forecast net debt to fall to ~$19m by end Dec 17E and a positive net cash balance of ~$62m by Dec 18E. Gross debt should also begin to fall in 2018 from the current $100m as scheduled repayments on the amended debt facilities resume. Even after accounting for the cash sweep mechanism on the debt, we believe spare cash should be available by end 2018E for Management to consider commencing capital returns to shareholders, in-line with its stated medium-term aim. 24

25 DCF/share - current operations +WCP B expansion +WCP B move to Pilivili* +Sep'18E net cash Sep'18E NPV - base case +WCP C addition Sep'18E NPV - upside case Price Target** assuming 0.5x WCP C KMR share price 13-Oct 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Hannam & Partners Research Net (debt)/cash profile ($m): base case, with expanded WCP B, move to Pilivili and with WCP C addition Net cash/(debt) - current operations ($m) +WCP B expansion ($m) +WCP B move to Pilivili* (H&P base case) ($m) +WCP C addition ($m) Source: H&P estimates, Company reports. *Instead of move to Nataka under current plan. Debt repayment profile: scheduled repayments & forecast cash sweep under H&P base case assumptions E 2018E 2019E 2020E 2021E 2022E Scheduled minimum debt repayment ($m) Accelerated repayments with cash sweep ($m) Source: H&P estimates, Company reports DCF ANALYSIS & PRICE TARGET DERIVATION Our 500p price target is derived from a discounted cash flow analysis using a nominal 16% weighted average cost of capital, equivalent to 13.2% in real terms. We apply a target multiple of 1.0x to our $589m DCF valuation (post-debt) of Kenmare s existing operations, and a target multiple of 0.7x to our DCF valuations for the WCP B expansion project and the potential addition of WCP C. Rounding to the nearest 10p, this gives a Sep 18E price target of 500p per share (using spot USD/GBP FX of $1.32/ ). This implies ~56% upside from KMR s current share price of 321p. DCF-based price target derivation for KMR using 16% WACC 16% WACC DCF $m Target P/NPV Valuation $m USc/sh GBp/sh Current Moma operations - DCF $ X $ WCP B expansion - DCF $ X $ WCP B move to Pilivili - DCF $ X $ Sep'18E net cash/(debt) $ X $ NPV - base case estimates $680.0 $ WCP C addition - DCF $ X $ Valuation / Price target (rounded to nearest 20p) $785.1 $ Source: H&P estimates. NPV including growth options & PT vs current share price Source: H&P estimates, Bloomberg. Notes: *Estimated NPV uplift from moving WCP B to the Pilivili zone in 2021 instead of current planned move to Nataka, assuming Pilivili Indicated Resource grade of 4.2% total heavy minerals can be translated to Reserves. **Price Target is rounded to nearest 20p. We apply a 16% nominal weighted average cost of capital to KMR s free cash flows, calculated based on the company s current interest rate on its amended debt facilities (i.e. 6m US LIBOR basis points), a beta of 1.26x, an equity market risk premium of 6.7% and a Mozambique country risk premium of 6%. We assume a target gearing of 10% debt to total capital. As outlined above, we have assumed long-term real prices of $200/t for ilmenite and $1,200/t for zircon. While we believe these to be appropriate assumptions, we provide a scenario analysis below of our NPV per share for Moma s current operations applying different ilmenite, zircon and WACC inputs. At a 16% WACC, we believe KMR s current 25

26 Nominal WACC Nominal WACC Hannam & Partners Research share price is discounting a long-term ilmenite price of ~$180/t, with little value ascribed to the potential expansion projects. Derivation of 16% weighted average cost of capital assumption WACC calculation US risk free rate 2.2% KMR credit risk spread (back calc) 4.0% Cost of debt 6.2% Effective tax rate 0.0% Post-tax cost of debt 6.2% Beta applied 1.26 Equity risk premium 6.7% Mozambique risk premium 6.0% Cost of equity 16.8% Target gearing (debt/[debt+equity]) 10.0% WACC 16.0% Source: H&P estimates, Bloomberg Sensitivity of Sep 18E NPV/sh (GBp) to WACC & LT ilmenite price Long-term ilmenite price from 2020E ($/t, real) % % % % % Source: H&P estimates, Bloomberg Sensitivity of Sep 18E NPV/sh (GBp) to WACC & LT zircon price Long-term zircon price from 2020E ($/t, real) ,050 1,155 1,260 12% % % % % Source: H&P estimates, Bloomberg 26

