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Base Resources: THE INVESTMENT CASE

Base Resources cautiously optimistic about mineral sands recovery prospects

Base Resources has a top quality mineral sands asset at Kwale and looks poised to benefit from a recovery in the market
Base Resources cautiously optimistic about mineral sands recovery prospects
INVESTMENT OVERVIEW: BSE The Big Picture
Workers at the Kwale mine site

“We’ve built an absolutely first rate operation,” says Tim Carstens of Base Resources Limited (LON:BSE)(ASX:BSE). “We’ve got the place absolutely humming.”

As a flagship asset, the Kwale mineral sands mine in Kenya has plenty going for it.

It’s low cost, it has a balanced range of products across the mineral sands suite, and it has customers that want to buy. Against that backdrop Base has been able to put ilmenite prices up recently, and is likely to be able to do so again before too long.

But if that all sounds too good to be true, it hasn’t come easy. When Base first put its development plans for Kwale in place mineral sands prices were forecast to rise and keep on rising. Instead, they dropped into a death spiral about a year before Kwale came into production, from which they’re only just beginning to recover.

What kept Base alive was the quality of Kwale itself, which at the last count, for the quarter to June 2016 was able to produce product at a cost of US$82 per tonne for onward sale at US$208 per tonne.

Useful margins indeed, and the fundamental reason why during the last period for which accounts are available, for the six months to December 2015, Kwale earned the company nearly US$30 mln before interest, tax and accounting charges.

“The thing that underpins us,” continues Carstens, “is that we have one of the best mineral sands deposits in the world.”

It has taken investors some time to cotton on, however, as the wider storms in the mining equities markets and in mineral sands in particular, have rather taken the shine off the Kwale operation. Until now.

Since February 2016 Base’s shares have risen nearly sixfold as mining markets in general have recovered and as the read-across into the mineral sands space has become obvious.

“Last year,” says Carstens, “it all started to bite. We saw the price falls starting to compromise viability across the sector. We saw significant volume reductions coming out of China and Russia.”

That meant there was less supply to go round. But demand was still in place, albeit that it’s seasonal across the northern hemisphere summer.

“With the end use of our products being ubiquitous in everyday life, demand can’t just fall off a cliff,” continues Carstens. Instead, he argues that what has mattered has been the amount of time it’s taken previously built up inventories to work their way through the system.”

And, after a long period of pain, it seems the inventories are now largely gone in the TiO2 supply chain. Increased demand is once again likely to mean increased prices, an effect that’s already evident with Base’s own product suite.

“We’ve been successful in pushing through price rises for our ilmenite,” says Carstens. And although US$15 per tonne may not sound like much, when its applied to Base’s overall output of 450,000 tonnes, it adds up to a significant amount. US$6 mln, in fact.

The primary market for ilmenite is in paint pigment, and demand for paint pigment is fairly correlated to global GDP. That’s currently in growth mode - in spite of the Brexit chaos - and with the US in reasonable shape and China still on the march, is likely to continue to that way.

That bodes well for Kwale, which as it stands boasts a nine year mine life, but which may yet turn out to have capacity to produce for much longer than that.

But Carstens is a cautious man. He’s been through one unexpected mineral sands bear market and if the worst effects now appear to be over, he’s not about to call a recovery too soon.

“We call the market as it is,” he says. “If we can see this momentum continuing through the Northern hemisphere winter then one might be prepared to say we’re through it.”

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