IN a development that may hinder its proposed divestment from parent, Anglo American, Kumba Iron Ore disclosed it stands liable for a tax claim of R5.5bn – worth about a quarter of the firm’s market value.
This is far more than the R1.8bn Kumba said on February 9 it may have pay to the South African Revenue Service (SARS) following an audit in which income from 2006 to 2010 was assessed.
Of the R5.5bn, some R3.7bn was due in interest and penalties. The tax is due by Kumba subsidiary company, Sishen Iron Ore Company in which it has a 73.9% stake. According to Investec Securities the tax payable is equal to R8.50 per Kumba share.
The company, however, said it would vigorously dispute the assessment saying that its “specialist tax and legal advisors, disagrees with SARS’ audit findings”. The company is also preparing an application to the commissioner of SARS – Tom Moyane – for a suspension of payment until the matter is resolved.
“As a responsible corporate citizen, Kumba and its subsidiaries believe that all taxes owed under South African tax legislation have been paid and that we comply with all applicable tax laws in all jurisdictions in which we operate,” said Norman Mbazima, CEO of Kumba Iron Ore in a statement.
“In 2015 alone, a year during which the iron ore price fell sharply, our business contributed R900m in corporate taxes and mineral royalties,” he said.
Anglo American CEO, Mark Cutifani, announced on February 16 that the group intended to sell or unbundle its 70% stake in Kumba, a process that would take a year to 18 months in order that the company was divested debt-free. The tax blow, however, would be a fly in the ointment of the sales process.
“Given our bearish outlook for iron ore prices in the near to medium term we expect Kumba to generate an underlying pre-tax profit of R1bn in FY16 and in that context an additional tax payment of R5.5bn is significant,” said Goldman Sachs in a note.
“Our base case is that no payment will need to be made with respect to the tax assessment and we note that Kumba is preparing for an objection against the tax assessment,” it said.
“However, we expect the stock to react negatively to the news today and expect the tax assessment to remain an overhang on the stock until fully resolved.” Shares in Kumba were just under 4% higher in Johannesburg valuing the company at R22bn.