Kumba final results for the year ended 31 December 2011.Record safety,exports,earnings and dividends.
Commenting on the results,Kumba Iron Ore("Kumba")CEO Chris Griffith said:"Driven by export volume growth and a 26%increase in iron export prices,Kumba delivered another set of outstanding financial results for 2011.We have achieved records in safety,exports,earnings and dividends.We are particularly proud of the progress made at Kolomela mine,which delivered on its promises,five months ahead of schedule and within budget.These results,together with the exceptional safety performance demonstrate that our strategy of optimising value from current operations and investing in safe,quality growth projects,is delivering.
"We are also delighted with Envision,our broad based employee share scheme.Envision sits alongside our broad based empowerment initiatives and sets a benchmark for employee empowerment goals and ideals in our country.Kumba has delivered meaningful broad based value transfer to our employees with a capital distribution of R2.7 billion,and R526 million distributed in 2011 to the communities in which operate.This is in addition to our dividend paid to Exxaro of R3.5 billion."
FINANCIAL HIGHLIGHTS:
Headline earnings increased by 19%to R17 billionRevenue increased by 28%to R45.8 billion-driven by 26%higher pricesOperating profit of R32 billion;up 27%Cash generated from operations rose by 27%to R34.3 billionR8.7 billion paid to South African governmentRecord R17.9 billion paid in dividendsTotal cash dividend of R22.50 per share;final cash dividend of R44.20 per share
OPERATING HIGHLIGHTS:
Exceptional safety performance;zero fatalitiesEnvision returned R2.7 billion to employee shareholdersKolomela mine-production five months ahead of schedule and within budgetProduction at Sishen mine negatively impacted by abnormal rainfall during H1Record breaking 39.1Mt railed on the Sishen-Saldanha lineRecord export sales volumes of 37.1Mt despite production challenges at Sishen mine
On the outlook for 2012,CEO Chris Griffith added:"Current volatile market conditions are expected to persist during the first half of the year.Iron ore prices in the second half of 2012 will be largely dependent on the improvement in the overall global economy,and in particular,the monetary policy easing in China."
He said that waste mining at Sishen mine is anticipated to increase again this year,in line with the planned ramp up that commenced in 2009,which will put upward pressure on unit cash costs of production.Annual production volumes from Sishen mine are expected to return to design capacity.Kumba's ability to supply iron ore to the market will be enhanced by the ramping up of Kolomela mine during 2012 to produce between 4Mt and 5Mt in 2012.Export sales volumes in 2012 are anticipated to grow by some~3Mt from the volumes achieved in 2011 as volumes from Kolomela mine ramp up,offset by the fact that excess finished product stockpiles at Sishen mine have been depleted to normal operating levels.Domestic sales volumes remain dependent on the off-take requirements from ArcelorMittal.
He added:"Our growth target of achieving 70Mt by 2019 in South Africa remains intact.Several studies are being conducted in central and west Africa as part of the company's growth strategy to establish a second mining footprint in Africa.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 inflationary cost escalations and operational cost pressures."
Financials
The group's total mining revenue(excluding shipping operations-R2.7 billion in 2011;R2.9 billion in 2010)of R45.8 billion for the year was 28%higher than the R35.8 billion of 2010.Operating profit increased by 27%from R25.1 billion to a record R32.0 billion.The group's operating profit margin increased marginally to 66%.Excluding the margin earned from providing a shipping service to customers,the group's mining operating margin remained stable at 69%.The operating profit achieved was impacted by the rise in operating expenses on the back of the growth in mining volumes across the group and above inflationary cost increases.
The group continued to generate substantial cash from its operations,with R35.3 billion(before the mineral royalty of R1.7 billion)generated during the year,27%more than the R27.0 billion of 2010.These cash flows were used to pay aggregate dividends of R17.9 billion,R2.7 to Envision participants,taxation of R7.0 billion and mineral royalties of R1.7 billion during 2011.Capital expenditure of R5.8 billion was incurred,of which R2.7 billion was to maintain operations,mainly for Sishen mine's fleet expansion programme.R3.1 billion was incurred to expand operations,mainly on Kolomela mine.
Safety
Kumba's overall safety performance saw a significant improvement in 2011 with the enhanced safety improvement plans implemented in 2011 delivering results.The group ended the year,for the first time since listing five years ago,without any loss of life.The group recorded 17 lost-time injuries('LTI's')for the year,which resulted in the LTIFR of the group improving to 0.08 per 200,000 hours compared to the 0.12 achieved in 2011,a 33%improvement.Kolomela mine continued its impressive safety record and achieved 22.2 million fatality-free and LTI-free man-hours-23 months without a lost time injury.
Operations
Notwithstanding the challenging start to the year caused by the abnormal rainfall,total tonnes mined at Sishen mine increased by 8%from 153.2Mt in 2010 to 165.0Mt,of which waste mined increased by 17.0Mt or 17%.Production at Sishen mine decreased by 6%from 41.3Mt in 2010 to 38.9Mt.
