Kenmare Resources PLC

LSE:KMR

Earnings Call Analysis

Earnings Call Transcript 2019-Q4

[Operator]

Welcome to the Kenmare 2019 Preliminary Results Call. [Operator Instructions] Today, I am pleased to present Michael Carvill, Managing Director; Tony McCluskey, Finance Director; and Ben Baxter, Chief Operating Officer. Speakers, please begin.

[Michael Carvill, MD & Executive Director]

Thank you very much, Sandra. Hello, everyone. Michael Carvill speaking. I'm the Managing Director. I'm going to do a short introduction. Tony will give us some review of the financial report, and Ben will give an operation review. And I will make some comments on market and outlook, and then we can throw the floor open to your questions. So thanks, everyone, for attending. And if I could just turn to Slide 4. This is a very unusual results presentation for Kenmare. Normally, we are all sitting in a room in London with our colleagues from the analyst industry, and we're talking with you guys in person. However, this is a webcast, and that's because of the outbreak of COVID-19. And so therefore, I'd like to make a few comments on the COVID-19 outbreak in relation to Kenmare before moving on because I'm sure this is high in everybody's thoughts. So firstly, as on Slide 4, there has been no material impact to date of COVID-19 on Kenmare's activities. There have been no confirmed cases in Mozambique. So it's one of those countries which so far has got off lightly from this particular virus. And none of our employees either in Mozambique or anywhere else has either got the virus or have been suspected of being in contact with anyone with the virus. There has been some impact on our expatriate employees. Expatriates operate on a 6-2 roster. They spend 6 weeks outside and then go home for 2 weeks. And the concern is that if they go home to some countries such as the United States or U.K. or wherever, that they might be able to return and continue with the work. And so that has -- the effect of that is much less than it would have been in the past in that some time ago, we had a very, very significant amount of expatriated employees. So we have had a 4- or 5-year focus determined program of localization and improving the -- and increasing the capacity of our local employees. So now we have less than 40 expatriate employees. And those expatriates have been very supportive, and many of them have said, "Look, what we're going to do -- well, what I'm going to do is forsake my R&R in the interest of business continuity and staying at my position." So it's an impact, but it has been much less than what rather -- than what otherwise have been the case. And we have had some lines of consumable to spare parts that we have had to change channels on, but that has been very manageable and has been so far -- had no effect. The market for ilmenite is strong and it has remained strong. So we have so far seen no negative effect on customer demands, and pricing, it has continued with its upward momentum. And in fact, we are loading a vessel at the moment, which is going to -- it's a 60,000-tonne parcel going to 3 separate customers in China. And all of those parcels are individual consignments. We'll negotiate it post the COVID-19 outbreak in China. So demand is holding out for now. However, that's not to say that if there's a worldwide slump in GDP, this won't have an effect. It will, of course, have an effect. But so far that has not shown through. The safety and well-being of our employees and the host communities at Kenmare are our highest priorities. And as such, for some weeks, we've had a very strict protocol as to who can come to site. And for myself and Ben, we're due to travel down on the weekend to the site. But we're not going in as the site wouldn't let us in because we're coming from areas where there are significant outbreaks of the virus. So that's an important part. It's ensuring that anybody that's traveling there is -- has not been contacted by COVID-19 in any way. And then on-site, we have new protocols in terms of social distancing, in terms of sanitation, sanitizer-ing, et cetera, and protocols on self-isolation, if anyone is -- has any form of feeling poorly that could anyway be associated with COVID-19. And also, we have worked with our medical services supplier, ISOS, to develop detailed self-isolation [indiscernible] who are suspected of having COVID-19 and medical facilities in place for people who actually have it as soon as medical facilities and treatment have the -- are there both to treat the person who has COVID-19 and also to isolate them from the rest of the community. In addition to that, we have restrictions for travel -- on travel for all of our employees throughout the world. So again, inter -- all our other companies have similar plans and procedures in place. These are updated regularly. We're not saying, "Okay, we have this better than anybody else or nailed or completely finished." We're reviewing and improving and refining these protocols all the time.And then, as far as the projects are concerned, we're working very closely with contractors to ensure staff well-being and business continuity. And we have had a very supportive response from our contractors who are basically saying that they will mobilize their people to site and then that those people will stay on-site for the duration so that they don't run into this or an ore issue, which is very gratifying, and we're very pleased to hear that. We have been focusing on securing our access to critical spare parts. And we have, for several weeks now, been increasing our orders of critical spare parts, and those are all working their way through the pipeline at the minute. And so we are also continually evaluating the effect of this virus on Kenmare and its business and its supply chain and its customers. And that evaluation will continue and is ongoing. And it is a period of great uncertainty that we are phasing into. I suppose the only thing that I would say is that we're doing that from a position of much higher liquidity than we have ever been in before and in a position of a much stronger balance sheet. In that way, the $80 million in the bank -- we have $80 million in the bank at the start of the year. And we spent a lot of last year negotiating new debt facilities, which are $110 million of term loan and $40 million of revolving credit facility. And out of which, we have only drawn $67 million. So in this period of uncertainty, we have some liquidity to help us through it. So turning to Page 5 or Slide 5. Just moving on, Kenmare's investment case is still based on the 3 main pillars that we have talked about before, gross margin expansion and shareholder returns. We're approaching end of that very protracted period of developing 3 separate projects. The last one of those will be in place at the end of quarter 3. And that will provide us with a 35% volume enhancement from 2019 through to 2021, which will give us an opportunity to expand our margin from its present level of 36% to being a first quartile margin producer, which we believe provides stability in cash flows through the period of the -- through any commodity cycle that we run into and that provides us with the opportunity for shareholder returns. So turning to Slide 6. On the left-hand side, there are some numbers there, which I think Tony will go through in much more detail when he goes through the financial review. But I'd just like to highlight a couple of points: firstly, that we would be paying our maiden dividend of USD 0.0818 per share. And that means that we will be issuing a final dividend of 5.25 -- USD 0.0552 per share shortly, which combined with the initial dividend of USD 0.0266 per share that we paid in October of last year provides us with the USD 0.0818. And we're delighted to do that, and that will complete our maiden dividend. And then just as I mentioned, we have secured those new debt facilities, and we believe that's an important factor in moving into this period when we're not quite sure how the world will react to the COVID-19 outbreak and government responses to that outbreak. So with that, I'm going to ask Tony to give us a review of the financial performance.

