Kumba cuts dividend as cash to debt vexes

[miningmx.com] – KUMBA Iron Ore passed the interim dividend and said volatility in iron ore prices made a final dividend hard to call amid restructuring, capital cutbacks, and a highly stressed balance sheet.

In its interim results presentation ended June 30, Kumba said free cash flow generation had fallen to R4bn compared to R14bn in the corresponding period of the 2014 financial year, and R9bn in the previous six months.

As a result, debt to EBITDA had increased from 0.5x in December to 1x as of June 30 leading to a worrying “decrease in debt covenant headroom”. Net debt was R6bn, lower than the R7.9bn as of December 31 but many factors of the R687m in 2014.

“There is a lot of volatility in the market and we cannot be certain how much cash we will have,” said Norman Mbazima, CEO of Kumba in a morning media call. However, he added that the group did not like idle cash on its balance sheet.

“If we have enough cash and there’s been a decrease in the volatility, I’m sure the directors would like to approve a dividend,” he said.

Kumba’s largest shareholders are Anglo American with a 70% stake and Exxaro Resources which has a 19% stake. It said in June that a reduction in the dividend from Kumba would hurt its own ability to meet debt covenants and pay shareholders.

Mbazima’s comments come amid a difficult six months ended June 30 in which the $60/t interim average price for iron ore was $37/t lower than the average in the whole of Kumba’s 2014 financial year. This heavily denting earnings, down 61% to R2.5bn.

The market also appears to be worsening as the average price for iron ore in July was $52/t although, as observed by Mbazima, volatility is high. On July 8, the price fell 10% in a single day, and 25% that week, only to regain some of its losses.

Said Mbazima of the outlook for iron ore prices: “We have no idea. It’s been very difficult to say on iron ore prices and the analysts forecasts are very wide”. However, in introductory comments to a media call he said he did not expect the market to improve for the foreseeable future.

The response from Kumba has been to throttle back capital spending to R6.9bn to R7.2bn for the year from previous guidance of between R8.9bn and R9.5bn. Purchases on items such as yellow machinery have been deferred for instance.

The rate of build for housing for employees has also been re-organised in the wake of lower numbers at the company. Kumba said on July 10 it would layoff 190 people at its Sishen and Kolomela mines. A week later it announced the closure of its Thabazimbi mine with the loss of just over 1,000 jobs.

Kumba’s plan was to achieve a break-even cash price of $45/t which it would achieve through a combination of mining and support cost savings.

Sishen and Kolomela mines would be reconfigured to process less waste tonnage in the which would enable them to focus on mining sections of the orebodies that generated more cash, a decision that would not materially affect the life of either of its mines.

Head office and study costs had been reduced by R531m in the last 12 months consisting of a 61% reduction in permanent and fixed term employees resulting in sustainable savings of R200m a year, equal to about $2/t. The lower capital spending profile would save $4/t.

Production at Sishen had been guided to 33 million tonnes (mt) in 2015 rising to 36mt in 2016 and 2017 while iron ore output at Kolomela would be increased 5o 13mt which would reduce its life of mine by two years. In both cases, Kumba was focusing on the reduction in unit costs.