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Investors cautious after Kumba Iron Ore’s first half earnings triple

Higher iron ore prices and a weaker rand/dollar exchange rate boosts earnings.

South African miner Kumba Iron Ore saw its first-half earnings soar 239% as it benefited from higher iron ore prices and a weaker rand/dollar exchange rate.

Shares in the company, owned by Anglo American, jumped more than 6% after Kumba reported on Tuesday headline earnings of R10.1 billion ($725.48 million) for January-June, up from R3 billion a year ago, but the shares then gave up most of those gains as analysts said the high iron price was unsustainable.

Kumba’s headline earnings per share (Heps) – the primary profit measure in South Africa that strips out certain one-off items – came in at R31.51 for the six months ended June 30, compared with R14.51 a year earlier.

Total revenue jumped 77% to R34.5 billion, largely driven by a 57% increase in iron ore prices to $108 per tonne and the rand weakening by an average 16% against the dollar.

“If you take out the higher iron ore price, Kumba had a relatively difficult time period production wise,” said Wayne McCurrie, economist at FNB Wealth and Investments. “An iron ore price above $100 per tonne is unsustainable over time because there’s no shortage of iron ore worldwide there might be a temporary shortage now.”

Kumba’s total sales volumes in the first half were flat at 21.4 million tonnes.

The company also suffered operational issues in the first quarter due to unscheduled plant maintenance which reduced volumes by 11%. While it was able to increase volumes by 12% to 6.3 million tonnes in the second quarter, production was still down marginally by 2% to 138 million tonnes compared to last year.

“For the second half of the year, we aim to improve our safety performance, increase production volumes and deliver on our full-year R700 million cost-savings target while continuing to achieve optimal market premia,” chief executive officer Themba Mkhwananzi said in a statement.

Kumba’s share price rose 6.5% to R522.69 by 0733 GMT before pulling back to R498.02, up 1.6%, by 0820 GMT.

The company said that while it expected the higher iron ore price to encourage rival producers to re-enter the market, it expected the impact to be limited.

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The unions are going to pounce to get their hands on those profits – business sustainability isn’t usually top of their minds…

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