[Tony McCluskey, Financial Director & Executive Director]

Thanks, Michael. Good morning, everybody. I hope you're all well. I'm moving to Slide #8, which is the slide with the key financial performance indicators. And you'll see that our financial performance in the main has been in line with 2018. The revenue is slightly up, plus 3%, mostly driven by a strong performance by the ilmenite market through the course of 2019 and an improved mix of our high-value co-products, zircon mineral sands concentrates, and I'll come back to that later. Whilst our total cost, cash cost per tonne has increased partly due to the slightly reduced production, our net ilmenite cost, which is the cost to produce a tonne of ilmenite net co-product revenues, is relatively flat year-on-year. It's up about $2. As a result of that, we have maintained our EBITDA at $92.6 million, fractionally down on the previous year. And the profit after tax is just under $45 million, dipping slightly because of depreciation and a small foreign exchange loss.So with all that, we have maintained our net cash position of $13.7 million, notwithstanding having reduced debt with principal payments of $19 million during the course of 2019 and funding the capital growth projects. So we managed to do this given the strong operating cash flow that we've seen in 2019. And having paid our maiden dividend of $0.0266 per share in October, we would be proposing a final dividend to shareholders at the AGM, which brings the total dividend up $0.0818, which is equivalent to 20% profit after tax being the Kenmare policy announced in Q3 2018 at our Capital Markets Day. So turning now to Slide 9 on product markets. You can see on the top right-hand corner the movement of ilmenite and zircon pricing through the course of the last 3 years. So we've achieved overall an 8% increase in average sales price for all products, made up of 7% increase in ilmenite prices with the tightening supply through the course of the last 12 months compared to the previous year and a somewhat softer 5% reduction in zircon prices. But the mix of our production and sales favors the high-value co-products. So we're selling more high-margin, high-value co-products. And as a result of that, we have managed to increase the average sales price. And the additional co-products, zircon in particular, which Ben, I think, will come back to, is partly a function of good work done at sites and the improved recoveries. Our shipping volumes are slightly down, but I think it's interesting to note that in each of the last 4 years, we have shipped over 1 million tonnes of product. And that reduction in 2019 relative to the previous year and our expectations is a result of some bad weather through the course of the earlier part of the year and some maintenance work on our conveyor belt. But we did finish with a very strong Q4, and we had a record quarter of over 350,000 tonnes of product shipped. So it was a good way to finish the year. Moving then on to Slide 10, we have the income statement, and the revenue line reflects what I've just outlined in the previous slide with our free onboard revenue increasing by $10 million. Whilst our costs have increased, and I'll come back to that, we have still seen a solid profit after tax of $45 million and maintained the strong EBITDA results based on sort of maintaining the EBITDA margin of 36%. We would expect this EBITDA to increase from 2021 when WCP B completes its move into the high-grade Pilivili zone, and we're in a position to increase our production because as we increase our production over a relatively fixed cost base, we're in a position to drive down our average costs, increase our margins and increase our volumes. So irrespective of further price upward movements, just on what we see at the moment, that should help us to expand our margins and our EBITDA. Moving then on to Slide 11. Our net ilmenite unit costs, which is after co-products, are broadly in line with the previous years. I mentioned up only $2. If I look at the sort of constituent elements, this slide here reconciles the cost of sales for the financial statements to the cost to run the business and the cost per tonne of ilmenite. You'll see a movement there of product stock of $4.5 million adjustment and that relates to the reduction in final inventory from in or about 200,000 tonnes at the beginning of last year to 160,000 tonnes at the end of the year. Having adjusted for that, the absolute adjusted cash operating costs are up approximately 4%. This is a function of just some demurrage costs, which relate to the inclement weather that I mentioned earlier as well as an adjustment to our consumable spare stocks. But broadly, most of the other costs were in line with our expectations. Our total volumes are down. And as a result of that, the net total cash cost per tonne is up 9%. But again, when we adjust out the co-products, we're back to a total ilmenite cost of $81 per tonne. And that compares, for example, with $184 per tonne, which we achieved in 2019. So if I move then on to Slide 12, we show a longer history of our production and cash operating cost per tonne profile. We've made some very solid progress over the last few years in reducing our cash costs per tonne through a combination of good operating cost management and increasing production. But we will see that improve further meaningfully when we complete the B move to Pilivili, and that will take us to a point where we're increasing our total output to 1.2 million tonnes of ilmenite plus associated co-products. And really, that's the key to driving down costs to something in the range of $125 to $135 per tonne in 2020 real terms. So where does that take us in terms of cash flow? Well, if I move on then to Slide 13, our solid earnings through the course of the last 2 years have enabled us to maintain an operating cash flow per share of 65p. But again, from 2021, based on the increased production, reduced cost per tonne and increasing margins, we would expect to see that this will increase. The balance sheet, which is on Slide 14, has a lot happening this year. It's a much stronger balance sheet than last year given the strong cash flow and given the new debt facilities that we've put in place that Michael touched on earlier, and I'll come back to them. But if I start with the plant, property and equipment, the investment in additions of $68 million is significantly higher than previous years as we've invested in our growth projects. In the main for 2019, that comprised WCP C of $27 million and B of $16 million in addition to the usual sustaining CapEx, which last year was just under $24 million. And you remember, we gave guidance in the range of $20 million to $25 million generally over a number of years. So that's in line with expectations. Inventories are slightly down. I touched on this earlier as we have sold more stock than we produced. Trade and other receivables shows a marked increase, but this is a function of the fact that we had such a strong Q4 and a lot of the tonnage went out in the last 6 weeks. So you would expect to see a slight increase in receivables as revenues have increased but because of the timing and profile of the shipments, a lot of that was back-ended. And as a result of that, the trade and other receivables at the 31st of December was up to $41 million, and that money has pretty much all been received in. Moving then on. Cash is down, but remember, we paid $19 million of principal back last year. And bank loans reflect the new debt facilities that we've put in place. In accordance with the financial reporting standards, the bank loans are not the amount that we drew down, which is $67.3 million, but they're $67.3 million less the transaction costs of $6.6 million plus a small amount of interest. The transaction costs then will be amortized over the 5-year life of the new loans. So that's why they're stated at about $61 million. Also, another new feature in 2019 is the leases. So IFRS 16, Financial Reporting Standards 16, came in, and you'll see this with other companies as well. Leases are now almost all on balance sheet. So Kenmare has 3 substantial leases: 1 relates to the rental of the Dublin office, 1 to the Maputo office and one to the Aggreko gensets. And so we see a lease liability being created here and an equivalent asset being created in plant, property and equipment with the value being amortized over the life of those leases. Creditors and provisions are up $22 million, and this relates mainly back to the WCP C plant. As that was coming to conclusion at the end of the year, we would have accrued a lot of invoices for the work that had been done, but it didn't quite get finished and started HMC production in February. So a lot of those costs were rightly accrued. And many of them have been paid now. But as a result of that, we have an elevated creditors and provisions at the end of the calendar year. Moving on there to Slide 15. We were very pleased to put in place new debt facilities in December. This has improved our liquidity. It's reduced our payments in 2020 because under the previous facilities, we would have had to pay a further $20 million. And so that is providing some liquidity relief during a period of elevated CapEx as we move B. The loans are more flexible, and they're on very good terms for Kenmare with 5 South African-based banks and institutions with good mining experience and each of these institutions know Mozambique well. So we repaid the existing loans of $64 million. And of the new banks, just over 1/5 of them are actually based in Mozambique, which is another good take as we embed ourselves in the country. If you look at the graph on the right-hand side, the commitments that we have in 2020 for development costs comprised the development capital of $120 million to finish C and to move B plant, plus the usual sustaining CapEx, in aggregate, $142 million. So as we were just reflecting on the cover of that with these new facilities in place, and one way to think about it is to say look at the cash at the beginning of the year, which is $81 million, plus the undrawn debt of $83 million. And without projecting 2020, we just looked at the operating cash flow that we generated in 2019. And I think that this is a helpful analysis because that says that there's $255 million of liquidity, covering $142 million of development and sustaining capital outgoings. So that was an interesting way of looking at that. And my last slide relates to the dividend policy. As you'll recall, our policy is to pay a minimum of 20% of profit after tax. For the full year, that would be $9 million, of which we paid approximately $3 million last year. So the final dividend will be proposed at our AGM. And again, coming back to where this is all taking us. When we get to 2021, we would expect to be generating increased earnings, and we would expect at that stage to be in a position to increase returns to our shareholders. So that's something we're all very much looking forward to. The dividend time table is in the bottom right-hand corner. But as I mentioned, this is still subject to shareholder approval at the AGM. With that, I will hand over to our Chief Operations Officer, Ben Baxter, for the operations review. Ben?

