Thursday 18 January 2018

Kenmare climbing back from the edge

Michael Carvill's Kenmare Resources nearly collapsed. But the Co Down native has just pulled off a transformative fundraising that lays a platform for future growth. He tells Gavin McLoughlin about his time in the weird and wonderful world of minerals exploration

A Kenmare facility in Mozambique. Ilmenite prices are starting to rise after a series of drops and difficulties with electricity supply, which had hampered production levels, have been resolved
A Kenmare facility in Mozambique. Ilmenite prices are starting to rise after a series of drops and difficulties with electricity supply, which had hampered production levels, have been resolved
Gavin McLoughlin

Gavin McLoughlin

'Did you ever read Huckleberry Finn?" Michael Carvill asks me.

I admit I haven't.

Kenmare Resources managing director Michael Carvill
Kenmare Resources managing director Michael Carvill

"On the last page of it he says something along the lines of: 'Well there, now it's finished, and if I had have known how long it was going to take to write a book, I wouldn't have started.' So the naivety of youth is I think an important factor in starting. Then it's sort of like a ski-jump, you push yourself off and you're halfway down the slope - you can't then say you're not going to do it."

It's been a long old slog for the Kenmare Resources managing director. Exploration is an exciting industry with the potential for enormous reward, and enormous mishaps. And Carvill has certainly had a few colourful experiences in his time. He's been kicked out of Sudan on foot of an Islamic revolution, come up empty-handed from a gold-exploration venture in post-Marcos Philippines, and most recently he's saved his company from the brink of collapse.

The exploration industry is in Carvill's blood. His father was a founding director of Tara Exploration - which found the Tara zinc mine near Navan in Co Meath. When he was a child, Irishmen working in the industry would come to his home and tell wild tales about falling down crevasses in Canadian glaciers.

Carvill thought it sounded like an exciting life. He began working at Tara as an underground engineer, and then he went to Algeria to work as a mechanical engineer on a construction project.

Then he went to the US to do an MBA. His thesis was about starting a minerals exploration company, looking at a coal seam just off the Dublin coast.

Tara was sold to Finnish company Outokumpu in 1986. Private investors had done well out of it and wanted to plough their capital into a new project.

They bought a controlling share of a dormant oil company called Kenmare Oil Exploration and pivoted towards minerals. Carvill was one of those on board and wanted to take the coal out of the Irish Sea.

"It was discovered by an oil exploration haul. They didn't find any oil but went through big coal seams, 12 or 18 feet or something like that, when over in England they were mining three feet at that stage. And they came close to the coast.

"So I thought, put a shaft down on the coast, go out and mine this stuff, it would be great. Then it became very clear that there would be a huge environmental racket, and that it wasn't going to work," Carvill says.

That was setback number one. Then the company broadened its focus to look overseas.

"We took the view that if we just went to Australia, Canada, established mineral provinces, that all we would do is we would take half a million, a million, whatever, of Kenmare investor capital, and the best we could have hoped to get is about an equal amount of geological potential. Now you could still be lucky, but that's what you're doing, you can only just be lucky," Carvill says.

"So what we said was, if we raised money and went places where the major companies aren't playing, that there is a potential to take that $500,000 and get $40m of geological potential.

"Our view was in general, we would look to places where the political risk was improving, and perhaps where it was just very uncomfortable and difficult to work, and we would embrace that before the majors got there."

Kenmare went into a project in Philippines, and that didn't work.

"The Marcos era had just finished, Corazon Aquino had just come in. It was still extremely turbulent but we took the view that it was an improving situation. We went there for gold exploration in a joint venture with the Philippines national oil company. A great project, worked really well, and there was good cooperation between the companies, fantastic place, good opportunity for gold exploration. But we didn't find any."

There was also a project in Sudan - where the company broke its rule of thumb on political risk because of the project's potential. That one really didn't work.

"The minute I arrived in it I said: 'This is an impossible place to work.' I think Sudan was a place where, when you got out into the countryside, the ordinary people were the nicest people you had ever met. The scenery is beyond imagination, people are fantastic, and it was all administered by a bureaucracy, which had no interest whatsoever at that time in improving the welfare of its citizens. That became quickly apparent.

"The project was just incredibly rich. It was an old gold working where the tailings (the leftovers from a previous project) had already been mined and were sitting on the surface for hundreds, maybe thousands of years, and all they had to do was be reprocessed. And those tailings were creating 16 grams a tonne, when the average grade of gold mined is like 0.3 grams a tonne.

"And what happened there was that there was an Islamic revolution and we were, not very politely, asked to leave," Carvill says drily.

Things worked out better in Mozambique, where Kenmare first started in 1987. Communism had just collapsed and the country was moving to a mixed economy.

But still it took 20 years to complete the first phase of their project there - centred on the Moma Titanium Minerals mine, where Kenmare takes a mineral called ilmenite out of the ground. It sells that to companies who turn it into titanium pigment - used in making things like paper, paint, plastics, and fabrics.

After phase one was complete, Kenmare spent a couple of years trying to work out problems with plant and equipment that had been delivered to it. Then, with ilmenite prices strong, it embarked on a 50pc expansion project.

The problem was that while the expansion was ongoing, prices for ilmenite began to fall and went into a protracted downward cycle.

