Rising iron ore prices boost Kumba

Kumba  Iron Ore is inside a honey pot with iron ore prices up 26% on last year on the back of soaring demand out of Asia.

The most negative aspect of the group’s 2011 results presentation on Thursday was that a few recipients of the BEE Envision payout at the end of November took unplanned leave and production dipped slightly in the last quarter. But, with all long-service employees receiving more than R500000 each, even the number of absentees was commendable.

CEO Chris Griffith can be forgiven for looking a little smug. Revenue increased by 28% to R45.8-billion and headline earnings were up by 19% at R17-billion from R14.3-billion in 2010. The share price rose by R53.13 in the year and a record R17.9-billion was paid out in dividends.

Another record was export sales volumes of 37.1 million tons, despite production challenges caused by rainfall in the first quarter of last year.

The new Kolomela mine also came on stream during the year, a full five months ahead of schedule and within budget – right on time for Kumba to take advantage of the good margins on offer. The Thabazimbi mine is in the process of a planned decommissioning, but the new Project Phoenix will fill the production vacuum this will create from 2016.

The company’s fastidious adherence to safety regulations has paid off with no loss of life at any of Kumba’s mines.

As the ore body dips down to the west at the Sishen mine in the Eastern Cape, the “stripping ratio” has increased to 2.6 from a previous ratio of about 2.0. The stripping ratio refers to the amount of rock and sand that has to be removed before the ore can be extracted. A ratio of 2.6 implies 26 tons of soil and rock must be removed to get at 10 tons of iron ore.

An increasing stripping ratio obviously has implications for production costs, but with profit margins of 70% and upwards these production costs are not keeping the executive awake at night.

In addition, waste mining, the use of innovative technology to extract ore from the already extracted “waste material”, increased 17% to 119 tons.

Looking ahead, Kumba, like most iron ore producers, sees the demand and price trend continuing unabated. But new operations are coming on stream as miners increasingly clamour to get in on the action.

Australia and West Africa have a raft of new operations planned, and when they add their supplies to the market demand might not be quite as fervent as it is now.