A miner of mineral sands: Base Resources

Tim Carstens is the Managing Director of Base Resources which is an ASX listed Africa focussed miner of mineral sands: that is zircon, rutile and ilmenite. It’s got a mine in Kenya that’s been going for five years or so and it’s got a fairly limited mine life; it’s churning out about $100 million cash a year and the company has just gone debt free. 

The share price hasn’t been going well lately over the last few years partly because the Kenya Mine is running down or at least they can see the end of the mine life there but you’ve got a new project in Madagascar which is in pre-feasibility study stage at this point and it’s a huge mine; it will have a long mine life but they’re kind of between mines at the moment, so it looks like a possible opportunity here to get in early. 

The pre-feasibility study is going to be released, according to Tim, in mid-March and at that point they’ll start talking about the Madagascar Mine and what’s likely to happen there and when it’s going to go ahead, how they’re going to raise the money for it. 

From then on maybe there will be more interest in the company. I thought it’d be a good idea to talk to Tim now just to give you an idea of what’s going on and you can make a decision as to whether or not you think it’s worth hopping into at this point when the share price is down a bit ahead of them announcing the go ahead for the Madagascar mine. 

Here is Tim Carstens, the Managing Director of Base Resources.

Listen to the podcast or read the full transcript below:

Tim, Base Resources is debt free, churning out a heap of cash.  Isn’t it about time you paid a dividend maybe?

It’s certainly been a topic of conversation at the board level and we haven’t really had the latitude to do that given that we were creaking under fairly high debt levels for a number of years.  I guess the point at which we’ve now got the latitude to do that has come at a point where we’re also progressing a very large development project now in Madagascar which is sort of the next iteration of Base’s journey and so we’re managing our capital in the context of that as well.  It’s a bit more of a complex story.

Right.  The picture of the company is that you’re producing cash out of Kenya and you’re investing it in Madagascar, is that right?

That’s certainly the plan.  We’re going through the final study phase on the Madagascar project at the moment but heading towards a decision to commence construction of that project very early in the new year.

Tell us about the Kenya mine, how old is it and how much money are you making there now?

We commissioned in the end of 2013 so we’ve been running now for sort of five or so years.  Last year I think cash generation was $115 million US last financial year, looking at probably a fairly similar number this year but it will drop off a little bit over the remaining life of the mine as we understand it through to the middle of 2024, not significantly but a little bit simply because our grades in the next dune we’re moving to, the South Dune a bit lower than the average that would be mining over the last five years.  We’re still going to generate significant cash.

You did expand production there, recently didn’t you?

Yeah, we did because as we moved towards the end of our central dune, which is where we’ve been mining since we started, the grades actually start to decline in that zone so this year has been sort of more indicative of what we’ll be processing over the future years and so our cash generation does come down a little bit. 

Is that a hard mine life or are you looking for extensions?

We’re definitely pursuing extensions, that’s the mine life on the basis of the resource as it stands but we’ve got a view exploration programs around us that are looking to extend that.  We’ve already extended from the end of 2022 to the middle of 2024 and we’ve just been granted another rather large exploration area just a little bit further to the south of us that we identified through an air born geophysics program a couple of years ago.

It makes sense that there’d be more of it around.  Rutile and Zircon and Ilmenite are fairly widely spread when they appear, there’s quite a lot of it isn’t there?

Yeah, there are.  They’re also deposited in our very particular ways, through wave action, and you tend to find that the remnant deposits like we mine, the dunal deposits are deposited at certain elevations and so we’ve done quite a detailed study around us to work out that there probably wasn’t going to be much and then through some additional thinking we identified that there was probably a different time period where there was a different deposition model, so a different coast line, different sort of circumstances.  Finding mineral sand deposits is not particularly difficult, finding mineral sand deposits with sufficient concentration and scale is slightly more challenging.

What’s the net present value of the Kenya cash, it’s one hundred and something million per year?

Yeah, if you look at it over the remaining life of mine we’re probably looking at generating something like just through to the middle of 2024 there’s probably $400 plus million of cash which is USD, so reasonably significant.

Tell us about the other one in Madagascar.

The one in Madagascar is very similar in terms of it being a mineral sand operation.  It’s a bit more of an ilmenite dependent operation than Kwale which is quite heavily dominated by rutile but one of the things we really liked about the Kwale deposit was the fact that it’s got a revenue to cash cost ratio of around 2.8, 2.6 in the last quarter which places it right at the very top of the industry which means we obviously manage our way through all manner of challenges. 

One of the things we like about the Madagascan deposit is that it’s even slightly higher, it’s heading towards three and it’s multiples of the size, the deposit that we’re starting with and we’re still drilling it out, is four or five or five times the size of Kwale and our Kenyan operation when we started it, a very large, very long mine life and something we’re pretty excited about.  We spent a lot of time studying mineral sand deposits around the world to decide that this was the absolute best one in the world and we got our foot on it a year or so ago.

