Kumba weighs Transnet penalties after utility failures cost firm R10bn in sales last year

KUMBA Iron Ore said it was “in discussions” with Transnet regarding financial penalties that may apply in a ‘take-or-pay’ rail contract after the state-owned utility delivered only 80.5% of Kumba’s contracted tons in the firm’s 2022 financial year.

This was down from 88% of contracted tons delivered by Transnet in the previous financial year when no penalty was applied.

“The contract itself has got a threshold below or over which there are take-or-pay obligations,” Bothwell Mazarura, Kumba CFO, said in response to a question following the presentation of the group’s 2022 financial year results.

“We would love for them [take-or-pay provisions] to be profit-based, but they are not. There is a calculation mechanism in the agreement itself,” he added.

Mazarura also said there were some “extenuating circumstances” and force majeure events post-period (after December 31) that would be taken into consideration regarding applying potential penalties in a take-or-pay agreement. Interruptions from heavy rains and an infestation of locusts in 2022, the latter causing derailments, had not reoccurred this year.

Failure to deliver Kumba’s full contracted tons cost the group R10bn in lost revenue last year, of which R6.5bn was sustained in the last quarter of the year. Last year, Eskom paid Exxaro Resources R9.7bn in penalties after downtime at the utility’s Medupi power station resulted in Exxaro being unable to deliver contracted coal.

Asked for details of the discussions with Transnet, Kumba CEO Mpumi Zikalala said that a two-week strike in October and locust swarms at the beginning of last year, which caused derailments on the iron ore line, might be put forward as force majeure events.

“We would look at the data and revert back to them … and say this is what they owe us. We are finalising that process,” she said.

Transnet’s lenders would not look kindly on any financial sanction as the utility did not generate enough revenue at the interim stage last year to meet its cash interest cover of 2.5 x (it reported CIC of 2.1 x). This means Transnet fell foul of covenant agreements with lenders who are understood to have waived the agreements until Transnet’s year-end.

In terms of an agreement with the Minerals Council, which last year sought the resignation of Transnet CEO Portia Derby, Kumba is collaborating with the utility in an effort to improve its run rate. This is through the iron ore steering committee which is one of four established jointly between the council and Transnet. The other commitees represent Transnet’s manganese, coal and chrome customers respectively.

Zikalala said there had been early progress in its interventions with Transnet but added that in the long-term the private sector ought to be allowed to operate the line on a concession basis.

“We still believe that concessioning the line is something that needs to be looked at,” she said. “That is where private sector comes in and we will continue to drive that. But for now, first things first.”