Archive - 2011

"Kumba has delivered another record set of results for the year ended December 2010 in which the outstanding performance achieved was primarily due to stronger export prices, an increase in export sales volumes and cost containment through improved operational efficiencies. With our final dividend of R21 per share, we continue to deliver growth in value for all shareholders. We are particularly proud of the substantial cash – R3.6 billion – that we returned to our BEE shareholders."

FINANCIAL HIGHLIGHTS:

• Headline earnings increased by 106% to R14.3 billion
• Revenue increased by 65% to R38.7 billion
• Record operating profit of R25.1 billion; an increase of 95%
• Export sales volumes increased by 6% to 36.1Mt
• Cash generated from operations increased by 101% to R25.6 billion
• Total cash dividend of R34.50 per share; final cash dividend of R21 per share
• Significant returns to BEE shareholders: Communities now hold an unencumbered 3%of SIOC, valued at over R5 billion

OPERATING HIGHLIGHTS:

• Sishen mine production up 5% to 41.3Mt; jig plant ramped up to capacity
• Kolomela on schedule and on budget – first production end 1H12
• All operations now have water-use licenses
• Exceeded Mining Charter targets
  o 46.8% management team are HDSAs
  o 14.4% employees are women
  o Blacks in management increased to 31.75%
  o Total skills development spend was 7.4% of salary bill
• Asset optimisation delivered benefits: R1.9 billion contribution to 2010 operating profit
• Procurement benefits of R687 million

On outlook for 2011, CEO Chris Griffith added: "We expect production to remain stable during 2011. The next stage of growth will come from Kolomela at the end of 1H12. Export sales are expected to be in line with the levels of 2010, around 36 MT with a potential upside of some super tariff volumes. Domestic sales volumes remain dependent on the off-take requirements from ArcelorMittal. China's crude steel production is expected to grow between 5% and 10% during 2011. We see limited room for growth in Chinese domestic iron ore production, supporting demand for seaborne imports. With no new major iron ore projects coming on line in the near future, we therefore expect the supply-demand balance to remain tight in 2011, which in turn should support prices.

He added: "We remain focused on optimising value of our current operations and delivering on the group's growth projects. Our focus continues to be on safety, production and mining volumes, sales and containing costs. These initiatives will help to lessen the adverse effects of a strong Rand, the mining royalty and operational cost pressures."

Financials

Kumba's total mining revenue (excluding shipping operations – R2.9 billion in 2010; R3.4 billion in 2009) grew by 79% to R35.8 billion (2009: R20.0 billion). Operating profit increased by 95% to R25.1 billion (2009: R12.9 billion) improving the group's operating profit margin from 55% in 2009 to 65% in 2010. Excluding the margin earned from providing a shipping service to customers, the group's mining operating margin increased from 61% in 2009 to 69%. The operating profit achieved was impacted by the implementation of the South African mining royalty effective from 1 March 2010, costing R1.4 billion, as well as the 13% strengthening of the Rand against the US Dollar which reduced revenues by R4.9 billion. Operating expenses (excluding the royalty expense of R1.4 billion) increased by 16% to R12.2 billion.

Kumba continued to generate substantial cash from its operations, with R27.0 billion (before the mining royalty of R1.4 billion) generated during the year (2009: R12.7 billion). These cash flows were used to pay taxation of R7.0 billion, mining royalties of R1.4 billion and aggregate dividends of R8.6 billion during 2010. Capital expenditure of R4.7 billion was incurred, of which R1.6 billion was to maintain operations and R2.4 billion to expand operations, mainly on Kolomela Mine and R0.7 billion was capitalised operating costs at Kolomela. At 31 December 2010 the group was in a net cash position of R1.7 billion (R3.0 billion net debt at the end of 2009).

Safety

Regrettably the group suffered three fatalities during the year, one each at Sishen, Thabazimbi and Kolomela mines. Kumba has invested significant effort in preventing any recurrence of the unusual events which caused these fatalities. Kumba remains committed to zero harm at all the group's sites and management has intensified the focus on compliance to operational safety standards and the ongoing dedication of every employee to the zero harm principles.

Commenting on the safety performance, Griffith added

"These lapses in our safety performance are not as a result of any complacency, or a loss of focus on safety. Since 2003 the company has achieved a 75% reduction in lost-time injury frequency rate and over the past few years we have invested more than R250 million at Sishen mine alone, in solutions to improve safety, fatal risk standards and technology to improve safety on our mines. As part of our unwavering commitment to achieving zero harm, we have revisited our safety improvement plans and invested significant effort in preventing any recurrence of the events which caused the fatalities."

Operations

Total tonnes mined at Sishen Mine increased by 19% to 153.2Mt (2009: 128.3Mt) of which waste material mined comprised 67% or 102.0Mt, an increase of 20.0Mt or 24%. Production at Sishen Mine increased by 5% from 39.4Mt in 2009 to 41.3Mt, as the jig plant completed its ramp up achieving 13.3Mt of production for the year. The improved quality of plant feed material and more efficient shutdown intervals were the main reasons for the outperformance by the jig plant. Production from the Dense Media Separation (‘DMS') plant decreased by 3% to 28.0Mt due to failures of single line equipment and the availability of feedstock from the pit. Further increases in waste mining is planned to ensure the required geological quality of ore is available to be fed to the plants.

