Base Resources (BSE) – Mineral Sands: Investors Missing Something

Base Resources Ltd.
  • Shares Outstanding: 1.17B
  • Share price A$0.16 (23.02.2020)
  • Market Cap: A$181.6M

Interview with Tim Carstens, Managing Director of Base Resources (ASX/AIM: BSE).

Base Resources is an Australian-based, African-focussed, mineral sands producer and developer. the track record of the company is solid, but the share price has suffered a little recently.

There are two core projects: Kwale, in Kenya, and Toliara, in Madagascar. Production commenced at Kwale in late 2013, and it has been throwing off a lot of cash; it has a very high revenue to cash cost ratio. However, it is nearing the end of its mine life. While there are some secondary lower-grade projects that could be expanded and ramped up to try to consolidate the loss of cash flow, it is unlikely to provide the same income as Kwale has been enjoying over the last few years.

Matthew Gordon talks to Tim Carstens, 19th June 2020.

The real potential gamechanger is Toliara, acquired in 2018: a natural successor to Toliara. It’s an enormous project with a similarly large life-of-mine: 50+ years. Base Resources is hoping to replicate its success in Kenya and has been “busily progressing” Toliara through to a DFS, which was put out at the end of last year. The real sticking point could be negotiations with the Madagascan government over terms.

Let’s start by talking a little about mineral sands. The mineral sands industry involves the mining and processing of zircon and titanium dioxide products (ilmenite, rutile and upgraded titanium dioxide products of synthetic rutile, slag and upgraded slag). 95% of total titanium dioxide production goes into pigments. Titanium dioxide comprises 75% of Base Resource’s revenue at Kwale. The remaining 25% is zircon, which is predominantly used in the ceramics industry.

What numbers are coming out of the “significant cash engine,” Kwale?

  1. RC ratio during higher grade operations of 2.8, now at 2.3. Toliara will be above 3.
  2. EBITDA of c. US$100M, and has been at this level for several years.

The biggest weakness has always been the short mine life. When production started, the mine life was around 11 years, which would take the company through to around 2023. In contrast, Toliara has at least a 33-year mine life. Carstens thinks the mine life will be pushing 100 years once all the resource is accounted for. Toliara will generate around US$130M pa in cash flow. These are serious numbers for a serious asset.

There is also a plan in place to extend Kwale to push it beyond 2023. Base Resources is currently completing a PFS for the company’s 3rd dune, the North Dune, with a 170Mt low-grade (1.5%) resource. This would be the very tail-end of the mining operation at Kwale and would clearly produce less cash.

Socially, East Africa is much less volatile right now than West Africa. Base Resources has an good relationship with the Kenyan government and no wonder; Base Resources comprises 65-70% of the entire Kenyan mining industry. The company is also the single biggest exporter in the country. Base Resources has been “officially anointed” as one of the country’s “Vision 2030 flagship operations.” Given the company market cap is only $178M this should tell you all you need to know about the nascent mining industry in Kenya. With this comes problems and opportunities.

COVID-19 hardly had an impact on Base Resources’ operations; it’s been “seamless” without anyone disruption to production. The company simply reduced the numbers of employees on its sites at any one time by c. 32%, and brought in the standard health precautions of testing and social distancing. Due to its good relationship with the Kenyan government, Base Resources was able to effectively navigate the government imposed restrictions by working with them.

Base Resources’ share price is currently at a 4-year low. Why, with what looks like a very good business on paper, is the share price struggling? Base Resources has a tight share registry: the top two shareholders hold nearly 50%, the top 4 hold 70%, and the top 20 hold 90+%. All of the company’s major shareholders, with one exception, have been picking up stock as they go along. To a large extent, Base Resources’ share price is set by the marginal high-net-worth top end of the register. The exciting DFS for Toliara hasn’t even got the needle moving, which is very surprising. One of the major challenges is Madagascar as a mining jurisdiction: it is something of an unknown, and the government hasn’t reached an agreement with Base Resources yet, which could take several quarters yet.

Other challenges include locking down the fiscal terms for royalty rights in addition to securing funding. While there are question marks held against these areas, particularly against the funding side of things, it’s difficult to encourage stock price growth. It is encouraging that Base Resources is progressing well on negotiating a project financing facility (US$350M debt facility + possible JVs) for Toliara. With what could be an imminent capital raise, investors are watching from a distance. Patience will be key for Base Resources. The big task is to market the value proposition at Toliara much better. Investors need to see the mineral sands project for what it is: exciting.

Base Resources drew down its full US$75M facility because of an “abundance of caution;’ it wanted to ensure it would have the capital available for maximum flexibility in the event that the COVID-19 crisis dragged on for longer than expected. It was a preemptive strike. It costs the company around US$500,000 per quarter to carry it as surplus liquidity. The company will readdress the need for the facility in early September.

Carstens hasn’t set an FID in stone yet. The timescale is hard to know right now. Once there is more clarity for the financial package that will be used to develop Toliara, dates will become more concrete. The delay situation with the Bank of America could also affect timings.

What did you make of Tim Carstens and Base Resources? Comment below and we will respond.

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