This forgotten stock has massive turnaround potential

Updated: 
Mining operations

The last 18 months has been a great time for mining stocks, with the sector bouncing back strongly from its 2015 collapse. However, there are always exceptions, as investors in Irish incorporated mining company Kenmare Resources (LSE: KMR) know to their cost.

Beyond my Ken

Kenmare's share price peaked at 11,850p back in February 2012, but the collapse was swift and just over five years on it trades at just 242p. Lately, it has flatlined, and today's publication of its half-yearly results to 30 June have done little to bring it to life. However, there are plenty of positives in this morning's report, and markets could be overlooking its bounce-back potential.

FTSE 250 listed Kenmare, which has a market cap of just £278m, is a far cry from the big FTSE 100 mining giants. The titanium and zircon producer has just one main asset, the Moma Titanium Minerals Mine in Mozambique, so you have to expect it to perform differently to the wider market.

Moma dearest

Moma posted an 82% increase in revenues to $102.4m in the six months to 30 June, due to rising prices and sales volumes. Over the year it has produced a record one million tonnes of ilmenite, the most important ore of titanium, and remains on target to hit 2017 production guidance.

Half-year ilmenite production rose 25% year-on-year to 504,800 tonnes and Kenmare also posted a healthy 32% year-on-year increase in zircon production to 37,700 tonnes. Total shipments of finished products increased 21% to 535,700 tonnes over the half.

Accentuate the positives

Kenmare has been keeping a lid on spending, with unit cash operating costs down 14% from $153 per tonne in first-half 2016 to $131, due to higher production and continued cost control this time. In 2016 the group posted negative EBITDA of $10.7m, now happily transformed into a positive $29.8m, a shift upwards of $40.5m.

First-half 2017 profits increased to $9.4m, again handily reversing a loss of $47.1m in 2016, a $56.5m positive change. It was greatly helped by a recovery in the price of ilmenite, despite recent signs of softening in the Chinese market.

In the balance

This is a vast improvement on two years ago, when Kenmare posted a pre-tax second half loss of $27.93m on the back a $32.09m first-half loss as its operations reeled from weather-related power outages, remedial work and unofficial industrial action.

Managing director Michael Carvill said it is producing record levels of zircon and capturing more of it in higher quality products. It is looking to reduce or defer capital expenditure, while optimising production volumes and maintaining balance sheet strength. 

Resourceful stock

Given its narrow focus, Kenmare will always be volatile. However, a shift to profitability after four years of losses is highly encouraging, as are management expectations of rising demand for ilmenite and zircon. The numbers appear to be heading the right way, with a negative valuation of -11.7 times earnings forecast to turn into a positive 12.7 times, and operating margins expected to shift from -17.9% to 14.2%.

City analysts expect earnings per share to leap a massive 133% in 2018, when profits should top £50m. Kenmare will remain risky but the fightback has begun, a fact yet to be reflected in the share price. How brave do you feel?

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Harvey Jones has no position in any shares 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.