Record export sales and revenue in an increasingly challenging market
Commenting on the results,Kumba Iron Ore Limited's("Kumba")CEO Chris Griffith said:
"Kumba's solid focus on operations and strategy has delivered another strong set of first-half results.This is ongoing proof that we are executing our strategy and continuing our excellent track record of delivering superior shareholder returns-R16 billion since 2007.
"Kumba has continued its strategic investment in the business to support its long-term growth initiatives,which has had an anticipated impact on costs.We are especially pleased with Kolomela which is ramping up well-ahead of guidance,ahead of the investment proposal and with a record safety performance.The mine produced 3.3Mt during the first half,more than double the 1.5Mt in 4Q11.Our balance sheet remains strong and continues to provide a buffer against a volatile global economic environment.In addition,we have maintained our world-class safety performance,and we are grateful that we have had no loss of life since 2010."
KEY FEATURES:
Record export sales volumes up 13%to 20.7Mt,boosted by Kolomela production,and supplemented by stockpilesTotal production increased by 13%to 21.6MtRevenue up 5%to R25.2 billionKumba's operating profit margin of 57%Healthy cash generation at R13.9 billionHeadline earnings of R23.07 per shareR6.2 billion(R19.20 per share)interim cash dividend declared.
OPERATING HIGHLIGHTS:
World class safety performance continues-no loss of life since 2010Sishen waste ramp up in line with guidance Sishen 2Q12 production increased 12%on 1Q12Kolomela continued with an exceptional all-round performance
On the outlook for 2012,CEO Chris Griffith added:
"The planned increase in waste mining at Sishen mine is expected to continue,which will support an improvement in production rates at the mine during the second half of 2012.Production at Sishen mine for the full year is anticipated to be in line with 2011 levels.
The planned increase waste mining will put upward pressure on unit cash cost of production.Should Kolomela continue with its current ramp-up performance,the mine should exceed guidance and produce at least 6Mt in 2012."
Export sales volumes in 2012 are expected to grow by between 3Mt and 4Mt from those achieved in 2011 as volumes from Kolomela ramp-up will be offset by lower stock volumes at Sishen.
He added:"While we expect volatile market conditions to continue,iron ore prices are expected to trade in a similar range as seen during the first half,supported by high-cost Chinese domestic iron ore production.
"Our growth target of achieving 70Mt in South Africa by 2019 remains intact,with studies in progress to establish a second mining footprint in west Africa."
Financials
The group's total revenue(including shipping operations-R1.7 billion)of R25.2 billion was 5%higher than in 2011.This was principally the result of an increase of 13%in export sales volumes achieved and a weaker Rand/US Dollar exchange rate,offset by a year-on-year weighted average decrease of 21%in export iron ore prices.Kumba achieved a 45%growth in turnover from shipping operations to R1.7 billion.
Operating profit of R14.4 billion decreased from R16.9 billion due to:
A decrease of 21%in iron ore export prices,which reduced operating profit by R4.9 billion A R2.7 billion increase in operating expenses(excluding shipping expenses)which is a function of a growing company.This is
as a result of above inflationary cost escalations and the company's growth,with a planned 33%increase in waste mined at Sishen mine at a cost of around R435 million,and the bringing into production of Kolomela mine adding R916 million to costs(for which the capitalisation of operating expenses has ceased),as well as an increase in the volume moved from the mines to the port for sale to export customers
As a result of the planned increase in mining activity at Sishen mine and above inflationary cost escalations,the unit cash cost increased by 21%to R182/tonne for the six months.This was further impacted by the shortfalls in production for the period.As with the rest of the mining industry,the group has seen above inflationary escalations in key input costs,such as the diesel price,which has increased by 15%from R9.28/litre to R10.67/litre,and electricity prices,which have increased by 16%year-on-year.
However,to mitigate this,Kumba remains focused on its asset optimisation programmes and participation in the Anglo American Supply Chain procurement scheme.
Kolomela mine's unit cash costs were R174/tonne for the six months.This unit cost should benefit from increased production as the mine ramps up to design capacity.
The group generated R13.8 billion during the six months.At 30 June 2012 the group had a net debt position of R0.7 billion(R1.6 billion net cash at the end of 2011).
Market
Global crude steel production,which drives the demand for iron ore,increased marginally for the first half of 2012 compared to the same period in 2011.However,when compared to the second half of 2011 world crude steel production increased by 4%,driven by increases in Europe of 6%(albeit from lower levels in H2 2011),and China of 7%,as their steel production exceeded a run rate of 720Mtpa in most of the second quarter.As opposed to a 0.5%increase in global crude steel production,seaborne iron ore supply increased by 3%year on year as production from the major iron ore producing regions rebounded from a traditionally weak first quarter.
Importantly for Kumba,although China's usage of iron ore was up by 4%year on year,the imported ore usage was up by 16%,and domestic ore usage was down by 17%,as high cost domestic ore and scrap metal was substituted for lower cost,higher quality imported ore.
On the back of record export sales,Kumba realised strong prices in the first half of 2012.In line with the market,realised prices fell 21%or US$35/tonne,to US$134/tonne.China continued to account for 71%of Kumba's export sales compared to 67%in the second half of 2011.Japan and Korea made up 17%of export sales and Europe's share remained at 12%and includes Kumba's first ever sales to India.
A record 19.5Mt of Kumba's ore was shipped in the first half of 2012.
Outlook
Iron ore prices going forward are expected to trade in a similar range to that in this first half supported by high-cost Chinese domestic iron ore production.The recently announced monetary policy stimulus of interest rate cuts in China should support demand for steel,but the short term effect remains to be seen especially in light of economic uncertainty emanating from Europe.
Kumba's profit remains highly sensitive to price and the Rand/US Dollar exchange rate.
Legal update
The High Court granted the DMR and ICT leave to appeal,but as yet no date has been set for the Supreme Court of Appeal to hear the matter.
An interim supply agreement is currently being negotiated by SIOC and AMSA before it expires at the end of July.
