Chinese economic recovery helps Kumba to record profits

Written by Ciaran Ryan. Posted in Journalism

Despite production setbacks due to Covid. From Moneyweb.

Kumba announced a R3.6bn investment to extend the life of its Sishen open cast mine to 2040. Image: Waldo Swiegers, Bloomberg

Kumba announced a R3.6bn investment to extend the life of its Sishen open cast mine to 2040. Image: Waldo Swiegers, Bloomberg

It was the year of Covid, but also of China’s remarkable economic recovery.

The country brushed aside the effects of the pandemic in the second half of 2020 to record 6% growth in steel production over the previous year. Chinese infrastructure investment declined 20% in the first quarter of 2020, then swung back to register nearly 1% year-on-year growth.

This worked to Kumba Iron Ore’s advantage, pushing average realised prices for the year to $115 a ton.

The average price of iron ore fines delivered into Chinese ports ended 2020 17% higher than the previous year due to surging demand, helped by government stimulus packages to revive the economyand supply disruptions in key supplier economies, notably Brazil, SA, Canada, Chile and Peru.

Kumba was able to command a slightly higher than average market price due to the quality of product it supplies, the result of a deliberate programme focusing on higher value iron ore.

Total tonnage mined decreased by 14% to 256Mt from 297Mt the previous year, mainly due to Covid and weather-related disruptions, as well as equipment reliability and availability.

Higher iron ore prices and a weaker rand translated to a record Ebitda (earnings before interest, tax, depreciation and amortisation) of R45.8 billion and free cash flow of R20.7 billion for the 2020 financial year.

“Our Ebitda margin rose to 57%, up from 52% in 2019 as we adapted our value chain and capitalised on our high quality iron ore products. Together with the strengthening price, this allowed us to achieve a 19% higher average realised FOB [free-on-board] export price,” said Kumba CEO Themba Mkhwanazi at a results presentation on Tuesday.

Margins were further boosted by cost discipline resulting in savings of R1.3 billion, including R613 million of Covid-related savings.

Operations

Kumba also announced a R3.6 billion investment to extend the life of its Sishen operation in the Northern Cape to 2040, using advanced ultra-high dense media separation (UHDMS) technology to optimise output. This technology allows Kumba to produce high quality iron ore from low grade material containing iron ore of between 40% and 48%.

Last year Kumba and Anglo American gave the go-ahead for the Kapstevel South mine at Kolomela, which it is estimated will cost R7 billion and yield an internal after-tax rate of return of about 25%.

Mkhwanazi says the company is continuing with its exploration programme in the Northern Cape to further develop its resource pipeline.

Total capex for 2021 is expected to be around R11 billion, which includes the deferral of non-critical capital spending from 2020. Slightly less than half of this will go to the development of the Kapstevel South pit, and the UHDMS project to recover low grade material.

Key figures

  • Revenue of R80.1 billion, up 24.6% on 2019
  • Operating expenses up 10.7% to R39.1 billion
  • Attributable free cash flow of R20.7 billion, up by 21%
  • Return on Capital Employed of 109%, up from 83%
  • Final cash dividend of R41.30 per share, giving a total cash dividend of R60.90 per share
  • Average realised FOB export price of $115/tonne
  • Cost savings of R1.3 billion, keeping C1 costs at US$31/t
  • Ebitda margin of 57%, up from 52%
  • Sishen life extension potential to 2039 with R3.6 billion UHDMS project approved in February 2021.

Source: Kumba 2020 annual results

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and Lewrockwell.com, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.