JOHANNESBURG (miningweekly.com) – Iron-ore mining and marketing company Kumba Iron Ore on Tuesday declared an interim cash dividend of R19.60 a share, representing a payout ratio of 75% of headline earnings.

Kumba CEO Themba Mkhwanazi said the company adapted its business quickly and comprehensively to meet the human, operational and market challenges of the likely enduring reality of the Covid-19 pandemic.

The JSE-listed Anglo American group company reported a strong performance in the first half of the year, with earnings before interest, tax, depreciation and amortisation (Ebitda) of R17.4-billion at a margin of 55%.

“We are a resilient and capital efficient business with a robust balance sheet, well positioned to navigate the current environment and the longer term,” Mkhwanazi stated in a release to Mining Weekly.

Highlights of the six months to June 30, in addition to the dividend, were:

• four years of fatality-free production;
• R13-billion in shared value created;
• average realised free on board price of $93/t;
• protected Ebitda margin of 55%;
• return on capital employed of 84%; and
• net cash of R15.7-billion.

Kumba's production of 17.9-million tonnes and sales of 18.6-million tonnes were in line with its Covid-19 adjusted guidance for the first half of the year, following continued improvements as it returned to pre-Covid-19 performance-rates in June.

Its strong Ebitda performance translated into R7.1-billion of attributable free cash flow. Taking into account our strong earnings, the resilience required for our new operating conditions, and need for a robust balance sheet, the Board declared an interim cash dividend of R19.60 per share, representing a payout ratio of 75% of headline earnings.

“We remain committed to our strategic imperatives of margin enhancement and life extension which are key to our sustainability. Our margin continued to benefit from constructive market prices and currency weakness, as well as the early and decisive action taken to protect our margin through additional cash preservation measures including delivering  R700-million in cost savings for the year to date.

“Kumba has been through challenging times before and we know how to respond. Our approach to navigating the pandemic is based on ensuring the resilience of our business, living our values of care and respect, and fulfilling our purpose to re-imagine mining to improve people's lives. We are building on our strategy to further strengthen our business and ensure that we remain agile, resilient and able to meet the challenges that we face," Mkhwanazi said.

OPERATIONAL PERFORMANCE

The company said that operational performance for the period reflected the lockdown and subsequent reopening of operations in the second quarter of this year with reduced workforce levels of 50%, before ramping up production to pre-Covid-19 performance rates in June. Consequently, total tonnes mined for the period decreased by 15% to 117.6-million tonnes, compared with 138-million tonnes in the corresponding period last year.

It said that both production and sales were closely managed in line with Transnet's logistical capacity, which increased to 80% in June. As a result, total production was 11% lower.

Total sales volumes declined by 13% to 18.6-million tonnes, owing to lower domestic offtake by ArcelorMittal South Africa of 0.4-million tonnes, while export sales volumes decreased by 8% to 18.3-million tonnes owing to logistical constraints and severe coastal weather conditions impacting ship loading at Saldanha port.

REVENUE AND EBITDA

Total revenue decreased by 8% to R31.6-billion, mainly as a result of lower prices and sales volumes, partially offset by a weaker exchange rate.

Kumba's average realised iron-ore export price decreased by 14% to $93/t, while the average rand/dollar exchange rate weakened by 17% to R16.67.

Sales volumes reduced by 13% to 18.6-million tonnes and shipping revenue increased by R569-million, benefitting from a weaker currency and higher volumes, partly offset by lower freight rates.

The R17.4-billion Ebitda reflected a decrease of 14%, and the Ebitda margin decreased by 3% to 55%.

Net cash at June 30 was R15.7-billion, with cash flow generated from operations of R15-billion and working capital increasing owing to finished stock increasing to 6.2-million tonnes.I

OUTLOOK

Various initiatives that embed safety behaviour and culture are under way to continue to improve on the four-year fatality-free track record. The Covid-19 response measures implemented are being integrated into the way Kumba operates and does business.

Communities will continue to be supported, along with business partners, suppliers and customers, as part of a commitment to improving lives and livelihoods.

The extent of the impact of Covid-19 on Kumba's operational and financial performance, including full-year 2020 guidance, will depend on the duration and severity of the pandemic and related restrictions.

The implications for export markets are still unfolding and although the company is encouraged by China's recovery and the reopening of the European economies, it said that it was remaining alert to the possibility of further risks developing, including a second wave of infection.

To date, operational performance has been in line with expectations and guided are total annual sales of 38-million to 40-million tonnes and total production of 37-million to 39-million tonnes. Sishen is expected to contribute 26-million tonnes of this and Kolomela 12-million tonnes.

Sishen's unit costs are expected to increase to between R385/t and R395/t, while Kolomela's unit costs remain between R280/t and R290/t, with cost pressures from mining inflation and managing the Covid-19 impact expected to continue.

Since the savings programme in 2018, the R2.6-billion saved has achieved the savings target two years ahead of time and aimed for now is a further R400-million of savings in the second half of this year to bring the total for 2020 to R1-billion.

Longer-term cost-saving targets are under review, in light of the uncertain and fluid current environment. An update on longer-term cost saving will be provided once there is more certainty.

CAPITAL EXPENDITURE

Capital expenditure guidance of between R5.6-billion and R6.1-billion for 2020 includes the deferral of R1-billion of non-critical capital expenditure to 2021.

"Our competitive products, flexible value chain and geographically diverse customer portfolio base ensure that we are in a position of strength. These unprecedented times further highlight the importance  of maintaining our cost discipline, talented workforce and the ability to adapt quickly to a fast-evolving environment with care and respect for all of our stakeholders.

“Our robust balance sheet and capital discipline provide us with the financial flexibility to allocate capital where it is needed most in our business during this time of uncertainty, while delivering sustainable returns to our shareholders," Mkhwanazi concluded.

INTERIM CASH DIVIDEND

Headline earnings a share of R26.19 were in line with Kumba's capital allocation framework and dividend policy, which targets a payout range of between 50% and 75% of headline earnings.

The dividend, declared from income reserves, is subject to a dividend withholding tax of 20% for all shareholders who are not exempt from or do not qualify for a reduced rate of withholding tax.