Kumba results for the year ended 31 December 2014
10 February, 2015
In 2014, Kumba successfully delivered on its plans and promises.
Commenting on the results, CEO of Kumba Iron Ore, Norman Mbazima, said “Iron ore prices were the single biggest factor to negatively affect our results for 2014. Markets have become much tougher, with prices significantly declining throughout the year. We have successfully delivered on the commitments we made at the beginning of last year. At Sishen mine, we exceeded our production target of 35 Mt, producing 35.5 Mt as the recovery plan was successfully implemented. The robust performance at Kolomela mine continued, lifting output by 7% to 11.6 Mt. Total export sales increased 4% to 40.5 Mt.”
KEY FEATURES
- Regrettably one fatality at Sishen mine in April 2014
- Sishen mine’s production increased by 15% to 35.5 Mt as recovery plan successfully implemented
- Kolomela mine continued to perform well lifting output by 7% to 11.6 Mt
- Export sales volumes were 4% higher at 40.5 Mt
- Significant 28% drop in average iron ore export prices to US$97 per tonne (Platts IODEX 62%)
- HEPS 29% lower at R34.32 per share
- R2.5 billion final cash dividend declared to shareholders
Market Overview
The export price at the beginning of the year was US$134/dmt and ended at a level of US$71.75/dmt at the end of December 2014, following strong growth in supply, particularly from the major suppliers, and slower crude steel production growth in China.
Global seaborne iron ore supply rose 11% in 2014 led by a 24% increase in Australian exports as well as a 4% increase in exports from Brazil and 2% from South Africa.
India became a net importer in the second half of the year. It is taking some time for uneconomic supply to exit the market. Global crude steel production increased 3.1%, slightly faster than 2013 as higher output in the rest of the world offset slower growth in China. Chinese crude steel production growth slowed from 6.5% to 4.5%, while Japan, South Korea and Taiwan benefitted from additional integrated steel capacity and high capacity utilisation rates. Europe recovered ground lost in 2013, showing 3% growth. Global steel production slowed in the second half, due to weaker conditions in China and seasonal maintenance in Europe, despite record high steel exports.
Operational Review
Plans implemented at Sishen mine over the past few years yielded benefits and were complemented by the implementation of the Operating Model at Sishen North mine in August 2014. The Operating Model represents a consistent approach across the business to ensure that we operate our assets to their full potential and enhance long-term operational capability.
Mbazima explained, “The three basic principles underpinning the Operating Model are: stability in operations that deliver predictable outcomes, experience lower operating costs and fewer capital expenditure requirements; lower variation in operational performance to increase capability and efficiency; and a clear understanding by team members of their own work, and how their team works. The model was implemented at the internal waste and ore mining in the North mine. It is already yielding results including improving scheduled work, now over 70% compared to 20% on commencement; a 50% reduction in waiting time on shovels, and 23% efficiency improvements in total tonnes handled since June 2014.
Sishen production of 35.5 Mt increased 15% (2013: 30.9 Mt), with total tonnes mined rising to 229.9 Mt (2013: 208.8 Mt), including 187 Mt waste (2013: 167.8 Mt). While this is below the previously announced 2014 target of 220 Mt, waste removal run rates are now meeting targets.
The strategic redesign of the western pushbacks of the pit, together with the improved waste removal run rates, means sufficient ore has been exposed to support the 2015 production target of 36 Mt. The improved mining plan has led to 780 Mt of waste being taken out of the revised life of mine plan with an 87 Mt reduction in reserves, increasing the net present value of the mine. The average life of mine stripping ratio has reduced from 4.4 to 3.9 and the life of mine has reduced from 18 to 16 years.
Total tonnes mined at Kolomela mine rose by 18% to 70.4 Mt, (2013: 59.9 Mt), including 55.5 Mt of waste (2013: 46.7 Mt), an increase of 19%. The mine produced 11.6 Mt of iron ore, an increase of 7%. Pre-stripping of the third pit at Kolomela was completed to maintain flexibility and the company aims to increase current production capacity through de-bottlenecking and optimisation of the plant. With the establishment of the third pit, waste levels going forward are expected to decrease and normalise. The new steady state production capacity is 11 Mtpa, up from 10 Mtpa. As a result, the remaining reserve life of Kolomela has reduced from 24 to 21 years.
Production at Thabazimbi mine increased by 74% from 0.6Mt to 1.1Mt as planned. The study for the reconfiguration continues but has been impacted by the current low iron ore price. The low grade project has been suspended and due to the low price environment in which the company is now operating, the future of this mine is being reconsidered. An impairment charge of R439 million was recognised.
