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Kumba loses grip over costs
Allan Seccombe
Posted: Thu, 15 Feb 2007

[miningmx.com] -- KUMBA Iron Ore’s (KIO's) costs sprinted nearly 30% higher in the 2006 financial year, and the outlook for 2007 iwas that they would hover at that level, CEO Ras Myburgh said announcing KIO's maiden results since formation last year.

Unit costs shot up 28% to R79.60/tonne, mainly because of contractor costs in the second half of the year to develop the R5.1bn, 13 million tonnes/year Sishen Expansion Project (SEP), which largely involved stripping away waste rock.

Costs were also driven higher by increased blasting costs to remove hard rock from the existing Sishen mine, Myburgh said.

cost levels were mind blowing
“The cost levels in the second half were mind blowing,” said David Plemming, an analyst at Macquarie First South.

“Those were massive increases,” he told Myburgh at the results presentation, wanting to know if the costs would remain constant because it would make a difference to analysts’ models and price forecasts.

Costs would remain at similar kind of levels in 2007 and Kumba had to decide how best to mine SEP, either through a new fleet or a system of conveyor belts. Until such a call was made the more expensive contractors would be used, Myburgh said.

“During this time of ramp up you will see those increased cost levels and we believe they will come down as soon as we decide which way to go with the longer term stripping and production capacity increases at Sishen. Those decisions will only be made by the end of this year,” he said.

SEP will begin production in the third quarter of 2007, which should bring costs down.

The rail capacity for the expansion is not expected to be a problem in 2007, Myburgh said.

Kumba has a capital expenditure profile this year of R2.5bn to R3bn. It posted operating profit for the 12 months to the end of 2006 of R5.4bn.

Kumba declared an R0.80 per share dividend. It was unbundled from Kumba Resources and listed as a pure iron ore play on the JSE in November. It is 65% owned by Anglo American.

Kumba has agreed a 9.5% increase for its 2007 iron ore sales to China’s Bao Steel, in line with a number of other iron ore and steel producer agreements on a benchmark iron ore price increase for 2007.

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Mittal Steel, the local arm of the international giant, has told Kumba, the owner and operator of the 75-year-old Thabazimbi mine that it no longer wants to participate in Project Phoenix, which will give the mine another 20 years of life onto the remaining four and a half.

Kumba is studying a number of options for what to do with the high quality ore that will come from Phoenix. The higher costs of mining the ore at R188/tonne basically rules out railing it from the mine 200km north of Johannesburg to a port, Myburgh said.

The remaining options include making the ore as attractive to South Africa’s largest steel producer to bring them back into the project or find another local buyer. Mittal is funding the feasibility study and would have stumped up the cash to extend the life of mine.

Mittal buys the mine’s annual output of 2.5 million tonnes/year at cost plus three percent.

Domestic iron ore sales were down nine percent at 8.3 million tonnes because of lower demand from Mittal and rail constraints from Thabazimbi. Export sales fell three percent in the year to 21.5 million tonnes because of a broken shiploader at Saldanha, the main iron ore shipment facility. Kumba’s production was up one percent at 28.7 million tonnes.