The Brumadinho dam collapse in Brazil in January killed an estimated 300 people. It was caused by a tailings dam failure 9km away at the Córrego do Feijão iron ore mine, owned by Brazilian mining group Vale.
This was the second time in four years that Vale had been involved in a dam disaster. The previous one was in 2015 when the Mariana dam, also in Brazil, collapsed killing 19 people.
Mining groups worldwide started looking at their own tailings dams as potential disaster areas. The latest Vale disaster pulled 90 million tons of iron ore from the global market and sent iron ore prices soaring.
Just look at the share prices of Assore, Kumba, African Rainbow Minerals and Afrimat, all of which have substantial iron ore operations. Afrimat has grown turnover by an average of nearly 11% per year for the last four years, keeping its average cost of sales increase below this.
In mining, that’s a recipe for printing money.
Though listed in the JSE’s construction sector, it made a well-timed decision to diversify into iron ore mining several years ago.
Afrimat share price
Kumba’s share price is closely correlated to the iron price, which has been on a tear this year and is nearly back to levels last seen in 2013. Last week Kumba announced a drop of 11% in total production for the six months to June 2019, largely due to maintenance issues. That’s a luxury miners enjoy during times of rising commodity prices, though production recovered strongly in the last quarter. Kumba’s focus on higher margin sales is paying off handsomely, with export sales prices improving by about a third over the last year.
Kumba share price
Amplats released its interim results for the first half of 2019 last week, with production holding steady over the same period last year. What really stands out is the 82% increase in its Ebitda (earnings before interest, taxes, depreciation and amortisation) to R12.4 billion.
Amplats share price
The same commodity price surge driving iron ore is also evident in platinum group metals (PGMs).
Peter Major, director of mining at Mergence Corporate Solutions, says Amplats’s results are surging in large part because of its decision to exit much of its underground production. The Mogalakwena mine produced 610 000 ounces in the first half of the year and is the world’s lowest cost producer, with a mouth-watering Ebitda margin of 57%. The comparable margin at Amandelbult was 26%. Amandelbult is in the throes of a turnaround programme that is now yielding decent returns: reserves and chrome recoveries were up roughly a third each for the first half of the year.
Despite an unprotected strike at the Mototolo operation that resulted in a 21% drop in output, Amplats recorded a 128% increase in headline earnings per share at the interim stage. Major points out that palladium now accounts for more than 40% of revenue, and this is starting to put platinum in the shade.
The lesson here is that open pit mining in SA has become more attractive and viable than underground mining.
“Government and the unions saw to that,” says Major. “Money goes where money is wanted. It’s a pity about the environmental destruction and massive drop in head count in open pit as compared to underground mining. But that seems to be what government and the unions have agreed is acceptable. So that is where all the investment and SA mineral production has gone to.”
This is Mining 101: cut your costs in the lean times, and enjoy the ride when the commodity cycle turns.