[Ben Baxter, Chief Operating Officer]

Thanks, Tony. Good morning, everybody. I'm going to move straight on to Slide 18, and I'll start by discussing our continued focus on responsible business practices. So on to health and safety, our lost time injury frequency rates was 0.27 and remains very good compared to our peers. We're working hard to further improve the downward trend that you see on the graph to the right. Our improved processes and standards continue to be recognized. Regarding health, we've seen year-on-year improvements in the reduction of malaria cases, and this is improving both the wellness and worker productivity of our workforce. The environment performance was good. We've rehabilitated more than 200 hectares of land in 2019, a 26% increase. Our people, we now have 96% of our workforce Mozambican at the Moma Mine, and 91% of the supervisory personnel are also Mozambican. So this allows us now to focus our efforts more towards developing skills and readying those employees for promotions and business growth. You'll also know that the Sustainability Committee comprising nonexecutive Board members was established by Kenmare in Q3 2019. And what we've seen -- and we're happy to say that, that committee has now visited sites, and the goals of this committee are now becoming well entrenched within our workforce. Moving on to Slide 19. The optimization of our operations is progressing well, and we had good performance in 2019 with record excavated ore and record product recoveries. The 8% increase in excavated ore came from improved throughputs driven by the 20% increase in capacity of WCP B and the associated dredge automation project that was installed at WCP B. The mine -- overall mine utilization also increased, and this is part of our continuing Projecto Oitenta utilization improvement program. Our processing performance improved with both ilmenite and zircon recoveries improving year-on-year, especially the zircon improvements, which were 14% over 2018 results. Of particular note is the new product that we introduced called mineral sands concentrate. This is a concentrate containing monazite and zircon. It was a $4 million project that was implemented in late 2018 and was delivered on time and below budget, and in 2019 delivered more than 12,000 tonnes of product, realizing its payback of less than 1 year. We also reprocessed stockpiled tailings during 2019 and this contributed significantly to the zircon improvement 8% and also moderately a 1% increase in the ilmenite recoveries. Moving on to Slide 20. I'll discuss the overall production update. Heavy mineral concentrate production was impacted 12% versus 2018, and that was due to the anticipated lower grades in the mining areas that we were mining. The ilmenite production was within 1% of the original guidance. However, all other co-products achieved their original guidance levels. You'll see the benefits of our margin expansion work with these percentages, both with the ilmenite being a lesser shortfall than the HMC production but especially the co-products, which had highest ever recovery levels mitigating that HMC shortfall relative to 2018. Particularly strong was the new mineral sands concentrate and also higher secondary zircon productions leading to a 43% increase in secondary -- in concentrate production. And as Tony already mentioned, we have a new quarterly record for shipments in Q4 of 2019, and this partially mitigated the poorer Q1 and Q3 performances where shipping was impacted by weather. I'd like to move on to Slide 21 to discuss the development projects in more detail. As you know, our strategy is to increase production to 1.2 million tonnes of ilmenite plus co-products. And just to take you through where we are with these, in 2018, we delivered the project to increase capacity of WCP B to up to 2,400 tonnes an hour. That project was delivered below budget with a cost of less than $10 million. And in 2019, we've really seen the strong benefits coming through from that project. In 2019, we focused mainly on the development of the WCP C operation. I'm delighted to say that, that production -- that project is now in production and is scheduled to come in below budget of $45 million. We're now moving further with our focus towards the delivery of the WCP B move, our third project -- and this is the project that will take us up to 1.2 million tonnes of production. That project is in line with its projections and is expected to be delivered for $106 million. On Slide 22, I'll go through in a bit more detail about WCP C's development. Like I say, we're very happy to say that production has now commenced on this project. As you know, it's a project which is a development of a small plant of 500 tonnes per hour, mining a high-grade area of the Namalope ore zone that was not accessible to our other larger WCPs. The average grades of 4.69% over the first 5 years and with that, 500 tonnes per hour capacity, we expect to be able to deliver an additional 150,000 tonnes of HMC per annum in combination with low costs leveraging the existing infrastructure and the fact that it's very close to our existing Mineral Separation Plant. This delivers compelling economics with a $96 million NPV and an IRR of 48%. As I say, the production has commenced, and the ramp-up is going very well. We've already hit 500 tonnes an hour on occasions, and we expect the project to complete soon within the $45 million budget. On Slide 23, I'd like to talk a bit about the WCP B move. This is a relocation of WCP B scheduled to take up to 12 weeks in Q3 of 2020. Pilivili is our highest grade ore zone in the Moma portfolio, and it has a mineral reserve of 180 million tonnes at 4.4% total heavy minerals. And this delivers an 8-year mine life. It has favorable mining conditions, and it has continuous -- contiguous ore beyond the Pilivili 8 years of mine life. Transportation is going to be done by road as it's the lowest risk relocation option using self-propelled modular transporters, and this will be undertaken by a specialist contractor who is already mobilizing and will be done in Q3. By way of a project update, the WCP B mine path at Pilivili has changed as a result of the environmental impact assessment process with some loss of ore in proximity to the villages close by. However, WCP B grade and mine life have been unaffected as we've reassigned the WCP C material in Pilivili to WCP B. WCP C is then expected to now move to Mualadi ore zone when it completes its life in Namalope. The key contracts, such as the civil engineering, the positive displacement pumping and piping, electrical infrastructure and the moving contractor have all been placed and are performing to schedule. So at this time, the project overall is on schedule and it's on budget. And we are now in the process of evaluating the potential impact of COVID-19 on the delivery of the project. On Slide 24, I'd like to just talk us through what the outcomes of these projects and growth and margin expansion will be. The Kenmare operational team is focused on delivery. And we're getting WCP -- sorry, we're getting up to the 1.2 million tonne production level from 2021. We've delivered WCP -- the upgrade WCP C is ramping up and WCP B move to Pilivili is on track. In combination, mineral sands concentrate production has monetized a former tailings stream. Our operational optimization projects are delivering. And overall, this gives us the opportunity to produce with cash operating costs per tonne expected to deliver between $125 and $135 per tonne from 2021 onwards. And as the graph shows at the bottom, we have a long-term mine plan at -- which will be sustained at nameplate capacity. So with that, I'd like to pass back to Michael for the market update.