Excellent progress was made at Kolomela mine,which was brought into production five months ahead of schedule,as a result of the outstanding performance by the Kumba team and Transnet.A total of 30.3Mt of waste material was pre-stripped during 2011(2010:18.6Mt)as two open pits are being developed,at a cost of R953 million(R793 million for 2010),which amount has been capitalised.The plant was successfully commissioned during 2011,delivering production of 1.5Mt for the year.
Kumba increased total sales volumes by 1%from 43.1Mt in 2010 to 43.6Mt in 2011.More importantly,export sales volumes increased by 1.0Mt or 3%from 36.1Mt in 2010 to a record of 37.1Mt as production was supplemented by stockpiled ore.China accounted for 68%of the export sales volumes(61%during 2010).73%of exports were sold under long-term or annual contracts and 27%at prices derived from index.Total domestic sales volumes for the year of 6.5Mt were down by 7%or 0.6Mt due to lower demand from ArcelorMittal South Africa Limited and plant shutdowns at the Saldanha and Newcastle plants.
A record breaking 39.1Mt was railed on the Sishen-Saldanha line in 2011,an increase of 7%,which includes 0.4Mt railed from Kolomela mine.
Market
Demand for iron ore globally is largely dependent on the state of the steel industry worldwide and,more specifically,on that of the steel manufacturing sector in China.
In 2011,global steel production was up by 6%to 1.5 billion tonnes(2010:1.4 billion tonnes),of which 683Mt was produced in China(2010:637Mt),an increase of 7%(2010:11%).China's seaborne iron ore imports rose by 8%to 654Mt(2010:603Mt).The balance of China's iron ore needs was met by domestic iron ore production,which was virtually unchanged at 301Mt(on a rich ore equivalent basis).However,Chinese crude steel production slowed considerably towards year end as a result of lower steel prices and slower steel demand,down 7%in the second half of the year compared to the first half.At the same time Chinese seaborne imports of iron ore were up 11%in the second half compared to the first half.The combination of higher seaborne ore supplies and lower crude steel production resulted in a sharp fall in index prices in the final quarter of 2011,reducing the need for high priced domestic ore in the second half of the year.
The global economic uncertainty in the second half of the year,coupled with a credit liquidity squeeze in China,particularly affecting downstream steel stocking by end users and the construction sector,caused steel prices to fall.In turn,steel mills cut production,slowed purchasing of raw materials,focused on fine ore(rather than lump ore)and turned to sourcing lower grade ore to limit absolute costs.This halted increases in the spot price of iron ore and curtailed the demand and pricing for high quality and lump ore.By the end of the third quarter,steel production had started to slow noticeably as steel prices continued to weaken and market sentiment remained uncertain.
Steel demand and pricing in Europe has been subdued since April 2011,following concerns around the European sovereign debt crisis.Japanese steel production and prices were initially impacted by the earthquake and tsunami during the first quarter but recovered during the third quarter.However,as economic concerns increased this also weighed heavily on steel prices in Japan towards the end of the year.As a result,European and Japanese steel producers started to implement production slowdowns in an attempt to stabilise steel markets.Consequently,iron ore off-take in these regions has slowed and China was the target of diverted contractual tonnages from a number of suppliers.
Spot iron ore prices fell to a low of$116.75/tonne CFR at the end of October 2011,losing around 35%from the peak achieved in early September 2011.Similarly,lump iron ore premiums came under severe pressure during the fourth quarter of 2011.
Steel markets in China remain subdued but have stabilised and steel production decreases levelled out.Steel producers resumed the sourcing of iron ore during November 2011 as stocks had been run down and spot iron ore pricing found a support level provided by high cost Chinese domestic iron ore production.Spot prices have recovered and climbed to around$140.00/tonne CFR to China in December 2011.
Outlook
The short-term outlook for the global seaborne iron ore market is impacted by ongoing macro-economic uncertainty.Monetary tightening measures to control inflation in emerging economies such as China started to have the intended effect.In addition,a lack of co-ordinated policy response to tackle the European sovereign debt crisis also impacted demand.Despite the short-term macro-economic uncertainty,medium to long-term prospects for demand remains robust as China continues to industrialise and urbanise.Nevertheless,as China shift from an investment intensive to consumption driven economy,the rate of growth for steel materials is expected to moderate to a more sustainable level.
While demand is a key driver for pricing,supply constraints also play a crucial role.In the short-term iron ore supply is anticipated to remain tight amid seasonal weather impacts in Brazil and Western Australia,and government's moves in India to control exports.Ongoing challenges producers face in delivering new supply will lead to increasing capital intensity and underpin long-term pricing outlook.
Kumba's operating profit remains highly sensitive to the Rand/US Dollar exchange rate.
Legal update
"The High Court decision was handed down in December and is an excellent result in that SIOC has secured 100%of Sishen's mineral rights.Our legal team is reviewing the applications to appeal lodged by the DMR and ICT.We need to decide by 17 February whether or not to cross appeal.
"The arbitration has been postponed and will only be heard once the High Court Review has been finalised.In the meantime,the interim supply agreement is in place until 31 July 2012.The interim agreement is definitive of the parties'rights during the period 1 March 2010 to 31 July 2012,meaning that irrespective of the outcome of the arbitration,neither SIOC nor ArcelorMittal shall have any claim arising out of the Agreement during the interim period,"Griffith concluded.
