Base Resources (AIM, ASX: BSE) – Mineral Sands in the Pink

Can Base Resources build on the success of their first project in Kenya without shareholder dilution? We interviewed Tim Carstens, Managing Director of Base Resources to find out.

Their ‘new’ project in Madagascar has a lot of similarities to the first project so a lot of learnings and complementary skill sets. Mineral Sands is little understood by investors as it is small market with few players, but it can have very high-margins. Rutile and Ilmenite are both used in the production of pigment ie: to colour paper, plastics, cosmetics. Plus Zircon is used in ceramics & tiles.

They produced some good numbers last year so we discuss the future for the business and find out where that growth comes from. Carstens tell us what he thinks it is going to take for investors to see a movement in the share price. We discuss their plans for project financing at the new project. They are debt free but there is no movement in the share price. When does the plan kick in for shareholders? Carstens also breaks down the shareholder register and what type of investor he is looking for.

Carstens says East Africa is better for business than West Africa but how is he planning to spend the money they made in Kenya? With no dividends on the horizon, where is the value being created? Lot’s of deliverables in the next year to build this Mineral Sands company in the hope of becoming a mid-tier company with only a few peers.

Interview Highlights:

  • Overview of the Business: What are Mineral Sands?
  • Review of Last Year and Focus on Safety.
  • Madagascar Asset: How Will They Get it Financed?
  • Share Price & Shareholders: What are They Doing to Bring Value to the Company? What’s Their Strategy for Growth?
  • When and Why Should You Invest?
  • Deliverables for Next Year.

Click here to watch the interview.


Matthew Gordon: Thanks for joining us Tim. You’re doing the rounds in London. Are you going anywhere else?

Tim Carstens: No, not on this trip. This is one of our regular visits to support the listing over here.

Matthew Gordon: Let’s start off with a minute summary on the business.

Tim Carstens: We’re a pure play Mineral Sands Company listed in Australia and here in London. We’ve got a highly profitable, successful operation that we developed in Kenya. It was Kenya’s first Large-Scale Mining project, and we’ve now picked up the learnings from that and looking to apply it in a new project we acquired about 18 months ago in Madagascar. A very similar style of mineral sand operation, a little bit bigger in terms of capital and looking to bring that into being and create a pretty unique mineral sands company that’s got a very clear growth path, highly profitable. And, something we think is going to have strategic relevance in the sector.

Matthew Gordon: For people new to mineral sands, please explain what it is.

Tim Carstens: In our terms, mineral sands… we basically produce three products. Rutile is the biggest component of our suite in Kenya. It’s the highest-grade form of Titanium Dioxide. It’s about 95%. We also produce a lot of Ilmenite, which is a lower grade form of the same material – Titanium Dioxide. And the majority of both of those go into the production of pigment. That 95% of all of Titanium Dioxide materials go into production of pigment. So, everything you see with a colour.

Matthew Gordon: So, paints, plastics, paper inks…

Tim Carstens: Food dies, you name it, make-up all has Titanium Dioxide pigment. And so, consumption is very tightly tied to a global GDP. Now it’s more of an urbanization and wealth driver, I guess, than industrialization. And then the third component for us is Zircon, which is quite different, predominantly used in the ceramics industry, in glazes and tiles and the like. Also has some other sort of industrial uses as well.

Matthew Gordon: You’ve said this project’s been going 18 months. How did last year go for you, 2018-2019?

Tim Carstens: Well, there’s two parts of the business – first is Kwale the operating mine in Kenya. We got our first shipment away in February 2014. So, we’ve been going for a while there.

Matthew Gordon: That’s cash producing, profitable

Tim Carstens: Significantly cash producing.

Matthew Gordon: Give us a sense of those numbers.

Tim Carstens: I mean last year was USD$113M. That was a record year, revenue was at USD$209M, so very, very significant producer.

Matthew Gordon: Debt free?

Tim Carstens: Debt free. We have now paid out the original $235M project financing that was used to part fund the construction with net cash of $20M. So, a very strong year last year from an earnings perspective. Another very strong year from a safety perspective. We haven’t had lost time injury since February 2014 right across the business. We haven’t had a medically treated injury for two years. It’s an extremely strong safety culture in our business.

Matthew Gordon: Let’s touch upon that, because most people don’t bother talking about.

