Kumba & Amplats Q4 production on the rise: Peter Major – Cadiz Corporate Solutions

‘Nice performance for Kumba, raising annual iron-ore output to a four-year high.’

SIKI MGABADELI: Some production updates today. Anglo American Platinum told us of plans to impair some assets due to lower prices. Kumba and Amplats out as well today – Kumba reporting a 10% increase in production in the fourth quarter, helped by a robust performance at its Kolomela Mine. Meanwhile Anglo American Platinum said group refined platinum production was up 14% over the quarter for 2013, which was of course affected by the two-week industrial action.
   Let’s chat to Peter Major of Cadiz. Peter, thanks for your time this evening. Let’s just start with overall Anglo American plans to impair some assets. I suppose that’s to be expected.

PETER MAJOR: You are spot-on, Siki. All the companies are doing it. It just shows how over-exuberant everybody was when we were in the middle of this super commodity boom. And all of us were surprised it lasted so long. Gee, I was definitely surprised it lasted that long. And now that we are coming down to average long-term prices for most of these commodities, realism is hitting everyone and they realise we’ve got to put things down to a realistic level and there are just too many overvaluations, there are too many optimistic assumptions based on things that weren’t sustainable. So yes, it had to be expected and I think everyone is coming to a very realistic base here, so people can make better decisions when they’ve got their feet on the ground.

SIKI MGABADELI: And what then should we expect in terms of capital expenditure going forward, because obviously Anglo is telling us that they will raise capex for Minas Rio to $8.8bn after an original estimate of $2.6bn. I just wonder what sort of decision-making then goes into where capital will be expended and where not.

PETER MAJOR: Look, one thing’s for sure. All capital is really, really analysed now. And something like Minas Rio, where you are starting a brand-new mine from scratch – and yes, capex has gone way over what it’s suppose to– you are going to spend whatever it takes to get that mine in full production, even if it’s in the downward part of the cycle because that mine will produce profits at today’s iron-ore price, even lower. So you have to spend that capex to get it to do it. But new capex you can bet is going to be radically cut back. Anybody else who is making money, they are going to delay their capex without a doubt because people aren’t sure – are commodity prices going to stay here go even lower?

SIKI MGABADELI: Yeah. Talking about iron ore, a nice performance for Kumba, raising their annual iron-ore output to a four-year high.

PETER MAJOR: Look, it is very good. They told us it was coming and that is really the only way you can protect yourself with a falling commodity price – you have to increase your production. And hopefully as you increase your production it is lowering your cost per unit.
   OK, we’ve got an ace up our sleeve called the rand, so we can increase production here and we’ve got a depreciating currency, so we have a much better buffer than, say, strong currencies or first-world currencies. But you’ll notice iron ore … Australian currency has depreciated 25, 30% in literally less than a year-and-a-half. So that’s given them a buffer. And even Brazil – they’ve got their own currency that did depreciate. So it hasn’t really given us an edge over those countries, but at least we are maintaining some kind of profit whereas all this …production is going to be way out of the money.

SIKI MGABADELI: Export sales for Kumba up 23%. I just wonder, Peter, what your expectations are for iron-ore prices and demand this year.

PETER MAJOR: Look, I don’t think demand can grow anywhere like it was and the world doesn’t think so. But, boy, did supply grow. That’s what’s happened here. It’s not that demand has fallen as much as I think the supply has gone up. And supply will reduce to meet demand – it’s definitely going to reduce. A lot of that supply was high cost. And even a lot of the low-cost producers are going to start analysing which components of their production were high cost, and they’ll close those. So it’s up to the producers to reduce supply, not increase supply, if they want to see prices ever go back up.

SIKI MGABADELI: And the situation on the platinum front?

PETER MAJOR: Boy, I think it’s actually held up better than I expected. These are not bad platinum prices – especially palladium and platinum. And with the weak rand it’s definitely giving the guys breathing room. They still have a lot of their operations that are losing money here, especially the old underground operations. And they are going to continue to close those, which is going to mean job losses. They are going to continue to put money and effort into the open-pit parts of their operations, which is to the detriment of the country, unfortunately, but what can the company do? It has to survive, it has to pay debt and it has to make money.

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