Base set for mid-tier powerhouse

Toliara in Madagascar shapes as an important ilmenite source at a time when burgeoning Chinese titanium pigment production has seen a recovery in prices and an encouraging price outlook.

That makes it a different type of project to Kwale, where rutile accounts for nearly half the sales revenue currently being generated, albeit on 15% of the production volume from the operation (470,000 tonnes per annum ilmenite, 90,000t rutile, 38,000t zircon) and albeit as rutile pricing continues its climb off a 2016 floor.

Toliara also has the resource base to support a multi-decade mine, giving the Base team a crack at a different scale of development and a transformational one for a company with a current market capitalisation around A$308 million.

But it's what Toliara has in common with Kwale that first drew the ardour of Carstens and his team, and kept their gaze even as a worldwide review of more than 40 projects over the past few years failed to reveal another one with the same level of appeal.

"We're very clear that it's the best undeveloped mineral sands asset in the world," Carstens says.

"We think this is going to be a 40-plus-year operation with a very similar revenue-to-cash-cost ratio [as Kwale], albeit with a different driver. Sulphate ilmenite is the engine room for Toliara; it's rutile for Kwale. With its very simple mineralogy [and] technically straightforward processing, we can see a high first-quartile revenue-to-cost ratio for Toliara - somewhere north of three, and we're at 2.9 now at Kwale, which is really at the top of the pile in the industry.

"We're seeing a similar capex and earnings profile at this stage.

"So this is a project that's squarely in our wheelhouse and we think it can deliver some fairly substantial returns to shareholders."

Following the completion of its initial acquisition of 85% of Toliara for US$75 million from World Titane Holdings, funded via a A$100 million equity raise, Base now aims to build on previous project study work with its own multi-phase optimisation program ahead of a construction decision in the second half of 2019. It would pay a further US$17 million for the outstanding 15% stake during that period, subject to certain milestones being achieved.

The Ranobe deposit at Toliara has a JORC mineral resource of 857 million tonnes at 6.2% heavy mineral, including 612Mt at 6.7% HM measured and indicated.

All going well, with important permits already in place and a supportive political environment around one of Madagascar's economically significant projects, Toliara is positioned for a run at a mid-2021 production start.

"The reason we like it is that it is a very large resource and it's high grade, and sufficient to ultimately support a Kwale-scale operation for 40-plus yrs. When we started Kwale it was an 11-year operation. That has shown itself to be massively profitable," Carstens says.

"Toliara has significant resource expansion potential. Our focus is currently only on one geological unit in the deposit. So the scope for this thing to be much bigger and for us be mining for 60-plus years is significant.

"And that allows us to think about the project as something that can be scaled up over time. As future market opportunities open up we can respond. And that's something we're building into our thinking in the development design.

"A large part of the project is infrastructure, including a port facility and new road, and once you've built that their scale doesn't change with future growth in production volume.

"You just put more frequent trucks on the road, and schedule more ships."

Kwale has more than demonstrated Base's project execution credentials.

The December quarter revenue-to-cost ratio of 2.9 equated to a record US$323/t of revenue. The ratio was 2.1 at the start of 2017. In the second half of the 2017 financial year Kwale generated US$53 million of EBITDA, enabling Base to rapidly pay down project debt that once stood at $220 million. It cut net debt by a further $20-21 million in the December quarter, reducing the total to $66 million.

Base's coming December half-year financials are expected to show the impact of further rutile and zircon price improvement over the past six months. The company reports at the end of February.

"We expect to see the net project financing debt eliminated towards the end of 2018, which will be another really key milestone for us," Carstens says.

"We've got very tightly controlled costs at Kwale; we're a relatively low cost producer. But the big factor for us is the value of our mineral assemblage, that's really what drives our revenue-to-cash-cost ratio.

"So the price improvement we've seen, and throughput improvement, have been key. We started with an 80 tonnes-per-hour mineral separation plant, and have now got it running consistently at 91tph. With a fixed cost proportion of something like 40-50%, you push more material through and it brings the costs per tonne down relative to the revenue.

"We've seen rutile prices start to move up after bottoming out at US$720/t."

After fetching about $780/t in the second half of 2017, the material is now selling around the $860-870/t mark.

With ilmenite selling for about $60/t in mid-2016, and rutile for $720/t, the value gap between the two commodities was stretched way past the traditional 4-6-times and as much as 80% of global ilmenite supply was uneconomic.

"We've also seen very strong improvement in the zircon price in the last 6-9 months," Carstens says. "We started the current fiscal year at $900/t and it's selling at the moment at just short of $1,300/t.

"So we've got a really good earnings profile that is improving.

"We're in a very tight zircon market; there is no new supply coming on and a clear supply deficit emerging this year. That's just going to continue to put pressure on prices to move up.

"Consumers of rutile are typically western chloride route pigment producers and they're running absolutely flat out in their plants … to meet demand. They're trying to get as much out of the existing plants as they can. That means feeding them with the best quality material available, which is why natural rutile is in really strong demand.

"Unless the world suddenly changes the way it engages with colour, or a hitherto unrecognised technology bursts onto the scene, we're not going to see a delinking of titanium pigment consumption from global GDP growth. They're very closely tied and have been for some time.

"Around 95% of all titanium dioxide feedstocks - ilmenite and rutile - is used in the production of pigment.

"So that's really our world.

"With Toliara added in, we become a really significant mid-tier player in that world."

Accelerated production at Kwale has cut the current mine life to five years, which is expected to become at least six after a reserve update based on 2017 extensional and resource definition drilling on the South Dune deposits.

"The next phase of exploration drilling at Kwale is planned for late this quarter in the prospective zone running to the north east of the current Central Dune. Of the areas we have that's the one that most interests us.

"We have done a little bit of work there, incidental to drilling some community boreholes, so we do know there is mineralisation there. But have no sense of the quantum at this stage.

"That's going to be an exciting development over the course of 2018 and I'd suggest by the end of 2018 we should have a pretty good idea of what we've got in that north-east zone."

Base has kept intact the technical group that delivered Kenya's first large-scale mining project, where it is also now closing on four years - 11 million man hours - without a lost time injury.

"It's a very settled management and board team, and we're ready for the next challenge," Carstens says.

"Where we are really different from our peers in the heavy mineral sands mid-cap space at the moment is that we have a highly profitable existing operation, and an absolutely world class development asset, with the team to develop it successfully."