We will be revising our FY 2014 production forecasts and pricing outlook Kenmare following a site visit to Moma mine. Although the company has largely overcome its production problems, power disruptions present a growing challenge and may persist for longer, with a temporary solution not due until at least Q1 2015. As a result, we have trimmed our FY 2014 production forecast from 1.05mt to 1.01mt. We have also trimmed our FY 2014 pricing. Although management still expect market recovery in H2 2014, weakening economic data is likely to continue to weigh in on pigment producers. In our view, market weakness is likely to continue until Q4 2014. As such, we have reduced our FY 2014 pricing forecast from $210 per tonne to $195 per tonne. Our zircon pricing remains unchanged. As a result, our FY 2014 revenue decreases from $280m to $251m and FY 2014 year end net debt increases from $221m to $251m. <p>

<B>Operational improvements though power grid dips may persist </b><p>
We got the sense that management has largely overcome operational issues affecting production. Plant utilization has improved and is stable and ramp up from the expansion largely complete. The main improvements made by the company include better mine planning and modeling to anticipate and reduce the effect of clay ore patches on production and improvements in the recovery time following power disruptions. <p>

However, power grid dips are the company’s main production challenge. The installation of a dip doctor in FY 2013 has largely dealt with shorter duration dips and reduced production disruption. However, the company has noticed an increase in the frequency of longer dips than the “dip doctor” is designed for. Management believes that this is due to a higher than expected growth in electricity leading to peak demand sometimes exceeding installed capacity. Without a solution, full capacity production may not be achieved. This has a more significant effect on zircon production.<p>

The state electricity utility has proposed load management as a short term measure, the installation of series capacitors on the transmission line in the medium term and the construction of an additional 400kv line in the long term. We see load management as having a limited effect in the short term. The installation of series capacitors has commenced but is not expected to be completed until Q1 2015. As such, power dip disruptions will likely affect production for the rest of FY 2014. <p>

As a result, we have trimmed our FY 2014 ilmenite production forecast by 3% from 1,05mt to 1.02mt and our zircon production forecast from 45kt to 40kt. <p>

<b>Markets remain weak</b><p>
The long term outlook for mineral sands remain positive given the demand and supply balance. However, the short term market remains weak though there are positive signs. Management have seen improvements in volumes sold with Q4 2013 and Q1 2014 sales volumes significantly higher than that achieved in Q3 2013. Kenmare expects pricing to improve during the second half of the year. However, we see market headwinds as significant. The increase in sales volumes has yet to translate into improved pricing. Lackluster economic data (e.g. US housing data) is likely to have an effect on pricing decisions. As a result, we see market weakness continuing until Q4 2014. As a result, we have reduced our FY 2014 average ilmenite price from $210 per tonne to $195 per tonne. <p>

<b>Balance sheet a short term risk, tweak to FY 2013 revenue</b><p>
In the short term, the persistent market weakness and its effect on Kenmare’s balance sheet remains a significant risk. The company is negotiating to extend the maturity of $226m in subordinated loans due in August 2015. This may present temporary relief. However, a more permanent solution will be required should current market weakness continue. As such, we do not rule out a capital raise as a possibility. <p>

Management also indicated that it will be capitalizing the first six months of expanded production. This will have an effect on reported numbers. This will have no effect on our valuation.
<p><h5>Muna Muleya</h5>


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