Kumba: Bullish on balance

[miningmx.com] — KUMBA Iron Ore’s first full year as a separately listed company since it was unbundled from Exxaro in 2006 certainly came up to expectations.

It did not disclose a pro forma HEPS figure for 2006 at this morning’s results briefing, but in rand terms headline earnings rose 44% in 2007, from R2.1bn to R3.1bn.

Questioned about Kumba’s dividend policy, following its declaration of total dividends of 750c from EPS of 974c in 2007, FD Vincent Uren said the aim is to distribute all available cash in any period, and come as close as possible to one times cover.

He added that Kumba should be able to finance its immediate expansion projects largely from debt, implying that the bulk of available earnings should again be passed on to shareholders this year.

However, while year-on-year comparisons are all flattering, comparing the two halves of 2007 is less encouraging. While for the year as a whole revenue rose faster than costs, boosting operating margin from 2006’s 45% to 52%, the reverse was true half-on-half. Costs rose by 22% in the second half, and the operating margin was only 50%, against 54% up to June.

Of the annual HEPS of 974c, 52c came in the first half.

Cost control was a feature of 2007, with unit costs up only 2.5%. However, this is slightly illusory, as inventory was stockpiled for the Sishen expansion project (SEP).

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If this is taken out, unit costs would have risen 6%, which is still respectable. Longer-term, Kumba wants to get costs back to the 2005 level, adjusted for its internal inflation.

CEO Ras Myburgh is upbeat about the future. Total sales of iron ore rose 10% last year, from 29.8 million tonnes (Mt) to 32.9 Mt, of which 24 Mt (21.5 Mt) were exports from Sishen mine.

Kumba has a strong project pipeline and plans to raise capacity to 50 Mt by 2013, with subsequent potential for 70 Mt, though Myburgh concedes that shorter-term targets could be jeopardised if there are further delays to the tight schedule for the Sishen South project.

Power supplies are another imponderable. Power problems will impact adversely on both production volumes and costs this year, though Myburgh says Kumba has already done a lot of planning to make its use of power more efficient.

One area where Myburgh has no reservations is the market, largely thanks to China, where steel output is expected to grow from 489 Mt in 2007 to 750 Mt in 2012. Its appetite for iron ore imports will swell more than proportionately, as it can’t expand its own production enough even to compensate for diminishing grades.

While the Big Three producers – BHP-Billiton, Rio and Brazil’s Vale – have announced 300 Mt expansions, and smaller producers could add another 70 Mt, this will only keep pace with global demand, says Myburgh.

The spot price has risen by 80% since July. Myburgh says the gap between spot and contract price is usually eliminated during annual contract renegotiations, but this year that would require a 60% rise in contract prices – though he prudently didn’t go so far as to say that that will actually happen.

And he cautioned that Kumba can’t renegotiate its existing contracts, except when customers want to lift their offtake, so there will be a time lag before it can benefit from the latest surge.

Market reaction to the figures today was mixed. Initially, generally bullish sentiment sent the price up 1,500c to a new high of 31,500c before a correction – possibly as the uninspiring second half sank in – to 30,250c. It’s now back on the up track, to 30,600c.

That’s an earnings multiple of about 31.4. Heady, but analysts, swayed by the exciting prospects, are on balance heavily bullish.