The group increased total sales volumes by 8% to 43.1Mt (2009: 40.0Mt). Export sales volumes from Sishen Mine increased by 1.9Mt or 6% from 34.2Mt in 2009 to 36.1Mt in 2010, of which volumes to China normalised to 61% (75% during 2009), as demand from Kumba's traditional markets normalised. Export sales volumes to Europe, Japan and Korea increased by 54% to 13.9Mt. Total domestic sales volumes for the year of 7.0Mt were up by 21% or 1.2Mt due to higher demand from ArcelorMittal South Africa Limited (‘ArcelorMittal').

Volumes railed on the Sishen-Saldanha line increased by 5% to 36.5Mt. Transnet's overall operating performance was impacted by the industrial action in the second quarter and a number of derailments in the second and third quarters of 2010. However, Transnet's operating performance did improve substantially in the fourth quarter, allowing Kumba to export more than the minimum 35 million tonnes planned.

Waste mining at Thabazimbi Mine more than doubled to 33.2Mt as the last new pit was developed as part of the extension of the life of mine to 2016. Production at Thabazimbi reduced by 19% to 2.0Mt for the year in line with the progression towards the end of the life of the mine.

Domestic sales from the mine, although impacted by logistics constraints, increased by 0.2Mt due to the off-take requirements of ArcelorMittal.

Market

World crude steel production continued to recover during 2010 and returned to above pre-2008 levels at 1.4 billion tonnes. China's economic growth continues to be robust contributing to a year on year growth in crude steel production despite government initiated macro-economic moderating measures, power restrictions and de-stocking through the supply chain. Crude steel production in China increased year on year by 9% to 626Mt. Europe, Japan and South Korea saw a 24% year on year increase in crude steel production, bringing total production to 341Mt, slightly below levels achieved in 2008. Despite the continued strength in iron ore demand in China, a surge in high cost Chinese domestic iron ore supply, incentivised by high index prices, resulted in a decrease of 2% to 603Mt in seaborne imports compared to 2009. Global seaborne iron ore demand increased by 5% to 979Mt, driven by a 19% increase in demand from the steel industry in the rest of the world.

Iron ore index prices rose strongly in 2010, with the 62% Fe Platts index averaging approximately US$147/tonne (CFR), up from US$80/tonne in 2009. The majority of export sales volumes are currently committed to long-term contracts, which are re-priced on a quarterly basis, and the remainder is sold at index prices mainly to annual customers and as additional volume to long-term customers in China.

Legal Update

The arbitration process with ArcelorMittal seeks to determine whether or not the contract mining agreement has lapsed automatically or remains in place.  The process is underway and three arbitrators have been appointed. We hope for a speedy resolution, hopefully by the end of 2011 or early 2012.

The matter of the high court review seeks to get the court to overturn the decision by the DMR to grant ICT a prospecting right, as well as to provide a declaritor on multiple ownership of undivided rights. SIOC is also appealing against the DMR's rejection of its May 2009 mining right application.

Commenting on the ruling, Griffith said: "We disagree with the way in which the DMR has acted in this regard as it is obliged to be an unbiased regulator. We will continue to protect the interests of our shareholders and the Board remains steadfast to have this matter resolved in court. We believe that it is good for the South African mining industry, for foreign investment and for Kumba that these issues are tested in a court of law."

Outlook

Crude steel production in China is expected to grow between 5% and 10% during 2011. The rate of growth of crude steel production in China is anticipated to decrease as the Chinese authorities seek further improvements in overall energy efficiency for the next five-year plan. Domestic iron ore production in China is unlikely to grow significantly beyond the 2010 level of 285Mt mainly due to diminishing qualities and increasing mining costs. The additional demand for iron ore in China during 2011 is expected to be sourced from seaborne supply, with the demand levels in the rest of the world remaining at 2010 levels. Shortfalls in seaborne iron ore supply, in particular from India, are anticipated supporting high iron ore prices.

Export sales volumes are anticipated to be in line with volumes achieved during 2010 and are dependent on the performance of the rail and port facilities. Domestic sales volumes remain dependent on the off-take requirements from ArcelorMittal, with any ore not taken by ArcelorMittal available for export.

Waste mining at all the operational sites is anticipated to increase, which will put upward pressure on unit cash costs of production. Annual production volumes during 2011 are expected to remain at levels achieved during 2010 as the jig plant has reached its name plate capacity.

Kumba's operating profit remains highly sensitive to the Rand/US Dollar exchange rate.

"We remain focused on optimising value of current operations and delivering on the group's growth projects. Our focus continues to be on safety, production and mining volumes, sales and containing costs. These initiatives will help to lessen the adverse effects of a strong Rand, the mining royalty and operational cost pressures."