Kennedy Ventures - Update
Final Results - Year Ended 30th June 2017
February 14th 2018
Putting aside the late delivery of its Final Results and the company's subsequent suspension from the stock market, most reasonable investors might ask what the turnover is or is likely to be for a resource business that has gone into production. However, remembering that this is the AIM market and also remembering that the underlying commodity is traded in a very opaque and complex market then we should not be surprised about the lack of information. By the way, it also needs to be borne in mind that Kennedy has signed a non-disclosure agreement with its sole customer. To get some idea about the sensitivity of this issue, on 13th November 2015, it issued a RNS refuting press speculation about the price that it would receive as part of an off-take agreement. So let's see if we can glean anything from these results.
Firstly, it made a ￡1.1 million loss for the year ended 30th June 2017 (2016: <￡788,000>). So far so bad so let's dig a little deeper. Normally, if a company experiences a significant leap in debtors without good reason, I would be a little worried. But for Kennedy it is, I would suggest, the opposite. Debtors have increased almost threefold from ￡64,000 to ￡166,000. But how much is it receiving for its production? We simply don't know. In fact, we don't know if these debtors relate to the sale of its prime resource.
The company has clearly gone out of its way not to reveal information that could prejudice its non-disclosure agreement with its main and only customer. This appears to extend to its production and stock levels. It has even gone as far as using a variety of measurements: tons, metric tons and kilos to muddy the waters further. However, it might be useful to piece together what we do know.
For the year ended 30th June 2016, it shipped 285 kilos (March 2016). This was part of what was supposed to be a long-term off-take agreement agreed in July 2015.
For the year ended 30th June 2017, it went on to ship 1.6 tons to a customer's bonded warehouse (November 2016). However, this was not paid for (The reasons are not apparent) and Kennedy took ownership of it - which it could do under the off-take agreement which allowed it to seek improved terms. Incidentally, this shipment was essayed and quality approved - it met the required standards. This occurred shortly after Larry Johnson became CEO. It then shipped one metric ton with a 48% purity (March 2017) to the customer. However, it's unclear whether this was from the stock in the bonded warehouse or from new production.
For the year ended 30th June 2018 a new multi-year agreement was negotiated - whether this is with the original customer is, again, unclear. However, it's with a North American end-user rather than a dealer. The second shipment, presumably one metric ton (September 2017). Which takes us now to a third shipment, presumably one metric ton (December 2017). A fourth shipment, presumably one metric ton, sent for testing, before being sent to the customer (February 2018).
However, it must be reiterated that the company will not disclose anything that will break its non-disclosure agreement. The above does not tell the full picture. It's unclear whether the 1.6 tons of Tantalum is still in a warehouse or whether some or all of it has been drawn down. And we do not know production or stock levels. However, the company appears to be ramping up production and purity. The constraining factor seems to be supplying the customer with the quality that it requires. The impression I get is that price is not the key determinant, it's quality and presumably reliability of supply. I would argue that although the end-user may be a demanding customer it will also be a difficult customer to lose. The standards that it sets will need to be met by all suppliers.
So what else do we know? Well the company's latest shipment of one metric ton was essayed before being delivered to the customer. It has a purity level of 51%. Apparently it needs a grade of at least 48% to meet the requirements of its multi-year agreement. The first shipment had a purity of 48%, so the company's efforts at improving quality are moving in the right direction. It may be worth considering that a purity of 25-30% is considered as saleable.
Kennedy is now in discussion with two further customers. However, we do not know just how far these negotiations have reached.
Improving Operating Efficiency And Capacity
It has made progress in terms of new work shifts which appear to have reduced its labour costs. It now works two shifts with the prospect of going to three and working 24 hours per day. It has improved its processes, including quality control and has also upgraded its plant. And its now in discussion with stakeholder groups with the aim of increasing its water supplies.
The appointment of an interim Chief Financial Officer might be viewed as a sign of the company's maturity. It has also taken on board a senior metallurgist as well as an exploration geologist and its in the throes of appointing a Technical Director. It's obviously intent on fully exploiting all the prospective mineral resources that its properties offer.