Tim Carstens: Ours is a less inherently dangerous form of mining than compared to Hard Rock Underground, for example. But yet there’s still an awful lot of moving parts in our business. You know, road transport, a lot of risks. The reason we focus on it is 1. It’s central to sort of how we want to go about doing business. 2. But it’s also a pretty good window in on the performance culture of the business in general. Because you never find a business or an operation that has really good safety performance and poor operational performance because the management disciplines that drive one, drive the other. The other reason it’s really important for us is we’ve come into a country with no history of mining in Kenya, in terms of no large-scale mining. We’re 98% Kenyan workforce. So roughly 1,000 people on site. So being able to embed that sort of safety culture in an environment that’s not used to it is a significant achievement.

Matthew Gordon: You’re also spending a bit of money on some CSR activity.

Tim Carstens: We do spend a significant amount each year. It was about $3.8M last year on community development and environmental enhancement programs. We’ve actually banned the use of the phrase “corporate social responsibility in the business” largely because it’s the language of obligation. Its what companies feel they need to do to be seen to be corporately socially responsible. We take a slightly more strategic view on it. In that for us, we need to have a community and a government that has a felt fair exchange of benefit, mutual benefit with us so that at one level we have a really proud, happy workforce. We have a community that will defend the project or the mining operation against any sort of political interference. And then at the other end of the extreme, we have a community and a government. They’re a fantastic reference for us when we want to move into somewhere like Madagascar, where we’ve now gone. We’ll be able to point to what happened in Kenya. And you very quickly have a government that recognizes you as someone they want operating in the country.

Matthew Gordon: Let’s talk about Madagascar. That’s a relatively new operation. How are things going?

Tim Carstens: That’s going really well. We bought it as a project, so it’s going through the study phases at the moment. We completed the Pre-Feasibility Study (PFS) in March, which reinforced our view of it being probably the best undeveloped mineral sand asset in the world. We’d looked at a lot of projects before we decided it was the one we wanted to go for. We’re now completing the definitive study, which will be out in December 2019. And that will then form the basis for completing the financing for development.

Matthew Gordon: So how are the conversations on financing are going? What are you looking for?

Tim Carstens: They’re going well. We’re looking at a combination of things at the moment. There will be a fairly significant debt package as part of the funding. We’re pursuing two options. One is a classic project financing, very similar to what we did in Kenya. And in fact, involving a lot of the same banks who had a fantastic experience with us first time round. They like the way we do what we do. They like the project and the way it gives them an entry into Madagascar in ways that probably haven’t had a lot of access to before. So that’s one debt funding option. We’re also pursuing in parallel a Nordic Bond, exploring that possibility and looking to put in place something around $350M debt facility. And in parallel with that, we’re also progressing a few joint venture discussions just to sort of understand what might be possible in with some industry plans.

Matthew Gordon: So, things are obviously going well on that front. The share price though. If I look at the history, in 2016, things took off in Kenya. The share price went screaming all the way up to $0.19. Very nice.

Tim Carstens: It’s been a bit of a wild ride almost from the moment we turned the plant on in Kwale in early 2014, our commodity prices were falling. And so, we actually got to the point in February 2016 of having a market cap of $16M. That was the low point when it was A$0.026 cents. And then we saw commodity prices turn and in about the middle of 2016 and share price shot up. We were up in the $0.30s. But we’ve largely tracked sideways since we acquired Toliyara sort of sat in a channel, $0.24 to $0.30 cents somewhere in that range. And to a certain extent, that’s explained by the market needing some more clarity on exactly how we’re going to fund the project.

Matthew Gordon: And that’s what I want to get into in now. If I look at some of the statements in your PowerPoint, you’ve mined more ore, your numbers are generally positive. You’ve paid down debts, you are net debt free. The share prices continued on a general downward slope. It’s been fairly up and down, but the general trend is slightly down.

Tim Carstens: I disagree with that. It’s been trending up for the last 12 months, but I see it’s exactly where it was twelve months ago.

Matthew Gordon: People can get have a look at the chart and work out how they feel about that statement. What is the go forward strategy here? Where are your loyalties? You’ve got loyalty to employees, loyalty to the community, loyalty to shareholders. But what are you doing for shareholders going forward? What’s the growth component to the story?

Tim Carstens: Well Toliyaras is clearly the growth component.

Matthew Gordon: But when does it kick in?

Tim Carstens: Well, on the sort of timetable we’re on, we’re aiming to be in production by the middle of 2022, which will still see us with overlap with Kwale – two operations running. You’ve got that diversity of earnings and extremely powerful earnings profile. I mentally Toliyara based on the PFS numbers is going to spin off free cash flow each year of around $13M. So significant cash flows across the two. One of the challenges in developing an asset in Kenya or Africa generally is getting full value in a share price sense for the earnings you generate simply because of this perception of risk. And that’s particularly exacerbated when you’re a single asset, single jurisdiction company. So, our strategy had always been to let’s go get Kwale up and moving. Use it to build our business model. Use it to build our capital base, our reputation, our scale with a view to then taking all of that to move to the next asset, to get that diversity happening and build a company with a number of operations that smooths that out and starts to unlock the latent value of the earnings.

