Company Overview: Base Resources Limited (ASX: BSE) is primarily involved in the production of mineral sands. The company owns and operates the Kwale mineral sands mine in Kenya, which commenced production in late 2013.  From Kwale, the company produces three separate products – ilmenite, rutile, and zircon. BSE is also progressing the Toliara Project in south-west Madagascar, 45km north of the regional town and port of Toliara. The company was listed on ASX on 2^nd October 2008.

BSE Details

Key Takeaways for FY21 Results:

• Decent Operational Performance from Kwale Operations: Despite the challenges created by the COVID-19 pandemic, BSE continued its Kwale operations uninterrupted and achieved production guidance in FY21.
• Strengthening of Ilmenite Prices: During FY21, BSE witnessed decent demand for all mineral sands products, which supported price improvement for ilmenite. Notably, the average price for Base Resources’ ilmenite in FY21 increased by 21%, compared to FY20, to US$230/t.
• Decline in Revenue: The revenue for FY21 stood at US$198.2 million, down by 5% on the previous year, with reduced production partially offset by price increases.
• Decline in NPAT: Net profit after tax for FY21 stood at US$11.0 million, down from US$39.6 million, impacted by Kenyan dividend withholding tax of US$9.0 million incurred on repatriation of surplus cash from operations to the company.
• Repayment of Debt: During the year, the company made full repayment and early retirement of the US$75.0 million Revolving Credit Facility. As at 30 June 2021, the company had cash of US$64.9 million and nil debt in its balance sheet.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Metrics: Gross margin for FY21 stood at 29.7%, down from 33% in FY20. Operating margin for FY21 stood at 17.7%, down from 24.8% in FY20, but higher than the industry median of 15.7%. Current ratio for FY21 stood at 2.29x, down from 2.67x in FY20, but higher than the industry median of 1.71x. The company had a nil debt-to-equity ratio in FY21.

Debt-to-Equity Ratio Trend (Source: Analysis by Kalkine Group) 

Top 10 Shareholders: The top 10 shareholders together form around 86.13% of the total shareholding, while the top four constitute the maximum holding. Pacific Road Capital Management and Sustainable Capital Ltd. are holding a maximum stake in the company at 26.52% and 23.53%, respectively, as also highlighted in the chart below:

(Source: Analysis by Kalkine Group)                                             

Latest Developments:

• Enhanced Economics of Toliara Project: The company recently released the outcomes of its Definitive Feasibility Study (DFS2) for its Toliara Project in Madagascar, which enhanced the scale and economics of the project. The DFS2 delivered a substantial improvement in the forecasted financial returns, including a post-tax/pre-debt (real) NPV₁₀ of US$1.0 billion and an average revenue to cost of sales ratio of 3.5, over an initial 38-year mine life.
• Increased Ranobe Mineral Resources and Ore Reserves: On 27 September 2021, BSE announced an update to the estimated Ranobe Mineral Resources and Ore Reserves at its 100% owned Toliara Project in Madagascar. As per the update, the estimated Ranobe Mineral Resources have almost doubled to 2,580Mt at an average heavy mineral grade of 4.3%. Further, the Ranobe Ore Reserves estimate has grown to 904Mt at an average heavy mineral grade of 6.1%.
• PFS Supports Extension of Kwale Mine Life: The company has recently completed a pre-feasibility study (PFS) at the Bumamani and Kwale North Dune deposits. Notably, the PFS supports the extension of Kwale mine life to mid-2024. This extension will provide BSE additional time to develop further opportunities within Kenya, while maintaining operational continuity.

Key Risks:

• Fluctuations in Mineral Sand Product Prices: The company is exposed to the risk related to the fluctuations in the prices of mineral sand products, as it could directly impact its top line.
• COVID-19 Uncertainties: The company is also exposed to the uncertainties surrounding the impact of COVID-19 pandemic as it could disrupt the company’s operations.

Outlook: Looking ahead, the company expects the demand for Ilmenite, zircon, and rutile from existing customers to exceed production capacity in FY22. Notably, zircon and rutile prices are expected to grow further in FY22. In FY22, the company is focused on finalising mining tenure arrangements for Kwale South Dune extension. Further, the company is focused on pursuing additional Kwale mine life extension opportunities.  BSE seeks to provide returns to its shareholders through both long-term growth in the company’s share price and appropriate cash distributions.

For FY22, the company expects the rutile production to be in the range of 73,000 to 83,000 tonnes and Ilmenite production to be between 310,000 to 340,000 tonnes. The production for Zircon is expected to be between 24,000 to 28,000 tonnes.

Stock Recommendation: Over the last one month, the stock of BSE has corrected by ~15.07% and is currently trading lower than the average 52-week price level band of $0.23 and $0.335, offering a decent opportunity for accumulation.  On a TTM basis, the stock is trading at a price-to-book value multiple of 0.8x, lower than the industry median of 2.4x, demonstrating that the stock might be undervalued. Considering the company’s decent production performance in FY21, modest outlook, debt-free balance sheet, current trading levels, valuation on TTM basis, and technical levels mentioned below, we give a “Buy” rating on the stock at the current market price of $0.260, down by ~5.455% as on 29 September 2021.  

Technical Note: On the daily chart, BSE stock price broke out the falling trendline resistance and prices are sustaining above the falling trendline support level. The leading indicator RSI (14-period) is trading at ~37.753 level, indicating the possibility of rebound in the stock. An important support level for the stock, is placed at AUD 0.20, while the key resistance level is placed at AUD 0.33.

BSE Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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