[Michael Carvill, MD & Executive Director]

Thanks, Ben. And I see we're running a little bit behind time. So I'll move as rapidly as possible through these remaining slides. So turning to Page 26. I said previously that demand for ilmenite is strong, and we believe the chart on Page 26 shows why. In our view, this is a chart from Kenmare's own analysis. We believe that demand is higher than feedstock supply and that feedstock supply has started to reduce as supply from existing mines declines and is expected to decline further. There were legacy inventories that had been supporting the market for the last several years. Those legacy inventories are now depleted. And as I mentioned, high-quality ilmenite is undersupplied. New projects are facing significant hurdles to development, but new pigment capacity has been added and has been ramped up. And consequently, we have seen that in price momentum in the ilmenite market. So turning to Slide 27. The chart on the top left-hand side is sort of another manifestation in the Chinese market -- of the same phenomenon. You can see from May '18 through to September '19 a gradual reduction in the imports of ilmenite into China. And that is, at the same time, as Chinese production of pigment has gradually increased. And so the reduction in import is not because of lack of demand but rather ongoing supply limitations in India and China and reduced production from existing but depleting mines and high-quality ilmenite inventories have been reduced as well. So therefore, they are not available to import. This lack of imports has been somewhat balanced by increase in production from Chinese domestic sources. But those domestic sources themselves have limitations to their capacity as well. So turning to Slide 28. We see a positive long-term outlook for all of our products. Ilmenite is experiencing a very positive environment at the moment with sequential price increases from Q2, Q3 and Q4, and that momentum has continued through then to Q1 2020. Not -- as we mentioned previously, if there is a general slump in demand were light based on COVID-19, that will have an effect on us. But the fact that the market is in undersupply gives some buffer that demand can reduce somewhat without the market going into surplus. Zircon is different. Zircon has had a soft -- has been in a soft market environment for about 18 months. COVID-19 has increased that, and the market is up at the moment. However, the long-term fundamentals on zircon remain extremely strong as one of the largest producing assets in the world. The Jacinth-Ambrosia mine had a very short period of new production before it becomes completely depleted. So just turning to outlook, and turning to Slide 30. The projects that we have either completed or underway will change Kenmare into a first quartile margin producer. And that first quartile margin production provides us the ability to provide our stakeholders with increased cash flow stability and the ability to maintain a positive cash flow throughout any reasonable commodity cycle. So we believe we're very close to achieving this goal and the completion of Wet Concentrator Plant B will be the completion. And so we're spending a lot of money this year. We know that. It's planned. We will continue to spend that as we complete the B moves. But when that's finished, we do not have plan for any significant development expenditures in the coming years rather than in some studies that we have to continue with regard to the movement of Wet Concentrator Plant A in 2025 or so. So in conclusion on page -- or Slide 32, our strategy is still based on gross margin expansion and the provision of shareholder returns. We see the completion of Wet Concentrator Plant B -- sorry, of C as a significant plank in that strategy and look forward to the movement, a successful movement of B to Pilivili on its start-up operations there as really the final building block in that overall strategy. And so with that, I would like to hand back and ask for questions from the floor.

[Operator]

[Operator Instructions] And our first question comes from the line of Richard Hatch from Berenberg.

[Richard James Hatch, Analyst]

Congrats on good set of numbers. Michael, can I just ask a bit more about the market? Are you able to give us any kind of flavor on just prices at the moment, kind of ranges of spot prices for chloride, sulfate, ilmenite, zircon at this point? And then just in terms of your own customers, I appreciate you kind of sell around and across the world. But what are your customers feeding back to you in terms of their visibility on the downstream? And then secondly, just one for Tony. Just that receivables build in the year, I appreciate you dialed it back a bit second half. But should we expect to see that, which kind of fully step back into H1 2020, kind of holding all things normal?

[Michael Carvill, MD & Executive Director]

Thanks, Richard. So in terms of pricing, we are only negotiating with those parties that do not have long-term contract with us. So we're not in negotiating -- in negotiations with our major Western customers at the moment. But we have completed in recent -- we have come to agreement in recent years with a customer in India, and that is significantly above $200 a tonne FOB. We have -- as I mentioned, that shipment to China that we're loading at the moment was negotiated post the Lunar New Year holiday in China. And again, that's all above $200 a tonne FOB material.

[Tony McCluskey, Financial Director & Executive Director]

Richard, with respect to the receivables, look, yes, they will normalize in 2020, but there'll always be a function of the timing of sales and shipments as well as credit terms. But we've seen a flip up and down over the years. I would expect that in 2020 that it will normalize. And I think that December 2019 was a particular peak because we had a record shipment that year.

