‘Royal flush’ for Kumba, and now for its next trick

Business

‘Royal flush’ for Kumba, and now for its next trick

CEO plans to build on vastly improved operations

Allan Seccombe

For the first time in many years external growth is spoken about by Kumba Iron Ore as it scrambles to extend the life of its two South African mines through technology and exploration.
While there might not be any pressing urgency to find takeover targets, the option is firmly on South Africa’s largest iron ore miner’s strategy checklist because its two mines in the Northern Cape have just 14 years of life left, a time frame the Anglo American subsidiary wants to extend as much as possible by exploring on and around its tenements as well as finding technological solutions to unlock ore in vast low-grade dumps at its flagship Sishen mine.
Kumba CEO Themba Mkhwanazi was reticent in giving any detail on what type of external growth the company was contemplating, time frames or even commodity, let alone geography.
“It’s about step-ups which are opportunistic and which, strategically, will be close to our core business. That’s really exciting for us to be thinking like this because we now have the opportunity off the back of the significant improvement we’ve made at our operations in recent years,” he said.Kumba wants to find ways to mitigate the financial challenges of working in a high-inflation environment, he said.
Kumba would do well to heed the lessons of the past. It had a disastrous foray into Senegal, signing an agreement in 2004 that resulted in an arbitration process that was concluded in 2010 after relations with the government there soured. It marked the end of Kumba’s foray abroad.
The strong cash generative nature of Kumba, particularly after a hefty restructuring of Sishen that brought the breakeven cost down to $29/tonne in 2015, was clearly evident in the company’s latest annual results despite the breakeven cost rising to $40/tonne, largely because of factors like freight costs that were beyond its control.
The 2017 performance, which combined a sound operational performance with a strong price, including a $14/tonne premium for three quarters of its production compared to the price received by its four largest peers, underlined the decision by Anglo to retain its 69.7% stake in Kumba instead of selling out as it had planned to do three years ago.Kumba declared a R15/share final dividend, bringing its total full-year dividend of R30.97 per share, a sizeable source of revenue for Anglo.
Kumba recorded a profit of R16-billion compared to a profit of R11-billion the year before. Revenue increased by R6-billion to R46-billion.
Cash holdings were nearly R14-billion compared to R10.7-billion a year earlier.
Mkhwanazi called the results a “royal flush”, with no fatalities at its flagship Sishen mine and Kolomela mine. The mines increased output by 8% to 45 million tonnes of iron ore. Railed volumes to Saldanha were up 6% despite adverse weather in the first half and two derailments in the second half of the year.
Export sales were 7% higher at nearly 42 million tonnes.

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