Kumba railed 42.2 Mt to Saldanha, and shipped 40.1 Mt for the export market, slightly more than the 39.3 Mt in 2013. Saldanha’s multi-purpose terminal (MPT), allowed the Group to export additional tonnage, particularly towards the end of the year.
Kumba increased sales to 45.3 Mt, of which exports were 40.5 Mt – 4% higher than 2013. Finished product inventory held at the mines and ports rose to 6.5 Mt from 2.9 Mt. Mbazima noted, “sales to China accounted for 57% of our total export volumes as we exported more to India in line with our strategy to broaden our customer base.”
The Group’s lump:fine ratio was 67:33. The superior physical characteristics of Kumba’s lump ore allows for the production of niche lump products, commanding an additional premium in the market.
Projects
The Group’s portfolio has been reviewed and optimised to leverage the current asset base. The target remains an additional ~5Mt in South Africa over the next three to five years, through incremental volumes from the projects at Sishen and Kolomela. Studies are underway to determine value accretive options to deploy UHDMS and other low grade technologies at Sishen. Further long-term expansion at Kolomela from current and additional pits is being considered. Despite the challenges of the current low price environment, the Group will continue to look for long term opportunities in Central and West Africa to preserve long-term growth options.
Financial Review
Total revenue of R47.6 billion decreased 13% from R54.5 mainly due to the significant drop in the iron ore price, offset to an extent by the weaker average Rand/dollar exchange rate, which dropped from R9.62 in 2013 to R10.83 last year. Operating expenses increased to R28.4 billion from R26.1 billion. The operating margin decreased by 12 percent, while the group’s mining margin was 45 percent.
Profit for the group amounted to R14.1 billion of which R10.7 billion is attributable to shareholders of Kumba, and R3.4 billion to SIOC’s empowerment shareholders. Headline earnings of R11 billion or R34.32 per share, decreased by 29 percent. Cash generated remained healthy at R21.8 billion Rand, R7.6 billion lower than in 2013, on the back of lower iron ore prices. Capex of R8.5 billion was incurred.
The board has announced a final cash dividend of R2.5 billion or R7.73 per share.
In recognition of the impact of lower iron ore prices on cash generation and in seeking to protect Kumba’s balance sheet amidst the continued uncertain market environment, the cover for the final dividend has been increased to 1.7 times and is expected to rise in the next dividend cycle.
Touching on regulatory matters, Mbazima said that Kumba is pleased with progress made in securing a number of regulatory approvals especially those at Sishen. He said, “These enable Sishen to implement its turnaround plan increasing productivity and reducing costs. The prompt and professional manner in which our applications for these approvals have been processed by the DMR officials is acknowledged and appreciated.”
“Following the constitutional Court ruling in December 2013, we applied for the 21.4 percent mineral right for Sishen in February 2014. Whilst we have engaged constructively with the DMR, the timing of the grant and any related conditions which the DMR may legitimately impose, remain uncertain. Our engagement on this matter continues.”
Outlook
Mbazima noted that Kumba has reviewed all aspects of the company and taken some decisive actions. Operating plans are being reconfigured to focus on lowest cost production units to fill the available rail capacity. He said, “we have reduced our capex in 2015 and 2016 and optimised our project portfolio resulting in the deferral of some of the capital spend to later years, as well as cutting exploration, technical and project study expenditure by ~50%. The future of Thabazimbi mine, is under review. “
In restructuring, the Group has implemented the Operating Model, reduced head office workforce by 40% and is reconsidering the extent of support services at operations. In addition, Kumba is conducting an additional review of LOM plans and new initiatives on operational efficiencies. Said the CEO, “We believe that the combined impact of these actions will ensure that Kumba remains a resilient organisation in a low iron ore price environment.”
Looking forward, Kumba is planning increased production to fill the rail line and expects Sishen to produce 36 million tonnes of ore in 2015, rising to 38 million tonnes in 2016. 240 to 250 million tonnes of waste will be mined in 2015 and this will rise further to peak at 270 million tonnes. Kolomela should produce 11 million tonnes and move 42 to 46 million tonnes of waste this year and is targeting to increase production to 13 million tonnes in 2017.
Kumba sees the market continuing to be challenging and does not expect a major recovery in iron ore prices. The company should continue to derive some benefit from its product qualities and the high lump:fine ratio.