[Richard James Hatch, Analyst]

Okay. And then, sorry, just a follow-up on Michael's comment on the market. Michael, is that for your IP2 product you're getting those sorts of numbers?

[Michael Carvill, MD & Executive Director]

Yes. Look, I mean, we have recently had negotiations on IP2 and IP3, and all of the numbers are above $200 a tonne and all of them are below $250 a tonne.

[Richard James Hatch, Analyst]

Okay. And then sorry, my last one is just a simple question. Just on the auditor statement, just the KPMG not issuing their final audit opinion. Is there any reason for the delay there? Or is anything -- is it just kind of a clerical kind of disruption?

[Tony McCluskey, Financial Director & Executive Director]

No, it's not a disruption. We always issue our preliminary unaudited. The full annual report will be issued in or about the end of the month. That will include the KPMG audit report. I don't expect to see anything unusual in that whatsoever, so it's a timing issue. It was as planned. So there's nothing in that, Richard.

[Operator]

Our next question comes from the line of Peter Mallin-Jones from Peel Hunt.

[Peter Mallin-Jones]

Following Richard's comments on sort of talking around pricing. I was wondering whether you could talk a little bit on what sort of volume visibility you have. I mean obviously you have longer-term contracts where you're fixing pricing to a [ local ] customer. So I was just wondering whether you could discuss what sort of volume visibility that may or may not give you and then perhaps discuss how shipments have been going so far this quarter?

[Michael Carvill, MD & Executive Director]

Shipments have been going fine this quarter. Thanks, Peter. And in terms of volume commitments, if I could put it like this, that really, the material that is not committed, is that material that is sort of bound for China because everything else is pretty well locked up. And we have 2 shipments only in the second half of the year still to go to China, still allocated to China and 1 shipment, 1 further shipment in this half, so 3 remaining shipments to China. So pretty well everything else is locked up and that's the position.

[Peter Mallin-Jones]

Okay. So just to clarify, those volumes on the contracts, they are -- the customers kind of almost mandated to take those. Is that the case?

[Michael Carvill, MD & Executive Director]

Well, no. They are on the contract, Peter. But customers are never mandated to take those. They just don't take it in. There is all -- I cannot sit here and say that if Kenmare decided that they weren't going to take the material that we would sue customers and they would pay us and they would take it. On the contract, they are, but every single customer has ways of saying, "Oh, well, we'd like to push back a moment or whatever, whatever."

[Peter Mallin-Jones]

So to reiterate, it's not a take-or-pay arrangement. That's -- so it's just clumsy phrasing on my part.

[Michael Carvill, MD & Executive Director]

Well, they are sort of take-or-pay arrangement. Basically, they are. But nonetheless, they're your customers. So they don't want to take and don't want to take.

[Peter Mallin-Jones]

Understood that. You can't force it down the throat if they don't want to take. You've got to...

[Michael Carvill, MD & Executive Director]

Exactly.

[Peter Mallin-Jones]

come back and have another negotiation 6 months' time or a year's time or on the next year time. So you just do the balance. Okay.

[Michael Carvill, MD & Executive Director]

Under all reasonable circumstances, those tonnes are locked in.

[Peter Mallin-Jones]

Understood. And then finally, Ben, perhaps one for you. Just wondering what the time line is looking like for WCP C to hit or sort of get to run at steady-state capacity? I mean obviously it's getting there in testing, but when are you anticipating it running in sort of normal steady state?

[Ben Baxter, Chief Operating Officer]

Pete, I think that, that will be fairly imminently. It's a matter of weeks. It's close, a couple of weeks here.

[Operator]

Our next question comes from the line of Roger Bell from Hannam & Partners.

[Roger McKenzie Bell, Director of Mining Research]

Congrats on the results. Just one question on your guidance for the year. It feels like the WCP C ramp-up may be a couple of weeks later than you'd initially said the first -- when you then initially launched the first delay earlier in the year. Given the sort of ramp-up time line and given the risk to the delivery of the B move to Pilivili, can you just sort of remind us how much flexibility you've got to sort of still hit the bottom end of your guidance range, 800,000 tonnes this year if, for example, Pilivili was -- you didn't get any material from Pilivili this year? And secondly, just on the ilmenite market. Where do you see the sort of pressures building up at the moment? It seems slightly hard to understand why the prices kind of accelerated upwards so far this year. I mean is there an element of Chinese domestic supply being under pressure because of coronavirus lockdowns? And also, are you expecting to see inventories stacking up somewhere in the system over the next couple of months if pigment plants are, as you say, continue to run at decent utilization rates in China? Yes, I'll leave it there.

[Ben Baxter, Chief Operating Officer]

Roger, I'll take the WCP C and plan question. The WCP C is a bit late. However, the ramp-up is going faster than one would have expected. So on that front, I think, I'm comfortable that WCP C is going to deliver well this year. On WCP B, as we said in the presentation, right now, the plan is on track for delivery in Q -- by the end of Q3, the plant will have been moved, and we will expect to ramp up as per normal in Q4. Obviously, COVID-19 is a concern on WCP B. But right now, there is nothing to say that we won't deliver according to that plan that we have. So I'm comfortable that we will achieve the guidance at this point.

