The mining company produces titanium minerals and zircon from its operations in Mozambique. And it supplies customers operating from more than 15 countries. The raw materials end up in finished products such as paints, plastics and ceramic tiles.
Strong demand and rising prices
Managing director Michael Carvill said demand for the company’s main product, ilmenite, was “strong” in 2020. He explained that ilmenite is undersupplied across the world. And that’s happened because of depleting ore bodies in Africa, mine closures in Australia, and ongoing restrictions in India.
One consequence is average prices rose by 9% in 2020. And Carvill said that momentum “accelerated” in the past few months. And it’s a similar story with many commodities. Prices have been shooting higher and mining companies have been making more money. Many mining stocks are a lot higher today than they were at the beginning of 2020.
At 403p, Kenmar’s share price has risen by around 70% since the beginning of January last year. However, today’s figures have mostly moved in the ‘wrong’ direction compared to the outcome in 2019. Ilmenite production declined by 15% and total shipments of the finished product fell by 17%. The company said that outcome arose because of poor sea conditions, and works to upgrade transhipment capacity, on top of the lower production volumes.
Revenue declined by 10%. Although higher average selling prices partially offset reduced volumes. But cash operating costs shot up by 19% because of those lower production volumes. The effect overall was a massive squeeze on profits after tax, which plummeted by 63%. Nevertheless, the directors pushed up the total shareholder dividend for the year by 22%. Why? Because it’s all about looking ahead.
Development projects to boost production
City analysts expect earnings to rocket more than 400% higher in 2021. The company has been investing in development projects that look set to improve operations ahead. Better production looks like it could combine with higher commodity prices to produce the elevated earnings outcome.
Forward-looking valuation measures make the stock look cheap against those earnings projections. The earnings multiple for 2012 is around six and the anticipated dividend yield is close to 3.5%. However, I’m being careful never to forget the inherent cyclicality in the business. Only around four years ago, the company was loss-making. And there’s a long history of volatile earnings.
Kenmare and other mining outfits can do all the development projects they like to improve production. But if the prices of the commodities they deal in plunge, the economics of their businesses may fall apart. And that’s why we see such volatile lurches in earnings, dividends and share prices in the mining sector.
It’s a big risk for investors. And with Kenmare having made decent profits for a number of years already, I have to wonder how close the business is to its next cyclical plunge. Nevertheless, I’m tempted to jump into a few of the company’s shares now while keeping one hand on the ejector seat handle.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.