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Kumba Interim Results 6 months ended June - Sishen Mine on track - Kolomela excellent

  • Kumba delivers solid operational performance, despite lower iron ore prices

Commenting on the results, CEO of Kumba Norman Mbazima said: “Kumba continues to deliver value to shareholders, with a solid operational performance for the half year as the production recovery plan at Sishen mine is executed and the strong performance at Kolomela mine continued.

While the market was tough during the first half of the year with iron ore prices falling significantly, we are pleased with our steady performance overall for the period. The R5 billon interim cash dividend is maintained at 1.3 x cover. This is both an expression of our confidence in the business and our commitment to shareholder returns.”

KEY FEATURES: FINANCIAL

  •     Operating profit decreased by 14% due to lower export iron ore process and costs from increased mining activities
  •     Capital expenditure for the period was R3.3 billion
  •     Total sales volumes increased by 2% to 22.5Mt
  •     Despite a 17% decrease in export iron ore prices realised for the period, which negatively impacted the headline earnings per share, an interim dividend of R15.61 per share was declared


KEY FEATURES: OPERATIONAL

  •     The most important aspect of our work is the safety and health of everyone in our organisation. Regrettably,  we’ve had one fatality at Sishen mine
  •     Kumba delivered a solid operational performance this year, with total tonnes mined up by 6% to 154.2 Mt
  •     Production of 22.8 Mt,  up by 5% from 21.6Mt in 1H13
  •     ° Sishen mine production up 5% as recovery plan is executed
  •     ° Strong performance at Kolomela mine continues
  •     Planned increase in waste mined at Sishen mine continues, up by 6% to 86.9 Mt
  •     Stable labour environment and multi-year wage agreement expected to be concluded soon


Sishen mine

The comprehensive technical studies that were concluded last year confirmed that on average Sishen would produce 37 Mtpa for the remainder of its life. “We indicated that this would be challenging in the short term due to significant ramp up of waste removal to around 270 Mtpa in 2016,” said Mbazima.

The revised mining plan has resulted in improved flexibility and better utilisation of equipment, with levels of exposed ore improving, giving us greater confidence of meeting the 2014 production target.

While we are pleased with the first half’s progress at Sishen, there is still work to be done to get the mine to where it needs to be, to achieve 37 million tonnes by 2016.
A core focal area is to improve productivity at the mine. Sishen is implementing the first Business Process Framework in the Anglo American group. Implementation will commence in August and will focus on productivity improvements through improved work management at the internal waste mining operations at Sishen, to also enable us to maintain a steady production rate.

Kolomela mine

Kolomela mine continued its strong performance, achieving excellent production of 5.5 million tonnes, up 4 %. Total tonnes mined rose by 11% to 31.3 Mt, of which waste mined was 24.4 Mt, an increase of 12%. The group aims to increase current production through de-bottlenecking and optimisation of the plant.

Thabazimbi mine

A major reconfiguration is planned for Thabazimbi mine to capture low grade opportunities and increase production to 2 Mtpa. The project study is progressing through the feasibility phase. Waste mined at Thabazimbi increased by 18% to 15.4 Mt as the mine progresses to its next phase. Production increased to 0.3 Mt for the six months. The mine is expected to produce ~1 Mt in 2014.

Market overview

Global crude steel production increased by 3.5% to 819 Mt for the first half of 2014, with China’s record production of 409 Mt being 5% higher. In a seasonal pattern, Chinese steel mills drew down iron ore inventory levels in early 2014, reducing iron ore demand. Global seaborne iron ore supply has grown strongly, driven by strong export growth of 25% from Australia, with a further 8% growth from Brazil. Chinese imports of iron ore grew strongly and displaced some of the high cost domestic material.

The strong supply of iron ore, particularly from Australia, resulted in pressure on iron prices since the beginning of 2014. Average iron ore prices in the first half of 2014 were down 19% at $111/tonne (2013: $137/tonne). Iron ore index (CFR China 62% Fe) prices steadily declined from $134/tonne at the beginning of the year, with the index ending the first half of 2014 at $93/tonne.

Growth

The group remains focused on delivering on its growth strategy, targeting an additional ~5Mt in South Africa over the next three to five years, through incremental growth at Sishen and Kolomela. Projects in support of the growth target are in various stages of study and subject to internal approval. The project pipeline remains dependent on available rail line capacity, among other factors, and Kumba continues to work together with Transnet to determine an optimum solution for incremental expansion of the Iron Ore Export Channel.
The exploration programme in Liberia under the joint venture with Jonah Capital was completed. The programme was found not to be economic and therefore closed. The group’s long-term growth strategy remains unchanged with the focused assessment of various opportunities in target countries in West Africa continuing.

Outlook

Steel fundamentals remain under pressure as growth in the Chinese economy slows, in particular in the construction markets where concerns remain over housing prices.  Iron ore prices are expected to remain at current levels in the third quarter of the year, though restocking by steel mills and a slowdown in Chinese domestic iron ore production in winter is expected to support prices towards the end of the year. Lump premiums are expected to increase to approach the marginal cost of sintering in the second half of the year.

Sishen is on track to produce 35 million tonnes and mine around 220 million tonnes of waste. Kumba expects Kolomela to produce around 10 million tonnes and Thabazimbi should increase production to around 1 million tonnes.  Export sales volumes are likely to be in line with 2013 levels.
Kumba remains conscious that the biggest investment case for the company is its high dividend yield. We will continue to pay healthy dividends to shareholders, said Mbazima.

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