[Michael Carvill, MD & Executive Director]

Thanks, Ben. With regard to the other part of your question, Roger, in China, during the shutdown for COVID-19, the mining -- domestic mining operations were more adversely hit by the shutdown than pigment operations. So there was a longer, more prolonged shutdown of the mining activities. And consequently, that drained further inventory out of the system in China. So that's one part of it. The second part of it is that there was development of new chloride pigment capacity in China, which requires imported ilmenite in 2019, and that is ramping up, last quarter 2019, early 2020 with a consequential increase in demand for imported ilmenite. So it's a combination of both of those factors. And I agree with you that it seems a little surreal that the world is shutting down, and the price of ilmenite is increasing. But nonetheless, that's what's happened. So what happens when United States goes into a more profound response to COVID-19, we can't speculate that it's going to have an effect on demand. And likewise, the response that European governments have been having over the last couple of weeks is obviously going to flow through into ultimate demand in the future. So far, we have not seen that.

[Operator]

Our next question comes from the line of Richard Morgan from Mirabaud Securities.

[Richard William Morgan, Head of Mining Research & Mining Analyst]

As you said, Michael, [ pretty not ] face to face. I think we're all getting used to this working from home business. Just questions on -- actually, most of my questions, I think, have been answered. Just on the WCP B move under which you're still evaluating the impact of COVID-19, but what is the key threat? Would it be the travel restrictions impact on, say, the contractors and that side of things? If the move is delayed, how long can be carry-on mining where it is? And what would the impact be on grade?

[Ben Baxter, Chief Operating Officer]

Richard, so to -- yes, you're quite correct. The biggest risks are really logistics risks around contractors being able to get people to site for fabrication or for construction activities and perhaps for the delivery of items coming from overseas, if that was the case. So those are the risks. We're mitigating those with frequent contact with our contractors. And right now, their commitment is to actually have people onboard -- on plant at the mine right the way through this outbreak and beyond until WCP B is delivered. So we think that we have mitigated those quite well.Regarding what if there was a delay, WCP B can continue to mine in Namalope. We've long since had a risk mitigation plan of what to do should there be a delay. And WCP B can mine there perhaps up to maybe at a stretch up to 6 months, but more likely 3, 4 months, I think, is the more likely scenario there. So we do have a reasonable mitigation period should that happen. However, the grades of the material, which are currently outside of our mine plan are outside because they are low grade. So there would be a net effect of a reduced production output should we have to take some of that material as opposed to moving to Pilivili earlier.

[Operator]

Our next question comes from the line of [ Milo Amsbury-Savage ] from Hannam & Partners.

[Unknown Analyst]

I'm just wondering if there are any plans to develop or invest in kind of solar renewable or battery storage. I noticed on the slides that diesel prices rose 14%, which accounted slightly for the variation in cost. So wondering if there are any plans to put in place renewable projects to perhaps mitigate price fluctuations or any potential energy security issues?

[Michael Carvill, MD & Executive Director]

No, look, our mitigation of -- in terms of electricity supply is the provision of diesel generators on site. We have looked at the idea of having some form of renewable energy stores there as well. But difficultly, as we have a large demand, and it's a 24-hour demand, so solar part doesn't do it by itself. The level of battery storage that you would need to sustain the operation through a 12-month -- 12-hour nonsunny period is so high that it's prohibitively expensive. So as yet, there is not a solution in terms of battery storage or renewable energy that has economic -- that is economically attractive to the organization. We continually review this. We keep a good eye on this all the time, and we are looking at different sort of smaller strategies about how to make our power supply more stable. But no, we don't see that there is going to be a wholesale supply of renewable energy other than our hydro energy -- hydro-generated electrical energy from the grid.

[Operator]

Our next question is a follow-up from Richard Hatch from Berenberg.

[Richard James Hatch, Analyst]

Rich Morgan kind of hit the nail on the head really is my follow-up. But just -- can you just give us -- you've given some really useful color on kind of just how you're trying to manage your supply lines. But are there -- aside from kind of your expat, are there any other key kind of critical items, which you kind of really need to lay hands on that you see as a potential risk? Or is it just purely labor? In that case, I've seen a couple of companies are doing kind of self-quarantine of expats in-country or whatever that may be. You've kind of talked a little bit about that earlier in your presentation, Michael. So is there anything else to add there? Or would you feel like you pretty much, say, nailed it just with the expats being the main risk?

[Ben Baxter, Chief Operating Officer]

Richard, it's Ben here. I think that really, the localization policy that we've had over the past 5 years is really coming to fruit when it comes to risks such as this. And being 96% Mozambican is really a big help as is our move to have more and more supplies coming from within Mozambique. And so these are good risk mitigation measures. We've got less than 40 expats right now, of which only a few are not from South Africa. And South Africa and Mozambique remains open at this point. So whilst ever that is the case, we are well mitigated against COVID-19. I think the other main focus area which has been touched on is around getting critical spares. And Michael mentioned that we've reviewed our critical spares, and we are expediting additional spares to -- as a mitigation method should they be required and supply lines close for any reason.

[Richard James Hatch, Analyst]

What are your main spares, the key ones that you asked then, stem interest?

[Ben Baxter, Chief Operating Officer]

So I'm referring to things like, particularly the internationally derived spares like dredge parts. Those are the ones which have long lead times and come from countries either in the States or in Europe, countries where there are -- the effects of COVID-19 are more prevalent.