When you talk about revenue cash are you talking about mine cost, the operating cost of the mine?

Yeah, so when I talk about revenue to cash cost ratio, I’m talking about the revenue per tonne relative to the cost per tonne, so we’re three to one.

I know that the Kenyan mine is quite a cheap mine to operate, so you’re saying that the Madagascan one would be even less, I suppose that’s a function of size to some extent is it?

Yeah, there’s that, there’s also complexity.  The minerality is a bit simpler in Madagascar, we don’t have to deal with what’s called a large slime fraction, which is kind of a clay fraction, which simplifies it but more importantly it’s the revenue per tonne of sand you have to mine.  Because the grade in Madagascar is quite a lot higher than in Kenya when you actually work out the revenue that you generate per tonne of sand you have to dig up a mine, it’s higher than it is in Kwale.  Just to give you some numbers to understand it let’s say our revenue per tonne in Madagascar might be $15 per tonne, the revenue per tonne in Kenya might be $13 per tonne with a cost per tonne that’s reasonably similar.

Right, so the margins.

It’s all about the margins, three to one.

The margins are three to one, right, huge.

Exactly.

Anyone would like a margin like that.

That’s right.  The only other complexity is you’ve then got to invest a rather large amount of capital to make all of that happen.  Then you’ve got the challenge of being in Madagascar.

Tell us about how you’re going to fund the Madagascar – how much is it going to cost and where’s that money going to come from?

Well we haven’t actually been – it’s been one of the frustrations for us when we acquired the project at the start of last year, was that we’re still going through the pre-feasibility study phase at the moment and won’t be releasing that until March so we can’t talk publicly about the capital cost and sort of the economics and everything else of it which is one of the reasons we’re sort of looking at a share price that doesn’t really represent value but in terms of capex Kwale was about $350 million US to build, Toliara in Madagascar will be a bit bigger than that so that sort of gives you a bit of order of magnitude.  In terms of funding we’re really working through a package of four different options, the first is the cash generated from Kwale, we’re going to have a few years of overlap so that provides a base.

We’ve also got a $75 million evolving credit line in place attached to Kwale so that’s available to us.  We’ve got quite a bit of experience with large project financing facilities given that that was a large part of how we funded the Kenyan project so we’re working our way through that process at the moment.  We are also exploring some joint venture opportunities out there to potentially bring in a partner probably someone from downstream in our sector to take a minority position with their motivation really being about securing supply of offtake around the ilmenite.  A few options in the hopper.

Definitely no dividend then?

It depends where we go with joint ventures and the scale of all of that, and what that means for what we need to do with Kwale cash.  We certainly have aspirations to be a dividend payer sooner rather than later but we need to be sensible about capital management in the context of the value we know we can create.

The share price hasn’t been great, you got above 30 cents at one stage last year and now it’s 25 or 24, and basically no one was impressed with you announcing that you’re debt free, nothing happened.

Yeah, nothing has really happened with our stock for a little while because everyone is really sitting back waiting to see what Toliara looks like.  It’s such a big binary sort of change in the shape of our business on two levels, one is the capex and the economics of it and then the second is how you’re going to fund it.  There’s almost this irrational sort of mental model for a lot of potential new institutional holders which is that you’re going to take the cash flow from Kwale for the next couple of years so we’re not going to see that as shareholders, and you’re going to put it into something in Madagascar that you haven’t been able to explain to us yet so I’m kind of not giving you credit for that either.

We’re in this sort of I guess twilight zone a little bit until we get that pre-feasibility study and the economics out in March so we’re just sort of having to bide our time a bit.

What about the politics of these places?  I mean there was a terrible event the other day in Kenya with the Al-Shabaab terrorists coming down and killing people, it’s not all that fantastic over there.

We’ve been dealing with the terrorism risk in Kenya since we first emerged there in 2010 and to be honest there hasn’t been an event in Nairobi since 2013, there had been obviously quite a few attacks but very much along the border lands with Somalia so it doesn’t really impact on us in that sense.  All of our operations and all of our people are in the very southern corner of Kenya, we’re 50km from the Tanzanian border.  It doesn’t really affect us, we don’t see much sort of terrorism activity, if you like, south of Mombasa at any point so it’s something we have to factor in to our thinking in how we manage movement and risk but it doesn’t really affect us directly.

What about Madagascar, what’s going on with their government and the way the place works?

