Kumba approves R7bn Kolomela extension but strikes cautious note as payout reduced

Themba Mkhwanazi, CEO, Kumba Iron Ore

KUMBA Iron Ore approved the R7bn construction of a new pit at its Kolomela mine in South Africa’s Northern Cape province that will maintain the mine’s production at some 13 million tons (Mt) a year.

Waste stripping and pit establishment of the Kapstevel South project would begin this year with the intention to produce its first iron ore in 2024. Kumba said the decision to allocate the capital, which would be funded from cash flow, was a vote of confidence in demand for its product.

Despite the bullishness, Kumba’s project announcement came with interim numbers in which the company eased on the throttle amid concerns that China’s economy recovery could be interrupted by a second wave of the Covid-19 virus.

The company paid a R19.60 per share interim dividend representing 75% of headline earnings, but this was less than the (admittedly) stellar 98% payout of headline earnings at the same time last year. Kumba also deferred R1bn in other non-critical capital expenditure to 2021 and said it would extract R400m in new cost savings this year taking total cost savings for 2020 to R1bn.

Kumba had met its R2.6bn cost savings target two years ahead of plan, but it had set down plans for longer-term cost savings. These targets were under review, it said, adding a slightly hawkish note on the market.

“The implications for our export markets are still unfolding,” said Kumba in notes to its interim figures. “Although we are encouraged by China’s recovery and the reopening of the European economies, we remain alert to the possibility of further risks developing, including a second wave of infection,” it said.

Production and sales volumes were down for the six month period owing to Covid-19 although Kumba said it would be back to pre-Covid run-rates in June. Prices were softer as well: the average price for its iron ore fell 14% to $93/t from $108/t previously, although historically this is still an elevated number.

Commenting in a media call, Kumba CEO Themba Mkhwanazi, said the iron ore price would moderate to $90/t for the remainder of the year. “It’s still a good price but there are potential impacts from Covid-19,” he said. The impact on earnings was minimal but Kumba iron ore sales were constrained by Transnet which might result in a working capital build.

Production was 11% lower year-on-year at some 17.9Mt (2019: 20.1Mt) and sales fell 13% to 18.6Mt largely informed by port and freight restrictions under which Transnet labours. Transnet capacity was 80% in June largely as a result of having vulnerable employees who normally work at its ports stay at home, amid the pandemic.

Transnet had committed to returning to normal capacity by September. Kumba had some 6.2Mt of finished stock in inventory of which 2.4Mt was sitting at port. Bad weather with swells of up to 10 metres had also led to port bottlenecks, said Mkhwanazi. Transnet has an iron ore rail capacity of about 60Mt annually. Kumba’s export sales fell 8% during the six month period.

Adjusted full-year guidance was intact at the interim stage. Kumba forecasts total sales of between 38Mt to 40Mt and production of 37Mt to 39Mt of which the Sishen mine comprises the lions’ share at 26Mt.

The lower year-on-year production has resulted in cost increases, however. Sishen’s unit costs will increase to R385/t and R395Mt whilst unit costs at Kolomela are unchanged at R280 to R290/t. Mining inflation owing to Covid-19 expected to continue.

1 COMMENT

  1. Why’s the consensus among investors to sell if Kumba performs at this level? despite the sell sentiment the share price has almost doubled.

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