Kumba approves R3.6bn life extension project pushing Sishen production out to 2039

Themba Mkhwanazi, CEO, Kumba Iron Ore

KUMBA Iron Ore today said it had approved the R3.6bn extension of its flagship Sishen mine in South Africa’s Northern Cape province.

The company, which is 70% owned by Anglo American, will take Sishen production out to about 2039 – an increase in mine life of up to six years – through ultra-high dense medium separation (UHDMS) technology.

Sishen, which produced 25.4 million tons (Mt) of Kumba’s 2020 production of 37Mt (a 13% year-on-year decline), previously had a mine life of about 13 years. The additional years of mine life are also a result of mining-related efficiencies (slope optimisation). UHDMS, on the other hand, is processing technology.

The project takes total new spend for Kumba to R10.6bn following the July announcement that it would proceed with the R7bn Kolomela (Kapstevel) extension.

“This is a game-changer for us,” said Themba Mkhwanazi, CEO of Kumba Iron Ore, of the Sishen life extension project. “This is a significant investment if you consider the [business] environment at the moment with Covid-19,” he added.

The group had also spent R800m since 2013 exploring the Northern Cape for additional iron ore deposits as Sishen’s mine life poses existential questions for Kumba. “We are not waiting until 2040,” said Mkhwanazi.

All in all, Kumba is to spend R11bn this year consisting of R5bn towards Kapstevel as well as early UHDMS project work with the balance allocated to stay-in-business capital. “You can expect elevated levels of capital expenditure for the three years from 2021 to 2023,” said Bothwell Mazarura, CFO of Kumba.

The project announcement comes on the back of strong fundamentals for the iron ore business founded on China demand and supply-side concerns.

Kumba today reported a higher average realised price of $115 a ton, as well as R1.3bn in cost savings. This formed the basis for record earnings before interest, tax, depreciation, and amortisation (EBITDA) of R45.8bn and R20.7bn in free cash flow, an increase of 21%.

The outcome for shareholders was the declaration of a R41.30 per share final dividend – equal to R17.8bn in payout – and which takes the total cash dividend for the year to R60.90/share, a 86% payout ratio for 2020. Pro forma cash would be R4.4bn after the dividend payments.

The outlook for Kumba this year is robust amid bullishness in the iron ore market. The group is forecasting a price of $130/t before freight costs. “We have a positive view on the market,” said Timo Smit, executive head of marketing and seaborne logistics for Kumba.

“China continues to power ahead so the demand side is good. On the supply side we think that Vale’s guidance has risk,” he said. “The supply side is fairly constrained which makes for a favourable combination,” he said, adding – however – that current prices of about $173/t spot were unlikely to be sustained.

Brazil’s Vale, the world’s largest iron ore producer, produced 300Mt of iron ore fines in 2020 and has forecast a 36% increase this year to 400Mt by the end of 2022.

Asked for his comments on inorganic growth options, Mkhwanazi said that the Northern Cape province represented the group’s best short- to medium-term opportunity to grow.