Company Overview: Base Resources Limited (ASX: BSE) is an Australian-based, African-focused, mineral sands producer, primarily involved in the operation of the Kwale Mineral Sands Operation (Kwale Operation) in Kenya and the development of the Toliara Project in Madagascar. The Kwale Operation is located 50 km south of Mombasa, the principal port facility for East Africa and is designed to process ore to recover three main products: rutile, ilmenite and zircon. The Toliara Project was acquired by BSE in January 2018 and is currently considered as one of the best mineral sands development projects in the world.

BSE Details

Improvement in Top-line and Bottom-line: Base Resources Limited (ASX: BSE) is a pure mineral sands company that operates the established Kwale Operations in Kenya and is developing the Toliara Project in Madagascar. The company continues to enjoy consistent production from Kwale Operation which allows it to maintain a robust financial platform for future growth. The company’s strategy is to keep pursuing mine life extension at the Kwale Operation through exploration, to maximise value creation for employees, the community, the nation of Kenya and shareholders. Since the acquisition of the Toliara Project in 2018, the company has made significant progress in the development of the project. BSE considers the Toliara Project as its next major growth opportunity. Over the last five years, the company has witnessed significant improvement in its bottom-line as well as top-line. From 2015 to 2019, the company’s revenue has increased at a CAGR of 14.76%. Over the same time-period, the company’s net income has also improved, rising from the net loss of US$13.4 million in 2015 to a net profit of US$39.2 million in FY19.

Five Years Financial Summary (Source: Company Reports)

Amid COVID-19 pandemic, the Kwale Operation in Kenya has continued uninterrupted at normal levels. Due to the resilient performance in the past few months, the company has maintained its FY20 production guidance levels for Rutile, Ilmenite and Zircon, despite the current challenging environment. With its high-quality asset portfolio, consistent production from Kwale Operations and sound demand for its products, BSE is progressing well to establish itself as a truly unique mineral sands company.

FY19 Results Highlights: For the financial year ended 30^th June 2019, the company reported total revenue of US$209.5 million, up 5% on the previous year due to higher rutile and zircon prices. During the year, the company’s EBITDA increased by 4% to US$113.5 million. During the year, the company witnessed an improved price environment and consistent production at Kwale Operations, which allowed it to report a net profit of US$39.2 million, up 15% on the previous year. The company reported operating cashflow of US$96.6 million in FY19, compared to US$117.1 million in FY18, due to a US$24.2 million increase in receivables following record sales in June 2019 of US$32.1 million.

FY19 Financial Metrics (Source: Company Reports)

H1FY20 Results Highlights: In the first half of FY20, the company produced 36.2kt rutile, 165.2kt of ilmenite and 14.9kt of zircon. The company reported total sales revenue of US$83.5 million in H1FY20, down by 18% on the previous corresponding period (pcp), due to lower production and timing of rutile shipments.

During the period, the company successfully transitioned and ramped up its mining operations on the South Dune orebody. Due to higher power consumption associated with increased pumping distance from South Dune, the company’s operating costs increased by 5% to US$33.6 million, compared to US$32 million reported in pcp. For H1FY20, the company reported EBITDA of US$43.5 million and NPAT of US$9.1 million. During the period, the company completed the definitive feasibility study (DFS) for the Toliara Project and concluded that the Project is a world class mineral sands project.

H1FY20 Results Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 94.01% of the total shareholding. Pacific Road Capital Management and Sustainable Capital Ltd. hold maximum interest in the company at 26.53% and 22.25%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

A Quick look at Key Margins:  For H1FY20, the company’s gross margin and net margin stood at 28.1% and 11%, respectively. The company’s assets to equity ratio stood at 1.32x, lower than the industry median of 1.7x. The company’s current ratio stood at 2.33x, higher than the industry median of 1.81x, demonstrating that the company is well equipped to pay its short-term obligations.

Key Metrics (Source: Refinitiv, Thomson Reuters)

March Quarter Update: During the March quarter, the company implemented health and safety procedures to minimise the risk of COVID-19 to personnel and surrounding communities. Further, the company was able to maintain its Kwale Operations interrupted at normal levels, despite the challenging working environment.  During the March quarter, the company’s production for all products was higher than prior quarter. The company produced 105,035 tonnes of Ilmenite, 23,683 tonnes of rutile and 9,163 tonnes of zircon, during the quarter. The company continued with the development of the Toliara Project’s Environmental and Social Management System. Over the quarter, the company spent US$3.3 million on the Toliara Project.  At the end of the quarter, the company had net cash of US$44.4 million, consisting of cash and cash equivalents of US$119.4 million and Revolving Credit Facility debt of US$75.0 million.

March Quarter Production and Sales Results (Source: Company Reports)

US$75 million RCF Drawn: On 1 April 2020, the company announced that it has drawn down the full US$75 million available under its existing revolving credit facility (RCF). This will help the company in securing enhanced liquidity and will ensure flexibility as part of a prudent management strategy in navigating the evolving uncertainty associated with the COVID-19 pandemic.

Market Conditions for Key Products: In FY19 and H1FY20, the market conditions have supported steady price improvement for rutile and ilmenite while zircon prices have softened slightly. The demand for rutile has remained strong in March quarter and ongoing restricted supply is currently maintaining a tight market. It is worth noting that Chinese pigment producers which are the company’s main ilmenite customers, have re-confirmed their demand for ilmenite and their intention to proceed with planned shipments over the coming months. Rutile sales are contracted for most of the forecasted production for the remainder of calendar year 2020. Ilmenite sales are fully contracted until August 2020, with a shipping schedule agreed with all customers for the remainder of CY2020.

Price Chart for Rutile and Ilmenite (Source: Company Reports) 

Key Risks: The company’s operations are exposed to the inherent uncertainties associated with the COVID-19 pandemic. Further, the company has material exposure to certain environmental and social sustainability risks associated with its operation of the Kwale Project and its development of the Toliara Project. The company’s revenue is derived from the sales of its products including rutile and ilmenite and zircon. Price fluctuation in any of its products can create revenue uncertainty.

What to Expect: Benefitting from the consistent production at Kwale Operations, the company has established a robust financial platform and intends to grow the business while creating a truly unique mineral sands company. Moving forward, the company is focused on Kwale mine life extension to maximise value creation for employees, the community, the nation of Kenya and shareholders.

The company continues to benefit from the continuous demand from its customers and price improvement in rutile and ilmenite. The demand for zircon end products is uncertain over the coming months but it is expected that any decline in demand will be offset to some extent by COVID-19 related supply restrictions.

Due to the company’s resilient performance amid COVID-19 pandemic, it has been able to maintain its FY20 production guidance. As per the guidance, the company expects Rutile production to be in between 75,000 to 81,000 tonnes; Ilmenite production to be in between 335,000 to 355,000 tonnes; and Zircon production to be in the range of 29,000 to 32,000 tonnes.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters) 

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of BSE has provided returns of 33.33% in the last three months. With this high-quality asset portfolio, solid equity base, and a sound financial platform, Base Resources Limited seems well placed to progress towards its goal of becoming a truly unique mineral sands company. We have valued the stock using Price to Earnings multiple based illustrative valuation method and have arrived at a target price of low double-digit upside (in % terms). For the purpose, we have taken peers like Western Areas Ltd (ASX: WSA), Jupiter Mines Ltd (ASX: JMS) and Lynas Corporation Ltd (ASX: LYC). Considering the sound demand for products, decent outlook for Rutile and Ilmenite, resilient performance amid COVID-19 pandemic, and FY20 production guidance, we give a “Buy” recommendation on the stock at the market price of $0.200 on 15 July 2020.

BSE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.