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Kumba Iron Ore earnings plunge, dividend dumped, mines rejigged

Norman Mbazima

Norman Mbazima

Photo by Duane Daws

21st July 2015

By: Martin Creamer

Creamer Media Editor

  

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JOHANNESBURG (miningweekly.com) – The earnings of South African iron-ore major Kumba plummeted in the six months to June 30 accompanied by a shattering of the iron-ore price, the closing of Thabazimbi mine, a rejigging of the remaining mines and a decision not to declare an interim dividend in a company that has been a long-standing dividend play.

Headline earnings were 61% lower at R2.5-billion, compared with R6.5-billion in the corresponding six months of 2014.

“It’s been particularly difficult for us in the iron-ore industry and all stakeholders would have to share in the pain,” Kumba CEO Norman Mbazima told journalists in a conference call in which Creamer Media’s Mining Weekly Online participated.

With the iron-ore price in the $50/t range, the company was taking steps to reduce its cash break-even price to $45/t for 62% iron product going to China, down from the $63/t in 2014.

Meanwhile, in the six months to June 30, normalised earnings of the Anglo American group company plummeted 52% to R9.78 a share and operations had to be reconfigured to achieve significantly lower cost of production on an average iron-ore price of $60/t.

Total sales volumes increased by 16% to a record 26-million tonnes despite a 1% production fall to 22.6-million tonnes.

Controllable costs were cut by 16% a tonne.

“We just don’t have the same amount of money that we used to have in different times,” Mbazima said, adding that he would be speaking to the company’s shareholders, the communities, the Northern Cape government and the national government to temper their expectations of what the company was able to do for them going forward.

In view of the cut in waste mining at the opencast operations, capital expenditure (capex) on mining equipment had been suspended along with related employee housing development, as it was no longer needed in the short term

Previous capex guidance of R8.6-billion to R9.5-billion had been cutback by 25% to between R6.9-billion and R7.2-billion, reflecting the deferred expenditure on waste stripping and housing.

On the likelihood of a final dividend being paid, Mbazima told journalists that iron-ore price volatility, which was expected to remain for some time, had reduced cash generation significantly.

“Prices are very uncertain, which is one of the reasons why we had to hold back on the interim dividend,” Mbazima told journalists.

However, if it turned out that there was sufficient cash in the bank at the end of the second half and price volatility had abated, he was sure that the board of directors would wish to declare a final dividend.

On the life-of-mine impact of mining Sishen for short-term cash generation, the Kumba CEO said that Sishen would be mined at 200-million tonnes of waste for three years before rising to 230-million tonnes a year.

The prior plan was to remove 240-million tonnes of waste at Sishen this year and rise to a sustained 270-million tonnes a year in 2016.

“We’re now going to mine that waste later in the life of Sishen and therefore we’re not expecting any reduction in the life-of-mine of Sishen,” Mbazima said.

On the impact of the current cash-saving drive on social expenditure, he added that the area of Dingleton South originally earmarked for employee relocation would now be mined as it had shallow ore, which was crucial to mine during these tough times.

But the Dingleton housing project itself would proceed as planned, he added.

In the past six months, new low-cost iron-ore supply had been exacerbated by muted demand, which had necessitated a robust review of Kumba’s business in order to improve its competitive position and reduce cash costs.

RECONFIGURING OF OPERATIONS

To cut Kumba’s cash break-even price to $45/t for 62% iron product going to China, overhead costs have had to be cut further, capital discipline reinforced, operations reconfigured and the production of lump products maintained.

The pit of the Sishen mine has been reconfigured and the new Kolomela mine’s waste profile optimised to conserve cash and increase production incrementally.

Capex has been cut and phased and 133 permanent positions eliminated at the head office involving a 61% employee reduction.

Further overhead cost savings are expected from a restructuring of support services at the operations and a review of stay-in-business capital project functions.

Total tonnes mined – excluding the now-closed Thabazimbi mine – were up 16% to 160.5-million tonnes but total production declined marginally to 22.6-million tonnes owing to lower production at Sishen of 16.1-million tonnes.

Kolomela at 5.9-million tonnes in the half-year continued to perform well.

Good logistics and shipments totalling 2.3-million tonnes through the multi-purpose terminal at the Port  of Saldanha resulted in a 16% sales volume increased on the back of record export sales of 23.2-million tonnes, compared with 19.7-million tonnes last year.

MARKET OVERVIEW

Global crude steel production fell 2.4% to 809-million tonnes for the first half of this year, with China’s production of 406-million tonnes 2.4% lower, with high Chinese exports supporting soft domestic demand.

Global seaborne iron-ore supply was flat at 662-million tonnes on 6% growth out of Australia and 11% from Brazil, offset by a decline from India and the rest of the world.

Nontraditional supply sources continue to be displaced by low cost capacity expansions.

Temporary supply bottlenecks were experienced by major iron-ore producers in the early parts of the year.

However, record port shipments in June and ongoing supply ramp-ups, including the commissioning of Roy Hill in Australia, will support supply growth in the second half of the year.

Index prices have steadily declined from the beginning of the year to historical lows as a result of increased supply availability, with major projects reaching execution, and subdued seasonal demand recovery as mills deleveraged inventories.

SISHEN MINE

Total tonnes mined at Sishen increased by 17% to 125.6-million tones and waste mined was 24% up at 107.7-million tonnes.

Sishen’s North mine, which continues to yield improved operating equipment productivity, is now being rolled out to the prestrip waste mining and heavy mining equipment maintenance areas.

In addition, after obtaining the appropriate licences, Sishen has started using two new waste dumps to  the west of the current pit to facilitate waste removal further by reducing hauling distances and lift factors.

KOLOMELA MINE

Total tonnes mined at Kolomela rose 12% to 34.9-million tonnes, of which waste was 8% up at 26.3-million tonnes.

Waste volumes are expected to reduce to not more than 38-million tonnes this year, ramping up thereafter.

Export sales volumes for the year are expected to exceed 43-million tonnes and domestic sales volumes of up to 6.25-million tonnes are contracted to ArcelorMittal South Africa.

Edited by Creamer Media Reporter

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