[Operator]

[Operator Instructions] Our next question comes from the line of Justin Chan from Numis.

[Justin Chan, Analyst]

I hope all of you are doing well, both personally and it sounds like the company is doing really well. Just my first one is on -- probably just to try to like have a constructive conversation on sort of end markets, and I realize it's early, but how we can sort of gain a flexible understanding as events unfold. In your view, would I be correct in saying if you look way downstream at pigment use and then relative to sort of the flow of lockdown events and restricted travel and end market, is it fair to say that the summer period is really the key demand period where people are repainting it and so on and so forth? So at least for the TiO2 side, as events unfolds, right now is perhaps a less critical downstream demand period and really that's more towards the summer. Is that a fair characterization or am I oversimplifying?

[Michael Carvill, MD & Executive Director]

So traditionally, Justin, there are 2 sort of peak demand periods. And that is the spring painting season in the Northern hemisphere, so in springtime, just before summertime. And then when summer comes, everybody goes on their holidays and there's a lull. And then that recovers in September, and then there is a strong period from September through towards Christmas when people are restocking and particularly Chinese are restocking in anticipation of a Chinese New Year holiday and extended breaks that manufacturing plants will be on -- in that period. So no, there is spring painting season, which we're sort of getting towards at the moment and a lull in the summertime and renewed activity in September, October.

[Justin Chan, Analyst]

I see. And so the drawdown -- presumably the drawdown of pigment inventory will be in preparation for that season. So we may or may not see that this season. And if painting is interrupted, the inventory build will sort of be around May, June. Is that a good way to think about it?

[Michael Carvill, MD & Executive Director]

Yes. I hope that's not...

[Justin Chan, Analyst]

No, that's quite helpful. Just -- I think, for all of our understanding because events are really fluid, so having a flexible understanding, I think, is quite important for all of us. And on that, I guess, having opportunity to speak to running a business, which has a significant, albeit reducing international travel component. If you had to, could you get to site now? Are the flights available? And how long from a travel sort of lockout perspective? And I realize it might be hard for you to answer somewhat speculative. But how long from a travel lockdown perspective? When does that become -- for the expats that you do have, when does that become an issue? Or when you plan the business, like what are the time lines that you think about?

[Michael Carvill, MD & Executive Director]

Right now, if I still have to go to Mozambique, I could probably go. I could probably go. It would mean that there would be -- there would have to be an accommodation from our protocols on site, which I would not seek to have. So I wouldn't seek to do that. I would say, okay, I've followed the same route as everyone else. And we would do that by avoiding the United Kingdom and flying directly from Ireland to the Emirates to Johannesburg and then inwards. As far as expatriates are concerned, look, I mean, I'm pretty sure that most of the guys will be happy to drop one rotation. But then when the second rotation comes up, like everyone else, everyone is worried. Look, we are all sitting here worried about our own families and our older parents and relatives and people who are a little bit vulnerable to this particular virus. So that will apply to those expat guys as well. And so that's -- I would imagine we'll get one rotation. After that, I don't know.

[Justin Chan, Analyst]

Right, I see. Yes. I mean, certainly, yes, I'm worried. So -- and I think everyone is. And sorry, just my last one is somewhat related to the second one. In terms of sales and negotiations, is there a significant face-to-face or travel-related component? Or is that something that given current events, you can pretty easily negotiate and get everything done without traveling?

[Michael Carvill, MD & Executive Director]

So normally, Justin, there is. There absolutely is. So it's a -- normal thing is you have to meet the guys. You go through a preliminary -- set of preliminary negotiations. And generally, you meet up to complete that, that deal. And it's all about what's happening in the room. And so yes. On the other hand, everybody is aware of what's happened. Everybody is aware that this can't be the case at the moment. And so I think -- I don't think there's any customers that are sitting there thinking, "Oh, well, look, old Kenmare guys didn't come over. So I'm not going to complete my negotiation with them." I think everybody is understanding that, in these circumstances, that face-to-face component will have to be forsaken or postponed until things calm down. But yes, I had intended to travel to India a couple of weeks ago to meet our customers and complete a deal with them. And I couldn't go, but they completely understood that. And we have just -- we have since then, just this week, come to an agreement on the [ consignment ] to go to India. So yes, but everybody is amending their normal behavior with COVID-19 in mind.

[Justin Chan, Analyst]

Yes, absolutely. I mean I take this call as I pace around my living room.

[Michael Carvill, MD & Executive Director]

Yes, exactly.

[Justin Chan, Analyst]

So quite -- I really appreciate that. I know there were some pretty off-the-beaten-track questions, but yes, I think they're just interesting. And frankly, investors are interested in these types of topics. So good luck.

[Michael Carvill, MD & Executive Director]

Thank you very much, Justin. Thank you.

[Operator]

Thank you. And as there are no further questions registered at the moment, I will hand the word back to our speakers for the final comments. Please go ahead.

[Michael Carvill, MD & Executive Director]

Okay. Well, look, thank you, everyone. I think we have run over our time. But thanks, everybody, for all of the very germane questions. They're issues that we're all grappling with. And good luck to everyone. I hope everyone is well and will continue to be well. And thanks for listening. Goodbye.