Kumba celebrates record year with 69% bump in dividend

Making a sweet transition for incoming CEO Mpumi Zikalala.
Kumba’s Kolomela mine near Postmasburg in the Northern Cape. Image: Bloomberg

Incoming Kumba CEO Mpumi Zikalala was handed a golden chalice by outgoing CEO Themba Mkhwanazi and had the pleasure of announcing another set of record results for the iron ore producer on Tuesday.

With Ebitda (earnings before interest, tax, depreciation and amortisation) up 41% to R64.6 billion for the year to December 2021, Kumba announced a full-year dividend of R103.20 a share, equivalent to 100% of its earnings.

This comes a day after another Anglo American stablemate, Anglo Platinum, announced at R300 a share dividend, more than six times the previous year’s payout.

Read: Anglo Platinum’s record-breaking performance aided by surging PGM prices

Revenue at Kumba was up 27% to R102.1 billion (2020: R80.1 billion), lofted by higher iron ore prices, though the results would have been better but for a stronger rand.

Though sales volumes were flat, Kumba’s average realised iron ore export price increased by 42% to $161 a wet metric tonne (wmt), up from $113/wmt in 2020.

2021 was a year of two halves for Kumba: the first buoyed by Chinese government stimulus to ramp up steel production, the second by production cuts in China as regulators sought to avert a potential energy crisis.

Those restrictions have since been relaxed, allowing for a recovery in Chinese steel production.

The iron ore price (the Platt 62 CFR index) averaged $160 a dry metric tonne (dmt) in 2021, up 48% on the previous year.

This is the second highest price on record, beaten only by the 2011 average of US$166/dmt. Chinese government stimulus and supply chain issues brought the iron ore price to new record levels, peaking at over $230/dmt in June.

After a brief economic crash in the first quarter of 2020 as a result of the spread of Covid, China led the world’s recovery with steel mills struggling to keep up with demand. The result was record steel prices in many parts of the world.

Demand for metallurgical and coking coal likewise broke all previous records, with prices of $400 a tonne and $675 a tonne at the market peak. Prices weakened in November 2021 following policy-driven production cuts in China.

Read:

Unit costs at the Sishen operation in the Northern Cape were up nearly 20% to R432/tonne. Unit costs at the smaller Kolomela mine increased from R304/tonne to R324/tonne – a 6.5% increase.

A cumulative cost saving of R4.1 billion since 2018 made a sizeable contribution to Ebitda margins widening to 63% from 45%. Zikalala says a further R1 billion in cost savings is targeted for 2022.

Overall, operating expenses, excluding mineral royalties, increased 7% to R38.4 billion (2020: R35.8 billion), driven by an increase of R1.3 billion in operational costs and R1.3 billion in logistics costs.

Iron ore prices in USD

Source: Trading Economics

Seaborne iron ore exports were flat in 2021, with declines in Australia offset by higher output from Brazil, following the start-up of the Samarco mine and the recovery at Vale’s Brazilian operations after a dam failure in 2019 that killed 270 people.

Export sales for the year remained flat at 40.3 million tons (Mt), constrained by logistical issues at Transnet, though there were signs of improved equipment reliability and shipping throughput in the second half of the year.

Key focus areas in the years ahead are reducing the group’s carbon emissions, keeping costs under control, and extending the life of mine assets.

Kumba is developing a 60-80 megawatt solar power plant at Sishen, while the ore reserve at Sishen increased 14% in 2021 to 653.4Mt, extending the life of mine from 2032 to 2039, with further opportunities identified.

Capex is expected to be between R10.5 billion and R11.5 billion for 2022, with roughly a third of this ‘stay-in-business’ spending, and R4.1 billion to R4.5 billion going to the development of the Kapstevel South pit at Kolomela and the ultra-high-dense-media-separation (UHDMS) project intended to position Kumba as a low carbon producer.

More than luck

Terence Hove, market analyst at Exness Africa, says the results are a testament to Mkhwanazi’s foresight in initiating the Tswelelopele (‘Move forward’) strategy in 2018, leading to R4.1 billion in cost savings and adding four years to the Sishen mine life.

“When this programme was introduced, Kumba was hoping to get its ore reserves up to 800Mt by 2022 and in fact achieved it a year earlier. So when iron ore prices started to take off post the Covid crash of 2020, Kumba was perfectly positioned to capitalise on this.

“If you look back at 2019, the price of the premium product Kumba sells overseas was about $90 a tonne, and last year the average price received was $160/t. Like Gary Player used to say, ‘The more you practice, the better your luck’. That’s what’s happened at Kumba.”

The outlook for iron ore prices in 2022 is largely dependent on the health of the Chinese economy, with the property sector leading the way. Iron ore prices are already up nearly 20% for the year to date as previous restrictions on steel energy use in China have been eased.

Listen: CEO Mpumi Zikalala discusses Kumba’s annual results, its iron-ore price expectations and relationship with Transnet (read transcript)

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