We’ve just had presidential elections over the course of November and December so we now have a new president elect who is due to be sworn in the next couple of weeks.  That all went pretty smoothly, it certainly went peacefully, the result has been acknowledged and accepted formally by the opposition leaders.  Once he is sworn in we’ll have a new government formed and we’ll continue on with life.  Things don’t really change too much in Madagascar in the sense that about 75% recurrent government expenditure is met by donor money and so the World Bank has an extraordinarily strong say in economic policy in Madagascar in terms of trying to set it on the right path.

You tend not to see much gyration in policy settings in Madagascar, it’s all very pro-development.  Fortunately, our new president has hitched his star to our project, down on the coast in the lead up to the elections he made a few very public statements that he sees this project as one of his priorities to make sure it’s driven through to development.

What’s he going to take out, the royalties?

At the moment the royalties in Madagascar are 2% which is quite low by global standards.  Typical royalties for mineral sands around the world, the highest is around 5 in Australia and South Africa, Kenya is at 2.5 at the moment but 2% is low.  Even with that they still haven’t been particularly successful in attracting any new mining investment in certainly over the last eight years.  Prior to that there were two very large mining developments in Madagascar, Rio’s big QMM mineral sand operation which was nearly a billion US, that was well over a decade ago and the other really large one was the Ambatovy nickel cobalt mine owned by Sherritt and that was about a $9 billion investment that was completed in 2013 I think but beyond that there hasn’t been a lot of new investment and they’re pretty actively courting.

Right, and what’s going on with the market for your products, I think the prices of rutile and zircon have been going up haven’t they?

Yeah, they have, there has been a very strong recovery and when we first started operations in Kenya in the end of 2013 we basically just watched prices running away from us down from then right through until the middle of 2016 so it was a pretty tough first few years because a lot of new supply had come in but now it was basically the middle of 2016 we saw demand having caught up to that additional supply.  We’ve seen the ilmenite price recover from sort of $60 a tonne to Citi now at around $150 a tonne, rutile ran from 720 to right now it’s about 1,050, very tight supply.  We’re expecting to see some further price improvement in rutile over the next quarter or so.

Zircon ran from 800 to around 1,500 at the moment.  That’s softening a little bit but we expect to see that track sideways from here.  If we didn’t see any change in prices from where we are, I think we’d be pretty happy.

Remind us what the stuff is used for, ilmenite is used in pigments isn’t it?

Absolutely, ilmenite and rutile are just different forms of titanium dioxide.  Ilmenite is typically around 50% titanium and rutile is about 95% titanium.  Roughly 95% of all of that, ilmenite and rutile, goes into the production of pigment and that pigment is used in everything you see that has a colour, pretty much ubiquitous in everyday life, everything from food colourings to paint.  Zircon is quite different, it’s used as a pacifier, particularly in the ceramics industry it’s used as a refractory, it’s used in welding and a few other things.  Quite a few different uses but the predominant uses are very much I guess hitched to urbanisation and wealth rather than sort of industrialisation.

Has anyone discovered another way to create colours yet?

No.  Unless the world changes the way it engages with colour we tend not to see much movement ultimately in demand for pigment, it’s very tightly tied to global GDP.  The R coefficient is something like 0.91, it’s quite tied to global GDP.

Right, and what about Zircon substitution, any sign of that?

There is potential for substitution in some applications and also some potential for thrifting where the downstream customers will use slightly less of it per square metre, for example in tiling.  That tends to kick in at certain price levels and certainly not at the prices we’re sitting at at the moment, at sort of around the 1,500 mark.  You get up into 1,700 per tonne you start to see those thrifting and substitution themes come back in but prices below that it’s definitely the preferred commodity for the end use.

When do you think you’re going to make some announcements about Madagascar and how you’re going to fund it and what’s going on there, and when the feasibility study is finished?

The pre-feasibility study is the big target, that’s coming out around the middle of March, is the target, that’s going to be our first big opportunity to really talk about the project and get people seeing it the way we see it, so it will be quite a lot of market engagement and public engagement around that.  We’ll also be getting a revised resource statement out taking into account the drilling we’ve been doing which is going to show it as a bigger project than we’ve previously been able to announce.

There’s nothing on the horizon that would make you think there’s a chance that it won’t happen?

No, not really unless the Madagascan government completely lost its mind and decided to implement a new mining policy that made projects completely unviable.  Madagascar is one of the poorest countries in the world, it doesn’t really have the latitude to do that so I don’t expect to see that.  We’re comfortable with the way our market looks, certainly with the economics of the Toliara project and its mine life that’s not going to be something we think is going to be a problem with getting this project up and moving.  The bigger issue is going to be the state of capital markets and particularly debt markets at the time we want to be financing this thing which is towards the end of the year.

Great to talk to you, Tim, thanks very much.

No problem, thanks a lot.

That was Tim Carstens, the Managing Director of Base Resources.