Archive - 2011

"The period also saw the ongoing development of Kolomela mine which has progressed to 94% completion, as planned and on budget. With construction substantially complete, the project now moves through cold and then hot commissioning with the first ore anticipated to be fed through the plant in the second half of 2011.

Financial Highlights:

• Revenue up 35% to R24.1 billion (2010: R17.8 billion)
• Operating profit up 51% to R16.9 billion (2010: R11.2 billion)
• Cash generated from operations up 58% to R15 billion (2010: R9.5 billion)
• Asset optimisation and procurement benefits achieved of R736 million and R749 million respectively
• Headline earnings of R9.1billion, up 40% to R28.23 per share (2010: R20.28 per share)
• Record interim cash dividend of R7 billion; R21.70 per share (2010: R13.50 per share)
  o R11 billion returned to broad based empowerment partners since 2006
  o Envision employee participation scheme to mature in November 2011

Operations:

• Significantly improved safety performance; LTIFR 0.05 (2010: 0.11)
• Robust market performance with average increase in export prices of 56%
• Substantial progress made on Kolomela mine development:
  o Life of mine now extended a further 8 years to 28 years
  o New permanent jobs created for 692 full time employees
• Mining production affected by abnormal rainfall, but total sales maintained at approximately 22Mt
• Record tonnes railed to port of 19.5Mt, up 7% (2010: 18.2Mt)

Commenting on the outlook for the remainder of the year, Griffith said: "Management has implemented focused plans to recover the majority of the shortfall in first half production by the end of 2011. Waste mining at Sishen mine is anticipated to increase as rainfall patterns return to normal. Production and export sales for 2011 are expected to remain stable with 2010 levels. Crude steel production during the second half of the year is seasonally lower than the first half putting modest downward pressure on iron ore prices for the remainder of 2011. Kumba continues to advance towards delivery of its growth projects, as Kolomela mine reaches the final stages of construction."

He added: "We continue to focus on maximising our asset base whilst driving operational and cost efficiencies to deliver Kumba's planned production and sales growth. This focus will help reduce the adverse impact of the strong Rand, mining royalty and other cost pressures. At Kumba, we remain committed to mining safely as we progress along our journey to achieving zero harm."

Safety

Sishen, Thabazimbi and Kolomela operated the first half of this year without a fatality as Kumba intensified its safety initiatives to achieve zero harm. The lost-time injury frequency rate (‘LTIFR') improved to 0.05 compared to the 0.11 in 2010. The Kolomela project was LTI-free throughout the period, attaining an outstanding 13.4 million LTI-free man hours, despite intense construction activity, with the last LTI recorded at the site in January 2010.

Operations

Total tonnes mined at Sishen increased by 6% to 76.7Mt (2010: 72.1Mt), of which waste mined was 51.8Mt, an increase of 12% from the same period last year. The mine had planned to increase waste mining, but these plans were adversely impacted by wet pit conditions resulting from excessive rainfall. The wet pits reduced run of mine material supplied to the dense medium separation (‘DMS') plant, causing total production at Sishen mine to decrease 12% to 18.6Mt (2010: 21.1Mt). Production from the DMS plant decreased by 2.4Mt to 12.3Mt. The jig plant achieved a run rate in excess of design capacity during the second quarter, which made good the shortfall of the first quarter. The jig plant continued to deliver ~3.2Mt per quarter (a third of Sishen mine's total production).

Total sales volumes for the half year were maintained at approximately 22Mt. Export sales volumes from Sishen decreased by 0.4Mt or 2% to 18.4Mt as Chinese steelmakers reduced the usage ratio of seaborne iron ore to domestic iron ore. Kumba's export sales to China totalled 69% of total export volumes, compared to 57% during the first half of 2010, as export sales to Japan reduced from 2.8Mt to 1.7Mt or 9% of total export volumes. This was partly as a result of the earthquake and tsunami as well as some rescheduling of vessels in June 2011 to July 2011. Notwithstanding lower production in the first half of 2011, total sales volumes were maintained as stockpiles were reduced at Sishen. Total domestic sales volumes for the period were 3.7Mt, up by 19% due to higher demand from ArcelorMittal South Africa Ltd (‘AMSA').

Volumes railed on the Sishen-Saldanha iron ore export channel increased by 7% to a record of 19.5Mt. Kumba shipped 18.7Mt from the Saldanha port destined for the export market, down 2% year on year, due to a breakdown of loading equipment at the port.

Waste mining at Thabazimbi mine increased by 67% to 23.5Mt as the last new pit was opened and it moves towards its life of mine end in 2016. Production at Thabazimbi was also impacted by abnormally high rainfall, and reduced by 34% to 0.5Mt. Domestic sales from the mine were higher at 1.1Mt driven by the offtake requirements of AMSA and supplemented from stockpiles.