"There was an excess inventory that had been generated. And companies like us that had too much leverage, and there are several of them out there, were just struggling to make ends meet. "So we had to sell, we couldn't say: 'Okay, we think demand is going to come back up so we'll just hang on and store the product and sell it in six months,'" Carvill says.

Prices kept going down and the highly indebted Kenmare ran into trouble with its lenders. Then the Australian miner Iluka started sniffing around.

"They rang us. And they indicated they'd be interested in making an offer, but were not at that moment making an offer. However, they were thinking of an indicative proposal which was subject to a whole bunch of constraints and provisos and all that sort of stuff, and were we prepared to accept this.

"So we consulted with our shareholders, consulted with our advisors, and said that for a set of reasons, one of them being that the offer was all in shares and some of our institutions didn't like to hold Australian stock, that we wanted them to review their indicative proposal, and that we didn't feel it was a basis for further discussion," Carvill says.

"They then came back to us and said: 'We can't really change it because we need to know more about the project, we need you to let us in to do due diligence on it so we can feel more confident in making a more concrete proposal.' And a proposal is good for our shareholders because if they like it, they can take it and if they don't like it, they don't have to take it.

"So we said: 'Okay, absolutely.' We went through an exhaustive due diligence process with them, put a huge effort into it. They visited the site with huge teams, we brought them around we gave them 2,500 documents, we gave them 500 man days of time."

During the process the market price for Kenmare's product was continuing to drop. Iluka was talking with Kenmare's lenders and told Carvill's company that time was on Iluka's side, gradually beginning to review their proposal downwards.

"The lenders were very keen to see that proposal eventuate into an offer as well because they would end up being paid. But Iluka never actually made an offer. They withdrew from their proposal in November. So then there was a period when, at that stage the lenders had a degree of control, and they were evaluating what they wanted to do."

Now Kenmare was on seriously thin ice. Carvill admits that there were "loads of points" where it looked "highly improbable" that the company would survive.

But while the Iluka process was ongoing he had been talking to the State General Reserve Fund (SGRF) of Oman, which had indicated it was interested in making a significant investment in Kenmare, which would allow it to reduce its debt. Carvill just had to convince the lenders to get on board, and ultimately they did, agreeing to take a haircut on what they were owed.

The company raised around $300m in equity, including $100m from SGRF, and reduced its debt from $392m to $100m.

"We worked to convince the lenders that the best thing for them and all of the other stakeholders was for them to come to some sort of a deal which would allow us produce an attractive investment proposal, not simply to SGRF but to the rest of our shareholder base, and that we would raise the money from the market," Carvill says.

"They didn't immediately leap at this, it took a little discussion with them, but at the end of the day they did, and they agreed to write off $69m and equitise $23m at the same price as the investment... they came through with what we think was a great deal."

I ask about his negotiating style and whether he feels he drives a hard bargain.

"When we built the mine in the first place, we bought the plant and equipment that BHP had developed for a project in Australia. They had spend $160m or something like this on it, and we bought it for $250,000 up front, and then we had to pay more in instalments or whatever. And somebody said to me: 'That was the greatest deal, you must be the best negotiator in the world'. And the answer was no I wasn't - that's all I had. It makes a good negotiator, not having any more money. And consequently with the lenders, what we had to convince them of was that if they wanted a paydown, they had to accommodate the capital markets. And so it was a communication really of that reality, when it's sort of easier for them to say: 'Well we have a right, we can insist on 100pc paydown.' Well, yes you can but you won't get it.

"So it's trying to get everybody to work in the world of the possible, and we just did it. If we had been later, I think Brexit shut the door. If we had been later, I think it would have been very difficult."

Now ilmenite prices are starting to rise after continuing to fall until the end of March. The major capital expenditure on the Moma project is complete.

Serious problems with the Mozambique electricity transmission system, which significantly hampered Kenmare's ability to deliver the production levels it had told the market to expect, seem finally to be resolved, Carvill says.

Now he wants to prove that the company can deliver a return to shareholders.

"For the next couple of years what we have to do is ratify the faith that investors have put in the company by demonstrating to them that production can grow and be smooth, and costs can be kept down and drop lower, and that we can eventually pay dividends.

"Now we have to pay lenders as well and all that sort of stuff, pay off our lenders in a proper way and pay dividends. So that's the plan - to establish that solid profile of production, good cash offtake, and use that for firstly lenders - we don't have to pay lenders off entirely or anything like that, we can pay dividends simultaneously, and establish ourselves as that.

"And then after a while shareholders will turn around to us and say, now that's done we'd like you to go and do other things. And so we'd be happy to hear that when that eventually happens.

"I can't see Kenmare doing copper in Kazakhstan, I think that we have a capacity in industrial minerals, we understand how they're marketed, we understand particularly this market, and we've got a capacity in Mozambique, maybe you could even say Eastern Africa, so those are the two things that I could ever imagine our shareholders would like us to leverage from. If we went and bought a gold mine in Arizona, I think people would be very annoyed and rightly so.

"We want to just focus on making the thing sing, and let the people who put money into this investment feel that it was the right thing to do, that they've got a good return on it and it's working really well. And then we'll move on from there."

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