Matthew Gordon: Do you think you’re telling that story well at the moment?

Tim Carstens:  We’re telling the story as well as we can at the moment, because the key unknown for people is exactly how we’re going to fund it. And we can’t explain it any more than we are at the moment, because we’ve got all these components that are moving forward sensibly. They can’t move forward any faster because obviously completion of a DFS is central to that. It’s a long-term exercise building a business from scratch.

Matthew Gordon: You are throwing out cash, you are paying down debt, and you’re looking after the administrative side of things. At what point do current investors or new investors get interested in you again. Are they going to wait until you get your debt package in place in the new year? Is that the moment they should really be looking at you?

Tim Carstens: I think people are crazy not getting involved now. But I understand why they aren’t. Because, we’ve got a very clear picture of what the value is in this business. And it’s a question of time before people actually see that. As I keep repeating, for a lot of people the lack of clarity around exactly how we’re going to fund it gives people a sense of maybe they’ll go fund raising and that’s something that we need to dispel. The other part to it is that we have a ridiculously supportive shareholder base where the top 20 hold 91% of the stock. The top three hold 65% of the stock at the current share price. No one’s really interested in letting any stock go.

Matthew Gordon: Isn’t that part of the problem?

Tim Carstens: Well, it is part of the problem, no question. But it’s why we need to be a little bit patient with this, because for someone looking to get in in a meaningful way as an institution, you’ve got to get yourself comfortable with the value proposition. You’ve then got to be able to see a pathway through to acquiring some stock in the first place. And then you’ve got to get yourself comfortable. You can exit if you wanted to. So, this liquidity share price standoff is unquestionably one of their challenges. The catalyst for breaking that is quite clearly getting the DFS out. So, that’s the next level of resolution around the shape of the project. But the critical catalyst, as far as I’m concerned, is when we’re able to go out quite clearly and say, here’s what the debt looks like, here’s what any joint venture looks like, here’s how the rest of the funding comes together. And this is what that means for you shareholders. Now, I think if people sit and wait until that happens, they might find they miss out.

Matthew Gordon: So that says to me that you’re interested in institutional investors, not so much retail?

Tim Carstens: No, not necessarily. We’ve made a concerted effort now to really reach out to retail. We just seem to have been more successful in getting to the institutional side of things, we’ve done quite well there. But the retail is somewhere we need to spend more time focusing on.

Matthew Gordon: Why’s that?

Tim Carstens: When you’ve got limited liquidity, they’re the people that are going to set the share price and then the price becomes the price at which blocks trade. And it’s something we do need to…

Matthew Gordon: And do you find that’s a much harder story to tell to retail? You mentioned the Africa component here. Also, mineral sands being little understood.

Tim Carstens: Yeah one of the challenges with mineral sands is there are so few pure play mineral sands companies in the world. It’s not a story that people get to touch regularly, even amongst institutional investors. They don’t see too many mineral sand companies coming around. It’s a less immediately clear sector in the sense that you don’t get a lot of commentary about it, it’s not like people talk about it like what’s happening in the copper price or nickel or whatever. And then you’ve got the Africa factor as well, which a lot of people just aren’t really quite comfortable with what Africa’s about.

Matthew Gordon: With gold, more so than most other minerals in Africa they might be a little bit more comfortable.

Tim Carstens: I always find it interesting that people seem to be more comfortable with gold in West Africa than super simple mineral sands in East Africa.

Matthew Gordon: Gold’s a very big market in terms of value terms and it’s been around a while. And mineral sands is new and it’s a smaller market.

Tim Carstens: It’s more the nature of the countries you’re talking about. There’s a lot more policy volatility in West Africa than there is in East Africa at the moment, except for Tanzania.

Matthew Gordon: I like Tanzania, I’ve worked there.

Tim Carstens:  It’s a great country, an interesting policy environment. People are waiting to see if there is a knock-on effect.

Matthew Gordon: Shareholders are sitting around patiently waiting for this pop. And you think it’s going to come when there’s clarity on your debt package. What are you going to do for them? Kenya generated a lot of cash. You’re hoping to replicate that in Madagascar. Is there some kind of dividend coming down the line or some share buybacks?

