[miningmx.com] — KUMBA Iron Ore (Kumba) increased earnings 90% to R6.5bn in the six months to end-June but the outlook for the second half is uncertain because of a change in pricing policy and falling steel production.
CEO Chris Griffith said Kumba had switched to quarterly pricing on its long-term contracts which make up the majority of the group’s export sales.
He commented, “quarterly benchmark prices for the April/June quarter have been negotiated on the basis of average index prices in the period December 2009 to February 2010 and have increased on average 100% compared to 2009/10 iron ore year benchmark prices.
“However, a pricing mechanism for future quarters is still under negotiation with customers and changing market conditions have led to significant uncertainty in iron ore prices in the short-term.’
Griffith said current index prices were lower than the implied July/September 2010 quarterly benchmark prices.
He added, “in an operating environment where steel production rates are being reduced it is uncertain whether increased iron ore prices under the quarterly pricing mechanism can be passed onto customers.
“Chinese steel production and iron ore imports in the second half of 2010 are expected to be marginally below levels achieved during the first half as Chinese steel mills prioritise cost over productivity and therefore focus on the use of domestic iron ore.
“The momentum of the recovery of Kumba’s traditional markets is slowing. Export sales volumes into China are expected to normalise at around 60% of the geographical sales mix.’
Kumba increased volumes railed on the Sishen/Saldanha export channel by 8% to 18.2mt for the first half of 2010 which included 0.6mt railed to ArcelorMittal’s Saldanha Steel plant.
That was despite the Transnet strike in May and a “significant derailment’ in April which together cost the company 1.2mt of “lost’ export sales volumes.
Kumba reported attributable earnings of R20.27 a share for the six months from which it has declared an interim dividend of R13.5 a share.
Operating profit rose by 64% to R11.2bn (previous comparable six months – R6.8bn) which increased the group operating profit margin to 63% (57%).
All of this is good news for Kumba’s black economic empowerment (BEE) partners who find themselves in an enviable financial position compared to their peers in other mining companies.
Griffith commented that, “this return of cash to shareholders has assisted in reducing the acquisition debt of the BEE shareholders of SIOC (Sishen Iron Ore Company – Kumba’s operating subsidiary).
“Less than four years after its establishment using the dividends received from SIOC, the SIOC community development trust will be in a position to fully redeem the R458m preference shares issued to pay for its 3% interest in SIOC in the third quarter of 2010, well ahead of original projections.
“This will result in the trust holding an unencumbered 3% interest in SIOC – now valued at R3.8bn based on Kumba’s share price of R316 on June 30, 2010 – and the ability to apply all future dividend cash flows to progress its community development objectives.
“This is a significant milestone for BEE and a very worthy initiative to empower our key communities where we operate. In future Kumba will deconsolidate this 3% shareholding once the preference shares are fully redeemed.’
