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Kumba exceeds FY production target, but feels export price crunch

Kumba exceeds FY production target, but feels export price crunch

Kumba Iron Ore CE Norman Mbazima speaks on the group's financial results. Camerawork and editing: Nicholas Boyd. 10/02/15

Photo by Bloomberg

10th February 2015

By: Megan van Wyngaardt

Creamer Media Contributing Editor Online

  

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JOHANNESBURG (miningweekly.com) – JSE-listed iron-ore miner Kumba Iron Ore exceeded the 35-million-tonne production target at its Sishen mine in 2014, owing to the successful implementation of a recovery plan for the mine.

Output was 15% higher than the 30.9-million tonnes produced in the prior year and the Anglo American subsidiary was now aiming for the mine to produce 36-million tonnes of iron-ore this year.

Kumba added that its Kolomela mine had achieved a “robust performance”, lifting output by 7% year-on-year to 11.6-million tonnes in 2014.

Despite the higher output, the iron-ore miner recorded a 13% year-on-year fall in revenue to R47.6-billion. The drop in revenue was attributed to a 28% drop in the average export iron-ore price to $97/t; a weaker exchange rate; and rising operating expenses, which climbed 9% to R28.4-billion, principally as a result of input cost pressures from higher mining volumes.

“Therefore, headline earnings decreased by 29% to R11-billion,” the company said in a statement.

Attributable and headline earnings for the period were R33.44 and R34.32 a share respectively, compared with the prior year’s R48.09 and R48.08 a share. A final cash dividend of R7.73 a share, or R2.5-billion overall, was declared.

The full-year dividend amounted to R23.34 a share, compared with R40.04 the year before.

Following the planned commissioning of a new modular plant this year, the production guidance for Sishen was increased to 38-million tonnes for 2016 and 2017. Kolomela was expected to produce 11-million tonnes this year and 12-million tonnes in 2016.

Export sales volumes for the year ahead were targeted at above 43-million tonnes, while domestic sales volumes of up to 6.25-million tonnes a year were contracted to steelmaker ArcelorMittal in terms of a supply agreement.  

GRIM OUTLOOKSpeaking at the group’s year-end results in Sandton, CE Norman Mbazima said iron-ore prices were the single biggest factor that negatively affected the company’s results for 2014.

“Markets have become much tougher,” he added, noting that “supply growth [was] much stronger”, particularly from the major suppliers, and that crude steel production growth had slowed in China.


Global seaborne iron-ore supply rose 11% in 2014, led by a 24% increase in Australian exports, as well as a 4% increase in exports from Brazil and a 2% increase from South Africa. India became a net importer in the second half of the year.

In a statement, Kumba noted that it was “taking some time” for uneconomic supply to exit the market – with the export price having fallen to a five-year low of $72/t in December – and that crude steel production was forecast to grow by only 2% in the year ahead, with slower growth of 1% to 2% in China and slightly stronger in the rest of the world.

“We do not expect a major recovery in the average iron-ore price and the group has undertaken a number of decisive actions to ensure that Kumba remains a resilient organisation in a low iron-ore price environment,” it noted.

These included reconfiguring operations to achieve lower cost production to fill the available rail capacity, reduced capital expenditure during this year and in 2016 and increasing the efficiency of its project portfolio – resulting in the deferral of some of the capital spend to later years, as well as cutting exploration, technical and project study expenditure by 50%.

Further, the group was planning to reduce its head office workforce by 40%, or between 140 to 150 people, and sought to optimise the Sishen life-of-mine plan “to squeeze out further value”, removing areas of high stripping ratios.

PROJECT PROGRESS
To facilitate the expansion of Sishen mine to the west, Phase 1 of the R4.2-billion Dingleton relocation project was successfully completed, with 71 homes in Dingleton North being moved to the new host site.

Construction on Phase 2, the relocation of the remaining 428 houses, buildings and businesses was under way and due for completion in 2017.

Further, Kumba reported that its 74%-owned Sishen Iron Ore Company (SIOC) had not yet been awarded the 21.4% Sishen mining right, which it applied for early in 2014, following the Constitutional Court judgment on the matter in December 2013. 

The Constitutional Court ruled that SIOC held a 78.6% undivided share of the Sishen mining right and that, based on the provisions of the Minerals and Petroleum Resources Development Act, only SIOC could apply for, and be granted, the residual 21.4% share of the mining right at the Sishen mine.

Kumba was actively continuing its engagement with the Department of Mineral Resources to finalise the grant of the residual right. Mbazima would not be drawn on a finalisation date.

By year-end, Kumba, from a 100% ownership reporting perspective, had access to an estimated ore reserve of 914-million tonnes at its three mining operations – a decrease of 15% compared with its 2013 reserves.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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