Kenmare Resources (LON:KMR) should benefit from a good trading environment for titanium oxide, highlighted by positive first quarter results from US pigments makers, TOR Minerals (NASDAQ: TORM) and Huntsman Corp (NYSE:HUN), according to Job Langbroek and Caren Crowley at broker Davy.
Kenmare operates the Moma titanium minerals mine in Mozambique. At the end of last month, the group said Moma was operating well and production was in line with expectations. The expansion programme to increase production capacity by 50 percent is well underway and scheduled for commissioning and ramp-up in 2012.
Crowley noted comments made by Huntsman in the wake of first quarter results, showing revenues up 35 percent year -on-year and up 10 percent quarter-on-quarter. Huntsman, a Kenmare customer, is forecasting higher raw material costs and improving selling prices, believing it can pass on cost increases to customers.
The analyst said during a conference call with investors, Huntsman commented that the pigment market was very tight and questioned whether there was enough titanium dioxide (TiO2) feedstock supply today to meet incremental demand from any proposed increase in pigment production capacity.
Huntsman commented that it was "going to take years for the ore situation to rightly balance itself". It also estimated that inventory levels in the pigment industry are less than 40 days, calling it unusually low for this time of year when demand is seasonally strong.
The Davy analyst said the comments from Huntsman – as well as recent statements from DuPont – are positive for Kenmare in that the rising prices for its minerals have so far produced no kick-back from pigment producers. She added that Pigment producers dominate the market for titanium minerals and titanium dioxide feed-stocks.
Job Langbroek followed Huntsman, a relatively small Texas-based producer of TiO2 pigments and alumina products, which reported strong Q1 growth in sales.
H e said: “The change in the pricing dynamics of the TiO2 pigment industry is well documented by now. Constraints in the first piece of the supply chain, i.e. the mining of feedstock for the pigment industry, has had a ripple effect all the way through. Kenmare, one of the new producers of feedstock, has reported stronger pricing and a shift away from long-term supply prices to short-term contracts.”
The analyst believes this has repercussions all the way through and the first quarter results from TOR illustrate this. It reported sales of pigment up 49 percent in the first quarter, and operating profits up 16 percent. However, final margins contracted overall from 10.9 percent to 9 percent, with TOR stating that the reason for the decline was increased raw material costs.
“The numbers neatly encapsulate the dynamics of the titanium pigment market at present and the changes underway therein. The growth in sales at TOR tells us that overall end-product demand remains strong, driven by global industrial recovery, especially Far East demand.”
But producers of pigment have to pay more for their raw materials, as evidenced by the decline in margins. A pricing 'inversion' is underway with a shift from consumers of pigment to producers of the raw materials, Langbroek believes.
“This means that the miners of feedstock, including Kenmare, are increasingly becoming price-setters rather than price-takers, a much more advantageous position. Our price target for Kenmare is 55 pence per share,” he added.