Tim Carstens: Shareholders fall into two categories in our world, the shareholders who would suggest that a dividend to be good. And then there is the vast majority who say, don’t be stupid because we’re looking for that growth. We can see the project coming next year. Why would you issue a dividend now ahead of making a major investment next year? So now, while we have every desire to be a dividend payer and its part of the business that we’re building and the diversity of cashflow we’re building, right now is not the time.

Matthew Gordon: Isn’t that the trap that producers fall into, that they create cash and they go, ‘oh, we need to grow, so we need to make an acquisition’. They spend a lot of money on an acquisition, spend money on the CapEx getting that into production to produce more cash, but they kind of forget about the shareholders along the way.

Tim Carstens: As a generalization, that’s fine. But to suggest that we’ve forgotten about shareholders is not really appropriate. Every company has its own peculiarities and its own circumstances. We started at Kwale with an asset that had to short mine life, it had mine life of 11 years. We’ve built an extremely robust business and business model and team. And, the option that you’re talking about would be for us to run that for cash and close the business and moved on.

Matthew Gordon: It’s not quite…

Tim Carstens: Well yes it is, because, you can’t get too close to the end of the mine life at Kwale when we’re talking about mid-2024 without having somebody to replace it. We’re not making the most of our platform that we’ve built if we’re not applying it to something else. And our shareholders have certainly been encouraging us to go down that path and we can see such significant opportunities in the sector because we had been so profitable during the downturn. Even in a downtime, we were still able to service our debt. We were not financially stressed in the way a lot of our competitors were. Which meant we’re able to grab what we think is the best project to add to the portfolio and get to that next level, at which point we will be a very significant cash generator and a completely different set of options at that point. For us, this was absolutely, unequivocally the clear path.

Matthew Gordon: What I’m saying is for institutions who will sit back and play the long game, that’s one thing. For retail, family office, high net worth looking for quicker return, it’s a very different model, Everyone’s got different investment models. Your focus at the moment is around the institutional guys, because it’s around 90% of the business.

Tim Carstens: Not necessarily. We actually found we have a huge number of very long-term retail. I actually take a different view. A lot of the institutions are actually much more focused on short-term performance. A lot of our retail shareholders understand the long game of building this company and they’re involved in it. And the point I’d make to shareholders who are looking for that short-term hit in the yield in the next two years, we’re probably not the company for you. So, I suggest you go somewhere else.

Matthew Gordon: That’s what I’m hearing loud and clear.

Tim Carstens: People can vote with their feet. I got no problem with that. We’ve been very clear about what we’re doing with this business and we’ve got a very clear path on how we develop it.And the shareholders need to choose whether it’s their profile.

Matthew Gordon: So next year, few things happening; the DFS and the raise.

Tim Carstens: Well the DFS will be in December then the rest of the year will be spent very much on bringing together the funding components, working towards being in a position to make a final investment decision to stop the major construction over the course of next year. Now, we’ve given ourselves a fair bit of runway through until probably the end of the third quarter next year to get all those pieces to come together, because there’s a fair bit of complexity in it and when you’re talking about potential minority joint venture participation, debt facilities, we’ve still got to pin down the final fiscal terms with the government in Madagascar. So, all of those pieces need to come together over next year. The other thing that’s getting a lot of focus for us is mine life extension at Kwale. We announced there is a large resource on a separate dune called the North Dune during the year. I’s very big, 171Mt, but quite low-grade. So, we’re doing a study on that at the moment to see what subset of that could make sense as mine life extension. Then we’ve got another couple of areas around Kwale that we’re exploring to see if we can identify more.

Matthew Gordon: Do you want to give us a little summary for investors looking at this from new as to why they should be investing in you guys?

Tim Carstens: We’re trying to build what is a very unique mineral sand company in terms of being a mid-cap company, heading towards having two operations at the moment. We’ve got one very profitable one we think we can extend. We’ve got another world class development asset. We’ve got a business model that’s been very successful in Africa. We do win quite a lot of awards for our environmental stewardship and community engagement. And the whole team that brought Kwale together is still with us. So, the whole team that did it the first time around is there to do it again. We’ve got a very robust financial platform to be able to build that business. But the long term aim here is to create something pretty unique, because in our sector, there is really only Aluca at $3Bn – $4Bn market cap. And then you drop down to Kenmare and ourselves around the USD$200M-$300M market cap. And we’re trying to create something quite unique in that space with a multi-asset sort of business with a growth profile.


Company website: https://www.baseresources.com.au/

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