China’s iron ore thirst is a lifeline for Kumba

CHINA has emerged as a lifeline for Kumba Iron Ore, which saw its exports to that country rocket by 130 per cent during the half-year to June even as demand from its customers in Europe, Japan and South Korea fell off.

The company had plans to increase its output to 53 million tons a year by 2013, Kumba chief executive Chris Griffith saids.Richard Simpson, a director of Obsidian Capital, said Kumba had switched a lot of its iron ore exports to China.’China has become a buyer of last resort in the iron ore market. (It) has saved the bulk commodity world and has continued to buy iron ore even during the eye of the global financial meltdown,’ Simpson said.Shoaib Vayej, Sanlam Investment Management’s head of resources, said Kumba’s results were ‘pretty good in a tough market’. He added: ‘It will be interesting to see whether they follow through in the second half.’Vincent Uren, Kumba’s chief financial officer, said the company’s exports increased 29 per cent in the first half to 17,1 million tons. He said Kumba had shipped almost 85 per cent of this to China via Saldanha in the Western Cape.Griffith said the group would spend N$7 billion over the next 18 months towards its target of expanding its iron ore output to about 53 million tons a year by 2013.Uren said Kumba could increase its long-term debt to as much as N$12 billion, from its present total of N$5,4bn, to fund that expansion.Kumba, the world’s fourth-largest supplier of sea-borne iron ore, had a gross debt-to-equity ratio of 75 per cent at the end of June.Griffith said Kumba was proceeding ‘full steam ahead’ with its expansion projects despite the slowdown in the global iron ore market, as well as a tight debt market, as it did not want to miss out on future opportunities.Kumba reported that interim revenue climbed 32 per cent to almost N$12 billion while profit for the six months to June rose by a slower 23 per cent, to N$4,3 billion.Uren said the improvement in profit was slower than the growth of revenue as a result of higher selling, distribution and shipping costs.The increase in profit and revenue had come on the back of higher sales volumes to China.Kumba cut its interim dividend by 10 per cent to N$7,20 a share. ‘The dividend was reduced due to the high capital expenditure as well as the tight liquidity in the debt markets,’ Uren said.Cash at the end of last month reached N$5,2 billion, up from N$2 billion at the end of June last year.Kumba’s shares on the JSE rose 4,2 per cent to N$200, which valued the company at N$63,9 billion.Production at the Sishen iron ore mine in the Northern Cape rose 14 per cent during the half year to 18 million tons while unit costs at the Sishen iron ore mine in the Northern Cape rose 23 per cent, almost triple the rate of consumer inflation, to almost N$115 a ton.Kumba’s iron ore output rose 12 per cent to 19,1 million tons in the half year.Griffith said the group expected to grow its iron ore production by 10 per cent this year, to 40,4 million tons.Kumba exported 90 per cent of the iron ore it produced. It supplies 30 global customers, mainly in Europe and Asia.Kumba is the JSE’s first pure iron ore play.It was born out of the unbundling of Kumba Resources, a process that also created base minerals firm Exxaro. -Business Report