27 FINANCIALS SUMMARY P&L, INCOME STATEMENT & CASH FLOW Source: H&P estimates, Company reports, Bloomberg 27

28 BOARD OF DIRECTORS Name Role Tenure (years) Other Directorships Steven James Mctiernan Chairman (non-exec) Principal, Sandown Energy Consultants Ltd Board Member, Energy Solutions Inc Michael Francis Carvill Managing Director 32 Director, Vico Properties Plc Terence Fitzpatrick Technical Director 24 n/a Anthony Mccluskey "Tony" Peter Bacchus Graham Martin Timothy Keating "Tim" Elizabeth Headon Gabriel Smith Finance Director 18 n/a Board Member (nonexec) Board Member (nonexec) Board Member (nonexec) Board Member (nonexec) Board Member (nonexec) OTHER SENIOR MANAGEMENT Director, Chatom Investments Ltd Director, Portland Gate Ltd Director, Stelle Ltd Director, Empson Road Ltd Director, Carvill Scotland Ltd 0.2 Board Member, Galaxy Resources Ltd 1 n/a 1 6 n/a 4 n/a Board Member, Gold Fields Ltd Board Member, Nord Gold Se Head:Mining Invsmt Private Equity, State General Reserve Fund Board Member, Kore Potash Ltd Name Role Tenure (years) Other Directorships Ben Baxter Chief Operations Officer 3 n/a Deirdre Corcoran Financial Controller & Company Secretary 17 n/a Jeremy Dibb Corporate Development & Investor Relations 3 n/a Gareth Clifton Mozambique Manager 16 n/a Eamonn Keenan Group General Manager, Sales & Marketing 23 n/a 28

29 APPENDIX MINERAL SANDS PRIMER WHAT ARE MINERAL SANDS? The term mineral sands refers to beach sand deposits which contain useful concentrations of heavy minerals such as ilmenite, rutile and zircon. These minerals originally form as crystals within igneous rocks (e.g. basalt or granite). As the rocks are weathered and eroded, the minerals are washed down to the coast via rivers or glaciers. Heavy minerals have a relative density of between 4 and 5.5, compared to ~2.65 for quartz (which forms the majority of ordinary beach sand). Consequently, over millions of years, waves and wind carry away the lighter quartz particles, leaving behind the useful heavy minerals. Some beach sand deposits are amenable to dredge mining wherein an area of the sand is flooded and excavated using dredges or dry mining techniques (which are often used where there are higher levels of clay). The heavier particles can then be separated from the lighter sands using gravity separation, producing a heavy mineral concentrate (HMC). Dredge mining at Moma Source: The HMC is then further subdivided, often using magnetic and electrostatic separation, into various saleable mineral products: ilmenite, rutile and leucoxene, which contain titanium dioxide; zircon, a form of zirconium silicate; and monazite, a phosphate mineral containing oxides of rare earth metals and thorium. Name Formula % TiO₂ Colour Density (g/cm3) Crystal form Transparency Ilmenite FeTiO₃ 52.6% Black Hexagonal Opaque Perovskite CaTiO₃ 58.0% Black, brown, reddish-brown, yellow Monoclinic Rutile Tetragonal Anatase TiO₂ 95.0% Reddish-brown, red, yellowish, black Tetragonal Brookite Orthorhombic Brown, green, grey, yellow, Titanite CaTiSiO₅ 35-40% black END USES OF ILMENITE & RUTILE: TIO2 PIGMENT & TITANIUM METAL Monoclinic Opaque or subtransparent Transparent to opaque The heavy minerals ilmenite, rutile and leucoxene contain titanium dioxide and are collectively known as titanium dioxide (TiO2) feedstocks. TiO2 is a non-toxic inert product with a very high refractive index, which gives it a superior ability to disperse light and create a brilliant white colour. Titanium dioxide pigments account for ~90% of demand (in terms of contained TiO2 by weight). The pigments are used in the manufacture mainly of paints, but also other coatings, papermaking, plastics and cosmetics. TiO2 pigment can have one of two crystalline forms - anatase or rutile, each with slightly different properties determining their suitability for the various end-uses. Titanium metal production accounts for ~6% of the end-use of TiO2 units by weight. Titanium has a very high strength to weight ratio, a high melting point and is very resistant to corrosion. This makes it a preferred metal for many applications including in jet engines, power and desalination plants and many medical and electronic uses. Rutile is also used in welding electrodes, accounting for the remaining ~4% of demand for TiO2 units. 29

30 TiO2 feedstocks: 90% of demand for TiO2 units is from TiO2 pigments TiO2 pigment: 58% of TiO2 pigment is used in coatings (paint) Coatings/paint: Mainly architectural (43%) & general industrial (28%) uses Welding electrode Titanium 4% metal 6% TiO2 pigme nt 90% Plastics 22% Inks 4% Paper & pulp 9% Fibres 2% Other 5% Coatings (paint) 58% Auto OEM 8% Packaging 2% Protective & Marine 12% Refinish 6% General Industrial 28% Aerospace 1% Architectural 43% Source: PPG presentation MINERAL SANDS VALUE CHAIN Ilmenite, rutile and leucoxene can, broadly speaking, follow one of two processing paths to produce pigment, known as the sulphate process or chloride process. The sulphate process employs simpler technology and can handle lower grade ores (hence lower grade ilmenites are often referred to as sulphate ilmenites and higher grade as chloride ilmenites ). However, the sulphate process is generally costlier on a unit opex basis, and can be more capital intensive depending on the plant set up required. The chloride process, first commercialised by Du Pont in the 1950s, was developed later than the sulphate process, and offers waste disposal, energy and quality advantages. Often, in both the sulphate and chloride processes, lower grade ilmenite needs to first be upgraded using a smelting process to remove the iron content (which can be sold separately as a pig iron by-product). The smelter slag is known as sulphate slag or chloride slag depending on the pigment production process for which the slag is destined to be used. Sulphate slag generally contains around 72-85% TiO2, whereas chloride slag contains ~85-87%. From raw material to end use mineral sand processing routes Source: 30