It makes a point that it has moved away from variable cost contracts in areas such as the procurement of diesel. It's now using more fixed cost contracts that improve cash flow. With fewer upfront cash payments.
In passing, the company's name is to be changed to Kazera Global plc to more closely reflect its African resource focus. Presumably, this will make the company more marketable.
Resource Investors' Woes
However one views it, Kennedy Ventures is a risky proposition. Not only is there the inherent underlying risk attached to the price of the company's main resource - Tantalum. A commodity that exists in a very opaque market. But it's also operating in a potentially unstable part of the world. And to cap it all, it's dependent on one customer that demands discretion.
As most resource investors are only too aware, there are significant issues with dilution as a result of the issuance of shares. For the year ended 30th June 2014, Kennedy had a weighted average of 38,791,151 ordinary shares. By 30th June 2017, that weighted average figure had climbed to 177,144,947 ordinary shares. I would suggest that in order to fully develop its Lithium deposits we can expect further fundraisings. By the way, the CEO was granted 10 million options exercisable at 6p each vesting over three years from August 2017. There appears to be no conditions attached.
And this is a company that has promised much. In an RNS dated 1st July 2015, it stated that it expected to make its first shipment in October 2015. The reality was that it did not start shipping until March 2016.
Ready, Fire, Aim - Getting Some Perspective
?For all its issues, Kennedy is delivering. Say whatever you like, in less than two years it has rehabilitated a mine and brought on board a world class end-user customer for a strategic resource that shows no sign of losing its importance. Especially in a world where both the US and EU have put in place legislation to encourage the procurement of non-conflict related sources of Tantalum.
Again, putting that into context, there are resource companies that literally never extract anything. They buy mineral rights and drill holes with shareholders' funds. This is not one of those companies. It's not only producing but developing its capacity to produce other strategic resources from the same property. Some of the ￡3.75 million raised in July 2017 is going to produce a JORC compliant resource estimate for its Lithium deposits.
Do I like the lack of information? No, I hate it. But you can go back and check its RNS announcements. Its client wants confidentiality. That's the deal. Hopefully, in the not too distant future as the company accrues more clients the revenues will be consolidated and we will have something to work on. At this embryonic stage that information is not available. By the way, as I write, this company has a market cap of less than ￡10 million. It may be a minnow but it's a minnow that has come a long way in a short space of time.
Not resting on its laurels, it's scoping its property to fully exploit all its mineral deposits, most obviously Lithium. Will it succeed? I don't know but it's in a very prospective neighbourhood and it has the infrastructure in place to monetise what is there. The Lithium bearing deposits also appear to be close to the surface which should facilitate their mining.
Incidentally, we may not know the identity of Kennedy's customer but we do know that Larry Johnson, Kennedy's CEO, is the former Director Mining And Tantalum Global Supply Chain of KEMET one of the world's largest users of Tantalum. The company has in place its "Partnership For Social And Economic Sustainability". This is a closed pipe supply chain approach to its Tantalum procurement efforts that also involves social development programmes. The latter is an area that the people behind Kennedy know well - they did it in Colombia.
In For The Long Term
I would suggest that to get some idea of where this company is heading, it may be worth taking a closer look at Amerisur Resources. As I pointed out in a previous article, the main players behind Kennedy are the same team that steered Amerisur. A long and difficult and still ongoing journey. Amerisur is now accruing around US$300,000 per day. But it has been a very long voyage.
It might also be worth bearing in mind, that Amerisur is well established in Colombia. But this has been a long process. One of its key strategies was to engage with local communities. This it has done through a variety of social projects. If the final customer is KEMET, this sophisticated approach would not have gone unnoticed. It would fit its own strategy of ensuring supplies of this key commodity.
As I have said before, I would not put a penny into this company that I was not prepared to lose. It's simply too risky. But I am in for the long haul. Ready, fire, aim suits me just fine.
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December 4th 2017