JOHANNESBURG (miningweekly.com) – The operational profit of JSE-listed Kumba Iron Ore fell 14% in the six months to June 30 on lower exports and the cost of increased mining activities.

But revenue was up mainly on currency weakness and Kumba maintained its interim cash dividend of R5-billion, which amounts to R15.61 a share.

“We remain conscious that the biggest investment case for the company is its high dividend yield and we will continue to pay healthy dividends to shareholders,” Kumba CEO Norman Mbazima said on Tuesday.

Revenue of R26.4-billion for the six months was marginally higher than the R26.3-billion for the comparable period in 2013, mainly as a result of the 16% decline in the rand/dollar exchange rate, 2% higher total sales volumes and R556-million higher shipping revenue, largely offset by 17% lower average realised export iron-ore prices.

Net profit was 16% down at R8.6-billion compared with R10.2-billion in the first half (H1) of 2013.

Steel fundamentals remain under pressure as growth in the Chinese economy slows, in particular in the construction markets where concerns remain over housing prices.

Global seaborne iron-ore supply has grown strongly, driven by Australia exporting 25% more and Brazil 8% more.

Iron-ore prices are expected to remain at the current levels of $93/t in the third quarter of the year.

Kumba’s production was up 5% to 22.7-million tons, made up of 15% more lump ore and 9% fewer fines, but exports were 2% down.

Lump premiums, often enjoyed by Kumba because of its high-quality ore, are expected to increase and approach the marginal cost of sintering in the second half of the year.

Strong supply of iron-ore, particularly from Australia, had pushed average iron-ore prices down 19% to $111/t in H1, with the iron-ore index prices ending at $93/t.

Because of increased domestic sales, total sales volumes increased by 2% to 22.5-million tons.

H1 tons mined rose 6% to 154.2-million tons and production rose 5% to 22.8-million tons.

The comprehensive technical studies have confirmed that on average Sishen will produce 37-million tons a year for the remainder of its life following the step-up in the removal of waste to 270-million tons a year in 2016.

H1 waste removed at Sishen mine rose 6% to 86.9-million tons, with the revised mining plan resulting in improved flexibility and better utilisation of equipment.

From next month, Sishen will begin implementing a business process framework to improve productivity.

A stable labour environment is expected to result in the conclusion of a multi-year wage agreement.

Kolomela’s production of 5.5-million tons is up 4% and reconfiguration is planned at Thabazimbi mine to capture low-grade opportunities and increase production to two-million tons a year.

Waste mined at Thabazimbi has increased 18% andthe mine is expected to produce one-million tons of iron-ore this year.

Increased Chinese imports of iron-ore displaced some of the high cost domestic material.

Globally, crude steel production increased by 3.5% to 819-million tons for the first half of 2014, with China’s record production of 409-million tons being 5% higher.

In a seasonal pattern, Chinese steel mills drew down iron-ore inventory levels in early 2014, reducing iron-ore demand.

Kumba wants to export five-million more tons a year over the next three to five years, through incremental growth at Sishen and Kolomela, dependent on available railway capacity, and Kumba is continuing to work with State rail enterprise Transnet to determine an optimum solution for incremental expansion of the iron-ore export channel to Saldanha Bay.

Kumba exports iron-ore to customers in a range of geographical locations around the globe including China, Japan, Korea and a number of countries in Europe and the Middle East.

An exploration programme in Liberia under the joint venture with Jonah Capital – which is part of the company’s long-term growth strategy in West Africa – is off the table on the grounds of being uneconomic.

Kumba was involved in arbitration proceedings against La Société des Mines de Fer du Sénégal Oriental (Miferso) and the State of Senegal over the Falémé project but is keeping the seemingly negligible proceeds from that arbitration under wraps.

Sishen is on track to produce 35-million tonnes and mine around 220-million tons of waste.

Kumba expects Kolomela to produce 10-million tons and Thabazimbi should increase production to one-million tons.

This year’s total export sales volumes are likely to be in line with 2013 levels.
              
A Kumba worker tragically lost his life in April when he fell from a height while doing maintenance work on a crane at Sishen mine.

The construction of the houses, businesses, churches and schools is under way at Dingleton to facilitate the expansion of Sishen to the west.

Unit cash costs at Sishen mine remained flat at R266/t and Kolomela mine incurred unit cash costs of R211/t, a 16% increase.

Kumba’s H1 operating profit margin decreased to 47% compared with the 55% for the same period of last year.

Capital expenditure (capex) of R3.3-billion was incurred, R2.8-billion on stay-in-business (SIB) activities and R643-million on expansion projects.

The group expects total capex for 2014 to be in the range of R7.5-billion to R8.2-billion.

Capex in 2015 and 2016 will include the results of the finalisation of the Sishen fleet plan for the next five years, as well as the construction activities related at Dingleton, where R4.2-billion is to be spent in the next four to six years.

The level of sustainable SIB capex in future is expected to average R1.7-billion a year.

Domestic sales volumes are expected to be 6.25-million tons for the year in line with the supply agreement with ArcelorMittal.

The Department of Mineral Resources has still not re-awarded the 21.4% mining right to the Sishen Iron Ore Company, which was applied for following the Constitutional Court judgment on the matter in December last year.

The South African tax authorities are also in the process of reviewing certain of the group’s tax matters, which the board contends have been appropriately treated.