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Is Kenmare Resources plc a buy after reporting 21% rise in production?

Photo: BHP Billiton. Fair use.

Titanium minerals and zircon producer Kenmare Resources (LSE: KMR) has risen by over 5% following the release of an encouraging trading update for the full year. The company saw a quarterly rise in production of 21%, highlighting its growth appeal. However, within a sector where good value is widely available, does it stand out as a buy right now?

Improving performance

The rise in production in the final quarter of the year meant that Kenmare’s production of ilmenite, rutile and zircon was at record levels in 2016. Further increases are expected in 2017, alongside a reduction in cash costs. They’re expected to be within the previously guided range of $131-$141/tonne in 2016, with further cost savings set to be achieved in future. In the second half of 2016, costs benefitted from higher production volumes as well as a renewed focus on efficiency. This boosted the company’s cash generation, while higher commodity prices could do likewise over the medium term.

Pricing for 2017 remains positive according to the company’s update. Ilmenite prices are expected to be supported by low product inventories throughout the value chain. During the fourth quarter, demand for titanium feedstock outstripped supply, resulting in higher ilmenite prices. The company was unable to benefit from this since it had agreed contracted prices previously. However, it believes that those higher prices will be realised in 2017, which bodes well for its outlook.

Profit potential

Clearly, Kenmare is a relatively risky business to own at the present time. It’s expected to post a loss in 2016, which would be its fourth consecutive year of being in the red. However, its performance is set to change this year, with a pre-tax profit of £16m forecast for 2017. This is expected to grow by 196% in 2018, which puts the company’s shares on a price-to-earnings growth (PEG) ratio of 0.1. This compares favourably to many of its mining sector peers such as BHP Billiton (LSE: BLT). It has a PEG ratio of 0.2 which, while higher than that of Kenmare, may prove to be more appealing.

A key reason for this is BHP Billiton’s lower risk profile. It produces a range of commodities, including an oil and gas division that has the potential to benefit from a rapidly rising oil price. This means that should the price of one or more commodities fall, the company’s other divisions could help to offset this. In addition, BHP Billiton has a stronger balance sheet than Kenmare and may be better able to survive a downturn than its smaller sector peer.

While Kenmare is an attractive buy right now, it’s still some way off being a successful business. However, for investors who can live with what may prove to be an uncertain near-term future, the rewards on offer in the coming years could be high. For most investors though, the more enticing risk/reward ratio of BHP Billiton makes it the better buy.

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Peter Stephens owns shares of BHP Billiton. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.