[miningmx.com] – THE view is that in his ‘inaugural address’ at Anglo American’s interim results announcement on July 26, newly appointed CEO, Mark Cutifani, will keep expansive comments on strategy to a minimum, and try to hit all the right marks on themes such as shareholder returns.
Behind closed doors, however, he may well consider the group’s iron ore assets as among the more straight forward strategic propositions: firstly, finding a joint venture partner for Minas Rio in Brazil, and secondly, buying out minority shareholders in Kumba Iron Ore.
Unlike Anglo American’s other assets in South Africa, Kumba Iron Ore is a highly cash generative business, and free of the fundamental problems that seem to characterise Anglo American Platinum.
“It is Anglo’s best asset, by far,” says a UK analyst who adds that the rest of Anglo’s assets – copper, platinum, nickel – need to be fixed, sold or restructured. Not Kumba, although it has its unique problems.
One is the under-performance of Sishen, the flagship mine in the Northern Cape province that will now produce sustainably only 37 million tonnes/year (mtpa), and higher waste product that first envisaged.
The 3mtpa less product will be partially offset by the new project, Kolomela, which may be able to produce 10 to 11mpta, some 2mpta more than its nameplate capacity thereby helping Kumba plug the shortfall in its 42mtpa allocation on the Sishen-Saldanha rail route.
But the difficulties at Sishen, where the stripping ratio will level out at a much higher 4.0 than 3.4 last year (currently peaking at 5.5), and lower production will knock the valuation of the company.
Nonetheless, Kumba generated enough cash in the interim to lift itself out of R4.3bn net debt to net cash of R2.5bn. It also paid a R6.5bn interim dividend to Anglo, and may yet pay a higher final dividend notwithstanding Sishen’s operational issues.
Says Kumba CFO, Frikkie Kotzee: “There is a chance of a higher dividend but it will depend on the rand/dollar exchange rate and the iron ore price”.
In the longer term, there are questions regarding whether Kumba can grow to the scale it articulated last year – 70 million tonnes/year by 2019 – a target to which CEO, Norman Mbazima, said he was sticking.
There is an element of boldness to this. Firstly, it was a production target Mbazima inherited from predecessor Chris Griffith; secondly, reaching export volumes of this size, a 71% increase in total volumes, turns on Transnet Freight Rail providing the infrastructure.
As Mbazima will know well from his time as CEO of Anglo Thermal Coal, the ability of TFR to deliver on its plans to grow capacity on the Richards Bay coal export line has been one of question and controversy. To accommodate the expansion ambitions of Kumba and others, TFR has to expand the Sishen line to 84mtpa.
“We are still talking about this. The feasibility [from TFR] should be ready. The detail of that will tell us what we can do well,” Mbazima said.
Kumba’s share price is 16% weaker this year, and with some analysts negative on Kumba owing to a possible weakness in the iron ore price (15% weaker for the remainder of the year), and the problems at Sishen, there may well be a buying opportunity for Anglo American for a business that is still fundamentally in good shape.