The Kolomela mine development remains on target and within budget. Overall the project has progressed to 94% of completion. During the period 15.3Mt of waste material was mined. 600Kt of ore have been mined and stockpiled for the commissioning of the plant. The life of mine has been extended by 8 years to 28 years, as more resources are now economically mineable.

Market

Total world crude steel production continued to grow reaching 760Mt in the period, up 6% from 2010 (717Mt). China's crude steel production during the first six months of 2011 increased 9% year on year to 352Mt. Crude steel production in Japan has remained flat year on year despite the disruption of the earthquake and tsunami in March. Global seaborne iron ore imports rose by 5% to 515Mt fuelled by an 11% increase in Chinese imports. With adverse weather and logistics constraints impacting on seaborne iron ore supply, the market has remained tight, incentivising Chinese steel mills to purchase domestic iron ore, the average implied grade of which continues to fall.

Iron ore index prices peaked during the first quarter, and though they have since retreated, they have remained high. On average, realised quarterly benchmark and index prices were virtually the same for the half year. The majority of Kumba's export sales continue to be long-term and on annual contracts, priced on a quarterly benchmark basis, derived from the iron ore index. During the period 71% of iron ore was sold on a quarterly benchmark basis and the remaining 29% were index sales.

Financials

The group's total mining revenue (excluding shipping operations - R1.2 billion) of R22.9 billion rose 41% (2010: R16.2 billion). This performance followed a weighted average increase of 56% in export iron ore prices, though partially offset by the continued strength of the Rand to the US Dollar. Operating profit increased by 51% to R16.9 billion, and Kumba's operating profit margin of 70% increased by 7% (2010: 63%).

Operating profit achieved was negatively impacted by the strength of the Rand which reduced revenues by R1,943 million; a R642 million or 14% increase in operating expenses (excluding shipping expenses) following increases in waste mined; the mineral royalty tax which increased by R296 million; inflationary cost escalations and lower production volumes.

The unit cash cost increased by 18% to R131.01 per ton as a result of above inflation escalations in key input costs, such as labour, electricity and diesel. The Bokamoso programme, which is focused on improving operational efficiencies, has assisted to mitigate some of the potential losses due to the abnormal rainfall experienced. Asset optimisation and procurement initiatives have delivered increases of R509 million in revenues and price benefits, operating cost containment of R832 million and reduction in capex of R144 million for the half.

The group continued to generate substantial cash from its operations, with R15 billion generated during the six months. These cash flows were used to pay tax of R3.7 billion and aggregate dividends of R8.7 billion. Capital expenditure of R1.9 billion was incurred, of which R597 million was to maintain, and R1.3 billion to expand operations, mainly at Kolomela mine. At 30 June 2011 the group had a net cash position of R2.2 billion (R1.7 billion net cash at the end of 2010).

Outlook for the second half of 2011

Chinese crude steel production is expected to increase by approximately 8% from 2010 levels. However, world steel production is expected to ease back due to stock cycle turns, with global crude steel production anticipated to increase by approximately 6%. Crude steel production during the second half of the year is seasonally lower than the first half. This is expected to put modest downward pressure on iron ore prices. Kumba continues to advance towards delivery of its growth projects, as Kolomela mine reaches the final stages of construction.

Management has implemented focused plans to recover the majority of the shortfall in first half production by the end of 2011. Waste mining at Sishen is anticipated to increase as rainfall patterns return to normal. Export sales for 2011 are expected to remain stable with 2010 levels. Domestic sales volumes from Sishen and Thabazimbi mines remain dependent on the offtake requirements from AMSA.

Waste mining at all the operational sites continues to increase as planned. In addition, at Sishen mine, further waste mining is required to make up for the shortfall in the first half of the year, which will increase pressure on unit cash costs of production. To mitigate this, Kumba remains focused on already successful cost management, operational efficiency and revenue enhancing initiatives from its asset optimisation programmes and participation in the Anglo American supply chain procurement organisation.

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

Legal update

The High Court review application in relation to the decision of the Department of Minerals and Resources to grant a prospecting right to Imperial Crown Trading 289 (Pty) Limited is enrolled for determination in August 2011. The private arbitration between Sishen Iron Ore Company and AMSA with regard to the lapse in contract mining agreement is due to start in May 2012.

Management change

Vincent Uren will step down as Kumba's CFO at the end of December 2011. He will continue at Kumba in 2012 working exclusively on the legal issues, and thereafter, he will be available in an advisory capacity as required. It is with regret that Kumba's board has accepted Vincent's decision, but is pleased the company will retain his services.

Chris Griffith, CEO said: "Vincent was appointed to the Kumba board in May 2006 and has made a significant contribution to the company since then. We are hugely grateful for all the work he has done particularly with regard to Kumba's legal cases."

Kumba now begins the process of finding a new CFO and will report on this in due course.